The Manufacturing Boom You Won't Notice

Foxconn, the big Chinese manufacturer of Apple (Nasdaq: AAPL  ) and Hewlett-Packard (NYSE: HPQ  ) products, is thinking about building manufacturing plants in the United States, according to DigiTimes.

The move might be symbolic, driven more by public relations than by financial gain. But dig deeper, and you get the feeling that this could be the start of something new.

"Over the next 15 years, another 1.8 billion people will enter the global consuming class and worldwide consumption will nearly double to $64 trillion," a recent McKinsey & Co. report begins. That means more manufacturing. And a good chunk of it will take place in the United States.

Some background here. There's a common misty-eyed perception that American manufacturing is in deep decline. In terms of production, it really isn't. As recently as 2010, America was the world's largest manufacturer (depending on how it's calculated, China may have overtaken the U.S. in manufacturing output last year). Even adjusted for inflation, America manufactures about twice as much today as it did in the 1970s.

And all signs point to continued growth. Two big forces will drive it. First, we're in the early stages of a big energy boom that has driven the cost of natural gas down to decade lows. Since natural gas is difficult to transport, prices tend to be regional, meaning our low prices provide a big competitive advantage over other nations. Natural gas in the U.S. currently costs $3.30 per million BTUs. In Europe, it's $10.60. In Japan, $16.70. Last month, BlackRock (NYSE: BLK  ) CEO Larry Fink talked about a CEO who moved a factory from Germany to the U.S. solely because of lower natural gas prices. "This shift in energy cost has the potential to rewrite the economics of [manufacturing] industries," McKinsey writes.

Second is a changing wage dynamic between China and the United States. Chinese wages are growing much faster than productivity, while in the U.S. it's the other way around. Add it up, and you get this, according to a report by the Boston Consulting Group:

Our analysis concludes that, within five years, the total cost of production for many products will be only about 10 to 15 percent less in Chinese coastal cities than in some parts of the U.S. where factories are likely to be built. Factor in shipping, inventory costs and other considerations, and -- for many goods destined for the North American market -- the cost gap between sourcing in China and manufacturing in the U.S. will be minimal. ... When all cost are taken into account, certain U.S. states, such as South Carolina, Alabama, and Tennessee, will turn out to be among the least expensive production sites in the industrialized world.

This is all great news for American manufacturing, and it will very likely usher in a manufacturing boom.

But here's what it probably isn't: good news for manufacturing employment.

While the real production value of manufactured goods has doubled since the 1970s, manufacturing employment has declined by more than 5 million jobs.

The reason is productivity. It simply doesn't take as many bodies to manufacture a given level of goods today as it did in the past. Automation and robots today do what people did three decades ago. My favorite example of this is the story of a U.S. Steel (NYSE: X  ) plant in Gary, Ind. In 1950 the plant produced 6 million tons of steel with 30,000 workers. In 2010 it produced 7.5 million tons with 5,000 workers. Or consider the auto industry. In 1990, the average American auto worker's share of total auto production was 7.15 vehicles per year. By 2010 each worker was producing 11.2 vehicles annually. Here's how Neil Irwin of The Washington Post put it:

In the newest factories, one can look across an airplane hangar-sized floor and see only a small handful of technicians staring at computer screens, monitoring the work of the machines. Workers lifting and pushing and riveting are nowhere to be seen.

That's the new manufacturing industry -- high output, low headcount. So even as the U.S. faces a manufacturing boom, "manufacturing cannot be expected to create mass employment in advanced economies on the scale that it did decades ago," McKinsey writes. You may not even notice it, in other words.

Instead, what we're likely to see is a fairly small group of engineers, accountants, designers, and high-skilled machinery workers fill the ranks of the new manufacturing boom. Here's Irwin again:

While machines have gotten very good at building cars, they can't design a car or develop a marketing plan. ... In other words, the manufacturing worker of the future is more likely to have a graduate degree and wear a suit or a labcoat to work than to have only a high school education and carry a lunch pail.

Which brings us back to the Foxconn plant. As DigiTimes writes: "Since the manufacturing of Apple's products is rather complicated, the market watchers expect the rumored plants to focus on LCD TV production, which can be highly automated." Exactly.

With the slowdown in China, many investors are worried about heady growth going forward, but fear not, because The Future Is Made in America. Domestic manufacturing is poised to once again become the investment driver of the world, and all because of one disruptive technology. You can uncover the three companies that will become the American Steel of tomorrow in our analysts new free report. Just click here to read more.


