High Paid Manufacturing Turns to U.S. - Analyst Blog

By Zacks | January 14, 2013 AAA

Outsourcing or offshoring has had a profound effect on the U.S. job market. Industries such as textiles, toys, shoes and a part of electronics have moved overseas to low-cost destinations such as China, Mexico and the Philippines. Consequently, traditional blue collar manufacturing jobs have shrunk in number in the U.S. Furthermore, globalization and trade have caused middle class income stagnation for the most part. Employment in manufacturing has declined from 32% of the workforce to about 9% at present. As part of the process, however, the U.S. economy has transitioned from a brawn to brains or "ideas economy". Yet, Americans are by and large not better off today than they were 30 years ago in terms of the median income. While globalization has reduced wages for many workers, its benefit is derived by shoppers in terms of cheaper consumer goods.

In the current phase of globalization, some high-skill manufacturing jobs are drifting back to the U.S. While services remains America's strength, local U.S-based production is gaining ground on account of varied factors such as a weaker dollar, cheap energy at home, rampant corruption in developing countries and rising wages in China.

For example, low paid Chinese workers were sought after by American companies until robots operated by trained American workers at Caterpillar's (CAT) East Peoria, Illinois plant were able to do the work for less.

The U.S. has evolved to become an advanced production hub in other high profile cases as well. This is borne out by the decision of foreign multinationals Airbus, Honda and Toyota to set up production facilities in America.

Reshoring is already under way with 3M Company (MMM), among others, shifting some production back home. High-end export-oriented manufacturing is making a comeback in the mid West as demonstrated by Cummins Inc. (CMI), Toro Co. (TTC) and Timken Co. (TKR).

While the earlier phase of globalization was marked by supply shock emanating from the huge pool of cheap labor in developing nations, the current phase of globalization is characterized by demand shock arising from rising prosperity in China, Brazil, India and other emerging economies. This translates into growing demand from the burgeoning middle class in these countries for Made in America goods and services. 

It is estimated that well over two million production jobs may return to the U.S. over a period of time but these jobs will need sophisticated skills. At a minimum, a community college degree will be required for these futuristic jobs. Among others, Microsoft Corporation (MSFT) and Siemens AG (SI) are setting up educational programs in conjunction with community colleges to overcome the skills deficit of the American work force and set the stage for a high-skill, high-wage workforce. 

To sum up, America can follow the footprints of high pay exporters, such as Germany which excels in top-class engineering goods, by manufacturing goods where it has a competitive advantage. However, a high wage society demands greater commitment to technical education. Niche arenas for American enterprise include aviation, defense, tech as well as areas with intellectual content such as education, entertainment, financial services and Internet related activity. Best examples of growing Internet-based activity include Amazon.com (AMZN), Facebook (FB) and Google (GOOG).

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