Our economy is straining at the bit to grow out of the Great Recession. You wouldnt know that from the dreary news on both the jobs and GDP growth front. The good news is found in the incredible potential for high-paying jobs, growth and wealth creation bubbling up in Americas manufacturing sector.
Manufacturing is hot, even though were supposed to be in a post-industrial economy. The transformation in American manufacturing today is redolent of a century ago when innovation and growth in the industrial landscape was blossoming in both big companies and start-ups.
On todays start-up front we have emerging 3D printers – machines that ‘print parts and products direct from computer drawings — that promise to do for conventional manufacturing what PCs did for central computing. For investors, lucky ones at least, 3D printing is already changing some fortunes.
The stock prices for the five (so far) publicly-traded 3D printing companies are exhibiting classic "irrational exuberance" — 3D Systems [NYSE:DDD], Stratosys [NASDAQ:SSYS], ExOne [NASDAQ:XONE], Swedens Arcam [Stockholm: ARCM] and last month Germanys IPO for voxeljet [NYSE:VJET]. On the worth-watching front, tech giant Hewlett-Packard [NYSE:HPQ] is promising to enter the 3D printing market next year. Think of that as the equivalent of IBMs entrance into the PC market in 1981 after Altair, Radio Shack and Apple proved it was a real market.
Investors are not the only ones excited about 3D printing as evidenced by sometimes over-hyperbolic writings from pundits, futurists, and post-industrialists. 3D printing is no fad — though count on more Altair-like early successes to collapse. And it is a long way from being a "bubble," a subject about which Ive written earlier and will return to in a forthcoming column.
But it will be some time before 3D printing generates a significant boost in the nations economy or job numbers. Meanwhile there is another manufacturing revolution already underway that is at a GDP-moving scale. The American hydrocarbon energy boom is driving a massive resurgence in domestic manufacturing.
The dramatic growth in U.S. oil and gas production has not arisen from new discoveries or the opening of off-limits federal lands, but from new technologies and techniques that literally manufacture liquid and gaseous hydrocarbons from solid shale rock. Widely reported as "fracking" – hydraulic fracturing – the story is in fact one of deep industrial innovation, digital technologies and software. In other words, it is a secular shift in the industrial landscape. (For more on the future of technology to manufacture oil and gas, see my earlier column.)
The U.S. is the worlds fastest growing and now #1 producer of oil and natural gas. The shale hydrocarbon revolution has already driven a 45% reduction in oil imports, contributed over $400 billion a year to the U.S. economy, and attracted nearly $200 billion in foreign direct investment in America over the past five years alone. And America is now a net exporter of refined hydrocarbons — manufactured gasoline and diesel – for the first time since 1949 and on track to become a net exporter of natural gas. The EIA forecasts some $2 trillion in private sector investment in this sector in the coming decade. (For more on the scale of these direct economic effects see my report The Case for Exports.)
All of this is doing more than eroding the trade deficit and roiling global energy geopolitics, as valuable as both those impacts are. And it is doing more than driving a renaissance in the manufacturing needed to build out the actual oil and gas extraction, transportation, and processing industries. Low-cost high-reliability supplies from the American hydrocarbon sector are also fueling a revival in the energy-intensive manufacturing sector from plastics to fertilizers.
In a remarkably little-noticed report this past summer the American Chemical Council (ACS) catalogued nearly 100 chemical industry investments valued at over $70 billion that are coming on-line by 2017. This will generate over one million jobs and add over $300 billion to the GDP.
The effects of the boom in the energy-intensive manufacturing ecosystem will inevitably ripple out, catalyzing more manufacturing both upstream and downstream. New less energy-intensive manufacturing businesses will take advantage of the proximity to low-cost high-reliability supplies and suppliers as well as the growth in labor force skills and the advances and investments in new underlying technologies. Thats how industrial and economic ecosystems work. And thats precisely what policymakers hope will happen when they try to "stimulate" such outcomes. But none of this requires taxpayer money. In this case, all activity is adding to state and federal treasuries.
This manufacturing resurgence comes at a critical time. Manufacturing is not part of yesterdays economy despite the prevalence of the post-industrial trope. Manufacturing underlies everything we use daily to survive, prosper or enjoy. Everything.
The App revolution (about which more here) that is unleashing productivity in everything from retail to healthcare services is anchored in hardware. Computers and smartphones are made possible by manufacturing processes: the conversion of sand into silicon, bauxite into aluminum, manganese and a mélange of magnetic elements into memory, oil into plastics, and coal into electricity. How Amazon operates and what it delivers are all firmly anchored in manufacturing. Ditto WalMart and FedEx. Quite literally everything around us that makes possible all we do every day is manufactured from the material world. The vaunted rise of the "service economy" is inseparable from manufacturing, except in the minds of post-industrialists,
The embedded feedback loop that is part of the innovation ecosystem linking "services" and "manufacturing" has been lucidly argued by Intels legendary Andy Grove. For example, software (supposedly in "services") for semiconductor manufacturing, is an inextricably integral part of every stage from design to production and operation. Speaking of semiconductors, 82% of U.S. sales go abroad making semi-conductors one of the three largest American exports. The other two are in the aviation and hydrocarbon sectors.
