I have read this article and similar ones but these efficiencies apply to China too.
What I would like to see is a
corpus of articles that are written by a authors drawn from a broad range of political thought [neocons, libertarians, conservatives, socialists, democrats, etc.] that show a consensus on trade/economic divorce with china.
A few years ago the ultimate realist, Henry Kissinger, wrote his book "On China" this subject -- see video below -- I haven't read the book but from all the reviews I have read and the talk I have seen I don't remember such a dire prediction:
I was quoting from the Industry trend. Industry would have received some unpublished nudge from the establishment.
December 10 - 2015 Manufacturing Survey
Made In America Third Annual Survey press release
Nearshoring and Reshoring: Businesses see Greater Opportunities Keeping Manufacturing Closer to Home - Supply Chain 24/7 Paper
Manufacturing Wages: China Vs US - Business Insider
Is U.S. Manufacturing Coming Back? - Inbound Logistics
Production’s coming home - ConsumerCurrents 16 | KPMG | GLOBAL
Global Manufacturing – SAGE Business Researcher
Are companies reconsidering their worldwide strategies?
Executive Summary
Corporations rushed to expand their global operations over the last three decades, motivated in part by China's aggressive policies seeking foreign investment. Industries including automobiles, clothing manufacturing and technology opened factories there and in other parts of the developing world, with the United States losing jobs from the shift: In 1979, a record 19.5 million Americans worked in factories; now, around 12.3 million do so, and China has replaced the United States as the No. 1 manufacturing nation. But the complexity of operating overseas, rising labor costs in China and rapidly changing consumer tastes are causing some companies to reconsider their global manufacturing strategies. A growing number view Mexico as a closer-to-home low-wage alternative, and a few corporations are bringing work back to their home countries in a process known as “re-shoring.” The challenges of global manufacturing raise a number of questions. Can China keep its manufacturing lead? Will low wages continue to drive global manufacturing? Is re-shoring real?
Overview
Workers install car parts on an assembly line in Qingdao in China's Shandong province. Low labor costs have helped make the world's most populous nation a manufacturing power, but is that situation sustainable?
(STR/AFP/Getty Images)
Throughout May and into June, a heat wave enveloped Western Europe. Temperatures soared in Spain, Portugal and France, prompting government warnings, especially for small children and the elderly, about the heat.
1
Such hot weather might have caught some retailers off guard, as they waited for shipments of summer clothes to arrive. But for Zara, the Spanish mega-retailer, the heat wave represented an opportunity.
With more than half its production in Spain, which is also where it sells 20 percent of its merchandise, Zara quickly adjusted its “fast fashion” lineup.
That meant the company changed its production mix and shipped lightweight summer garments to its stores in the hottest zones weeks before they normally would have received them.
The strategy worked: Spring 2015 sales for Zara's parent company, Inditex, jumped 13.5 percent from Feb. 1 to June 7, while competitors such as Sweden's Hennes & Mauritz (H&M), which produces more than half its garments in Asia, could not respond as quickly.
2
Zara's nimble response illustrates how manufacturing is changing in the 21st century. Speed is essential, as is flexibility—the ability to meet rapidly changing market conditions. “If they own the factory, they exert more control,” says Amit Khandelwal, a professor of business at Columbia University. He explains that Zara essentially operates two sets of factories: one in low-cost Asian countries to produce basics like T-shirts and jeans, the other in Europe, where it produces limited-edition on-trend clothes that frequently fly out of stores within days of being put on the sales floor.
Apple is another company that has to move fast to satisfy its demanding customers. As soon as the technology company introduces its latest products, “early intenders” place their orders online and line up outside Apple stores to be the first to own them. That puts pressure on Apple's global production network, directed by its lead contractor in Taiwan, to get phones and watches out the door fast.
This pressure to be both fast and efficient illustrates a second change in manufacturing: Globalization and the quest for cheap labor no longer work the way they did in the 1990s, because a far-flung operation can pose major headaches for managers, while the advantage of lower labor costs, which drew so many companies to China, is vanishing.
Download Excel
Note: Based on value added in each country's national currency. Figures represent the total value of each country's economic output minus the value of any goods and services used in production.
Source: “National Accounts Statistics: Analysis of Main Aggregates, 2013,” Department of Economic and Social Affairs, United Nations, 2014, pp. 88–135, downloaded from
http://tinyurl.com/o688uar
Manufacturing accounted for 31 percent of South Korea's economy in 2013, 30 percent of China's, 24 percent of Indonesia's and 22 percent of Germany's. The United States, by comparison, generated 12 percent of its economic output from manufacturing.
Long Description
Horizontal bar graph shows the percentage of gross value added by 15 countries' manufacturing industries to their national economic output in 2013.
Data for the graphic are as follows:
Country Percentage
South Korea 31%
China 30%
Indonesia 24%
Germany 22%
Japan 19%
Mexico 18%
Russia 15%
Brazil 13%
India 13%
Italy 13%
Spain 13%
United States 12%
Canada 11%
France 11%
United Kingdom 10%
In the final decades of the 20th century, many CEOs and academics hailed globalization as the future, with corporations believing that opening factories overseas was the best way to thrive in an increasingly competitive world.
One proponent was Harvard University economist Theodore Levitt, who in 1983 predicted a new commercial reality: “the emergence of global markets for standardized consumer products on a previously unimagined scale of magnitude.” Instead of operating as multinational companies, with disparate operations planted in various parts of the world, corporations would operate seamlessly in this new global environment, Levitt wrote in the Harvard Business Review.
3
Executives at all manner of companies defended their growing overseas investments, citing lower labor costs, the incentives offered by countries to open new factories and the chance to sell more goods abroad.
Also fueling their determination to go global was China's huge potential as a market as well as a place to invest. And the opening up of Eastern Europe and the former Soviet Union after the fall of the Berlin Wall led to additional opportunities. “It was kind of a no-brainer,” said Jack Smith, the former chief executive of GM.
4 “One of the things that stood out right away was that China had a GDP per capita that was very similar to what was happening in Central and Eastern Europe,” where GM had invested after the Berlin Wall came down.
