Volume 14, Number 1 - February 2017
Welcome to the latest edition of EntreWorks Insights, a quarterly newsletter that reports on business trends, policy developments, and other issues affecting the business of economic and workforce development. You’re receiving this note because you’ve asked to subscribe or because you have some previous interest in the work of EntreWorks Consulting. If you wish to subscribe or be removed from this list, please send an email to info (at) entreworks.net. If you’re interested in the newsletter, please read on. Please feel free to share with friends, family, colleagues, and other loved ones. Comments and constructive criticism (and praise) are also welcome. You are also encouraged to visit and comment on the EntreWorks blog at http://entreworks.net/blog. Thanks for your interest.
Donald Trump’s election campaign and first month in office have been predicated in part on his plans to “make America great again” via economic policies that support key US industries like manufacturing. He has repeatedly contended that he and his team will bring manufacturing jobs back to America, and turn American industry into the envy of the world. Of course, the devil is in the details, and this edition of EntreWorks Insights digs into these details, attempting the challenging task of assessing what’s likely to happen (and what should happen) with manufacturing policy in the coming years.
Before discussing policy options, we should look at the current state of play. Manufacturing has had a tough couple of decades, but it’s hardly the “American carnage” claimed by President Trump.
The decline in manufacturing jobs is a widely told story. Since 2000, US manufacturing jobs have declined by 29%, even at a time where overall US employment grew by nearly ten percent. As recent research from the Information Technology and Innovation Foundation (ITIF) notes, these depressing numbers hide an even more sobering reality. Manufacturing output is also declining at a rapid pace. Between 1999 and 2015, overall manufacturing output jumped 27percent. But, if one fast growing sector—computer related manufacturing---is removed from the data, overall output improvement rates decline to roughly seven percent.
So, manufacturing jobs and output are stagnant, but there is some cause for optimism. The US’s significant cost disadvantages have disappeared, and it is now cheaper to manufacture in the US than in many parts of China. While this level playing field is good news, it would be preferable for US firms to compete on quality as opposed to low cost. Moreover, other countries like Mexico will still enjoy cost advantages when compared to US manufacturing.
Better news comes from the fact that US manufacturers are poised to benefit from what researchers are calling Industry 4.0 or the Next Production Revolution. These terms refer to the combination of manufacturing and new digital technologies, such as robotics, sensors, artificial intelligence, and cloud computing. The Internet of Things is simply the first iteration of this ongoing industrial transformation. McKinsey Global Institute research suggests that this revolution in automation could boost global productivity rates by as much as 1.4 percent per year.
American manufacturers are investing big time in these new capabilities, and are expected to double their investment levels (up to $350 billion) in the next few years. And, the face of manufacturing is already being transformed. According to a recent PwC survey, 59% of surveyed US manufacturers already deploy robotics technology and about 2/3 are already using 3D printing tools for prototyping, production, and other purposes.
Policy Issues and Directions
The rise of Industry 4.0 is very good news, but there’s no guarantee that the US can capture this opportunity or effectively support workers who may be displaced in this economic transition. That’s where policy comes in. Using the Presidential bully pulpit to “save jobs,” as in the recent Carrier deal, is not necessarily a bad thing. But, it does not constitute an effective and impactful manufacturing strategy. To fully capture this opportunity, and to build a sustainable US manufacturing base, some new policy directions will be needed. Read on for my take on what should happen!
While the media has focused on manufacturing job loss, worker shortages are the reality for many manufacturers. And, this labor shortage is likely to persist into the future, even as automation hits the factory floor. Talent development has long been a priority concern for large manufacturers and groups like the National Association of Manufacturers. But, it is now a pressing concern for smaller firms as well. A recent survey of small manufacturers from the Manufacturing Extension Partnership (NIST-MEP) program finds that nearly 47% of firms identify employee recruitment as a top challenge. In 2009, only 19% cited this challenge.
US manufacturers and policy makers will need to prepare for an extended period of worker shortages. From the policy side, we need to think about how to build stronger talent pipelines to get workers prepared for Industry 4.0 jobs. From the industry side, managers will need to rethink how they hire, train, and deploy workers. Workers who combine digital and engineering capabilities will be in especially high demand.
New workers cannot be the only focus for talent development. Reskilling and upskilling current manufacturing workers and managers will also be required. In fact, surveyed manufacturers now report that the lack of digital culture and training is the Number 1 challenge impeding adoption of Industry 4.0 technologies and practices.
Succeeding in Industry 4.0 will depend on the ability of US manufacturers to remain at the leading edge of innovation. This will not occur in industry alone; it will depend on a robust role for government as well. Leading manufacturing nations, such as China, Germany, and Japan, all rely on extensive public support. Continued and expanded public innovation investments are needed here as well.
