BLOOMBERG, MAY 16, 2020
Whatever supply-chain upheaval comes from the coronavirus pandemic, it’s unlikely to lead to more U.S. manufacturing jobs.
By Brooke Sutherland for Bloomberg – The coronavirus pandemic is likely to spur a bigger revival of manufacturing in North America than the multiyear U.S.-China trade war ever would have on its own. Unfortunately, that’s unlikely to translate into much in the way of U.S. factory jobs.
While the tariff volleying of 2018 and 2019 exposed the risks of China-dependent supply-chains, it largely did not lead to manufacturers putting America first on their list of desired factory sites. Instead, if they diversified away from China at all, companies mostly decamped for other low-cost countries in Southeast Asia, including Vietnam, Thailand and Cambodia.
The initial concentration of the coronavirus pandemic in China seemed likely to accelerate that trend. But if the pandemic has taught us anything, it’s that nowhere in the world is safe from the fallout and that the practice of zigzagging goods around the world is increasingly risky.
On an earnings call last month, Emerson Electric Co. President Michael Train described “some rough times” keeping its own factories and those of key suppliers open in Italy and said the lockdown in India had proved “exceptionally challenging as logistics and the ability to operate were shut down practically overnight.”
Honeywell International Inc., Cummins Inc., and Johnson Controls International Plc are among the many companies that have flagged issues with factory closings or staffing shortages in Mexico as local governments sorted through what businesses they deemed essential enough to open, with the definitions diverging in many cases from the U.S. standard.
The result is that companies are no longer just worried about being overly dependent on China; they’re worried about being dependent on any geographic region.
The nature of certain manufacturing businesses means downtime at low-cost suppliers can actually wind up being the most disruptive, David Simchi-Levi, a professor of engineering systems at the Massachusetts Institute of Technology who focuses on supply-chain management, said in a recent interview. With the coronavirus peaking in different places at different times, Simchi-Levi highlighted the benefits of a centralized pooling of essential inventory so that companies can be more flexible in moving resources around. Think of it as the “just-in-case” counterpart to the “just-in-time” inventory strategy that’s dominated manufacturing in recent years.
A more permanent solution is to build more factories in more places, including the U.S.
The coronavirus has “finally prompted people to look at increasing the number of places that they’re manufacturing so that their highest-value, highest-margin products can’t be cut off if a country gets shut down for reasons of what we’re going through currently or any sorts of future events that destabilize the supply chain,” Blake Moret, CEO of Rockwell Automation Inc., said at a Goldman Sachs Group Inc. conference this week. Toolmaker Stanley Black & Decker Inc. has reached out to Rockwell about bringing manufacturing operations closer to its North American markets, as did a number of life-sciences companies that aren’t ready to publicize their plans yet, Moret said, characterizing the concept of returning work to the U.S. as a “hot topic.”
As you might have guessed from the “automation” part of Rockwell’s name, its customers generally aren’t reaching out because they want to find ways to get more humans in their factories. Rising wages across Asia and the U.S.-China tariffs have diminished the economic appeal of manufacturing in the region, Moret said. That’s especially true if companies can replace workers with machinery and cut down on transportation expenses by putting factories closer to the products’ ultimate destination. The fact that Moret cited life-sciences companies is particularly interesting given calls by the Trump administration to ramp up domestic production of key medical supplies and drugs. It appears it may get its wish, but for a president who campaigned on a return of manufacturing jobs, it’s likely to be a hollow victory.
Don’t count out Mexico as a beneficiary of this push for more localized manufacturing, either.
The fact that the U.S.-China trade war coincided with a Trump administration push to rewrite the North American Free Trade Agreement “had a slowing impact on foreign direct investment in Mexico because companies have been maybe somewhat reluctant to make new investments without really understanding what the trade rules might be,” Michael Upchurch, the chief financial officer of railroad Kansas City Southern, said at the Goldman conference this week. Kansas City Southern gets nearly half its revenue from Mexico.
That dynamic has shifted: Even as tensions between the U.S. and China appear to be heating back up, Congress gave its final sign-off to the U.S.-Mexico-Canada agreement in January, and the Trump administration has said it’s aiming to bring the deal into effect by July 1. With tariffs still in place on some $360 billion of imports from China, “there is a real desire to begin to near-shore, and Mexico’s a great place to do business,” Upchurch said. “Labor rates are very economical certainly compared to the rest of North America and even a slight advantage to what you see in the Far East.”
The era of “reflexive” offshoring of U.S. jobs may indeed be coming to an end, as U.S. Trade Representative Robert Lighthizer argued in a recent New York Times opinion column. But the “overzealous emphasis on efficiency” that he cites as one factor for those decisions very much lives on.
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