Here we see a categorization failure regarding "services" and "extractive industries" that serves to hide the true nature and scale of manufacturing in North America. The categories come from the North American Industry Classification System (NAICS) that is useful for census accounting but less so for understanding core realities.
Fully 30% of the value of manufactured goods are found in NAICS "services" that are neither ancillary nor collateral, but integral to manufacturing. The misappropriation of "service" functions contributes not only to inflating what "services" actually comprise but can give the impression that, well, you can have a profitable service-centric economy without manufacturing much of anything.
As an aside, to learn more about the ludicrousness of some NAICS categories and the vacuousness of the post-industrial trope, I highly commend a new book on the history and current (not future) state of Americas manufacturing sector; Vaclav Smils Made in the USA: The Rise and Retreat of American Manufacturing. (And which I have reviewed in the City Journal.)
But back to Americas reality and the continuing stubborn unemployment rate and middle-class wage stagnation. It bears noting that manufacturing jobs pay nearly 30% more than the average for all industries. Manufacturing has the highest economic multiplier of all industrial sectors, generating $1.48 of economic activity for very $1 spent in manufacturing; and manufacturers are responsible for two-thirds of all private sector R&D spending. You would think politicians would be doing back handsprings to find ways to incentivize the burgeoning of Americas manufacturing sector.
There is one obvious policy option that Smil outlines in his Made in the USA. The American "manufacturing sector taxation went from lowest to highest in the OECD." Simply reducing corporate income tax to the OECD average — never mind making it the lowest again — would boost the U.S. GDP 2% and add 350,000 jobs. These are jobs that are the sticky kind, full-time and high-value that the economy thus far has struggled to restore.
Yes, Ive heard the argument that the GEs of the world dont as a practical matter pay the high tax rate. But thats irrelevant. Nearly all net job growth comes from small and mid-sized enterprises which do not have the legal and structural resources to game the tax code and thus do pay the high tax rates. Protecting – and incentivizing — the small and mid-sized manufacturing businesses should be at the core of a jobs and manufacturing strategy. Germany figured that out. As the worlds third largest manufacturing exporter, Germany enjoys a huge positive balance of trade in large measure because of its Mittelstand policy to support that nations midsized companies (100-500 workers). In America those would be called small companies and they are the engines of growth.
Consider another tax issue ripe for beneficial reform. The current punitive tax structure regarding foreign profits for American firms is the reason $1.5 trillion of capital sits off shore, a lot of it deriving from manufacturing, much of it awaiting repatriation. Creative policies to unleash that tsunami of capital for investment in the U.S. should be an obvious target for job formation.
We could list other policy reforms from less burdensome regulations (again, in particular relevant for small businesses), favorable treaties (more free trade is good, see Congressman Uptons new North American Energy Infrastructure Act for example), and diplomatic initiatives with more backbone (in particular in regard to issues such as currency manipulation and "dumping"). But the key fact is that the tidal forces for cheap energy and high-quality productive labor force are moving the epicenter of manufacturing growth back to the U.S.
Is it likely America will seize the opportunity to resolve policy issues and capitalize on its energy abundance to prime the pump for a broad manufacturing renewal?
In a spoiler alert regarding the earlier noted Made in the USA, Smil believes recent government and corporate policy decisions are not encouraging. But he does note that as "a lifelong critical observer of American society I am well aware how it has repeatedly demonstrated its impressive capacity for renewal." Political willpower may be elusive but history gives us hope that it can resurface in America.
Efforts to change taxation and regulatory policies face daunting political headwinds. But the good news is that the reasons for the historic erosion in U.S. manufacturing are not fundamental to technology or demographics or the laws of physics. There is nothing immutable here that necessarily disadvantages America.
The senescence of Americas manufacturing base is not foreordained. After all, half of the "50 most innovative companies in the world" according to a new Boston Consulting Group report are located in the U.S. And while innovators are in every sector, it is in manufacturing we find the most tantalizing potential.
Finally, back to the 3D printing revolution. It will benefit mightily from the ‘traditional manufacturing resurgence. It begins with capital, the core accelerant for all innovation, which the resurgence is generating in record quantities. The emerging 3D printing ecosystem is also linked to precisely the same advances in core knowledge in the interstices of manufacturing, in other words the chemistry and physics of processing and making stuff. Basic natural laws, and thus the advance of our understanding and manipulation of them, are just as relevant to fabrication of plastics and metals whether on a desktop printer or in a dystopian-scale Dow Chemical factory.
Thus the shift of a global epicenter of manufacturings ecosystem to the U.S. comes from the trifecta of more knowledge, talent and capital. It doesnt all happen everywhere and all at once. But it has already begun in a dozen or so states with highly productive shale fields. That is how we glimpse the future. SF writer William Gibson, who created the word "cyberspace," said that the "future is already here – its just not evenly distributed." To which Id add, "yet."
Original Source: http://www.forbes.com/sites/markpmills/2013/11/04/americas-unevenly-distributed-resurgence-in-manufacturing-has-started-in-the-shale-fields/