Today the manufacturing sector of the US economy is hovering around 12% of GDP. Twenty years ago this sector accounted for approximately double, or 23% of GDP. Year to date the US economy, as measured by GDP growth, is rather flat with growth around 2%.
The next 3-5 years promise a substantial uptick for US manufacturing companies, with the confluence of 3 Mega manufacturing trends. What changes need to occur today to prepare for the next 3-5 year opportunities? And, more importantly; is your organization ready for these changes?
How are we, the academia and the pubic/private economic development organizations, the small to medium sized manufacturers and even financial institutions going to respond quickly to the opportunities that present themselves?
The answer is that if we understand these mega-trends and implement the correct strategic changes, we will have the opportunity for huge economic rewards.
Mega-trend #1: Shortage of Technical and Managerial Resources for Manufacturing.
As indicated by the reduction in the percentage of GDP, the manufacturing sector has been shrinking for nearly 20 years. Off shoring, chasing low labor rates, and explosive growth in the Asia Pacific region has led to a downward spiral of the manufacturing sector in the US. The recession in 2007 further exacerbated the situation by decimating the small to medium manufacturing enterprises. We have essentially “blown a hole” in the pipeline of new workers for manufacturing. Large manufacturing entities continue to reach down into the small manufacturers to replenish their workforce. The small manufacturers can find a means to deal with the shortage of talent and likewise will continue to grow their business and be very successful.
Mega-trend #2: Transition of Baby Boomer Ownership of Small to Medium Sized Manufacturing Firms.
As with other numerous demographic shifts, the baby boomer generation will also have a significant impact on Small to Medium Entities (SME) over the next several years.
Some estimates indicate that that nearly $1 Trillion of ownership equity will exchange hands annually over the next 10 years. Although, I think this number is greatly exaggerated, the number of manufacturing SME’s ownership transactions will clearly grow exponentially over the next several years. If prepared, financial institutions; Banks, M&A firms, Private Equity and Transactional Services organizations will flourish in this environment. If you are a manufacturing entity, merger and acquisition opportunities will be numerous. As with Mega-trend #1, those organizations that are positioned to take advantage, will find endless opportunities.
Mega-trend #3: North American Manufacturing Growth.
Unlike the other two manufacturing mega-trends above, manufacturing growth is not guaranteed. But socio-economic and political pressures are increasing. Clearly a “mind shift” will need to occur relative to the social and economic status quo of the United States. The most likely outcome will be a renewed focus on manufacturing. Historically speaking, manufacturing jobs have a multiplier effect on the economy. As reported by the Economic Policy Institute of Washington DC., manufacturing provides a nearly 3 to 1 multiplier relative to job creation in other sectors beyond just the manufacturing.
Currently the manufacturing sector has a wage premium of nearly 11% for workers with less than a college education, with nearly 50% of workers in this sector having a high school degree or less. Current demographics indicate that 19 percent of Millennials have a college degree (i.e. 81% do not) compared to 35 percent of Gen X and 29 percent of the Baby Boomers. Although, according to a Pew Research Center survey performed a few years ago, 40 percent of Millennials were still in school, the current graduation rate will not change the percentage significantly. With a wage premium for workers with less than a college degree, underemployed Millennials will benefit the most from this growth in the manufacturing sector. The socio-economic impact of growing the manufacturing sector is significant. The United States is ready for this economic inversion.
So what does the United States manufacturing sector look like on the other side of this confluence?
Opportunities for improved margins and organic growth in manufacturing SME will explode. Manufacturing economic activity will flourish. As the manufacturing sector grows relative to the GDP (currently 12% of GDP) the US manufacturing sector economic make-up will begin to look more like Mexico (18%), Japan (19%) or Germany (23%). From a historical perspective this bodes well for the United States. Underemployment will be reduced significantly.
Public Institutions; State and local Economic Development groups, Chambers of Commerce and Rural Communities must all be ready to support the growth. Academic Institutions; 4 year universities, 2 year colleges, Trade schools/Post-Secondary Vocational Training, High School Vocational and STEM (Science, Technology, Engineering and Mathematics) training programs and Middle School STEM preparations must all be active and productively generating new adequately skilled workers.
Manufacturing Small to Medium Entities must have a plan on how to deal with all 3 of the mega-trends. Finally, and most critical, the linchpin: Financial Institutions; Banks, Private Equity, Merger and Acquisitions firms and Transactional Services firms must all ramp-up and be prepared for this economic inversion.
The indicators that this inversion is coming are already visible; the economic and political climates are set, is your organization prepared to exploit these opportunities?