September 27, 2011

When technology OEMs began to outsource the manufacturing of their products to specialized contract manufacturers over 30 years ago, there were a number of critics that suggested that outsourcing a core activity such as manufacturing would eventually harm the OEMs who would lose the ability and knowledge associated with hardware manufacturing, and eventually be at the mercy of the contract manufacturers. Up until recently those critics were treated like Chicken Little…the sky didn’t fall on technology manufacturing in the US. Outsourcing manufacturing to Electronics Manufacturing Services (EMS) providers, (the updated term for contract manufacturers) enabled OEMs to substantially reduce fixed cost investments, reduce risk, and improve cash flow and corporate margins. But as is so often the case, what started out as a more efficient business model evolved into a model that now threatens the very fabric of our capitalist society...the US economy.

In the last 10 years or so the economic dynamics have dramatically changed with regard to the importance of domestic manufacturing.            10 years ago the largest EMS companies were predominantly North America-based providers, manufacturing the majority of their products in NA factories. Today the largest EMS providers are Asia-based providers, and the vast majority of technology manufacturing now occurs on foreign soil, in lower cost regions such as China, Malaysia, Vietnam, India, Mexico, and Eastern Europe, with even lower wage African nations waiting in the on deck circle.

According to the US Labor Department’s Bureau of Labor Statistics this unprecedented strategic shift has resulted in a loss of over 6 MILLION manufacturing jobs in the US alone since 2000. From a standpoint of keeping our economy strong and passing along a strong economic foundation for our children, I view this as completely unacceptable. Paraphrasing a quote made famous by Ross Perot, one has to ask the question: “Why has this “great sucking sound” of manufacturing jobs draining away from the US been allowed to continue? I believe the answer can be summed up in two simple words: Ignorance and Greed.

In chasing ever lower product costs and higher earnings, most major hardware manufacturers wasted no time in closing higher wage cost factories in the US and Canada in favor of low wage nations such as Mexico, and China. In just the years between 2002 and 2006, China added 11 million manufacturing jobs to its rolls, which is coincidentally nearly the same number of manufacturing jobs the US has lost since 1980.

In an op-ed article published on The Huffington Post, Leo Hindery, Chairman of the Smart Globalization Initiative at the New America Foundation, explains the dilemma we are facing:

“Structurally speaking, no economy as large, complex and geographically far-flung as ours can prosper over the long term with less than 20-25% of its workers being in manufacturing and without the sector contributing a similar percentage of GDP. Yet as it is, only around 9% of Americans now work in manufacturing, and as a percent of our GDP, the sector provides just 11% of the total."

The proof of this conclusion is found in history, starting with the forty years leading up to the Second World War, when the percent of U.S. employment in manufacturing was a fairly consistent 30% or so, and followed by the three decades thereafter, when, despite the introduction of new service sector jobs as post-War manufacturing incomes rose, such percent still consistently hovered at around 25%. These seventy years of robust manufacturing were -- it's no coincidence -- generally robust years for the middle class as well, hallmarked by wide-scale new home construction and new car ownership, quality public school education for the nation's youth, and fair salaries with relatively little income inequality.

Hindery says the U.S. must focus on its approach to trade, particularly toward China, if it is to rebuild its manufacturing capabilities and compete globally. The first step is to create a strong U.S. manufacturing policy. He points out that 19 members of the G-20 have very precise national manufacturing and industrial policies. America alone does not.

“By not having our own manufacturing and industrial policy and by persisting with corporate tax policies that are in conflict with the objective of having a robust domestic manufacturing sector, between 1998 and 2010 we lost approximately six million manufacturing jobs overseas, with more than two million of these occurring from 2007-2009,” said Hindery. “In just the years between 2002 and 2006, China added 11 million manufacturing jobs to its rolls, which are as many manufacturing jobs as we now have left in total in America.”

China’s manufacturing policy – though very much illegal – has been highly effective, says Hindery. The country has surpassed Japan in becoming the world’s second-largest economy, passed Germany as the world’s biggest exporter, and will likely knock the U.S. off its top spot as the world’s biggest economy by 2030.

“We have benignly and actively neglected this sector for far too long,” writes Hindery. “And regardless of who wins the 2012 election, we need to focus on these manufacturing, trade and education-related issues if we want to have a healthy, vibrant, ethically sound nation moving forward.”

The bottom-line: More product development and manufacturing jobs need to be repatriated to the United States and Canada immediately to turn this economy around. If you agree, please provide your feedback and comments here, and make your opinion known to your political leaders. Nothing less than the fate of our economy and our children’s futures rests on our ability to act now before it is too late.

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