As companies took advantage of a plentiful workforce and, until recently, low labor costs, they shifted millions of jobs and entire industries, especially in textiles and electronics, from the United States, Europe and elsewhere to China, as well as parts of South Asia and Mexico. Companies especially rushed to invest in China after it joined the World Trade Organization in 2001. Its membership created tens of millions of manufacturing jobs in China, and later led to the displacing of the United States as the world's biggest manufacturer.
But such success eventually resulted in higher labor costs in China, and some U.S. manufacturers now see Mexico as a closer-to-home low-wage alternative, thanks to the infrastructure developed there since the North American Free Trade Agreement (NAFTA) was adopted in 1994, and a few companies are even bringing work back to the United States.
Foster Finley, a managing director at the consulting firm AlixPartners in Southfield, Mich., does not expect any sort of wholesale departure from overseas markets, or a return to the glory days of 1979, when 19.5 million people worked in American manufacturing. That figure is now around 12.3 million, according to the Bureau of Labor Statistics.
5
Download Excel
Note: July and August 2015 figures are preliminary estimates.
Source: U.S. Bureau of Labor Statistics, accessed Sept. 14, 2015,
http://tinyurl.com/42x5ru3
The number of manufacturing workers in the United States rebounded slightly to 12.3 million after it had fallen to a 75-year low of 11.5 million in late 2009. Manufacturing employment climbed steadily after World War II, peaking at 19.6 million in June 1979. The number fell over the next three decades, dropping most rapidly during recessions in the early 1980s and early and late 2000s.
Long Description
Line graph shows the number of manufacturing workers in the United States from January 1945 to August 2015.
Figures are shown in millions of workers. Data for the graphic are as follows; in this table, data have been condensed to include only numbers for January of each year; a full Excel table is downloadable on this page:
1/1/1939 9.1
1/1/1940 9.9
1/1/1941 11.0
1/1/1942 13.0
1/1/1943 15.5
1/1/1944 16.4
1/1/1945 15.7
1/1/1946 12.7
1/1/1947 14.3
1/1/1948 14.4
1/1/1949 13.9
1/1/1950 13.2
1/1/1951 15.0
1/1/1952 15.1
1/1/1953 16.1
1/1/1954 15.4
1/1/1955 15.0
1/1/1956 15.9
1/1/1957 16.0
1/1/1958 15.1
1/1/1959 15.0
1/1/1960 15.7
1/1/1961 14.9
1/1/1962 15.3
1/1/1963 15.5
1/1/1964 15.7
1/1/1965 16.2
1/1/1966 17.1
1/1/1967 18.0
1/1/1968 18.0
1/1/1969 18.4
1/1/1970 18.4
1/1/1971 17.3
1/1/1972 17.3
1/1/1973 18.3
1/1/1974 18.8
1/1/1975 17.3
1/1/1976 17.3
1/1/1977 17.8
1/1/1978 18.6
1/1/1979 19.4
1/1/1980 19.3
1/1/1981 18.6
1/1/1982 18.0
1/1/1983 16.7
1/1/1984 17.6
1/1/1985 18.0
1/1/1986 17.7
1/1/1987 17.5
1/1/1988 17.8
1/1/1989 18.1
1/1/1990 17.8
1/1/1991 17.3
1/1/1992 16.8
1/1/1993 16.8
1/1/1994 16.9
1/1/1995 17.3
1/1/1996 17.2
1/1/1997 17.3
1/1/1998 17.6
1/1/1999 17.4
1/1/2000 17.3
1/1/2001 17.1
1/1/2002 15.6
1/1/2003 14.9
1/1/2004 14.3
1/1/2005 14.3
1/1/2006 14.2
1/1/2007 14.0
1/1/2008 13.7
1/1/2009 12.6
1/2/2010 11.5
1/1/2011 11.6
1/1/2012 11.8
1/1/2013 12.0
1/1/2014 12.1
1/1/2015 12.3
He's skeptical about the idea of “insourcing,” which some global companies such as General Electric have touted, even as they maintain broad networks of factories overseas.
Finley uses another term: “near-shoring,” or shifting production to Western Hemisphere nations such as Mexico, where U.S. companies can still save on labor costs but manage operations more easily than if executives are a 15-hour plane ride away.
The reason isn't patriotism, Finley says. “It's very much an effort to produce better business results for the company.”
Rows of shipping containers wait at Lianyungang port in China's Jiangsu province; managers of global manufacturing firms must continually assess the efficiency of shipping from China to distant markets.
(ChinaFotoPress via Getty Images)
Ian Bremmer, a political scientist and consultant, has a different term for the changes occurring: “guarded globalization.” He noted the emergence of a “very different flavor of globalization [in developing nations]—slow-moving, selective and with a heavy dash of nationalism and regionalism.”
6
Haste and scattered global operations can lead to mistakes, as one glaring example shows: In 2010, Toyota CEO Akio Toyoda sat uncomfortably before a congressional committee in Washington, D.C., explaining why millions of his company's cars had to be recalled for defective gas pedals that sometimes led to the autos accelerating out of drivers' control. The issue led to as many as 89 deaths worldwide.
A big reason for the defect, he and others at the carmaker acknowledged then and afterward, was Toyota's push over the past 25 years to become a global manufacturer.
7 As Toyota grew, its internal communication process did not change, despite all the modern tools that technology offered. Toyota remained a Japanese-focused company, with decisions centered there and information not shared fast enough with the rest of the world. In the aftermath of the crisis, Toyota abandoned the idea that it should expand production wherever it could, no matter the stress on its operations. (See Short Article, “
After ‘the Learning Period’ at Toyota.”)
Justin Rose, a partner and managing director with The Boston Consulting Group, says Toyota's crisis coincided with twin developments in China, where wages were rising and the government was focusing on attracting technology centers and developing an internal culture of innovation.
“The era of super-cheap, highly accessible labor in China is quickly passing or is already over,” Rose says. “The next frontier is to transform those workers into more highly skilled laborers and move up the food chain into increasingly value-added activities”—those tasks that are more sophisticated than simple assembly-line ones. That includes devising new manufacturing methods and assembling an entire product, rather than just attaching a part as a device moves down the line.
But, as Zara showed during the heat wave, too much caution and China's new approach could clash with consumers' expectations, honed by a quarter century of seeing the marketplace change with lightning speed.
As the World Wide Web became widely available in the 1990s, and as social media grew this past decade, consumers demanded new products much more quickly than factory output could adjust, especially in industries such as technology and fashion.
