The US manufacturing sector has also shied away. In fact, American businesses have not taken advantage of the nation’s strength in manufacturing innovation and R&D in an effort to keep costs under control. This meant that the Americans failed to become more efficient and productive than the Chinese or the Germans.
President Joe Biden hopes to change all that and give US high-tech manufacturing a big push. He’s funding small U.S. businesses—SMEs—and expects to take manufacturing innovation from U.S. labs to the home market and beyond. It won’t be easy to beat China, but a sleeping giant is finally waking up.
What has hurt US manufacturing?
Concerned about America’s manufacturing trade deficit, former US President Donald Trump has waged a tariff war against China. Although they may have treated the symptoms and not the disease, this is a problem for US presidents.
The US trade deficit in manufactured goods has more than doubled in the past decade. This has left US supply chains vulnerable to global shocks such as the pandemic. And then, of course, thousands of jobs took off overseas.
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A report by McKinsey in 2021, ‘Creating a more competitive US manufacturing sector’, captures problem areas for the US.
*The US has lost six percentage points of its global share in scale-based activity over the past 25 years,” the report says. Scale-based activity refers to large investments in physical capital, higher plant utilization, and standardization of parts and processes. Is. .
*US share in flexible activities also declined by 4 percent. Flexible activity refers to the adoption of digital production techniques to “reduce the scale required to be profitable”.
*But in R&D and design-based activity, the US share of global manufacturing GDP rose by four percentage points. This is America’s strength and President Biden would like to capitalize on it.”
Simply put, the US is at the forefront of innovation but is struggling to take it to market and grow it.
It’s a puzzle, well, for some. Why has the US failed to capitalize on its edge in research and innovation in manufacturing? This has a lot to do with American companies hunting for immediate profit by cutting costs—after all, the stock market also rewards companies with an expanded bottom line. Many US companies have not invested enough in technology adoption, staff training, and research.
Therefore, despite being the global leader in R&D, American companies have not been ahead of Chinese and German rivals in productivity and quality.
The White House is waking up to the problem. The Biden administration “plans to host a series of roundtables with 16 Manufacturing USA institutions to develop specific proposals, enhance innovative technologies, promote region-based regional workforce initiatives, partner with unions and support small and medium-sized suppliers on how institutions can strengthen our supply chains.”
It also plans to engage industry leaders in identifying and commercializing and funding “transformative inventions” from US-based startups.
There are other initiatives in the works to take cutting edge innovations for SMEs. Now, they should be motivated to use them.
Biden rolls out red carpet for small businesses
More than 99% of America’s more than 30 million firms are small businesses that employ about 60 million people, or about 47% of the US workforce. And yet US SMEs have been losing weight in recent years, with their contribution to GDP falling from about 48% a few years ago to about 45% now. Biden hopes to revive SMEs with his goal of making America a manufacturing hub again.
In recent years, the US has had an edge in high-skilled and high-paying services. The country has had a trade surplus in services, even though about 5% of its service companies are exporters.
In contrast, manufacturing SMEs are outsourcing work with US companies to low-cost destinations such as China and Taiwan. In semiconductors, US-based fabs account for only 12% of the world’s manufacturing, up from about 37% in 1990.
The Biden administration claims it is working with the private sector to raise about $80 billion in semiconductor investment to fund new fab or fab expansion in the US by 2025.
Meanwhile, President Biden unveiled the Creating Auxiliary Incentives for the Production of Semiconductors for America Act (CHIPS) and will invest $50 billion in the production of semiconductors in the US.
The Biden administration is also opening new funding lines for SMEs to help them in a big way. The Export-Import Bank (EXIM), the official export credit agency of the United States, has a strategy to “prioritize financing to environmentally beneficial, small business, and transformational export sector transactions, including semiconductor, biotech, and biomedical products”. is working on. renewable energy, and energy storage,” the White House says.
He is not everything. The Treasury Department and the Small Business Administration will funnel more than $70 billion in additional lending and investments for small businesses, including small manufacturers.
lessons from china
China became the factory of the world in three decades driven by its cheap labor and a symbiotic ecosystem of suppliers, component manufacturers and distributors. Change did not happen overnight, but over three decades. Its momentum and progress gained momentum only after Dragon’s entry into the World Trade Organization in 2001.
In many ways, the Chinese government turned manufacturing into a mass movement through a tidal wave of small businesses that spread across the country. There are over 140 million SMEs and the self-employed in China. SMEs contribute 60% of total GDP, 50% of tax income, 79% of job creation and 68% of exports. In 2020, a staggering 22,000 new businesses were being registered daily.
Biden hopes to do something similar, perhaps using America’s unique strengths. Therefore, the US is opening funding lines to small businesses, exposing them to cutting-edge innovation and technology, hoping that productivity gains will follow, neutralizing the cost benefits (cheap labor) that China and others have. Asian countries, such as Vietnam and India have it. ,
There are some emerging trends that could potentially herald an American manufacturing renaissance – rising labor costs in China and increasing automation on factory floors.
How technology can be Biden’s weapon
A McKinsey study shows that slowly but surely, China is losing its labor-cost advantage. Technology is helping companies reduce costs and grow their workforce.
Many companies in the US were adopting Fourth Industrial Revolution (4IR) technologies to stay competitive and maintain operations during the pandemic. 4IR is a cocktail of Artificial Intelligence (AI), Robotics, Internet of Things (IoT), etc.
And then, there is the growing footprint of robotic automation in manufacturing processes. according to international business administrationIndustrial robot installations in the US grew by more than 10% between 2008 and 2018. More than 80% of it was under construction.
In fact, Reuters reports a record high growth in robots joining the US workforce in 2021. North American companies added 40,000 robots to their rolls in 2021, a 28% increase over 2020.
Obviously, there have been supply-chain challenges in recent times, and companies have been forced to make the most of technological resources. In addition, the pandemic created a shortage of human resources, making robots a real alternative.
Can America become the factory of the world?
America has some of the best universities and research institutes in the world. In a technology-driven world, America is still seen to be ahead in innovation and R&D initiatives. With its economic strength, it can certainly gain a reputation as a manufacturing destination for the world in the years to come.
Can it make China the best in manufacturing, especially in high-tech products? It won’t happen overnight.
China has built a manufacturing ecosystem that is increasingly difficult to replicate. And the Chinese are very good at picking up on best business practices from rivals and partners, as the Germans have found. They will do whatever it takes to maintain their cost advantage, even using technology at scale if necessary—robots, 4IR and beyond.
Also, remember, Vietnam, India, Taiwan, et al. They are cost-competitive not only because of cheap labor but also because of their relatively weak currencies against the dollar. So, if hi-tech manufacturing moves out of China, other countries will also benefit from a trickle-down, including India, as Mint has previously reported.
So, at 79, Biden might not be able to make America a manufacturing powerhouse for his presidency. But he would like to leave a lasting legacy on which a future US president could possibly ride. It took China three decades to reach here.
Can Biden oust the animal spirits that will shrug off time and vault America to the top of the manufacturing high table much faster, perhaps in a decade? It will test Biden and incoming presidents. But, if Biden did change US manufacturing, it would do well to make up for his weak approval rating.
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