What Has Driven Manufacturing Offshore?

When I give my presentation on “Why Should we Save American Manufacturing and What can I do?” I am often asked if unions drove manufacturing offshore.   My answer is “not in general.”  This answer elicits disbelief so I briefly explain the reality.  This article will explain my answer in more detail and consider the real reasons why manufacturing in the United States has gone offshore.

First of all, unions only represent about seven percent of the private sector workforce today, down from 12 percent in 2007.  At the peak in 1945, nearly 36 percent of American workers were represented by unions in the private sector workforce.  Now, 36 percent of national union membership is comprised of public sector workers; in other words, people who work for local, state, and federal government directly or indirectly for government-funded agencies.

Second, the first industries to set up manufacturing offshore were not unionized – electronic component and toy manufacturers.  I’ve worked in San Diego’s electronics and manufacturing industry since I was 18 years old, and I never worked for a company that was unionized.  In fact, at the most there were only a dozen or so companies that were unionized, and at the present time, I only know of two companies that are unionized – General Dynamics NASSCO (shipbuilding) and Caterpillar’s Solar Turbines (gas turbine engines, compressors, and power generator sets).

California’s high technology industry in Silicon Valley was never unionized, and virtually all of California’s technology-based manufacturing industry is not unionized.  The only union that still has any significant membership in California’s manufacturing industry is the International Association of Machinists & Aerospace Workers, and its membership has dropped dramatically in the past 20 years.

The search for lower cost areas for manufacturing isn’t something new.  Sixty years ago, northern and New England companies started moving manufacturing to the southern states.   Why did these companies move?  First, because southern states were “right to work” states; in other words, not unionized, so wages were lower.  Second, there were less burdensome government and environmental regulations in these states in the years before the establishment of the national Environmental Protection Agency and OSHA.  And third, most of the southern states had lower personal and corporate tax rates than the northeast states.

Thirty years ago, manufacturers, particularly West Coast manufacturers, started moving high-volume production to Hong Kong, Singapore, and the Philippines for the same reasons – lower wages, less government regulations, and far less stringent environmental regulations.  About the same time, manufacturers set up assembly and manufacturing in Mexico in maquiladoras to produce goods for the U.S. and world markets for all of the same reasons.

The next area for lower cost manufacturing was Asia, predominantly China and India.  At first, U. S. manufacturers outsourced specific parts and components of products with offshore vendors.  Then, they outsourced whole product lines to offshore vendors, and finally they built their own manufacturing plants in China after the Chinese government’s policies changed to allow private ownership of companies and foreign investment.

The difference between sourcing in foreign countries such as Hong Kong, Singapore, the Philippines, and Mexico is that the manufacturing facilities in those countries have been either manufacturing plants owned by U.S. companies or owned by private entrepreneurs of the particular country and were not companies owned all or in part by their government as was the case initially when manufacturing was set up in China.

In my opinion, the main reasons why U. S. companies have offshored manufacturing are:

  • Lower labor costs
  • Few or no environmental regulations
  • Less government regulation on building construction and operations
  • Lower taxes
  • Global “free trade” mentality

The benefits of the first two are eroding as wages increase in China and other foreign countries and environmental laws are passed and starting to be enforced.  A good understanding of the Total Cost of Ownership about which I have written previously and which is now quantified by Harry Moser’s Total Cost of Ownership worksheet calculator for the Reshoring Initiative will help bring some manufacturing back to the U. S. from offshore.

What I call the global economy mentality is even starting to be questioned, although there have been key people in the past 20 years that have been warning of its perils.

The late Sir James Goldsmith, a billionaire international business leader, wrote two books, The Trap (1993) and The Response (1995) warning of the perils of globalism.  He even gave a speech to the U. S. Senate in 1994 warning of the perils of globalism.  He “predicted that the working and middle classes in the United States and Europe would be ruined by the greed of Wall Street and corporations, who would boost corporate earnings by replacing their domestic work forces with foreign labor, which could be paid a fraction of labor’s productivity as a result of the foreign country’s low living standard and large excess supply of labor.”

Roger Milliken, who led Milliken & Company for 71 years, during which it grew to become the world’s largest privately owned textile and chemical manufacturer, shared the same opinion.  One of the last in the tradition of those great industrialists who built America’s manufacturing success; he believed that America’s manufacturing leadership was the foundation of his nation’s economic achievement.

Ralph Gomory, an American applied mathematician, former IBM executive, and president of the Alfred P. Sloan Foundation for 18 year, has written extensively on the nature of technology development, industrial competitiveness, models of international trade, and the function of the corporation in a globalizing world.  In 2007, he became president emeritus and joined the Stern School of Business at New York University as a research professor.  He currently focuses his work on addressing the increasing complexities of the globalized economy and the differing goals of countries and companies.  In his 2001 book, Global Trade and Conflicting National Interests, co-written with Professor William Baumol, Gomory wrote, “A country that ends up producing little value will have little to consume at home and little to trade abroad, and will have a low standard of living.”  The book also presents the idea that the free trade theory of “comparative advantage” of David Ricardo was merely a special case, not a general theory.  Mr. Gomory’s books and papers have contributed to shaping the national argument on the roles and responsibilities of American corporations in the modern American economy.

