Forum for Innovation

In December’s edition of The Atlantic, Charles Fishman explains why America may be in for an “insourcing boom.” Manufacturing operations that were moved offshore in past years are now beginning to make the jump back to American shores. Companies like GE are rapidly refitting idle assembly lines and building new ones with aplomb. 

The heart of Fishman’s projection of an America manufacturing renaissance is found in Raymond Vernon’s consumer product life cycle, which posited that developed countries like America would remain competitive in producing “new, high-value products,” even as low-value manufacturing moved to less costly shores. The only snag in this story came with the rapid development of countries in Asia and Latin America. Labor supply rapidly swelled. Workers there were able to manufacture both low and high-value products at a fraction of America’s labor costs. As the 2000s marched on, more and more factories took root offshore, bringing jobs and even innovative capacity with it. Indeed, Fishman quotes Lou Lenzi, the head of design for GE Appliances, as saying that “your whole business goes with the outsourcing.” American manufacturing appeared to be on life support. 

Today, it appears that we were too quick to write off Vernon’s product cycle. The story of American manufacturing may be changing thanks to 5 key factors:

1) Shipping has become much more expensive due to high oil prices

2) Energy-intensive industry is much less expensive in America due to low natural gas prices (side note: unlike with oil, natural gas prices are not set on a global market, so America’s gas boom is opening up a wide price differential with the rest of the world)

3) Wages in developing countries are much higher now than they were a decade ago (Chinese wages are growing at 18% a year, though these numbers are more of an educated guess)

4) “Unions are changing their priorities” (though the recent fight over the fate of Hostess shows that points of contention remain)

5) Labor productivity in America is growing 

Ultimately, the story of insourcing revolves around a changing labor market. That is, more productivity and flexibility at home coupled with higher wage costs abroad. These benefits are compounded by the efficiency gains of pairing the design and making of a product together, and then in turn moving this process closer to the end market. All of this should be good news to Americans hurting for work and for an economy that has made do with tepid growth. 

Before we declare victory though and splash our magazine covers with news of “America’s comeback” (here’s looking at you, Atlantic), let’s remember that America’s changing labor market needs a different set of skills to match. Unfortunately, America’s workforce isn’t fully ready, leading to the domestic skills gap that Sandra-Westlund-Deenihan describes in our latest BHQ. The Economist also highlighted evidence of a skills gap in companies needing science, tech, engineering, and math grads; these firms are now running trade deficits with labor-intensive products. 

Another related challenge is that the reshoring process is feeding into a bifurcation of the manufacturing labor market. In other words, it is generating a healthy supply of manufacturing jobs for those with low or high-skills, yet relatively few for those in the middle. In fact, NPR’s Adam Davidson pointed this out in an article for The Atlantic earlier this year. And as Felix Salmon explains, even jobs at the low end face tough competition from higher-paying service jobs (that also don’t come with stringent skills requirements). Regardless of the types of jobs that return, they will certainly be smaller in number. 

American manufacturing will undoubtedly remain a pillar of strength for the American economy. Even as manufacturing employment declined in past years, output continued to reach new heights. We have retained our innovative capacity (for now) as well as worldwide demand for what we produce. Over the next 15 years, roughly 1.8 billion consumers will join the global economy, and many of them will be purchasing the high-end products that developed countries like America are best positioned to supply. Change is coming though and we must be prepared to meet it.