AN AMERICAN MANUFACTURING RENAISSANCE; IT’LL TAKE MORE THAN CHEAP ENERGY

5/15/13

Appaloosa Founder and CEO Dave Tepper was on CNBC yesterday arguing that America’s increasingly abundant supplies of oil and gas could lead to an industrial renaissance.   While it’s usually not advisable to bet against the unbelievably successful and incredibly insightful Mr. Tepper, he might be getting carried away with his enthusiasm in this instance.

Certainly abundant and relatively cheap energy supplies are a huge positive when companies are deciding where to locate.  But if cheap and abundant energy were so decisive in determining a country or a region’s manufacturing base, Saudi Arabia, the United Arab Emirates, and Russia would be manufacturing juggernauts.  

There are many other things that go into the manufacturing soup…a favorably business climate, a skilled and motivated work force and the highly underrated physical proximity to markets are perhaps most salient.

A favorable business climate?  Despite all the very justified complaining some of us do in this country about the government’s hostility to business, the United States, on a relative basis, is a very favorable place to do business from a tax and regulatory standpoint if one looks at the entire picture.   Yes, corporate taxes are high, but no one pays them at the 25% top rate.   And, believe it or not, individual tax rates are low on a relative basis, and how much a company’s employees, and especially its management, who make the location decisions, pay in taxes is a major consideration when deciding where to do business.   American laws allow far more labor flexibility than do those in Europe or Japan.   All in all, this is a good place to do business…on a relative basis.   Of course, the White Sox are a good baseball team relative to the Cubs, and that is not a complete digression.

A skilled and motivated work force?   We may have a problem here.  Given the “everyone must go to college” mentality in this country (See my 5/10/13 post, STUDENT LOAN FORGIVENESS:   THE OBAMA ADMINISTRATION’S (?) ASSAULT ON THE RESPONSIBLE), our near disdain for anything approaching manual labor, and our failure to impart the basic math and reading skills that are necessary for skilled and semi-skilled jobs, we fall behind many countries e.g., Japan, Germany, Korea, and, to a growing extent, China) in worker training.  And motivation?   I invite those who wax enthusiastic about the motivated and eager next generation to spend some time in a college classroom.   While the spread among students is indeed wide and there are a number of very impressive kids among my and my colleagues’ students, observations don’t skew toward the “I’m hungry, eager, and willing to bust my hindquarters to make it big” end of the spectrum.   Let’s leave it at that.

Even if we have a skilled and motivated work force, ours is by no means a cheap work force.  Yes, it’s cheaper to hire a worker here than it is in Europe, Japan, or Canada, at least at first glance.   When one factors in health care costs, though, the comparison gets tighter.   Further, while labor is quite rapidly getting more expensive in China, Chinese workers are still far cheaper than American workers.   And there is all of south Asia and sub-Saharan Africa waiting in the wings.   Before you guffaw at the productivity gap or the capability of such workers, remember when it was said that Chinese workers could never compete with American workers?   And yours truly is old enough to remember when the expression “Japanese piece of junk” was more than an ironically humorous tag line.

Proximity to markets?   Some of the world’s fastest growing markets lie to our south, but the distance between the United States and, say, Brazil, is not as small as one might think.   Certainly, Brazil is closer to Brazil than we are.  More important, the fastest growing markets are in Asia and we are long way from Asia.   Shipping costs are high and will likely get higher, making proximity to those markets imperative, especially for heavy manufacturers.

Cheap energy is a big plus and will certainly be a positive for American manufacturing.  But there is plenty more in the mix that makes manufacturing here attractive.  And our country is, well, mixed in our relative attractiveness in those categories.