Sunday, March 13, 2011

More on the Rebound in U.S. Manufacturing

From The Economist, an article titled "Rustbelt Recovery," with this sub-title: "Against all the odds, American factories are coming back to life. Thank the rest of the world for that." Here's one key paragraph:

"For the first time in many years, American manufacturing is doing better than the rest of the economy. Manufacturing output tumbled 15% over the course of the recession, from December 2007 to the end of June 2009. Since then it has recovered two-thirds of that drop; production is now just 5% below its peak level."

16 Comments:

At 3/13/2011 7:36 PM, Blogger morganovich said...

i would be interested to see how it compares to the rest of the economy ex-building and the other markets (furnishing, appliances, fixtures, etc) that go with it.

the building market is such a wreck and the knock on effects into associated industries so severe, that i suspect many industries look better than the economy as a whole.

housing starts are still down 75%. that is an ASTOUNDING number.

take 3 90's and one 25 and your test average is 74...

take the 9-10% or so of the economy (high 4's for building and about that again for other associated goods) that is focused on them out and i wonder if it is manufacturing that is doing well or the comparator set that looks so terrible because of the building industry boat anchor it is dragging.

 
At 3/13/2011 8:01 PM, Blogger PeakTrader said...

Myth of China’s Manufacturing Prowess
March 10th, 2010

People often compare China’s urbanization to Western industrialization in the 19th century.

However, there is a key misconception about China’s manufacturing prowess.

In the United States and Europe, the manufacturing industry was created due to technology and innovation. For example, railways came into existence because of the invention of the steam engine and automobiles were created because of technology breakthroughs in automobile engines.

In China, the manufacturing industry is being created in response to global demand.

Chinese manufacturers take orders from Western companies that have designed products for their home markets. They have no involvement with product development, innovation, market research, and even packaging.

Unlike the manufacturing industry in the West that gave birth to a middle class of both white-collar and blue-collar workers, manufacturers in China mostly absorb surplus labor from rural areas with few skills.

Those rural migrant workers live in dormitories, earn about $100 to $200 a month, and hardly fit into the category of the middle class. (To be clear, there is a burgeoning middle class in China. Most of them are in urban private businesses, state-owned enterprises, and multinationals).

James Fallows, national correspondent for the Atlantic, visited many factories in China. He saw people working on the assembly lines and was convinced those tasks would only be performed by machines in the United States.

(James Fallows studied American history and literature at Harvard, where he was the editor of the daily newspaper, the Harvard Crimson. From 1970 to 1972 Fallows studied economics at Oxford University as a Rhodes scholar).

 
At 3/13/2011 10:06 PM, Blogger AIG said...

"James Fallows, national correspondent for the Atlantic, visited many factories in China. He saw people working on the assembly lines and was convinced those tasks would only be performed by machines in the United States."

And he would be totally wrong. Which of course, should surprise no one that being educated in literature and history does not provide one with the knowledge to understand manufacturing.

There are many reasons why some assembly and manufacturing functions are performed in places like China. Replacing automation with human labor, is hardly ever, if ever, a reason. Productivity and and most important quality would suffer tremendously, and disqualify most such products from demand in American markets. If they are being done by hand over there, they'd most likely be done by hand over here too (because the task would be too complicated to perform by machine).

But then again, none of the observations in the article of Fallows has much significance. Sure China's rise does not follow the same trajectory as the industrial revolution 150 years ago. So what?

Lets stop worrying about China. Their economic base is to our benefit.

 
At 3/13/2011 11:20 PM, Blogger Che is dead said...

"... experts in manufacturing staffing say that many of the factory workers who find themselves without a job simply don't have the specialized skills now in short supply."

"There are a lot of people out there looking for work who are assemblers, who are semi-skilled," said Jeff Owens, president of ATS, a manufacturing consulting firm. "There is definitely a shortage of people who are very capable to make the factories run."

