I attended the Precision Machined Products Association’s annual meeting in Austin over the weekend. The question I heard often was, “Why is my business so good if the economy is so bad?” Unfortunately the speakers hardly addressed this topic, so I will try to explain it.
1) Structural changes in the world economy now favor American manufacturing. A lot of businesses have gone away in the last 10 years. They’ve closed, moved to China, downsized, gone bust, or merged—and not much has started up in the last decade and a half. Manufacturing was downsizing in the ’90s but it was masked because of the Internet and telecom boom.
2) Automotive is coming back, but we mistakenly think of automotive as just GM, Ford and Chrysler—American vendors are doing a lot of work with Toyota, Honda, and Mercedes, too. High yen and Euro values relative to the past make America a low cost producer.
3) Relentless productivity advances in manufacturing makes for better margins. The press mistakes “restructuring” and cutting people as indicative of bad business. It may be the reason for continued good business. Head count and profits no longer rise together and even the Wall Street Journal misses it.
4) Contrary to popular opinion we are starting to get better young people to join manufacturing. Old people always think the younger generation is shiftless and inept, but I think that the notion that you cannot recruit capable new people is obsolete in this labor climate. Nonexistent desk jobs no longer look appealing next to $80,000 machinist jobs with benefits.
5) China is struggling to compete—wages are rising 15-20 percent per year, the workforce turns over constantly, there is a shortage of skills, and high-energy costs. The realization of what it really costs to make things in China with the travel, logistics, and quality issues has made outsourcing to China less attractive for American firms.
6) Innovation. If you look at big companies like Apple, Cummins and Amazon.com you see that America still has game. Add the brilliance of our farmers and the revolution in oil and gas production with horizontal drilling and you see a core economy that is thriving and world class, but one does not necessarily hire unemployed 56-year-old bankers.
All of this does not mean that Europe is not a mess and that retired Chicago teachers are going to get the pensions that were promised them for the next 50 years. The world economy is in the throes of a nasty restructuring not that different than what American manufacturing has gone through for the last 15 years. I like our odds. I wouldn’t bet on the French though.
Question: Do you feel optimistic about 2012?