Manufacturing Outlook Depends on Whom You Ask

Dec. 8, 2008
Understanding the Volatility of the World Economy

The volatility of energy prices and escalating costs of raw materials is only part of what ails the world economy. But fretting over the financial crisis could translate into unnecessary hand-wringing.

“The current contraction taking place in U.S. manufacturing is a cyclical development,” says David Huether, chief economist, National Association of Manufacturers. “Last year, U.S. manufacturing output reached an all-time high. The U.S. remains the largest manufacturing economy in the world and its share of global manufacturing output has remained relatively stable—between 20 and 25% over the past 30 years. By itself, the U.S. manufacturing base would be the eighth largest economy in the world. The slowdown that is taking place is being driven by the housing downturn along with spillover effects from the finical crisis that is affecting consumer spending and business investment domestically, as well as economies overseas, which will likely dampen export demand going forward.”

But another analyst might tell you that cyclical is as cyclical does. “Manufacturing as a whole, historically, does not see a cyclical cycle,” says Clint Adamkavicius, senior research analyst, industrial automation and process control, Frost & Sullivan. “The manufacturing markets tend to run about six months behind the rest of the markets, and more cyclical markets, such as the housing market, tend to dictate to manufacturing through a trickle-down effect. As for it being a permanent change, at this time there is no data to support that, being that we are in a global market, and there are still developing markets that could become very lucrative in the future.”

And these emerging markets could prosper from an infusion of engineering talent. “Access to qualified workers is increasingly becoming a major concern for U.S. manufacturers,” says Huether. “This pertains to skilled production jobs as well as professional positions such as engineers. This is a very real problem that could undermine our country’s traditional competitive edge in innovation. Too few college students are enrolled in engineering, and many who are studying engineering are foreign-born students who in many instances are not allowed to remain in the U.S. after their college careers.”

The U.S. still remains one of the top producers of engineering talent, says Adamkavicius. “I know there are reports out there that contradict this statement, many of which I have read,” he says. “However all of the reports I have looked at comparing the U.S. to, say, India or China carry a very loose definition of the term ‘engineer.’ If we are talking degreed engineers—mechanical, manufacturing, process, electrical—the U.S. still holds a competitive edge over even its closest competitors. The bulk, from what I read, of graduates coming from other countries are graduating with more of a technical degree. These degrees are faster to achieve, and this is one of the main reasons why we have seen losses within manufacturing to our Asian counterparts. One of the major arguments is the issue of reverse-engineering of branded U.S. technology. Chinese manufacturing, specifically, has been able to reproduce manufacturing goods from the U.S. and sell them here at a much lower price while maintaining a profit. However, there is very little evidence to show independent engineered marvels in regard to manufacturing coming from Asian countries. The majority of their products can be directly linked back to an engineered component or product from either the U.S. or Europe.”

So how does the U.S. combat this? “Simply put, second-level branding,” explains Adamkavicius. “Second-level branding is a marketing model seen mostly in the automotive industry, whereby a manufacturer puts out two different tiers of products. For instance, Toyota cars vs. Lexus vs. Scion. One company, three different brands and you won’t see a Toyota Land Cruiser with a Lexus tag on it. The end user knows up front the level of quality they are buying from Day 1. They will expect nothing more or nothing less; however in the end if a Toyota breaks down, the end user is not blaming Lexus. So the branding maintains. The manufacturing community has seen a significant loss in sales to foreign-made products. The resounding trend in this is that many end users, though still acknowledging branding, are content in substituting quality for price. Why not exploit this behavior? This same model can be employed in various manufacturing markets. Now the optimal way to do this is to acquire a Tier 2 participant and to not rebrand its product, so that the established name still exists. However a new company could also be born, such as an LLC or LLP; however this will take a considerable front-end investment in equipment and marketing.”