OCTOBER 29, 2016 -- BY JIM NEFF
THE NEFF ZONE
LESSONS FROM THE FACTORY FLOOR
This political season you've heard a lot about the manufacturing and jobs outlook in the United States. It's common to hear politicians bemoan the “fact” that China has it all and the U.S. is going down the tubes. It's expedient rhetoric, but outside the make-believe world of politics and down on the factory floor a different reality is taking shape.
According to the Chicago-based Reshoring Initiative, a nonprofit think tank that supports U.S.-based manufacturing: “When you think of manufacturing megapowers, one country immediately springs to mind: China. After all, that nation has maintained the lead in the manufacturing horse race since 2010. But that’s about to change. The U.S. will outpace China as the world's most competitive manufacturing nation by 2020.”
There are several reasons for this, but analysts call the overall change “Manufacturing 4.0” or “Next Manufacturing.” Manufacturers are finding that the total cost of ownership (TCO) favors U.S.-based factory production. “The domestic energy boom has lowered the cost of transportation, prompting more factories to return to U.S. soil. There is proximity to a growing field of local suppliers that provide raw materials. Keeping production in the country means there are no duties and tariffs. R&D innovations on the factory floor aren’t at risk of intellectual property theft.”
Manufacturers also note that consumers are demanding “Made in America” products like never before. Even so: “The U.S. doesn’t have to lower its prices or wages to be competitive with China; it needs only a lower total cost to produce that product.” (http://www.ozy.com/acumen/the-us-is-beating-china-on-the-factory-floor-this-is-why/71321)
If you look at the Global Manufacturing Competitiveness Index, right now China is at the top with an index score of 100.0, but the U.S. at 99.5 is barely behind. By 2020 the index projects the U.S. at 100.0 while China will drop to 93.5, a stunning turn-around. (https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Manufacturing/gx-global-mfg-competitiveness-index-2016.pdf)
Concurrent with this manufacturing boom, the jobs market is also affected. “Thirty-seven percent of U.S. industrialists say their need for skilled labor will actually increase.” The key question is where will this labor pool come from.
Again, the answer does not spring from political hot air but instead rests with real world solutions. “A July report from the Dallas Federal Reserve, covered by Business Insider, notes: “People want jobs. There are millions of jobs available. Yet, nobody wants the jobs that are available. Why? Because many of those jobs aren’t good jobs. The answer is incredibly simple...they need to pay more. Low pay is the number one reason people quit their jobs, and when people quit, companies need to spend more to recruit, train, and retain new employees. It often ends up being more expensive to bet on the fact that you can find cheaper replacements than to just give out raises.” (http://www.cheatsheet.com/money-career/employers-good-workers-wages.html)
Now, you may think just paying people more and training them for the work you expect them to perform is a bit simplistic and perhaps not cost efficient. A “new” concept called “efficiency wages” is turning that notion on its head in the real world of work (as we speak).
Several major employers in this country are testing the theory. “That set in motion the biggest test imaginable of a basic argument that has consumed ivory-tower economists, union-hall organizers and corporate executives for years on end: What if paying workers more, training them better and offering better opportunities for advancement can actually make a company more profitable, rather than less? It is an idea that flies in the face of the prevailing ethos on Wall Street and in many executive suites the last few decades. But there is sound economic theory behind the idea. 'Efficiency wages' is the notion that employers who pay workers more than the going rate will get more loyal, harder-working, more productive employees in return.”
The bottom line of the theory is that if you properly train and then pay a worker a commensurate wage, that employee “is likely to work harder and show greater loyalty... (and) has more incentive to work hard, even when the boss isn’t watching.”
One company utilizing this approach even found another bonus. “The extra wages it is paying its workers don’t all go out the door on payday...Spending at the stores by employees has risen — offering a possible metaphor for what those efficiency-wage economists argue might happen across the economy, if wages were to climb.”
So there you have it. No fancy political maneuvers. No government intervention. Just plain American work ethic and trickle-up proving to be the one economic constant. Paying attention to what's actually happening on the factory floor pays off again.