"And while it might only take about a year of training for a person to get the skills they need, many blue collar workers aren't eager to try and find a new job in manufacturing after already being laid off."

"The perception out there is that we're losing manufacturing jobs to China and India. So if they've already been displaced and they're going to go back to school, they're going for something not manufacturing-related ..."

Factories having trouble finding skilled workers

 
At 3/14/2011 1:46 AM, Blogger PeakTrader said...

AIG, you're making false assumptions.

1. Machines don't necessarily insure 100% quality.

2. Labor can be cheaper than installing a machine and maintaining it.

It can be cheaper to hire 100 workers at $0.25 an hour (or $25) with 8% defects and then check or correct defects than 10 workers at $15 an hour ($150) with 1% defects.

 
At 3/14/2011 2:02 AM, Blogger PeakTrader said...

Also, I may add, U.S. manufacturing is larger than what's measured, because it has been broken into pieces.

Part of U.S. manufacturing has been outsourced rather than done in-house, which is reflected in the service economy.

Much of the work done in the Silicon Valley's throughout the U.S. is really part of U.S. manufacturing.

A proportion of China's production is U.S. manufacturing that was offshored and imported back to the U.S.

 
At 3/14/2011 2:11 AM, Blogger AIG said...

Peak, don't take this the wrong way but I'm a manufacturing engineer (by education at least), and you are waaayyy off.

1% defect rate would make laugh most Soviet manufacturers. 8% defect rate, is so far beyond this world, not even Zimbabwe would buy your products if you gave it to them for free.

No one assumes "machines" are 100% error free. Machines maintained and operated by qualified people, get close.

Cheap labor doesn't and can't compete. It will never be cheaper to have 100 guys making things less efficiently than 10 guys making things. Your process will go out of control real fast, and you will turn out garbage that no one will want. There is a very severe diminishing returns curve here.

But cheap labor doesn't make things machines make. Labor just assembles things that machines make, and thats why those manual assembly jobs in China would be manual assembly jobs in the US too. But of course, the more complicated the product gets, the higher your quality requirements are, the higher qualified your employees will have to be.

25 cent hourly wages, I don't think have been seen in China since the 1990s. They are closer or above $2/hour now.

 
At 3/14/2011 2:39 AM, Blogger PeakTrader said...

AIG, it really depends on the products and machines.

Also, China produces many goods in older industries with declining prices.

 
At 3/14/2011 2:50 AM, Blogger AIG said...

"Also, China produces many goods in older industries with declining prices."

Can you name me one such industry?

"AIG, it really depends on the products and machines."

No. There is no industry in the US that I can think of, that would ever imagine accepting a supplier with a 1% defect rate.

 
At 3/14/2011 12:12 PM, Blogger Jason said...

AIG, your argument doesn't consider a crucial item: Cost of capital.

In my manufacturing experience, automation was always preferred to manual process. Quality and throughput always improved once a process was automated.

However, availability of capital would always limit the level of automation...At least in my experience.

Once you factor in limited or expensive capital, outsourcing to a source that utilizes human capital for manufacturing, where the quality is tested in, becomes palatable.

Also, yields vary widely from one good to another. It is not uncommon for semiconductors to have initial product yields <50%. Consumer electronics have yields in the 95% range. You just never see the failures.

 
At 3/14/2011 1:33 PM, Blogger Buddy R Pacifico said...

This comment has been removed by the author.

 
At 3/14/2011 2:58 PM, Blogger AIG said...

Jason you're right. But what sort of processes do intermediate goods go through to weed out the defects, till you get acceptable consumer products?

In almost all cases, it involves testing, which involves machines designed for testing, involves employees who know how to do the tests, and an army of engineers to control the process. In fact the calibrating and testing machines are typically the most important and time consuming part of an assembly process.

Its no different in China. Except they need twice or three times the number of people and time to do it.