Celebrities didn't want to wait for runway fashions to be available during the following season: They wanted the gowns to wear to awards shows
now. Millions of people who followed the apparel of movie stars and the Duchess of Cambridge also wanted to order those clothes, too, whether or not faraway factories had yet ramped up to produce and ship them.
As economists, business executives and others debate the outlook for manufacturing, here are some of the questions they are asking:
Weighing the Issues
Can China maintain its manufacturing lead?
Over the past 35 years, China made a dedicated push to dominate global manufacturing. But with its economy faltering and labor costs rising, China wants to compete with industrialized countries such as Germany and the United States and to create advanced engineering development centers. That could be tougher to accomplish than simply making the economy bigger.
China's domination of global manufacturing resulted from its government-controlled industrial policy and helped lead to years of extraordinary economic growth.
Download Excel
Note: 2014 figures are estimates.
Source: “Leading manufacturing economies share in world MVA,” United Nations Industrial Development Organization, June 2015,
http://tinyurl.com/pdr3mvo
China's importance to global manufacturing can be measured by “manufacturing value added”—the share of global gross domestic product generated from manufacturing. It contributed 18 percent of the global manufacturing economy in 2014, far more than in 2005 and well over the 11 percent added by Japan, formerly the second-largest contributor. South Korea and India also increased their share of the global manufacturing economy's value between 2005 and 2014. The contribution of most other countries shrank, including that of the United States.
Long Description
Horizontal bar graph shows the share of global gross domestic product generated from manufacturing by 15 countries in 2005 and 2014.
Data for the graphic are as follows:
Country 2005 2014
United States 22.6 19.3
China 10.0 18.4
Japan 12.3 10.9
Germany 7.5 6.9
Republic of Korea 3.1 4.0
Italy 3.9 2.7
United Kingdom 3.4 2.5
France 3.3 2.5
India 1.6 2.3
Mexico 1.9 1.8
Brazil 1.9 1.6
Canada 2.2 1.6
Spain 2.1 1.5
Russian Federation 1.6 1.5
Turkey 1.1 1.3
Into 2015, China achieved an increase in its gross domestic product (GDP) of at least 7 percent annually for a quarter century. It accompanied its rapid expansion with an industrial policy that called for investments in infrastructure, including roads, high-speed rail and ports. It developed an industrial corridor along its southeastern coast, which is home to about 60 percent of the nation's manufacturing output. To fulfill its goals, 150 million people left villages and towns over three decades to work in cities and factories, in the largest rural-to-urban migration in history.
8
China's major industries remain state owned. Unlike the United States, China has not put a premium on innovation, although the government wants that to change as the country encourages the development of technology centers. In 2015, it began “Made in China 2025,” a plan to “comprehensively upgrade Chinese industry,” according to the Center for Strategic and International Studies.
China wants to create 15 innovation centers by 2020 and 40 by 2025, serving 10 priority market sectors. They include advanced information technology, machine tools and robotics, aeronautics and biopharmaceuticals.
9
China's long-held advantage as a low-cost producer is eroding, as the workers from villages who flocked to cities to work in factories return home, having saved up enough money to live more-comfortable lives. New opportunities have arisen for some outside factories, and China's formerly strict one-child policy has limited their replacements.
Now, with China changing its focus from mass-market production to a more sophisticated manufacturing approach, experts question whether it will maintain its manufacturing lead. China continues to grow, meeting its 7 percent target in the first half of 2015, but the crash of the Chinese stock market in mid-2015 raised questions about the world's confidence in the nation's economy, which some investors fear be an unsustainable bubble.
In July 2015, China's auto dealer group said the nation could see its first decline in auto sales in more than 17 years, amid fears that consumers would avoid major purchases in the wake of the stock market's decline.
10
Certainly, wage growth has caused some manufacturers to look elsewhere. “If you make textile products, labor is a relatively large part of the cost structure,” says Rose. These companies tend to pick the lowest-cost locations, and those now include Vietnam, Bangladesh and North African countries, he says. In 2006, Chinese workers' annual wages averaged about $3,000 (in 2015 dollars), according to figures compiled by TradingEconomics.com. By 2014, that had almost tripled to about $8,200 (in 2015 dollars).
11 In comparison, annual wages for workers in Mexico averaged $5,600 per year, the website estimated.
A trio of analysts at The Boston Consulting Group saw the rise coming in a 2011 research report. “For many goods, when transportation, duties, supply chain risks, industrial real estate, and other costs are fully accounted for, the cost savings of manufacturing in China rather than in some U.S. states will become minimal within the next five years,” Harold L. Sirkin, Michael Zinser and Douglas Hohner wrote.
12
But other experts say too much is at stake for China to abandon the cornerstone of its economic growth.
“You really have to think of China as three pieces,” says Finley at AlixPartners. There is coastal China, where manufacturing operations were first established; inland China, which Beijing is touting to manufacturers unhappy with the costs of doing business in the industrial area; and the agriculture-focused hinterlands, areas not yet ready for foreign investment.
Finley says his company's clients have been put off by China's efforts to get them to invest inland. “People are not overly thrilled,” he says. “You can tap into a China with a much lower wage rate, but the workers are less skilled, less sophisticated; it's a less-infrastructure supported part of China, and you'll have all the commensurate problems.”
Despite decades of economic growth, China still does not offer manufacturers the local market for their products that many companies hoped it would. About 70 percent of goods are still exported, Finley says, just the opposite of the United States, where 70 percent of domestic production is purchased by American companies and consumers.
He does not write off China's chances for continued global leadership, however. “China has a lot of resources, a lot of people and a lot of ambition,” Finley says. “China has plans for expansion and control that are not what the U.S. wants.”
Will low wages continue to drive global manufacturing?
The global push of the past 30 years has meant tremendous upheaval for American labor. The days of well-paying, working-class jobs with attractive benefits, requiring minimal training, are long over.
Union leaders blame globalization, and it's easy to see why. Manufacturing jobs in the United States have plummeted by about 7 million since 1980, even though there has been a slight rebound since the depth of the recession in 2008. At the same time, the number of manufacturing jobs in China has multiplied five times, to around 68 million.
13
“When you're in the U.S. and talk to trade union folks, they will all say that globalization is bad for labor,” says Stephen J. Silvia, a professor at the School of International Service at American University.