Another person of like mind is Paul Craig Roberts, an American economist and columnist for Creators Syndicate who served as an Assistant Secretary of the Treasury in the Reagan Administration and earned fame as a co-founder of “Reaganomics.”  He is a former editor and columnist for the Wall Street Journal, Business Week, and Scripps Howard News Service.  He has written or co-written eight books, contributed chapters to numerous books and has published many articles in journals of scholarship.

In an opinion article in the June 20, 2011 issue of Manufacturing & Technology News, he said, “Anytime there is an excess supply of labor, or the ability of corporations to pay labor less than its productivity, the corporations bank the difference, share prices rise, and Wall Street and shareholders are happy.”

In this article, Mr. Roberts comments on the key points made by Nobel prize winning economist, Professor Michael Spence, and Sandile Hlatshwayo, a researcher at New York University, in their report “The Evolving Structure of the American Economy and the Employment Challenge,” published by the Council on Foreign Relations.

Mr. Roberts writes that Spence and Hlatshwayo use data from the Bureau of Labor Statistics and the Bureau of Economic Analysis to show that “U. S. industries are separated into internationally tradable and non-tradable components.”  Non-tradable goods and services cannot be offshored or produced in locations distant from their market, and government and health care have become the largest employers in the past 20 years.  Tradable jobs produce goods and services that can be produced in locations distant from their markets and can be exported.   This has resulted in “the adverse movements in the distribution of U. S. income over the past 20 years, particularly in the middle of the income range…The evolution of the U. S. economy supports the notion of there being a long-term structural challenge with respect to the quantity and quality of employment opportunities in the United States “

Jobs paying the $20 per hour that have historically enabled American wage earners to support a middle-class standard of living are leaving the U. S.  Only 16 percent of today’s workers earn the $20 per hour baseline wage, down 60 percent since 1979.

This is expected to get worse according to the U. S. Department of Labor Occupational Outlook for 2006-2016 in which the prediction in 2006 was that 70 percent of the jobs created between 2006 and 2016 would be service jobs, paying low to very low wages.  Of course, this report was written before the start of the Great Recession, and we’ve lost another one and a half million manufacturing jobs since then.

State employment data released on July 22, 2011 by the Bureau of Labor Statistics mirrors national patterns of the past two months.  American workers continue to pay a staggering price for the lack of concerted action to create jobs for the millions who are unemployed.  In June, 19 states and the District of Columbia continued to have unemployment rates of 9.0% or higher, and seven states and Washington, D. C. continued to have rates of 10.0% or more.  Ten states and D. C. have lost jobs since June 2010, even though the economy has technically been experiencing a recovery.

In a meeting on June 13, 2011, the Jobs and Competitiveness Council, headed by General Electric CEO Jeffrey Immelt, told President Obama that there isn’t so much a shortage of jobs, but a shortage of trained workers, engineers, and skilled foreign immigrants to fill jobs that may exist.  Their answer for the manufacturing industry that has lost 5.5 million jobs in the past decade is to increase training of CNC machining and advanced production.  While I agree that there is a shortage of CNC machinists, their plan would only generate a grand total of 2,000 jobs in the first year, and 4,000 jobs in the second year.  This is nothing compared to the 21 million jobs we need to get to full employment.

Another suggestion of the Council was to increase immigration of foreigners with graduate degrees and PhDs so they could quickly receive Green Cards.  Tell that to the millions of highly educated technicians and engineers that remain unemployed at the same time foreigners on HB-1 and I-1 visas are filling many of the jobs that remain within the United States.   There was no discussion on how to create more jobs for American engineers, computer scientists, programmers and other technology specialists who are currently unemployed.

It’s frustrating that many experts say that education is the answer to the unemployment crisis.  I’ve never known so many highly educated General Managers, Operations Managers, Vice Presidents, CFOs and even CEOs that are unable to find jobs in San Diego’s high technology manufacturing industries.  The last thing these people need is more education.   What they need are more companies willing to hire a person with the education and experience that puts them in a higher salary bracket.

One of the most useful recommendations of the Council was that the federal tax code be changed to allow training of advanced manufacturing workers to be a depreciable expense under Section 179 of the tax code.  This would help manufacturers train their workers in the concepts and tools of lean manufacturing and Six Sigma, which is one of the best ways for U. S. manufacturers to be more competitive in the global economy without having to offshore their manufacturing.

Reshoring American manufacturing will bring back more jobs than any training programs could possibly do and create more American made products for export, which will reduce our trade deficits.

2 Responses to “What Has Driven Manufacturing Offshore?”

  1. Michele,

    What do you think about the idea that poor leadership in American manufacturing has led to less satisfied workers? And then these less satisfied workers do poor work and therefore this leads to poor efficiencies in the workplace and significantly higher labor costs??

    Asking for a friend who’s doing some research on leadership.


    Kit Hill, Ed.D., LMFT

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