US Manufacturing on the Rebound? Harvard Thinks So.

by JT McGee

Harvard Business School cuts back on Finance, ups ante on manufacturingRecently, the Wall Street Journal uncovered that Harvard Business School would be changing the make-up of its Business School to bring in more manufacturing students, and fewer from the areas of finance.

Harvard’s 2012 class would be made up of greater than 30% finance students, and roughly 9% manufacturing students. By 2013, that would change completely; 25% of students would come from finance backgrounds, while roughly 15% would come from manufacturing.

Never has manufacturing in the United States been so tempting. Below are a few of my own thoughts from a manufacturer’s point of view:

  • The dollar is cheap – The weakening US dollar means that capital is going further in the United States than it would elsewhere. When your choices are between the United States and China, the Renminbi’s multi-year, 27.7% surge against the Dollar since 2005 makes the US attractive to global brands. (It seems like just yesterday that then-Treasury Secretary John Snow was firing shots at China; it’s almost hard to believe that was six years ago.)
  • Debt markets are favorable – The levered business has never enjoyed such low borrowing costs. Not only are investors willing to accept meager returns on US dollar denominated debt, but they’re also willing to push maturity dates as far out as 100 years. (See a related post on 100 year debt.) Inexpensive long term debt service is the engine of capital-intensive manufacturing processes that are the bread and butter of developed world economies.
  • US consumer demand weak in light of international strength – American consumers aren’t spending as happily as they were a few years ago, but exports to other (mostly emerging market) countries remain strong. Since the major manufacturing inputs–energy, and general raw materials–are largely priced in US dollars globally, only one input isn’t: labor. Labor in the United States, relative to five years ago, is far cheaper in the US than abroad. Few of us would have ever thought it would make sense to produce something in the US and ship it to eager consumers in China and India.
  • Car economy – A combination of the Japanese earthquakes, US financial crisis, and “cash for clunkers” reduced the number of cars available for purchase. The US fleet in the aggregate is its oldest ever at more than 10 years, and manufacturing in the United States for domestic consumption is starting to make a lot of sense as transportation prices soar. The US car fleet shrank by 4 million vehicles in 2009.
  • Employment Picture – There is no shortage of states bidding for manufacturing jobs with tax incentives. Manufacturing remains one of the best ways to employ huge numbers of people, most of whom can be trained on the job.
  • Political stability – The year 2011 should go down in history as a reminder that no government is too large to be overthrown, and no nation is inherently secure against default, revolution, and/or corruption. In Jordan, Egypt, and other Middle Eastern countries, political insecurity threatens many textile manufacturers. (Interestingly, the so-called “Arab Spring” was kicked off with a protest at a state-run textile factory in Egypt.) The United States may have an elevated political environment, but it’s nothing compared to the many millions of people protesting all around the world.
  • Rising wages in emerging markets – In China, wages for manufacturing workers have doubled at Foxxconn centers. In others, workers are receiving 25%+ wage hikes. Compounded on top of the surge in the Renminbi, not only do workers have more to spend, but manufacturers have smaller margins. Boston Consulting Group adds that Chinese manufacturing wages are rising by 15-17% per year while productivity growth is only half that number. The Group goes further to say that by 2015, costs will converge as labor intensive Chinese industry takes a second spot capital intensive manufacturing processes in the United States. (A big thanks to FinancialUproar for the comment and reminder!)

A chart from The Economist magazine showcases how quickly US manufacturing has rebounded against weakness in other sectors:

Post recession, US manufacturers led the recovery from 2009-2011.

It stands only to reason that Harvard Business School would open its doors to more manufacturing students only if there were more demand for manufacturing MBAs. Also, HBS, being the rational market actor that it is, knows that salaries after graduation are an important indicator of a quality MBA program. Following this thought to its logical conclusion, Harvard has little incentive to provide MBAs to people who fail to make the best use of it. Harvard is telling us that it sees improvement in manufacturing.

