Laying the Groundwork for a Manufacturing Renaissance

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First came a Harvard Business Review article by GE CEO Jeffrey Immelt on “Sparking an American Manufacturing Renewal.” Second was President Obama’s announcement in which he proposed spending $1 billion in 2013 to build a National Network for Manufacturing Innovation that would kick-start US manufacturing. (Ironically, he made the announcement at a Rolls Royce North America aviation facility. Rolls Royce is a British company.)

These two “stakes in the ground” to rejuvenate US manufacturing come on the heels of a four-day conference in February where the captains of industry addressed US competitiveness, or the lack thereof, and what to do about it. At the conference, Immelt announced that GE would hire 5,000 US veterans over the next five years, invest $580 million in its aviation business, and build or rebuild 16 plants in the US.

It seems the tide is turning on outsourcing, which has been the conventional wisdom for US business now for well over a decade. Is this the dawn of a manufacturing renaissance?

Of course it’s too early to tell, as rebuilding the US manufacturing base will take years if not decades. The economy has shifted from close to a quarter of the workforce involved in manufacturing in the 1980s to about 10 percent today.

Still there’s momentum behind the rhetoric. For one thing, it’s an election year, and President Obama needs a jobs creation plan he can tout on the campaign trail. At the same time, there’s a business argument to be made for bringing manufacturing back home.

China’s labor costs have been increasing steadily over the last few years, which means outsourced production costs for US companies have been rising. As Immelt wrote in his HBR article, “outsourcing that is based only on labor costs is yesterday’s model.”

At the same time, oil prices have been climbing, which means transportation and logistics costs are going up. These two cost factors alone have investors asking pointed questions of corporate management about manufacturing strategy.

Immelt’s article cites three factors necessary to make US manufacturing globally competitive: 1) enhancing in-house innovation capability (this means hiring innovators such as designers and engineers); 2) investment in research to predict consumer trends; and 3) building IT infrastructure.

He points to his company’s recent $40 million datacenter investment and a multiyear IT project at GE Appliances as examples of the importance of that third factor. The datacenter will replace more than 330 systems across the business and create 1,000 jobs in the United States by 2014, he writes.

Then there’s the geopolitical argument for investing in US manufacturing. The speed of China’s transformation from a low-cost manufacturing center to a design and product innovation center has taken many foreign companies off guard. This evolution -- coupled with the government’s industrial policy and an attractive exchange rate for its currency, the RMB -- puts China is a position to achieve a competitive advantage in a variety of markets from smartphones to medical devices to wind turbines in the coming years.

Obama is proposing something close to industrial policy with his National Network for Manufacturing Innovation. The program includes government investment with academia and industry for applied research in new technologies, including establishing up to 15 innovation centers across the country. Each center would facilitate collaboration among local companies, universities, and state and federal agencies. Those agencies include the Department of Defense and Energy.

No doubt the combination of economics and politics will mean a renewed focus on US manufacturing. But is it a renaissance? We’ll know in a couple decades.