Loss of Manufacturing Jobs

There is great consternation in the United States today over the loss of our manufacturing to Asian countries, mainly China. How much and how quickly will depend on a number of global economic, technological and political factors. There is a valid argument that this competition is not a “zero sum game”. Lower cost manufacturing in Asia will bring down prices for our consumers and as the prosperity of Asian workers improves there will be an ever-increasing market for our “more advanced “ products. The question is what “more advanced” products and what makes us think that these will be manufactured here?
As global competition continues to grow, the struggle to maintain, if not increase, profits will continue to drive companies to lower costs. A way to reduce labor cost, a large contributor to overall cost, is to move manufacturing to places where it is cheaper. Another way is to improve productivity with systems and automation, which not only cut labor, but improve the quality of the output along with efficiency. This drive to improve quality, in the near future will become a point of contention for China. Deming, the father of Japan’s statistical quality systems said that automation only makes sense if there is a shortage of labor or is required for precision and consistency. Currently China has an abundant workforce that can be moved from inefficient small farms to grow manufacturing well into the future. To make up for the migration of farmers to the cities, agricultural efficiency will need to be improved. The buying power of the population will increase dramatically during the growth phase but then will start to shrink, as it has here (We hid this fact by maxing out our credit cards) reducing demand.
With increased prosperity, labor costs will rise and to compete on quality more automation will be implemented. China’s manufacturing advantage will diminish and a labor surplus created. Japan’s manufacturing advantage lasted only a couple of decades before it started moving to Singapore, Malaysia, Vietnam, etc. Singapore then started losing its manufacturing to China. Our advantage only lasted from the end of the Second World War (1946) to about the nineteen eighties. These advantages are relatively short lived with ever decreasing life-spans, ours was 30 years, Japan’s 20 and Singapore’s 10.With the improvements in agriculture, the transplanted workers will not have farming to return to and will be limited to low value service sector jobs in the cities. Though a portion of access will be absorbed into China’s developing military/industrial complex, this will reduce demand and create even more access labor. A society can sustain a large service sector if it is producing real value either through farming, mining or manufacturing. As long as there are adequate commodities produced, how much labor is utilized to produce them is less important. After all, the goal of manufacturing is to devise methods that eliminate labor from the production floor. To that point, we are a major agricultural producer yet the total labor employed in agriculture is relatively small.
China has land and minerals and its manufacturing base is expanding. In china there is emerging a very wealthy business class creating an ever-increasing gap between the rich and poor. When manufacturing shrinks, allowing the poor to return to pre “boom” poverty will lead to social unrest. So whether there will in fact be social unrest will in part depend on how well the service jobs are compensated and how large the gap between the very rich and very poor becomes. Studies have shown that social ills are caused more by this gap than poverty in absolute terms. Here China has an advantage in that their totalitarian government can more quickly and easily intervene, adjusting wages or with their military.
Over the last several decades, in the United States there has been more and more wealth going to the “traders”, bankers and administrators of multinational companies. This is contributing to a widening gap between the very wealthy and those living on so called “Main St.” With high paying jobs, whether they were high paying because of union negotiations or skill requirements, shrinking, and as manufacturing continues to shift to Asia, the labor accustomed to high wages will increasingly turn to low paying service work. As more money is concentrated in the hands of fewer, as has been the trend in the last several decades, there will be fewer people with the resources to pay for the service. After all there are only so many lawns to mow and dinners to serve. Though we still have our agriculture and mining, if our manufacturing base diminishes, so will our value created and thus our ability to sustain a service economy. Having said this, I am optimistic that this trend need not continue.
As mentioned in the previous posting on “Workplace Quality of Life”, manufacturing can be broken down into three phases. A product, with methods required to build it is developed. There is an initial production phase where it is tested and tools and methods improved. Once refined and fully documented it matures and goes into the third phase, mass production. The Free Market System without government intervention, will push to build things in regions that make most economic sense. Production labor (or direct labor in manufacturing parlance) cost is the key consideration in the mass production phase. Though it is also an issue in the development and initial production phase, engineering, administrative and management (indirect labor) costs are proportionately higher in the first two phases.
I believe we have an advantage in the initial manufacturing phase. First let’s look at development. There are indications that diversity of ideas brought about by diversity of disciplines, cultures and experiences is a major contributor to creativity and thus innovation. Our ability to accept and assimilate people from different cultures and backgrounds gives us a lead in this area. Sustaining this diversity is the strongest piece of “American exceptionalism”. Though there is some ethnic diversity in China, it pales by comparison to ours. The development will be done where the innovators live and work. Then, since there needs to be heavy interaction between development and the initial manufacturing phase, it will be done wherever products are developed. Furthermore our culture of ingenuity and independence along with our capital markets will certainly add to this advantage. Technologies are evolving at an ever more rapid pace and the new widgets will become increasingly more complex and more quickly obsolete the old. This fact should lead to a trend reducing the life of production runs and increase the number of new developments and thereby “initial manufacturing”.
So if the above argument holds true, we will retain the higher value, short run and initial manufacturing jobs and increase the value and improve the quality of work life of our factory workers. What can screw this up? First, if we allow ourselves to be drawn into the movement toward a white, Christian, ethnically pure theocracy, we will lose our diversity and thereby our strong advantage in creativity and innovation. Secondly, if we do not recognize the importance of allowing workers to exercise their ingenuity in the initial manufacturing phase and force long run production systems onto the work floor (see post on Workplace Quality of Life), which I believe we are trying to do now, we will lose the advantage of proximity to development. This will also weaken our development and thus our overall economic advantage. I think we are a rational people and unless there is a very serious economic meltdown, the probability of instituting a theocracy is very slim at best. The second, however, I am not that sure about. Will we acknowledge the difference between phase two and three manufacturing and not force systems that stifle factory innovation? This requires a longer-term strategy and Wall Street rewards short-term gains and industry leaders with longer-term strategies may not survive.