For instance, unions have fought hard against the Trans-Pacific Partnership (TPP) treaty, a sprawling agreement that would involve a dozen nations, including the United States, Canada, Australia, Japan, Malaysia and Singapore. The Obama administration vows to protect jobs under TPP. But the AFL-CIO calls the deal “deeply flawed,” and says the United States is pushing to grant favored trade status to some countries “with deeply troubling records of human and labor rights violations.”
14
Pedestrians in Washington, D.C., pass an advertisement lobbying against the Trans-Pacific Partnership, a proposed 12-nation deal to reduce trade barriers.
(Brendan Smialowski/AFP/Getty Images)
But take the conversation outside the United States, however, and the attitude changes. Employees at companies in developed countries may, or may not, have been hurt by globalization. It depends on the country, the company and the industry, Silvia says.
He contends that the push overseas has not hurt skilled workers in Germany, Japan and, to some extent, the United States.
At the lower end of the scale, the quintupling of manufacturing jobs in China and the growth of jobs in countries such as Mexico, Cambodia and Indonesia has benefited their workers and raised their standard of living, even though their wages are less than in the United States.
Economic experts divide industrial jobs into three categories. The first, entry-level jobs, require few skills and can be performed by pretty much anyone with basic literacy skills. The second, midlevel jobs, may require some training but not formal education. Finally, skilled jobs, with technology components, require intensive training for industrial workers.
The first two categories have grown the most as companies invested in China—and they are the most threatened in any economy, if the sole determinant is low-wage levels, says manufacturing efficiency expert James P. Womack. He describes this practice as “labor arbitrage,” in which companies locate investments based entirely on pay rates.
“Once the Cold War was over and the Soviet Union fell apart, it was off to the races in terms of finding cheap labor,” he says.
Textiles aside, Womack contends labor arbitrage may be coming to an end in China and elsewhere for some industries, simply because of consumer demand. “The easy part is over for China,” he says. “The large part of what could be moved has been moved.”
Two things are colliding to limit Chinese job growth, Silvia says. One is demographics. China's one-child policy means that fewer young people will be filing into factories in coming years.
The second is China's own shift away from mass production to advanced technology and innovation. Khandelwal, at Columbia, says it isn't a detriment to China that wages are rising.
“The fact that China is no longer a cheap place to produce means the country has developed quite a bit,” he says. “So, what's going to be your next move? It's not going to be assembling components. It's going to be creating value added.”
Given the depth and breadth of China's manufacturing economy, Khandelwal believes that companies will not abandon it simply for lower-wage countries. For one thing, China may have been a historic anomaly.
For years, his native India has been talking about expanding its economy, only to fail to develop the kind of working class that has emerged in China.
“Can India, or Brazil or African countries industrialize?” he asks. “It's a really deep question and important for policy, too. Can you leapfrog, or do you need a transition period?” The answer, he says, is not yet evident.
Is re-shoring real?
Over the past 30 years, American manufacturing was awash in “outsourcing,” or moving work to production sites outside the United States.
In recent years, there has been anecdotal evidence of “insourcing,” or moving production back to the United States, a practice that some also call re-shoring.
The Organization for International Investment, a trade group representing foreign companies in the United States, says these firms have created 5.8 million U.S. jobs, or about 5 percent of private-sector employment. That includes 2.2 million manufacturing jobs, the group says. There has been direct foreign investment in all 50 states, in industries ranging from automobiles to food and beverage products to chemicals.
15
Download Excel
Source: “Insourcing Benefits U.S. Manufacturing,” Organization for International Investment, January 2015, p.2,
http://tinyurl.com/p9c282n
Japanese manufacturers employed more than 326,000 American workers in 2012. Together, Japanese, German (293,300), British (258,300) and Swiss (191,600) companies provided almost half of the nearly 2.2 million foreign manufacturing positions in the United States.
Long Description
Pie chart shows the number of manufacturing workers employed in the United States by foreign companies.
Figures are in thousands. Data for the graphic are as follows:
Country Number of jobs, in thousands
Japan 326.3
Germany 293.3
United Kingdom 258.3
Switzerland 191.6
France 186.7
Canada 179.1
Netherlands 91.8
Ireland 88.9
Italy 87.4
Others 470.4
But beyond foreign companies doing business in the United States, the data about U.S. companies moving work home are sketchy. Individual companies have trumpeted the things they are doing to bring back work. For instance, General Electric outsourced about 80 percent of its IT work to India and other countries in the 1990s but has since reduced that outsourcing to some 70 percent.
16
In a 2014 study, the accounting firm Deloitte found that technological advances such as cloud computing and online business processes were allowing companies to keep work overseas. Eighty-nine percent of survey respondents said they would continue outsourcing, until there was legislation blocking them from doing so.
17
But there is evidence of a growing interest in near-shoring, or moving work closer to the United States. For a number of companies, that means Mexico.
18 Finley of AlixPartners says such a shift is a far more likely prospect than wholesale returns of factories and products.
More than 40 percent of respondents to an AlixPartners survey said they would consider moving production if it meant their companies could better meet U.S. demand. And 86 percent said they have shifted production already, or plan to do so in the next two to three years.
19
Saravanan Kesavan, associate professor of operations at the Kenan-Flagler Business School at the University of North Carolina, Chapel Hill, says near-shoring has become tempting for companies that want to escape long supply chains. “Manufacturers set up shop where costs were low,” he says, “but when you're sourcing from the other side of the world, you might be placing orders six to nine months in advance. Who knows what's actually going to sell six months in advance?”
Finley and others say Mexico's maturing supply network, or base, has finally made it a viable alternative to Asian production for many industries, especially those producing more-expensive goods such as automobiles and electronics.
“In the case of Mexico, the supply base in the past few years has become drastically well developed,” says Osamu “Simon” Nagata, executive vice president of Toyota North America and the veteran purchasing director at Toyota.
Between 2002 and 2012, Mexico's automotive exports increased 152 percent, to $70.3 billion, and electronics exports grew by 73 percent, to $74 billion, according to Stratfor, a global consulting firm.
20
Mexico's emergence has come not only because of the North American Free Trade Agreement, now 20 years old, but also because of free trade pacts it has signed with other regions, such as Europe and Latin America.
