During its height in employment there were tens of millions of people working in U.S. factories, but that number has steadily dwindled. There are now around 12 million people in manufacturing and according to the National Association of Manufacturers (NAM), that number is expected to drop to 11.2 million by the middle of the decade. Manufacturing makes up a smaller percentage (11.2%) of the U.S. GDP1 than at any time since the 1940s. It ranks third behind professional services (12.8%) and government (12.3%). The U.S. has simply become more diverse with no single stand out industry as in the past. In terms of global volume, the U.S. is second only to China and accounts for almost 30% of the total. Only Germany rivals the U.S. in terms of value while China is a distant fifth. It has been said that China makes the world’s consumer goods and the U.S. makes the machines the Chinese use to make those goods.
Impact of Technology
In the 1980s and 1990s the number of people employed in manufacturing fell rapidly. Initially it was assumed that these jobs had been lost to operations overseas. Manufacturers in the U.S. could not compete with the low production costs in nations like China, India, and Mexico. The assumption was that the job loss was attributable to these sourcing decisions, but the reality was much different.
The majority of the job loss in the U.S. was due to the advance of robotics and technology. The abrupt loss of jobs in the 1990s was due to the development of material handling systems that replaced the legions of people that were moving things all over the factory. Over the last twenty years these robotic innovations have continued to accelerate and the expense of implementing technology has been steadily reduced.
The used machinery market began to explode in the early part of the last decade. New equipment manufacturers responded with lower prices and incentives in order to keep their share of the market. This brought the price of technology and robotics down to levels small and medium sized businesses could afford and it has led to a surge in manufacturers that are classified as small businesses. According to the Fabricators & Manufacturers Association, International, 98.6% of manufacturers in the U.S. are classified as small business with less than 500 employees and revenue between $8 million and $80 million. A staggering 75% of these companies have twenty employees or less. For an industry once ruled by large factories, this has been a seismic shift.
At the same time small companies in the U.S. were able to start taking advantage of the technological revolution, it started to become less advantageous to do business with overseas sources. There had always been issues of transportation, logistics, communication, and management but the trade-off was worth it as long as production costs were low. Soon enough, wages started to rise in China, and there seemed to be a steady increase in regulation and government interference. It started to look less advantageous to source and produce overseas by the end of the 2000s.
Automation Accelerated by COVID
The already rapid advance of technology in manufacturing has been further accelerated by the developments of the last few months. Companies are responding in a variety of ways to the tense environment in China. Many have opted to diversify their supply chains by doing more business in countries like Vietnam, Mexico, and India but it’s not an easy shift. These nations do not have the infrastructure to support the kind of activity that was possible with China. They lack the transportation advantages and the ports; they lack the experience that Chinese companies have accumulated; and they simply lack the skilled manpower China has developed. This has led many companies in the U.S. to turn toward technology and robotics.
There may be opportunity to follow the lead of Japan. Facing a severe manpower issue for decades, the Japanese have led the world in the adoption of robots and technology in manufacturing. The Japanese have a population dominated by those over 65 – fully 30% of the total as compared to 15% of the total in the U.S.2 The average age of those with the required skills in manufacturing is now over 55 in Japan. In the U.S. that number is not far off – those in the skilled trades are averaging 53 years in age. The U.S., Japan, and Europe all face the need to replenish this aging population, but none have developed a strategy to do so, which expedites manufacturers toward the use of automation and robotics.
Latest Technological Advancements
The two most interesting developments on the horizon will be the expanded use of artificial intelligence (AI) and the creation of “cobots”. The assumption has long been made that there are things that robots and computers cannot do, but these assumptions are beginning to erode. An experiment was conducted involving turning over a collection of very complex contracts to a team of contract attorneys and to an AI program simultaneously. A day later the ten attorneys found 90% of the mistakes, but the AI program found 95% of them in seven seconds. There are not many endeavors the computer world can’t encroach upon.
The manufacturer will be seeing a lot of these cobots in the future. These are designed to function as an extension of the person, augmenting their skills as opposed to replacing them altogether. They are already in use in the medical world as extensions of the surgeon. In manufacturing virtual reality is used to identify what is happening in a machine or process so that adjustments can be made on the spot. The cobot reads what the human wants done and orders the robots to perform that task. The potential is vast and accelerates every year.
Additionally, manufacturers have yet another impetus as the world copes with a pandemic that requires people to maintain distance. It is very hard to run an assembly line with people spaced a minimum of six feet apart, but machines have no such issues and can be jammed together as needed. The bottom line is that technology continues to respond as Moore’s Law has stated for years – a doubling of capacity and technology every two years. This referred to the number of transistors on a microchip but has been interpreted as describing the overall advance of technology.
What are the Implications?
COVID-19 presents the opportunity to take a hard look at operations and improvements that can be made. As you consider the options, you’ll want to do so while assessing the risks and ensuring the plans fit within the overall strategy of your organization. MarksNelson has the experience to support your manufacturing organization as an advisor, offering insights and technology advancements to help streamline and improve your processes.
Additionally, the pandemic may offer the ability for your organization to access Trade Adjustment Assistance Funds (TAA Funds). These funds can be used to help cover the costs of consultants or industry-specific experts to help with process improvement, technology implementation, and more. Let us know if we can support your business through this process.
1 U.S. Bureau of Economic Analysis.
2 United Nations, World Population Prospects, 2017 revision.