Does America really need to re-build its manufacturing base to grow?

“We have become a nation of consumers. We don’t make anything anymore. Well I’m done consuming … I want to make!”- Jack Donaghy

Jack Donaghy, played by Alec Baldwin on NBC’s 30 Rock, is portrayed as the quintessential corporate CEO.

When fictional Kabletown buys NBC in a 30 Rock episode last season, Jack is horrified to learn that his new company is no longer interested in producing new products because they’ve already found the perfect cash cow, which is “pay per view porn.”

Jack realizes Kabletown is neglecting half of its possible market (in this case, women), and that there is always room for innovation in business, leading to his comment about making a version of his new “product” called “pay per view women’s porn.”

(Of course, this is nothing more than men offering affirmation and their listening skills to women!)

However, there is some truth to Jack’s statement about the predicament of the American economy.

Not only is Jack’s comment an amusing double entendre, it points out that America has become a service economy that doesn’t make products the way it used to.

His comment also echoes a point about the nature of business in America that is currently being espoused by our President.

Mr. Obama is on the campaign trail in preparation for the mid-term elections and seems to think that the road to recovery is through rebuilding the nation’s manufacturing base.

But does that mindset show the President understands the economic problems of the United States or is it further proof that Mr. Obama and his administration simply don’t understand the nature of business in America today?

There are seven key factors that drive the cost of manufacturing. Raw materials, labor, overhead, exchange rates, freight, duties and inventory. Each plays its own part in creating an American economy that increasingly outsources its manufacturing needs.

Of course the United States was the preeminent manufacturing center in the world for decades, but the manufacturing golden age ended a long time ago. The United States, like most former industrial powers, is now an economy based on service industries.

Why?

Manufacturing in America is simply too expensive for big business when compared to the rest of the world. 

According to the Manufacturing Outsourcing Cost Index, manufacturing can be done in Mexico for almost 25% less than in the United States and almost 20% less in India, which are the two leading Low Cost Countries the U.S. outsources it manufacturing to.

Labor costs are far lower in those countries, but those aren’t the only advantages.

Mexico has a favorable exchange rate and because of its proximity to the US, costs aren’t impacted drastically when transportation and material costs increase.

India is a very close second when it comes to affordability primarily because their favorable exchange rate largely offsets transportation and inventory cost increases.

In fact in 2009, all major Low Cost Countries (LCC’s) gained on the United States and in most cases, the cost advantage is now equivalent to 2005/2006 levels.

So the reason the American economy is based on services rather than manufacturing is simple, cost.

Think about it.

The costs of creating a business that builds widgets is far more expensive than setting up a consulting business out of one’s home.

Even if you’re an accountant, what are your overhead costs?

Better yet, what if you run a website or other type of “invisible” service?

It doesn’t matter what field you’re in, if you operate in a service economy, expenses are far less onerous than if you are setting up a manufacturing plant.

In turn, those lower costs lead to greater margins and faster profit.

Let’s consider some of those key cost drivers one more time.

The cost of raw materials may not change very much. After all, America is rich with raw materials, but for a company looking to manufacture products in America, the other costs are exponentially more expensive than in other nations.

First of all, American labor costs companies more.

The average American worker who earns $14 an hour is actually costing their employers $20.

The differences in average wage, benefits and productivity around the world are enormous.

Overhead is also typically more expensive in America because the relative costs of energy, equipment, taxes and insurance.

Despite the recession, the dollar has remained strong, which also hurt the margins for companies manufacturing in the United States who want to export their goods to other countries.

So what does this information tell us about the nature of the American economy?

First, unless the strength of the dollar weakens, outsourcing is simply more cost effective for American companies.

The weakness of currencies in LCC’s leads to cheaper rates on everything vital a manufacturer needs to survive, profit and prosper.

More importantly, we have to understand the nature of our own modern economy.

Yes, the U.S. may no longer the leading manufacturer in the world, but it is the leader in ideas and in its the ability to create capital … even if the economy has been in recession.

As the leader in business, it is not longer an American responsibility to build goods for the rest of the world.

The responsibility of American business is to grow and innovate, and find new ways to reach customers …

Which leads us back to Jack Donaghy … and our President.

Jack says he wants to “make,” but in reality, his product was made by another company he didn’t own or control.

But he did discover another way to reach new customers.

In that sense, Jack remains the quintessential American CEO:  finding ways to grow top line revenues and bottom line profits while leveraging new ideas to new customers all the while outsourcing production.

This is what President Obama needs to understand.

For businesses, making products outside of the United States makes financial sense and doesn’t weaken the economy.

In fact, it boosts margins and gives companies more capital to hire new workers and expand.

The challenge is to find other ways of growing and innovating that don’t push the nation backwards towards a production economy … with little chance of competing against the rest of the world.

Which really means “innovate” is the new “make.”

And to think you might have thought you couldn’t learn anything about business by watching TV!

Jodie Shaw