21
“Firms want to be located in countries where they can freely export to any market,” says Donald Grimes, an economist at the University of Michigan.
But Mexico still has its ups and downs because of competition and the weaknesses in its labor force. For one thing, foreign direct investment fell in 2014, to $22.6 billion, well short of the record $42.1 billion in 2013. (A major investment by Anheuser-Busch InBev, the international beverage company, in Mexican beverage giant Groupo Modelo helped boost the 2013 figure.)
22
Increasingly, it is losing its textile business, lured from the Northeast and Southern United States, to Asian manufacturers who produce in high volumes that Mexican plants can't match.
Some companies, analysts note, are put off by the activities of Mexican drug lords, who are profiting from the growth in foreign investment by tightening their grip on industries they can control, such as mining and logging.
23
Finley, however, says that American businesses in general feel more comfortable working with their Mexican neighbors than with the Chinese government. “People view China with some wariness and skepticism. I don't come across a lot of people who worry about the Mexicans because they'll take us over someday,” he says.
Background
Trade's Deep Roots
Manufacturing has been an international industry for hundreds of years, with the concept of global trade at its heart. In the 1600s, English and Dutch traders crossed the Atlantic seeking business opportunities.
English entrepreneurs in 1607 founded Virginia's Jamestown colony, where they manufactured soap, pitch, glass and lumber—some of the first American-made products to be exported.
24
At the beginning of the industrial age in the late 18th century, English factories began exporting goods. In the 19th century, the American South expanded its economy by exporting raw materials, primarily cotton, to foreign countries, where they were made into finished products, in contrast to the North, where industries developed to supply local markets.
After President Abraham Lincoln ordered the blockade of Southern ports during the Civil War, smugglers brought in goods from Bermuda, the Bahamas and Cuba, scooping up illegal shipments of tobacco and cotton to supply factories overseas.
25
By the 20th century, companies considered global production as soon as they reached significant scale. Henry Ford, who founded his eponymous car company in 1903, declared he wanted Ford Motor to produce vehicles abroad as soon as possible. He made good on his promise, building his first cars in Canada and England starting in 1911, two years before he perfected the automatic assembly line.
Assemblers work on Ford Motor Co.'s first Model T assembly line, which went into operation on Oct. 7, 1913, in Highland Park, Mich.
(Ford Motor Co.)
Two world wars interrupted the flow of global manufacturing and trade. German companies, in particular, were stymied in efforts to produce abroad immediately after World War I, leading them to focus on their internal markets. British and Japanese companies actually opened their first car assembly factories in the United States before World War II, just as American companies including GM and Ford opened production facilities in Japan.
26
Growth After World War II
As the world economy regrouped after World War II, manufacturing became the key step in moving a country from an agrarian society to a wealthier, industrialized one. In 1970, manufacturing employment accounted for just under 300 million jobs worldwide, or about 25 percent of global employment, according to the United Nations Industrial Development Organization (UNIDO). In 2009, manufacturing accounted for roughly 500 million jobs worldwide, or about 16 percent of global jobs, UNIDO says.
27
Now, manufacturing accounts for roughly 500 million jobs worldwide, or about 16 percent of global jobs, UNIDO says.
Manufacturing employment has been rising in developing countries and falling in developed ones, where service jobs have made up for some of the lost factory jobs. Manufacturing as a share of GDP has declined from 16.4 percent in 1990 in industrialized countries to 15 percent in 2010, said UNIDO. In industrializing countries, or those still making the transition from agriculture, manufacturing as a share of GDP has risen from 16.5 percent to 21.3 percent.
Worldwide, 64.1 percent of global manufacturing output takes place in industrialized countries, compared with 67.7 percent in 2010, according to UNIDO.
The United States is one of the nations most affected by the recent global shift. According to the Bureau of Labor Statistics, the nation had 19.3 million manufacturing jobs at the beginning of 1980. Manufacturing fell to a low of 11.5 million jobs at the beginning of 2010, after the depth of the recession. By mid-2015, U.S. manufacturing employment had rebounded to 12.3 million jobs.
28
Some of the positions, including those at union-represented U.S. auto factories, were restored at lower pay than before the recession. For instance, veteran workers at factories represented by the United Auto Workers earned about $28 an hour in wages during their most recent contract (which expires in fall 2015). But starting pay for newer workers, under a two-tier wage system implemented in the wake of the 2009 auto bailout, was about $19 per hour. Those workers do not have the opportunity to “grow” to full pay during the life of the contract.
29
Foreign companies in a variety of industries, including automotive, appliances, food and beverages, are one of the major sources of manufacturing investment in the United States. Manufacturing investment by foreign companies in 2013, the most recent year for which information is available, was $65.9 billion, according to the Commerce Department.
30
These jobs tend to be more stable than those at U.S.-based companies, because investments were made recently and companies want to be able to fully amortize them. During the 2007–09 recession, manufacturing jobs at U.S. companies fell by 33 percent, but by just 6 percent at U.S. plants of foreign companies, Commerce said.
China's Rise
Outside the United States, China by far has led the expansion of manufacturing employment. In 1970, it had 14.2 million manufacturing jobs, placing third behind the United States with 18.2 million and the Soviet Union with 27.1 million, according to UNIDO.
By 1990, China had 42.4 million manufacturing jobs, dwarfing the Soviet Union (which was about to disintegrate) and the United States. In 2010, China had 68.8 million manufacturing jobs, leading the United States and the new third player, India. By 2012, 50 percent of all manufactured goods in the world were produced in China.
In the last decade, Vietnam grew almost as quickly as China. Between 2005 and 2010, Vietnam's manufacturing sector rose by an average of 9 percent a year, according to McKinsey & Co. The growth was fueled by Vietnam's 2007 entry in the World Trade Organization, and it was balanced between the industrial and services sectors, with each accounting for about 40 percent of Vietnam's annual output.
31
Vietnam has a thriving retail market of its own. Its retail sales have risen from $42.3 billion in 2008 to $75.6 billion in 2014, and the forecasting group Economist Intelligence Unit predicts sales could soar to $109 billion by 2017. Ho Chi Minh City and Hanoi both have fast-growing retail markets, with new shopping centers featuring global brand names such as Hermès, Banana Republic and Topshop.
