Yesterday President Trump met with the National Association of Manufacturers group in the White House to discuss the outlook for manufacturing jobs gains and the larger increase in actual manufacturing sector gains.
The results of surveys conducted with current manufacturing companies is stunning with 93% holding an optimistic outlook.
However, beyond the optimism there’s additional data which is annoying the media and professional-left who are determined not to focus on successful Trumponomic strategy.
As a direct result of President Trump’s multifaceted economic strategy, manufacturing companies are having to look at TCO which is “Total Cost of Ownership”. You see, President Trump is not only approaching manufacturing growth policy from the investment side, his policies also approach the larger impacts on raw material, energy and labor.
This multi-pronged policy approach forces companies to look at transportation and location costs of manufacturing. If domestic costs of material and energy drop, in addition to drops in regulatory and compliance costs of operating the business, the operating cost differences drop dramatically.
This means labor and transportation costs become a larger part of the consideration in “where” to manufacture. All of these costs contribute to the TCO. Transportation costs are very expensive on durable goods imported. If the durable goods are made domestically, the transportation costs per unit shipped drop significantly. The TCO analysis then further reduces to looking at labor.
U.S. Labor is more expensive, yes. However, if material costs, energy costs, regulatory costs and transportation costs are part of the TCO equation – then higher labor costs can be offset by the previously mentioned savings.
For two years CTH has repeatedly stated that under Trump’s proposals “total costs” drop so dramatically, that off-shored manufacturing is no longer the best play. We are seeing that shake out right now. For the first time in 30 years companies are reviewing the TCO of products and finding less and less financial reasons for off-shore manufacturing.
The first well framed article on that new Trumponomic analysis appeared last week in Market Watch:
For decades, U.S. companies have been chasing cheap labor offshore and then importing products to sell in the U.S. market.
Now, Trumponomics, a broader focus on Total Cost of Ownership (TCO quantifies all relevant costs, risks and strategic factors) and advanced manufacturing together have the potential to end the manufacturing stagnation of the past 30 years and create millions of manufacturing jobs in the U.S.
Over the past 20 years, the boom in offshoring drove our goods trade deficit up by about $640 billion a year, costing us three to four million manufacturing jobs.
The most direct way to reduce the trade deficit, as President Trump has said he wants to do, is to substitute domestic production for imports, i.e. via reshoring and foreign direct investment (FDI) in the U.S. The result of eliminating the trade deficit would be a rapidly growing manufacturing workforce for the first time in 40 years, a rise in average wages and a 25% to 30% increase in manufacturing output and jobs.
Many companies that offshored manufacturing didn’t really do the math. An Archstone study revealed that 60% of offshoring decisions used only rudimentary cost calculations, typically just price or labor costs and ignored other costs such as freight, duty, carrying cost of inventory, delivery and impact on innovation. Most of the true risks and cost of offshoring were being ignored.
Now is a good time to re-evaluate the cost of domestic vs. offshore production, and not just because of the risk of an angry tweet from the president.
Chinese wages have been rising by about 15% a year since 2000. As a result, the Chinese labor cost in dollars per unit of output is now about four times what it was in 2000. We estimate that about 25% of what is now offshored would come back if companies quantified the total cost. These products would generally have characteristics such as high freight cost vs. labor cost, frequent design changes, volatility in demand, intellectual property risk, and regulatory and compliance requirements.
For these most-reshorable products, such as large appliances with high freight costs, medical devices requiring high technology and quality standards, and plastic products that are getting cheaper thanks to declining natural gas and oil prices, the offshore manufacturing cost gap vs. the U.S. is now smaller than the offshoring “hidden costs” mentioned earlier. (read more)
I am beyond excited to see economic and manufacturing analytics’ focusing on the Total Cost of goods. Donald Trump, now President Trump, has been making this economic policy argument for over three decades; and there are a bunch of us who have held similar views but frustratingly only found them falling on deaf ears.
We already have the raw materials: iron ore, steel, mineral deposits, and we have abundant energy resources, these are immediate cost advantages. The area of disagreement I have with forecasts is in the area of wage growth.
The fed, and as a consequence most economists, are projecting 2% wage growth year-over-year. However, they (all of them) are not factoring in the speed with which Main Street economy can/is restarting when uncoupled from Wall Street policy. The demand for labor is already increasing dramatically. I would not be surprised to see micro-level (regional) 6-8% wage growth by the end of Trumponomics year #1.