These investments can take multiple forms, but two programs are especially important. The Manufacturing USA program is just gaining traction, and started to show important results in building stronger ecosystems for advanced manufacturing. Similarly, the NIST-MEP program, which provides technical assistance to smaller manufacturers, should be continued and expanded.
A dynamic US manufacturing sector should also be a place that is welcoming and supportive of start-up and scale-up entrepreneurial ventures. We need more manufacturing start-ups, and we need to do a better job of supporting them.
Few manufacturing analysts comment on the small manufacturing revolution that is already underway across the US in the form of breweries, distilleries, food production, and other “makers.” These folks are artisans, but they are manufacturers as well. Small scale manufacturers are starting to transform many urban areas, and we need to do more to support them. Local entrepreneurship efforts can help, but we also need to encourage the development of specialized real estate like maker spaces, shared kitchens, and the like.
Programs like the NIST-MEP can also help, and there’s good news on this front. In a late 2016 surprise move, Congress passed a new version of the COMPETES Act which changes current cost sharing rules related to NIST-MEP consulting services. This shift will make it easier for new and small firms to get sophisticated consulting services that will help them retool, grow, and capture new markets.
Having more entrepreneurs—in manufacturing and elsewhere—is a good thing its own right. But, it can also help rebuild the industrial commons, i.e., the "R&D and manufacturing infrastructure, know-how, process-development skills, and engineering capabilities" that are essential to modern manufacturing. New firms can help introduce new process, product, and service innovations and help bring new manufacturing opportunities back home.
US manufacturers face many global headwinds. President Trump and others point to trade pacts like NAFTA as key factors in US job loss. Yet, these trade impacts are likely dwarfed by the effects of a strong dollar which has appreciated more than 25% since 2013. While the strong dollar makes imports cheaper, it creates big challenges for US exporters. Many analysts predict that the continued strong dollar will have a pronounced negative effect on manufacturing employment.
Some researchers advocate direct action to realign the dollar’s value vis-à-vis currencies in China and other major US trading partners. While this prospect may be unlikely, we do need to recognize that the strong dollar is a more important factor than trade deals in terms of reducing US exports.
Most of the issues highlighted in this essay are forward-looking, i.e. they assess how to build a stronger US manufacturing future. However, we must not forget the past. The rise of Industry 4.0 will not be smooth and seamless. Many workers and communities will face displacement as automation and new ways of working change the face of US manufacturing. Smarter policies to support and retrain displaced workers must be part of any effective manufacturing policy program.
Sadly, the US presently does an awful job on this front. The US has a unique and unenviable position: our workforce faces some of the highest levels of economic dislocation, yet we provide some of the worst services and support in terms of helping workers respond, retrain, and recover. A few figures tell the depressing story. Over the past two decades, about 3.2% of American workers are displaced every year (i.e. they lose jobs due to outside economic factors as opposed to poor performance). And, of this group, only half are re-employed within one year. (Note that these figures cover all workers in all industries; they also undercount displacement levels in downturns like the Great Recession. The displacement figures are higher for older workers and in industries like manufacturing, and conversely, the reemployment numbers are worse.)
The US needs to completely rethink how it supports displaced manufacturing workers. At a minimum, we likely need to spend more on these activities. Currently, the average OECD country spends twice as much as the US in labor market and retraining programs. But, we also need to do things differently. New policies should include: better early warning systems to be aware of potential job loss or firm closings, new employment approaches like job sharing and job rotations that can help reduce full-time job loss, and robust investments in training, apprenticeships, and job-to-job transition assistance. These types of programs are the right and just thing to do, but they can also help address the talent development challenges noted earlier in this essay.
Life at EntreWorks HQ remains busy and rewarding. We are in the midst of two major long-term efforts: 1) A research project (on behalf of the Appalachian Regional Commission) assessing the development of entrepreneurial ecosystems in Appalachia and, 2) Providing continued support to the Office of Economic Adjustment’s Defense Industry Adjustment program. We are also supporting engagements with the Administrative Office of the US Courts, the University of Pittsburgh, the National Association of Counties, and the University of Texas-Arlington.
We also have numerous upcoming speaking engagements, including a panel at the March 2017 annual meeting of the National Association of Workforce Boards and at upcoming National Association of Counties and National Association of Development Organizations’ events in the DC region. We also continue to provide more regular news and updates at the EntreWorks blog at http://entreworks.net/blog. Recent posts have discussed America’s poor track record on worker retraining, new thinking on clusters, and rural wealth creation. You can also access blog updates at our Facebook and LinkedIn pages and on Google Plus.