US manufacturing supply base weakened by cheaper imports

09 November 2017 Authored by Consulting.us

US manufacturing has witnessed a steep decline in its fortunes in recent years. A new report highlights decreased competitiveness as one of the key drivers of its decline, with smaller suppliers and their employees losing out as firms cut costs through outsourcing, automation, and the elimination of redundancies.

A year on from the surprise victory of polarizing US President Donald Trump, analysts are still unpacking the causes of his unlikely political triumph. The electoral college system – a state-based system that means the popular vote does not elect the president – is what ultimately handed Trump the presidency. But one of the many sources of rival Hilary Clinton’s defeat lay with her own campaign. The defeated Democrat did not campaign in ‘rust-belt states’ such as Michigan, on the assumption that she could rely on their historical support. Michigan, however, went ‘red’ on November 8th 2016, with the electorate switching to the Republicans despite staunchly supporting the Obama administration for the past eight years. The sustained loss of jobs in the manufacturing sector – something the state is dependent upon – was cited as a major factor in the political switchover.

Manufacturing remains one of the US’s larger employment sectors, as well as a key driver of innovation. The sector, however, has suffered considerable decline in recent years, as elucidated in a new report from McKinsey & Company‘s Global Institute titled ‘Making it in America.’ The report explores some of the key causes of the steep decline of US manufacturing since the early 2000s, while further examining the effect that wider labour market changes have had on employment and suppliers.

US ranks second in world for manufacturing value added

The US is one of the world’s largest manufacturing hubs, creating around $2.2 trillion in value added in 2015 – well above rivals Japan ($768 billion) and Germany ($668 billion). The US has, however, fallen behind first-place China, which steadily climbed from number 8 in 1985 and number three in 2005. China’s manufacturing value added was $3.1 trillion in 2015.

The manufacturing industry remains one of the largest drivers of research and development in the US, accounting for about 70% of private sector research. In terms of export activity, the sector generated about $1.3 trillion in export products in 2015 – a 20% increase from 2005 – and is responsible for 60% of total exports from the country.

Domestic-supply-base-hollowed-out-saw-trade-deficit-increase

Trade deficit

While US exports remain high, McKinsey notes the widening trade deficit in advanced industries, which has increased considerably across various subcategories since the start of the recession. Petrochemicals and fertilisers and pharma saw relatively minor dips further into deficit, while computers fell back to the deficit levels of the Y2K-era. Semiconductors deficit grew sharply, as did that of automobiles. Aerospace was the sole industry to see significant gains in net exports since 2010, up to a more than $100 billion surplus, while medical devices saw small declines but managed to remain just above neutral.

A number of factors have influenced the growth of the US trade deficit to its level of $800 billion, of which $380 billion derives from advanced manufacturing. The primary reasons for the increased deficit are related to competition, the relatively strong US dollar, and changes in consumer demand – leading US manufacturers to increase pressure on supply chains, with considerable supply acquired from imports. The Trump administration has threatened to curb the increasing imports, with the introduction of large import tariffs for parts hoping to encourage manufacturers to choose ‘American made’ parts. However, experts predict that the tariffs may actually have a negative impact on US manufacturing, as the cost of more expensive domestic or foreign inputs will ultimately be passed on to consumers, who will purchase less manufactured goods– further hurting sector employment in the long-run.

Job-declines-and-modest-rebound

Aside from a growing dependence on imports, US manufacturing has also seen significant job losses. The drop in employment was most pronounced in the early 2000s, when the sector lost about 3 million jobs, before dropping by a total of 5.5 million jobs at the depth of the Great Recession. In recent years, the number of jobs in the sector has increased by almost one million, though job levels remain considerably below peak manufacturing employment in the 1960s and 1970s.

The number of production plants operating in the US has declined by around 30% since 1997; automation has increasingly improved productivity and reduced the need for workers, with the remaining plants employing about 15-20% fewer workers. Principally, though, the research notes that relatively poor competitiveness is the key reason for the decline in US manufacturing, with companies turning to off-shoring, automation, and reduced benefits to cut costs. Additionally, around 10% of manufacturing jobs are staffed by low-paid temporary workers, many of whom rely on food-stamps and other government programmes to make ends meet.

Real-manufacturing-value-added

The loss of competitiveness has produced a number of ‘knock-on’ effects in the wider sector. Smaller suppliers have been especially squeezed, with many smaller players wiped out as the domestic supply chain was hollowed out in favour of foreign parts. While consumers benefitted from lower product prices, the margins of many companies in the sector were further squeezed in a competitive ‘race to the bottom’.

Some industries in the sector have fared better than others: asset-light and innovation-heavy industries like high-tech and pharmaceuticals have seen their relative value added remain at near-record levels. Profit growth has also been concentrated in those industries, highlighting the increased inequality in the sector environment.

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