32
Bangladesh, now the world's third-largest exporter of clothing among developing countries, has become an Asian center for garment manufacturing. It nearly doubled its garment exports between 2004 and 2009, according to The New York Times, and that industry employs 3 million people, more than any other in a nation of 160 million whose economy is largely based on agriculture.
33
Bangladesh has nearly 70 million people of working age, and it could easily absorb some of China's 20 million garment industry jobs, should companies choose to move them. But Bangladesh has a literacy rate of only 55 percent, compared with 92 percent for China. And regular blackouts lasting several hours a day beset the country.
Trade Wars
Two major trade confrontations in the 1980s between the United States and Asian countries had a significant impact on U.S. industry. One was the Voluntary Restraint Agreement negotiated between the United States and Japan over automobile manufacturing, after Japanese imports captured more than 30 percent of U.S. auto sales. The agreement limited Japanese imports to 2 million vehicles; to sell more vehicles in the United States, the companies had to produce them at domestic plants.
Union leaders thought that if the Japanese built plants here, they would quickly be unionized, Womack says. They miscalculated: The Japanese, German and Korean manufacturers built an entire nonunion industry, largely in the American South.
Meanwhile, China focused on developing a steel industry that is now the world's biggest, capturing about half of global market share. A key reason it wanted its own steel industry was to attract auto companies, which invested more money in China in 2014 than in any other global market.
34
China produces more than four times as much steel as the U.S. industry did at its peak in the 1970s.
35 The industry is largely government owned. In recent years, it has focused more on exports, leading to charges in the United States and Europe that China is dumping steel at prices lower than other manufacturers can afford.
Chinese policies have allowed foreign manufacturers to depart from the past practice of sourcing parts locally and then exporting finished goods. Apple's iPhone is a good example of how things have changed.
The iPhone is designed in the United States and assembled in China (as well as at one production site in Brazil), but Apple sources the components from suppliers in 30 countries, according to the company.
36
Andrew Rassweiler, senior director of materials and cost benchmarking at IHS Technology, told the public radio program Marketplace that a U.S.-built iPhone could cost as much as $2,000 at retail, if all U.S.-sourced materials were used. The parts alone, he estimated, would cost $600, and Apple could be expected to add a substantial markup.
37
The Supply Chain
The iPhone is but one example of the evolution of supply chains in global manufacturing, both in China and the United States. Supply chains refer to the flow of components to a factory, and the flow of finished goods to the end user. Until the 1990s, American manufacturers typically kept days' and even weeks' worth of parts on hand. But that meant they had cash tied up in inventory they were not using.
As the 1990 book “The Machine That Changed the World” explained, Japanese manufacturers embraced the practice of just-in-time inventory, or keeping as little inventory on hand as possible and relying on frequent shipments of parts ordered as needed. (See Expert View, “
Q&A: James P. Womack on Global Manufacturing.”)
For one thing, they did not have the money to tie up in inventory during their rebuilding years after World War II. For another, their factories tended to be smaller than sprawling U.S. facilities, meaning they didn't have space to store the parts.
Now, just-in-time is a standard practice across the world's manufacturers, made possible by developments in shipping, including air freight and the standardization of containers, says Womack, co-author of the 1990 book.
Before World War II, goods were shipped in all kinds of packages and sizes. But the need to ship materials around the world for wartime led to the development of a global standard for shipping containers. In 1955, the first standardized container that could be loaded directly onto a ship, train or truck was developed.
38
Freighters are now built to hold standard-sized shipping containers, which can be loaded at a factory and taken by rail or truck to a nearby port, for transportation around the world.
Technology Revolution
Beyond the ability to move goods, communications technology allowed manufacturers to monitor their operations in real time, and to communicate with suppliers from different parts of the globe. As computers began to appear on desktops during the 1980s, and companies were linked by telephone and then high-speed modems, managers found it easier to share information about their operations.
Depending on the company, this information was available to different departments within a corporation and sometimes shared with suppliers, and was easily viewable on a computer screen.
Bob Shanks, chief financial officer at Ford, says computer technology has helped shift Ford from a company with flags planted in different markets, mainly the United States and Europe, to one operating seamlessly worldwide. About 50 percent of its manufacturing footprint is outside the United States, and he expects that to grow.
“We are very much a global company—global in terms of our investment, global in driving a consistent strategy across the region, global in terms of product,” Shanks says.
He reached for his tablet computer to demonstrate how he could see Ford's operations in real time. Each region regularly submits data on cost, revenue and manufacturing output. Rather than wait for information to arrive by email, Shanks need only bring up the region of a business unit he wants to review, then click on a various data and compare regions with each other in real time.
“Before you had separate area rugs,” he says. “Now, it's a tapestry, and it's all woven into one fabric.”
Technology links are only a tool for executives, however, says Shanks. They still face significant challenges in managing their factories around the world.
Current Situation
The Zara Model
The spring 2015 heat wave only enhanced the global manufacturing reputation of the Spanish fashion retailer Zara.
It is a presence in American shopping malls, on high streets across Europe and in countries from Azerbaijan to Venezuela. Zara sells clothing for men, women and children, with a home-goods business offering tableware, fragrances and bedding. Whether you speak English or Greek, Spanish or French, Zara's website can adjust to your preference.
“If you go to Zara every week, you see something new,” says Khandelwal, the Columbia University business professor.
A shopper walks down a Madrid street with a bag from Zara. The Spanish fashion retailer controls its global manufacturing supply chain tightly in order to stock the on-trend goods customers around the world demand.
(Denis Doyle/Getty Images)
Zara is inextricably linked with its Spanish base, yet it taps production sources around the world. Khandelwal says many experts point to Zara as the company that most successfully manipulates its supply chain, the flow of goods to its factories and the distribution of finished products afterward.
“Envision it as literally a thread from retailers to manufacturers,” says Kesavan of the University of North Carolina. “It used to be a smaller thread. Now, it literally wraps around the world.”
Basics like T-shirts are made in cheap-labor countries such as Indonesia, but Zara also offers limited-edition products, often featuring international designers, which it aims to sell at close to the retail price, without deep discounts.
When those products sell out, they are not restocked. The healthy margins on these items are meant to offset the slimmer margins on cheaper goods, Khandelwal explains. Zara's flexibility has allowed it to avoid the long lead times that plague other fashion companies, which are often stuck with too much inventory of goods that don't take off with consumers.