Since we know many employers also kick in some cash to pay for student studies, we should also know that maybe, just maybe, US-based manufacturing companies are upping the ante in human capital to lead future US manufacturing expansion.

This is a trend that Americans should welcome with open arms. We need jobs in bulk, and manufacturing is the perfect provider.

Readers,

How is the manufacturing economy in your local area? Are things improving?

Or are we still stuck in 1990′s manufacturing globalization and domestic stagnation?

Bonus points: If you do not currently work in manufacturing, can you name 10 people you know who work in manufacturing in the United States? I know I can’t.

P.S. If you enjoyed this post, you may also enjoy a post about how Warren Buffett lied to you about railroads.

{ 15 comments… read them below or add one }

No Debt MBA June 15, 2011 at 09:27

I saw this same article (and have a post written, way to beat me to publishing!) and wanted to see how applications compared with graduating class profiles. Some of the bump in finance should be attributable to the fact that they probably applied in droves during the financial crisis.

I hadn’t thought about the employer sponsorship angle. I think your argument that we might see stronger manufacturing in the next few years in the US is a good one.

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JT McGee June 16, 2011 at 12:08

I knew I had to act fast. ;) I think you’re right about the bump in finance, but even still, the bump in manufacturing needs some explanation. I think recovery is that explanation.

The case for US manufacturing has never been better.

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Ashley @ Money Talks June 15, 2011 at 14:16

We have a plant going in right down the street from us. First Solar. They manufacture, you guessed it, solar panels. GM had their proving grounds here but don’t use them any more. So much better use of the land. Supposed to bring a few hundred jobs to our immediate area. I’m excited about it.

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JT McGee June 16, 2011 at 12:09

First Solar is huge…$10B company. Good stuff.

You guys should be happy about it. Solar isn’t going anywhere as long as incentives exist for solar panel production. Hopefully the industry will soon be able to stand on its own two feet.

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Financial Uproar June 15, 2011 at 18:51

I read that Economist article, it was pretty interesting.

Let me add another reason to be bullish on U.S. manufacturing: higher wages in China.

There are plants in China making clothes and other consumer stuff that can’t compete because their wages are too high, compared to countries like Bangladesh. Combine increasing wages in the developing world with higher transportation costs, and I think we’ll see more local manufacturing make a comeback, especially for large items like cars.

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JT June 17, 2011 at 10:03

Thanks for reminding me of the wage growth. I wanted to mention it, but I couldn’t find a specific source. Found a better one, though, in a Boston Consulting study. It will be interesting to see how this plays out.

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Bill June 15, 2011 at 23:46

Posts like this one are why I come back each day to stay informed on what is going on around the world. Keep it up!

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golfer June 16, 2011 at 01:20

this is why I subscribed

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JT McGee June 16, 2011 at 12:10

Plug for subscribers! Upper right hand corner. ;)

I like your style. Comment more often. :D

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JT McGee June 16, 2011 at 12:09

Thanks Bill.

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Dana June 16, 2011 at 01:56

It is an interesting news. if the prediction is true, in near future, we will see the normal US market.

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Jeff @ Sustainable life blog June 16, 2011 at 15:28

We dont do manufacturing where I am – mostly resource extraction, so I cant say how the sector is preforming in other areas. I’d be happy to see the sector return to 70s levels, but I’m skeptical that will happen, to say the least.

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JT McGee June 22, 2011 at 16:53

Ha! Jeff, do you think it’s a problem that we look back to the stagflationary 70s as good times? ;)

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Little House June 17, 2011 at 08:53

There’s not a whole lot of manufacturing where I live – at least not that I know of. Of course, there is a Bud Light plant down the street, but I’m pretty sure it doesn’t export internationally. ;) As for naming 10 people in manufacturing, um….nope. I can’t say that I can do that. It will be interesting to see if manufacturing becomes a stronger engine in our economy. I guess time will tell.

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JT McGee June 22, 2011 at 16:54

You’re probably right that the Bud Light isn’t going anywhere outside the border. I think most international markets would reject it entirely. ;)

I think it will be interesting too. We desperately need it.

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