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  • Report this Comment On November 20, 2012, at 11:05 PM, kyleleeh wrote:

    What scares me about stories like this is that their isn't really ANY labor intensive industries anymore. Which begs the question of what are people going to do for income if an ever increasing amount of work is being done machines? What is going to drive consumption?

    Economists always dismiss this by saying that someone always comes along and finds a use for all the untaped human capital. Yes, this is true to date, but they don't always do something constructive. Hitler came to power by giving millions of unemployed Germans "something to do". You look at the events of the Arab spring, the Austarity protests in Europe and Occupy wall street in America, and you can see that an ever growing number of people are not reaping the benifits of capitalism. As an investor this scares the hell out of me, because it means that most people have no skin the game and no reason not to vote for protectionism, socalism, and redistrabution of wealth.

    That being said the humanitarian in me thinks it would be a net good to become more socalist in a machine driven world. We may look back on Globalization and the digital revolution as the high water mark of capitalism before it's terminal decline....Humans have never invented a social system that lasted forever.

  • Report this Comment On November 20, 2012, at 11:38 PM, TheodoreCleaver wrote:

    So what is Foxconn's motivation for building the robotic assembly plants here? The rumor I read was that Foxconn is buying lots of Japanese, mainly FANUY, robots, so it wouldn't be the robot technology.

    It might be that the end-product shipping costs from China to the US market outweigh the world-wide shipping costs of the raw materials to Michigan. Well, but what raw materials would they preferentially source from the US? Gorilla glass? Cheap oil & natural gas?

    Maybe it's really because Apple wants new products delivered with shortest possible lead times? (Bonus! Shorter plane rides for Apple's manufacturing engineers to get to the factory.)

    That's my guess, I guess.

    But no, not many middle class jobs. As Chrystia Freeland, author of "Plutocrats: The Rise of the New Global Super-Rich and the Fall of Everyone Else" pointed out on the Colbert Report (Oct 11), the world ruling elite no longer need the US middle class consumers; profits can now be harvested from economies all over the world. So, no, not many more middle class jobs on the foreseeable horizon.

  • Report this Comment On November 21, 2012, at 3:19 AM, Chilaw wrote:

    Excellent article. One thought:

    The future manufacturing boom may benefit engineers, technicians and designers most directly. BUT, there is an ancillary economy that will develop and benefit. For instance, imagine a Foxconn factory in the middle of Alabama. The factory, parking lot and access roads will need to be constructed, maintained, and expanded – that means construction jobs. The factory will have people traveling to and from the location – that requires several hotels nearby, which means more jobs. The workers at the factory will need places for lunch/dinner and that means a few restaurants – more jobs. The factory will consume large amounts of energy – that means more business for the local utilities. The employer and all the employees will need to buy or rent local real estate – more jobs. The factory will pay taxes to local and state governments – that means government money and possibly more jobs. The factory will need a constant supply and maintenance of basic inputs like paper, metal, computers, glass, etc., which benefits local businesses.

    And we're not even considering the subcomponent suppliers that may crop up.

    This boom will help employment, just indirectly when compared to the old model. And most of these indirect jobs will probably not require advanced degrees in robotics.

  • Report this Comment On November 21, 2012, at 11:32 AM, TMFBiggles wrote:

    @ Chilaw -

    These things you speak of existed when manufacturing employment was at its peak, too. It's not as though we had no hotels and restaurants and housing and OfficeMaxes serving the various manufacturing plants before. All employment has indirect positive economic effects. How does a plant with 1,000 employees create a larger indirect effect on the economy than a plant with 10,000?

  • Report this Comment On November 21, 2012, at 4:36 PM, RonaldReagan2016 wrote:

    Foxconn needs to build a plant to help produce iPhones, iPads etc. . . The wait times to buy these are still 2-4 weeks. Getting these items produced faster will bring in more $$$, except American workers won't get out of bed to work at a factory making 12 cents an hour and free egg foo young. . .

  • Report this Comment On November 22, 2012, at 11:37 AM, ryanalexanderson wrote:

    Automation is the broken window fallacy in reverse. As in, if you can automate something but choose to do it manually, that's like breaking a window to repair it. Jobs in the short term at the expense of overall quality of life.

    So long as it happens at a regular pace, it will be beneficial to the aggregate, just as tractors revolutionized agriculture and benefited the aggregate.

    Besides, there's always original digital content to be produced. Robots can't do that yet. Well, okay, maybe the occasional Motley Fool "Five star stock poised to pop" article. ;)

  • Report this Comment On November 25, 2012, at 10:10 PM, Mk10000 wrote:

    I am not so sure that natural gas prices will stay so low. The Obama EPA/Sierra Club have had great success in their war on coal, and they are now turning their attention to "fracking" and drilling in general. It will be a terrible shame if the socialists in charge right now screw this up.

