Will global manufacturing increase post-pandemic? Learn how the United States will hopefully manufacture more, increase jobs, and boost the global economy.
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By Jeff Korzenik, Chief Investment Strategist
Published: August 10, 2020
There is a tremendous amount of speculation around what a post-pandemic world will look like—what will change and what will go back to normal. What is, at this point, beyond speculation is that the post-pandemic supply chain and manufacturing ecosystem will be vastly different.
Over the next five years, there will be an increased focus on the global manufacturing dynamic, with companies weighing more and more the geopolitical implications of a relationship with China. There will be strong intervention from the federal government to bring more jobs back to the U.S.—irrespective of November election results. There will be a push to manufacture more medical equipment and supplies domestically so there's less reliance on China when emergencies arise.
While it's too soon to say what the new normal will be for much of the country, it's clear what the next evolution of global manufacturing and supply chains will be: jobs will be moving away from China and at least some of those relocated positions will be in the United States.
Reliance on Foreign Manufacturing
The global pandemic has highlighted concerns that U.S. has been overly reliant on foreign manufacturing. As China struggled to handle the coronavirus within their own borders, shutting down or limiting production meant they were unable to meet global demands. On top of reduction in capabilities around typical consumer goods and industrial needs—electronics, equipment parts, and more—they weren't able to handle the increased demand for medical equipment either.
And with recent events showing a need for increased cybersecurity measures against China, it's clear that moving more manufacturing back domestically is best for the U.S.—both economically and politically.
Fortunately, bringing jobs back to the United States is a firmly bipartisan position. So, while there may some political nitpicking when it comes to specific efforts to support this domestic shift, the biggest challenges to increasing domestic manufacturing are elsewhere.
Challenges to Increasing Domestic Manufacturing
There are three main challenges we're going to face as we consider shifting manufacturing back home:
- It is still cheaper to produce goods in China. That cost-savings gap is ever decreasing as the wages in China continues to increase, but depending on the industry, there can still be a significant cost savings in foreign manufacturing. This makes it hard for corporate decision makers who are trying to decide between more expensive domestic options. In those cases, government intervention may be our best option. Incentivizing or subsidizing those manufacturers who decide to shift to domestic manufacturing can help mitigate any negative impact to the bottom line. There are other implications of shifting production costs in China—globalization trends, potential for higher prices and inflation, increased labor costs—which will all impact the global manufacturing ecosystem as it evolves.
- Our manufacturing infrastructure has declined. In addition to any manufacturing facilities that would need to be built, we don't have the railways, power generation, or other basic infrastructure elements in place that would be necessary for this increased scale of manufacturing. Some of this is a natural result of a mature economy becoming more oriented to service sector jobs. Even with the return of some goods-producing jobs, we should not expect a return to 1948 America, when roughly half of all jobs were in manufacturing. It also means there will be some geographies across the country that aren't going to be seeing this increase in manufacturing work; some regions no longer have a sufficient base and associated infrastructure to justify a buildout.
- The workforce is aging out and not being replenished. Older, experienced workers are retiring. And unfortunately, we've had decades of strong cultural prejudice against these goods-producing jobs. People have made wrong assumptions about the work, they've mistakenly blamed technology for replacing jobs—in reality, moving them overseas was, on balance, the primary culprit—and we've had parents and schools discouraging people from this blue-collar work. Fortunately, there's an opportunity for the education system to step in and fill this gap. Offering trade classes in public high schools and emphasizing the opportunities can, over time, refill the employment pool. In the meantime, we already have a strong a potential pipeline of talent in second-chancers—those with criminal backgrounds or victims of the opioid crisis. Most are willing and able to do the work, and have shown they can do it well.
What Domestic, Post-Pandemic Manufacturing Looks Like
We're still currently in the throes of the global COVID-19 pandemic, but companies should start thinking about how this will be impacting their business in the future, and what steps they can take now to best support their employees and customers. Some considerations:
- If you're a business directly in the industrial and manufacturing space, start planning now about how this shift may impact you, what opportunities may arise, and what actions you can take. For those businesses not directly in the sector but connected to an industrial or manufacturing company—so essentially everyone—now is also the time to be forward thinking about the impact.
- This may be a prime opportunity to start looking into mergers and acquisitions opportunities. If this is a chance to expand into the manufacturing sector, is there an ideal partner already out there? Consider how you may be investing in capital over the next several years. Is this an opportunity to expand existing facilities? To build a new facility altogether?
- Moving industrial jobs away from China doesn't automatically mean moving them to the U.S., but that will likely be the focus. Many Western nations will likely be doing the same self-reflection about the type of relationship they want to have with China specifically, but also doing similar reevaluating with India, Indonesia, Vietnam, Singapore and similar countries. Production costs can't be the only factor considered. They have to be weighed alongside cybersecurity, geopolitical implications, and what's best for employee safety and health.
A Time for Action
This pandemic has caused introspection economically, politically, and culturally – and hopefully we see that translate into action. Celebrating frontline healthcare workers should mean ensuring enough PPE and medical supplies for every need. Creating more industrial jobs domestically can make an outsized contribution to much-needed economic growth. Economists speak of manufacturing as having a high “multiplier effect”—in that each dollar of value added in domestic manufacturing creates three additional dollars in GDP and each manufacturing job results in three additional jobs elsewhere. With such a high payoff, government response could include helping companies make the necessary transitions.
The decisions made in the next few years around supply chains and manufacturing will have a long-lasting impact economically, as well as on dedicated workers and they develop the resources the country needs.
The views expressed by the author are not necessarily those of Fifth Third Bank, National Association, and are solely the opinions of the author. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank, National Association or any of their subsidiaries or affiliates, and are provided without any warranty whatsoever. Deposit and credit products provided by Fifth Third Bank, Member FDIC.