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The core components of the manufacturing industry in the United States (employment and output) have been diverging for the past few decades. The looming fear of being ousted from the top spot on the global manufacturing totem pole has become an increasingly foreboding specter overshadowing the reality of the situation, which is that we remain the world’s largest manufacturer, but only by a narrow margin.

It is true that globalization has helped low-cost producing nations, such as China to rapidly gain considerable ground, but in Real Manufacturing Value-Added terms, the United States continues to be the forerunner (if only by a nose) in global manufacturing output. The real problems the country faces in the manufacturing industry are the loss of domestic jobs in that sector and where the country will stand in the future.

Although there is conflicting data that suggest China became the largest manufacturing nation by output in 2010, according to the most recent analysis performed by the United Nations Statistics Division, when one takes into account the Real Manufacturing Value-Added figures (which looks at output on a constant currency basis, so as to eliminate the effects of price and exchange rates), the U.S. represented roughly 20% of global manufacturing at about $1.83 trillion and China was nipping at its heels with $1.79 trillion. This gives credence to the concerns about the U.S. facing stiff competition in the manufacturing arena.

However, one must consider the fact that the U.S. achieved that $1.83 trillion in output on the backs of 11.5 million workers, while it took 100 million Chinese workers to generate slightly less output. Indeed, China’s rapid economic expansion over the past two decades, thanks mainly to very low-cost labor, has been impressive, especially considering that in 2009, China accounted for only about 12% of the world’s manufactured goods. This advance suggests that the global economic downturn enabled China to benefit from increased demand for less expensive goods.

Still, there are several factors to consider when looking ahead at U.S. manufacturing potential. One is the substantial decline in that sector’s employment over the past several decades (from about 20 million in 1979 to roughly 11.5 million today). Global outsourcing, increased worker productivity, technological advances and the further mechanization/automation of the manufacturing process have all helped to reduce the labor intensiveness of the industry. This has reduced costs and enabled the U.S. to increase production at a more profitable pace.

On the other hand, the shift in jobs to the service and technology sectors can only drive economic growth but so far. There remains a need to produce tangible, useful goods that support infrastructure and strengthen the core of domestic economic productivity. Hence, the increasing prevalence of labor outsourcing is, in fact, enhancing the competitiveness of nations like China, India, and the Republic of Korea (Korea).

The Global Manufacturing Competitive Index (GMCI) notes that the Asian region offers the most favorable prospects for manufacturing growth over the next five years. The GMCI ranks talent-driven innovation as the highest driver of manufacturing growth. The abundance of highly skilled workers, scientists, engineers, and researchers in Asia, particularly China, India, and Korea, combined with heavy government investment in science, technology, and manufacturing physical infrastructure, has earned this region top ratings for manufacturing competitiveness, ahead of the U.S. Thus, while the U.S. attempts to cut costs and boost productivity through the outsourcing of labor, production activities, and the export of research/development and intellectual assets to emerging nations, this practice is in fact substantially aiding other nations’ competitive positions and putting the U.S. at risk of losing ground in the future.

The aforementioned factors are a legitimate cause for concern. But, at present, the U.S. remains a manufacturing powerhouse in terms of high-quality, high-demand, cutting-edge products in the fields of technology, telecommunications, medical instruments, and office machinery. There are seven U.S. companies among the top 20 largest publicly held manufacturing companies in the world (by year-to-date revenue through November 2011), including the global leader, energy behemoth ExxonMobil (XOM - Free ExxonMobil Stock Report). This share of the top 20 is much higher than any other nation, and includes companies that span various industries such as General Electric (GE - Free GE Stock Report), General Motors (GM), and Hewlett Packard (HPQ - Free Hewlett Packard Stock Report).

Moreover, the rapidly accelerating level of individual worker output in the U.S., which has tripled since the early 70’s, indicates that the earning power of the average American employee exceeds that of other manufacturing nations. Furthermore, at 20%, the U.S. share of global manufacturing is greater than those of Germany, France, Brazil, and India combined. And although China has caught up to the U.S. in terms of output, the wealth generation that has resulted from that country’s economic development has begun its transition into a consumer-driven economy. This shift should eventually force the Chinese government to allow its Renminbi (Chinese currency) to strengthen against other global currencies and thereby drive up manufacturing wages. In fact, many argue that Chinese labor practices and currency policy are what have enabled the manufacturing sector to expand as rapidly as it has.

All told, the ongoing global economic malaise has no doubt tempered U.S. manufacturing growth over the past several quarters, but recent data suggest that pent up demand and a bubbling rebound is likely to herald a protracted up cycle. This country has the breadth and depth of resources and capabilities to maintain a dominant position. However, absent a cohesive national policy on reinvigorating the U.S. competitive position in manufacturing, the country may find itself struggling to maintain its competitive footing.   

At the time of this article’s writing, the author did not have any positions in any of the companies mentioned.