Because of its size, Zara has the flexibility to own its own factories, or to contract out the work, Khandelwal says. All these decisions are made at its headquarters in Arteixo, Spain, called The Cube, home to its 200 designers, who keep its eight labels fresh.
Communication Issues
Even though a company can operate globally and control its supply chain, manufacturing is far from a trouble-free proposition. Language barriers, time differences and human nature interfere with the best of intentions.
Toyota in 2015 is a much different company than the Toyota that began this decade. CEO Akio Toyoda is now an experienced chief executive, known for his love of racing as much as his company leadership.
Then, he was only months in the job, despite his status as the grandson of Toyota's owner, and he faced one of the biggest crises at Toyota since his grandfather had to restart the company after World War II.
In 2009 and 2010, the company recalled millions of its cars worldwide for problems with unintended acceleration, which caused drivers to have trouble keeping their cars under control.
As it turned out, the problem was discovered first in Europe, and repairs swiftly ordered, but information on how to fix the cars was not shared across Toyota's operations.
39 That meant Americans waited longer for repairs, even though Toyota knew how to make the fixes.
“We were like a tree that grew too rapidly, that as a result was not able to form a strong enough trunk to protect it from the elements,” Toyoda said, looking back on the situation in March 2014.
40
Toyota's recalls in Japan, Europe, the United States and elsewhere were a wake-up call that the company had to evolve from a Japan-focused company to a global one that could act quickly, no matter where a problem occurred.
After the recall crisis, Toyota established a global executive in charge of quality and delegated responsibility for addressing quality issues to each of its major regions.
The company opened up its top management ranks to non-Japanese executives, naming an American, Julie Hamp, as its global communications chief and a Frenchman, Didier LeRoy, as one of six executive vice presidents. (Hamp resigned in 2015 after her arrest on charges of illegally importing prescription drugs from California to Japan.)
41
And it put a three-year hold on building more factories. That, in part, enabled Germany's Volkswagen to eclipse Toyota in the first half of 2015 as the world's biggest carmaker.
The hold lifted in 2015, when Toyota announced plans to build a factory in Mexico. It will mark the first time in North America that Toyota will have an established supply chain to feed the plant, says Nagata, the company's longtime purchasing executive. (See Short Article, “
After ‘the Learning Period’at Toyota.”)
Supply Chain Problems
Toyota was able to find solutions to the problems that led to its recalls. But ensuring quality across the supply chain has been a major headache for some global manufacturers.
Take the recall of airbags made by the Japanese company Takata, a supplier to Toyota, Honda and a dozen other global carmakers.
The airbags were installed in more than 30 million cars worldwide, but have been exploding with more force than intended. Takata doesn't know how to fix the problem, although it is making replacements, and the U.S. government can't say whether the replacement airbags will be free of defects. The issue is likely to drag on for years, until a solution is found and the cars can be repaired.
Meanwhile, the flooring giant Lumber Liquidators, once a darling of Wall Street, is struggling. It became the subject of an investigation by “60 Minutes” alleging that laminated flooring products imported from China had higher levels of formaldehyde than were allowed by California law.
Lumber Liquidators' CEO resigned, and its shares fell to new lows in summer 2015.
42
The complexities of the supply chain and the jobs that have been lost to global competition have prompted warnings from Democrats and trade groups that companies should be cautious about expanding further.
And yet, one of the most aggressive trade pacts ever is now the subject of sweeping negotiations. The Trans-Pacific Partnership, involving a dozen Pacific Rim countries including the United States, would cover nearly 40 percent of the global economy.
In the United States, the TPP has become the 21st-century version of NAFTA, in terms of the political debate that it has raised. Support for the treaty has been generated by the U.S. Coalition for TPP, a group of companies and associations ranging from farming to publishing to retailing. They say the agreement will open up markets for farmers and manufacturers and create U.S. jobs.
43
Foes have run television ads opposing it, and a variety of websites denounce it, especially because details of the agreement are being kept secret until a final draft is ready.
Nonetheless, President Obama, a Democrat, has continued to push for the pact. In June 2015, Congress gave him “fast track” authorization to proceed on the agreement, meant to lower tariffs and create new regulations for everything from global banking to agriculture and the pharmaceutical industry.
44
Obama insists that the TPP will not threaten American jobs. “We should level the playing field so that our workers have the chance to compete and win,” he said.
45
But others say that globalization harms the American industrial workforce. “In terms of the future, American manufacturing workers will be the big losers, with significant downward pressure on their wages and benefits, and increased job insecurity,” says Gary Chaison, professor of industrial relations at Clark University.
Negotiators failed to reach a deal this summer, but talks were set to continue in fall 2015.
Looking Ahead
Automation Threat
Experts say two factors will determine what happens to global manufacturing. One is innovation: Who can find creative ways to compete in a rapidly changing global economy? And the second is technology: How much work will be performed by industrial workers, and how much by machines?
“The big thing I'm keeping an eye on is automation,” says Khandelwal of Columbia University. “The same trends that have hit the U.S. in manufacturing are now hitting China. It's allowing firms to increase value added without extra workers.”
Rose, the managing director at The Boston Consulting Group, believes the swell of manufacturing employment in China is over.
“Companies have learned from going to China and other places that there are penalties in productivity that [come] with low-wage labor, and they have become more sophisticated in looking at productivity-adjusted wages,” Rose says.
As in the United States, Kandelwal sees a difficult period in China as automation displaces vast numbers of workers.
“That's going to be a painful adjustment process,” he says, “but it's not necessarily a bad thing.”
A drop in manufacturing employment could free up workers for other industries, such as the technology centers that China is encouraging employers to create, Khandelwal says.
It also could help overcome a possible worker shortage resulting from China's one-child policy of the late 20th century.
Khandelwal says automation could allow other emerging countries, perhaps those in the Middle East or Africa, to catch up faster because they would bypass what has historically been the first step—opening factories with human-operated assembly lines. That step requires creating thousands or even millions of manufacturing jobs and training workers to fill them.
These factories would require fewer employees for the same amount of production, but those overseeing production would need to be better educated to make the best use of the technology. That is a challenge, even in industrialized countries, where skilled production workers are in demand. “Can India or Brazil or African countries actually industrialize? Some people think not,” Khandelwal says. “Others say that China will be the last country to experience [massive job growth] because of automation.”