These jobs cannot be performed by humans. The example PeakTrader gave was to replace 10 people, with 100 lower-paid people. But, we're ignoring the very severe diminishing return curve of labor. An "average" rule of thumb (which of course varies greatly) is that for every tripping of employees you cut their productivity in half. And thats ignoring people quality and product quality.

The thing is, most jobs performed in China or elsewhere, are not jobs which replaced an automated process in the US. If the jobs moved from the US (which is rarely the case), then the whole process moved to China as-is; machines and all (and then have to be re-assembled in China in such a poor way and layout, that it would take another 6 months-1 year to get it working properly)

 
At 3/14/2011 3:15 PM, Blogger Buddy R Pacifico said...

IHS Global Insight states "China overtakes U.S. manufacturing dominance".

 
At 3/14/2011 3:16 PM, Blogger AIG said...

Well actually forget consumer products. More important are intermediate goods, as they are far larger in value than simply assembling done at the end of the line.

If I am an assembler or manufacturer of a product in the US, or in Asia...say AC motors. I have a China operation or supplier making, lets say, a thermal sensor for the motor. My customers expect my motors to be delivered at 0ppm defects. They don't want to waste their time testing my motors, and I don't want to pass quality costs to them (or they WILL drop me). So I expect my Chinese supplier to give me as close to 0ppm as possible.

I know thats not possible, but if the Chinese supplier cannot prove to me that they have a sophisticated system for controlling for quality, I don't care how cheap they are...I will lose my business if I buy from them. At the very least I will have to incur the quality costs myself, to check every sensor they provide, and this will undue any cost-savings.

Simply, there's 2 kind (or more) of processes that move to China. Low-level assembly work, usually at the end of the process where little can go wrong, and very little value-added work (which generally can't be done by machines anyway)...or processes that move there to be closer to the value stream. This second type, generally is the same process that would be done in the US, including machines. But it attracts the best of the best in China, not just "cheap labor". The cost-savings come from streamlining, not cheap labor.

 
At 3/14/2011 8:20 PM, Blogger PeakTrader said...

AIG, I'll reply to one of your assumptions, although I'm not convinced about some of your other assumptions.

You say:

"Cheap labor doesn't and can't compete. It will never be cheaper to have 100 guys making things less efficiently than 10 guys making things. Your process will go out of control real fast, and you will turn out garbage that no one will want. There is a very severe diminishing returns curve here."

Obviously, China, for example, uses more labor than developed countries to produce the same good, or commodity, and yet it's able to outcompete them with cheaper labor:

The hidden downside of Santa's little helpers
The Irish Times
December 21, 2002

China now makes 70 per cent of the world's toys..."Wages have actually gone down, there is so much surplus labour," agrees Monina Wong, a researcher with the HK Coalition for the Charter on the Safe Production of Toys.

Toy factories hire the least-skilled workers, who spend their time on monotonous tasks such as painting colours with a brush or spraying, or clipping the pieces together.

An investigation into the price of a Mattel Barbie doll, half of which is made in China, found that of the $10 retail price, $8 goes to transportation, marketing, retailing, wholesale and profit for Mattel.

Of the remaining $2, $1 is shared by the management and transportation in Hong Kong, and 65 cents is shared by the raw materials from Taiwan, Japan, the US and Saudi Arabia. The remaining 35 cents is earned by producers in China for providing factory sites, labour and electricity.

 
At 3/14/2011 8:31 PM, Blogger PeakTrader said...

I said: "China produces many goods in older industries with declining prices."

AIG said: Can you name me one such industry?

My answer: Look at China's top exports:

Top Chinese Exports to the U.S.

1. Computer accessories, peripherals and parts.
2. Miscellaneous household goods.
3. Toys & sporting goods.
4. Computers.
5. Non-cotton household furnishings & clothing.
6. Video equipment.
7. Household furniture.
8. Footwear.
9. Cotton household furnishings & clothing.
10. Telecommunications equipment.

 

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