  • Report this Comment On November 26, 2012, at 12:53 PM, ShrikeTheFoolish wrote:

    Mk10000,

    This is an investment website

    It is not your own personal partisan conspiracy blog, not yahoo.com, not your group of like-minded friends.

    Please keep your political waste to yourself.

  • Report this Comment On November 26, 2012, at 1:19 PM, SkepikI wrote:

    Just finished reading some other article comments bemoaning the loss of the middle class. Its NOT lost..just changing dramatically like it did early last century. Employment for the lazy who want to just step into good paying jobs with HS or less or a college degree approximating that and an able body will be chronic underemployed, unemployed and underpaid. Unemployment rates for those with real engineering degrees right now is 4-5% depending on when, where and what specialty you look at (yes I have a BS ChE and watch this stuff). And yet those seeking an easy road, pubs with their friends every night and the pied piper, insist on finishing up a history, sociology, etc degree.

    I watched the computer revolution from close range several decades ago. I bought my first Northstar desktop (obsolete and out of business) in 1981 for $5000 (a lot of money then too) it came with wordstar, a daisywheel printer and its own monochrome tiny screen. I learned programing in the 70's on a CDC 3600 that took up a whole building- totally obsolete now like me...and am now typing this on a machine with more capability than that on my desk... THE PEOPLE BEMOANING THE DEMISE OF THE MIDDLE CLASS from computers could have filled a small city... nothing like that occurred!

    Maybe some of you want to go back to plowing a small plot with mules for full employment. I don't. We are IN THE MIDDLE of another manufacturing revolution driven by cheap computing, nanotechnology and low capital costs. If you are stuck on middle class status, and know nothing, work hard at building buggy whips maybe you should consider working hard at knowing something that will be useful in the next decade. OR be really good at something arcane and find people to pay you for it...I actually saw an interview today with a "Social Media Executive Consultant" Most people wont believe we are in a golden age where you can earn a living at most anything (including buggy whips) but you will struggle if you are not very good at it, or expect to be paid well in a dying business (Hostess industrial baking).

    For real investors- its no trick to spot the Pandora's box of massive change...the trick is to deduce what to do about it and then execute. No I still dont know. I have a few ideas, and Apple aint one of them. This was a great food for thought article, particularly since I am reading N. Silver's new book. That might be even better food for thought if someone wants to article about it...hmmm, maybe I should give it a go...

  • Report this Comment On November 26, 2012, at 5:12 PM, Darwood11 wrote:

    @TheororeCleaver, the robots are manufactured by FANUC; possibly a typo?

    Here's the interesting thing. Currently, about 5% of the U.S. workforce is employed in manufacturing, per recent statistics I've read. So, yes, perhaps there will be a Foxconn plant here. Big deal?

    This is reminiscent of solar. Less than about 0.2% of electricity on the grid in the U.S. comes from solar energy. My point? Yawn!

    I'm one of those sunset industry people, who has been retained by that steel mill in Gary IN to provide process control upgrades. Ditto for the refinery in Whiting, IN, Steel in East Chicago IN. In fact, for process plants of all types from CA to NY.

    My point? There are a small number of very skilled people in high demand in the U.S. who support manufacturing and heavy industry. A very small number. Government and popular opinion have just about destroyed these industries in the U.S. However, we do still build automobiles, recover steel, refine petroleum products, produce 42% of our electrical power from coal fired boilers, and make elaborate automated systems to control all of these. So guess what? That very small number of smart people is doing very well. No thanks to anyone.

    Foxconn may very well be the WalMart of manufacturing in the U.S. WaHoo!

  • Report this Comment On November 28, 2012, at 11:16 AM, atkinskd wrote:

    The hardest part of my job is eliminating the human interaction. The fact is a machine, doesn't get sick, doesn't have 'off' days, competing priorities etc. Finding operators to bridge the gap to technically savvy enough to attend and troubleshoot this equipment is tough since finding a position that allows them to pay for the necessary education just isn't there.

    Unfortunately labor intesive jobs are really geared toward very high mix, short life-cycle (<2 years) products where vision systems, machinery etc has to be updated before ROI is realized, to replace the laborer. They do exist but are few and far between.

    The other thing to consider is capability, my Dad worked at J&L back when. In it's heyday the steel industry could produce anything and everything an engineer could conceive. Tooling back up to that level is a 10-15 years out too IMO.

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