Innovating Globally
To succeed, global manufacturing investments also require innovation. Where will the best ideas come from? And, equally important, can innovation translate to other markets?
In this area, the manufacturing world is paying close attention to Elon Musk, the billionaire CEO of Tesla Motors and SpaceX.
Musk is a modern-day Henry Ford for the disruptive effect he is having on the automobile and space aviation industries.
Before Tesla, electric vehicles were considered curiosities with limited appeal. GM, for instance, killed its EV1 electric vehicle in 1999 when it failed to sell (and spawned a popular documentary, “Who Killed the Electric Car?”).
But Musk's approach has been to sell directly to consumers, with whom the company has constant contact.
Starting with a limited-edition $100,000 electric car, Musk has since added a $70,000 Model S. He also is developing the Model X sport utility and a far-cheaper small electric vehicle due by the end of the decade. All are or will be produced in the United States, according to Tesla.
Eventually, the vehicles will be powered by electric battery packs produced by Musk's gigafactories, the first of which is under construction near Reno, Nev. The battery packs would be built in conjunction with Panasonic, and assure Musk of a supply that cannot be guaranteed from Japan and elsewhere.
Construction vehicles move dirt on the site of Tesla's gigafactory outside Sparks, Nev., near Reno, on Nov. 4, 2014.
(Tesla Motors)
The 5 million square foot gigafactory, which is being built in partnership with Panasonic of Japan, also will produce home batteries called Powerwall that can be used to supplement solar panels and as a backup electrical power source.
Musk decided to build the giant factory, which is more than twice the size of a typical automotive assembly plant, because he did not want to risk an interruption in the battery supply chain for his vehicles. “The way we're approaching the gigafactory is really like a product,” Musk said during a news event in May 2015. “What we're designing is a giant machine.”
46
At the same event, Musk said he could envision “many gigafactories in the future. Many companies will need to build gigafactory-class plants of their own.”
Where those factories will be located—and indeed, where other manufacturing operations of all kinds will be set—is a question that could take the rest of this century to answer.
About the Author
Micheline Maynard is a former senior business correspondent and Detroit bureau chief for The New York Times and a contributor to Forbes. She has reported and written extensively on global manufacturing, and has visited nearly 100 factories worldwide. Her books include “Curbing Cars” (2014), “The Selling of the American Economy” (2009) and “The End of Detroit” (2003).
Chronology
1870s–1920s Companies in the United States, Japan and Europe begin opening offices and factories in other parts of the world as manufacturing spreads. 1887 England-based Lever and Co. purchases a site near Liverpool for a huge soap factory. 1903 Henry Ford founds the Ford Motor Co.; a year later he opens Ford of Canada. 1905 The Swiss-owned Nestlé merges with the American-owned Anglo-Swiss Condensed Milk Co.; the merger gives the new company factories in the United States, Britain, Germany and Spain. 1908 William Durant creates General Motors and soon owns 11 companies, including Chevrolet and Oldsmobile. 1913 Ford Motor develops the automatic assembly line, speeding the expansion of global production. 1917 Ford opens its first factory outside North America in Ireland, followed by plants in England and France. 1919 The United States emerges as the world's dominant manufacturer, accounting for 40 percent of all output and 60 percent of the world's steel. 1920s Beset by hyperinflation after World War I, Germany eclipses England as Europe's dominant manufacturing power, in part because it cannot spend money on its military under the Treaty of Versailles. 1930s–1940s The Great Depression and World War II dampen global expansion. 1932 Stock market prices plummet after the 1929 crash and manufacturing output drops to half its 1929 level. 1941 With the United States entering World War II, the aviation and automobile industries convert their operations to armament production, which they will do until the war ends in 1945. 1947 The General Agreement on Tariffs and Trade (GATT) is negotiated, with 23 nations participating. The agreement, in place until 1994, marks an effort to set global trade rules and combat protectionism. … The Cold War shuts off Russia and much of Eastern Europe to global manufacturing, causing international companies to focus on the Western Hemisphere. 1950s–1960s New ways to transport and manufacture goods sweep global companies. 1955 North Carolina trucking entrepreneur Malcolm McLean introduces “intermodalism,” which allows shipping containers to be moved seamlessly between trucks, trains and ships. … The European Economic Community (now the European Union) is formed. 1958 Toyota sells its first car in the United States, the Toyopet. The poor reception causes Toyota to stop selling the vehicle and return with a more powerful model in 1959. 1959 The first industrial robot is developed by inventors George Devol and Joseph Engelberger. Two years later, an industrial robot is installed at GM's Trenton, N.J., plant. 1960 International standards for containers are set. 1964 Mexico establishes the maquiladora program, allowing foreign companies to open manufacturing operations for export, rather than be required to serve the Mexican market. 1966 The first international container ship sets sail. 1970s–1990s Communist China invites investment, and trade agreements are negotiated. 1979 China opens its economy to foreign investment. … U.S. manufacturing employment peaks at 19.6 million. 1981 With the U.S. economy declining, Japan becomes a dominant global manufacturing power, exporting electronic products, automobiles and other consumer goods. … The United States and Japan negotiate the Voluntary Restraint Agreement (VRA), setting limits on imports of Japanese vehicles. The VRA prompts Japanese automakers to undertake joint ventures, and they subsequently open their own American factories. 1994 The North American Free Trade Agreement goes into effect, allowing for the easier flow of goods between the United States, Canada and Mexico. 1995 The World Trade Organization replaces GATT; more than 160 nations are now members. 2000s–Present Manufacturing booms in China, but companies begin to reassess expansion. 2007 Apple introduces the iPhone. Manufacturing initially is overseen by Foxconn, a contractor based in Taiwan, which assembles about 40 percent of consumer electronics sold around the world. 2008–09 After a Wall Street meltdown, the Bush and Obama administrations restructure General Motors and Chrysler, part of an $82 billion bailout of the U.S. automobile industry. Italy's Fiat takes control of Chrysler's management. 2010 China becomes the world's biggest car producer. 2014 Mexican car production sets a record, with further expansion expected due to new plants from Toyota, Audi and Ford. 2015 China's economy stumbles amid its stock market meltdown.
Only Pakistan and Myanmar will offer Chinese bases, and even in times of war, only Pakistan will provide China an foothold. Myanmar wont. 
