Pumping Muscle into U.S. Manufacturing

By: Craig Barner, Forbes

A number of recent initiatives, including a couple in the Midwest, are seeking to pump muscle into U.S. manufacturing as fresh data on industrial activity gives M&A professionals reason for optimism.

The Institute for Supply Management announced that U.S. manufacturing picked up in January to its highest level in nine months, as new orders and employment improved. The organization’s index of national factory activity rose to 53.1 from 50.2 in December; a reading above 50 indicates expansion. Also, the Association of Manufacturing Technology announced that orders among member companies in December were at their highest level in 13 years and that it expects a 2012 total of $5.71 billion, an increase of 2.6 percent from 2011.

Three investment bankers who focus on industrials said M&A could increase if U.S. manufacturing goes up. “I think it could spur activity,” said Robert Billow, a managing director at Billow Butler & Co., an investment bank in Chicago. In particular, defense, electronics and automation/material handling could see the biggest increases, he said.

The initiative that has attracted the most interest from Wall Street is the Reshoring Initiative. The project, based in Kildeer, Illinois, aims to bring manufacturing jobs back to the U.S., said Harry Moser, president. A key element is to assist companies in assessing their total cost of offshoring and “shift collective thinking from ‘offshoring is cheaper’ to ‘local reduces the total cost of ownership,’” according to the RI’s mission statement.

About 60 percent of manufactures apply a “rudimentary” model to assess the total cost of manufacturing products abroad, said Moser, an engineer who trained at the Massachusetts Institute of Technology. Such organizations ignore 20 percent or more of the total cost for offshoring, he said. A tool on the RI’s website, the Total Cost Estimator, allows users to create a free account, login and calculate their true costs of offshoring.

“Three or four” unnamed investing organizations—including private equity and hedge funds—have asked Moser which companies could benefit from reshoring, he said. Also, BB&T asked Moser to speak at a conference about the reshoring concept, he said.

Three other initiatives have yet to attract that kind of attention from the financial community but some are fairly new:

  • Illinois Manufacturing Lab (IML): Launched by the University of Illinois in February, the IML is aimed at enhancing the productivity of manufacturing and the speed of product innovation, said Caralynn Nowinski, associate vice president for innovation & economic development in the office of the university’s Vice President of Research. The IML has not opened, and a timeline has not yet been identified, she said. The lab, which will be located in the Chicago area, calls for $5 million in funding from the state of Illinois and $5 million to be raised from industry, Nowinski said, but she declined to say which companies have been solicited. The IML is expected to be sustainable through corporate memberships and fees for service. It is modeled on Germany’s Fraunhofer Institute, an application-based research organization involving 66 institutes and research units, according to Fraunhofer’s website.
  • National Network for Manufacturing Innovation (NNMI): This federal-government initiative originated in early 2012, when President Obama proposed it, said a spokesperson for the National Institutes of Standards and Technology (NIST), which has been working to develop the plans, she said. The Department of Defense opened the National Additive Manufacturing Innovation Institute in Youngstown, Ohio, after funding was identified for it, she said. The Additive Manufacturing institute is piloting many of the ideas developed for the NNMI. At least 40 companies are involved in the institute, as well as universities, community colleges and nonprofits, she said.
  • Make it in America Challenge: A federal effort to encourage reshoring was announced by the Obama administration in September, said a spokesperson for the Department of Commerce. The $40 million multi-agency competition is intended to accelerate reshoring, she said. The challenge is expected to give out approximately 15 awards, depending on the number of eligible applications. An announcement is expected this year and that will provide guidelines for submitting an application.

These efforts have borne some fruit already.

For example, about 220 to 250 organizations have brought manufacturing back to the U.S., the RI’s Moser said, with the heaviest migration from China. This represents about 50,000 jobs, which is 10% of job growth in manufacturing since January 2010, he said.

Some recent examples of manufacturing coming back to the U.S., provided by Moser, include Wright Engineered Plastics, a manufacturer of plastic injection molds, which returned some production to California from China; and Morey Corporation, a manufacturer of circuit boards, which returned manufacturing to Illinois from China because of quality issues with a component.

The top reshoring industries include electrical equipment, appliances and components; transportation equipment; and machinery, Moser said. Key reasons for returning to the U.S. include rising wages offshore, better quality of goods produced in the U.S., easier access to repairs and lower delivery costs, he said.

In his February State of the Union address, President Obama announced the creation of three hubs for manufacturing innovation, which will be overseen by the departments of Defense and Energy, with funding identified, said a spokesperson for the NIST. These hubs, which have not opened, will address national security and energy needs.

Given political and economic tensions, however, one wonders if these efforts, however commendable, face the same task as Sisyphus, the tragic figure of ancient Greek myth—rolling an immense boulder up a hill, watching it fall down and repeating the action for eternity as punishment for his transgressions.

Take, for instance, the estimate of 50,000 reshored jobs. The RI’s Moser called this “a trickle,” noted that U.S. organizations continue to offshore jobs and that there has been a net loss of 3 million jobs since offshoring started decades ago. But Moser estimated that 6 million jobs could be created if certain scenarios, such as an increase in Chinese wages, continue.

Consider also that the Fraunhofer Institute that the IML is modeled after has a $2.48 billion budget, of which $2.09 billion is generated through contract research, according to Fraunhofer’s website. As a result, about $390 million forms the Fraunhofer’s base budget, of which almost 30 percent is contributed by the German federal and land governments—or about $117 million. How is the IML supposed to emulate Fraunhofer’s success with only $10 million in seed funding?

Finally, the scabrous politics of Washington could blight federal assistance to improve manufacturing. President Obama requested funding for the NNMI as part of the 2013 budget, but the budget has not been approved by Congress.

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