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Manufacturing back to the U.S?

In the late 1990s, West Bridgewater, Mass., was home to a thriving factory producing surgical equipment for Johnson & Johnson.


“We were doing a massive amount of, essentially, PPE,” or personal protective equipment, says James Wyner, CEO of Shawmut Advanced Materials, which owns the factory.


If you remember the dire shortage of PPE that confronted U.S. health care workers in the early stages of the coronavirus pandemic, you might wonder what happened to that massive supply of American-made masks and gowns. And you might have guessed the answer—the same one that has replayed hundreds of times over the past two decades.


“All but a tiny little piece of that business went off to Asia in the late ’90s and early aughts,” explains Wyner, as free-trade policies and a profit-maximizing corporate ethos turned China into the world’s factory floor. “We saw that business go out the door.”


Johnson & Johnson divested its PPE unit, and the roughly 250 employees then working at the Shawmut facility lost their jobs. During the same period, 90% of U.S. PPE manufacturing moved abroad.


That’s just one page from the epic tale of American industrial job loss. Nearly 5 million net manufacturing jobs have disappeared since 1997, according to the Economic Policy Institute—roughly one out of every four. Though automation has played a dominant role in those job losses, critics also blame free-trade policies such as the 1993 North American Free Trade Agreement. The decline of American manufacturing jobs has helped shrink the middle class and worsen U.S. income inequality. Political scientists, moreover, have found strong links between the loss of those good jobs and the rise of political extremism in the U.S.


On top of those long-term trends, COVID-19 has highlighted the fragility of the global supply chains that define 21st-century manufacturing. The Biden administration is signaling broader structural reforms aimed at both reducing those supply-chain risks and slowing or reversing manufacturing job losses longer-term, a process known as “reshoring,” by making manufacturing in the U.S. more attractive.


Huge federal pandemic spending has given Shawmut and others their first bit of runway to return medical manufacturing to the U.S., providing a preview of what broader trade and industrial reform could mean. Shawmut is doing more than just bringing back long-lost jobs—the West Bridgewater facility is expected to employ about 300 workers, slightly more than its headcount in the 1990s. Fueled by a $143 million federal contract, SiO2 Materials Science is standing up production of innovative vaccine vials in Houston. Ellume, an Australian testing startup, is scouting locations for an American factory to make COVID-19 tests for its own $232 million contract. These are just a few examples of the green shoots nurtured by pandemic spending.


Long-term reshoring success, though, will likely depend on serious reform to U.S. national trade and industrial policies. President Biden in February signed an executive order for a review of U.S. “supply-chain risk,” broadly defined to include everything from climate shocks to “economic competition,” in sectors including pharmaceuticals, rare earth minerals, medical equipment, and semiconductors. Findings from that review are due on Biden’s desk in just a few weeks, and its recommendations could lead to something new for the U.S.: national industrial policies directly aimed at supporting critical industries, largely in manufacturing.


If such efforts succeed, they will create more than just manufacturing jobs. Both because they depend on other goods and services, and because they are traditionally unionized and well-paid, each manufacturing job creating nondurable goods like masks supports more than five jobs elsewhere in the U.S. economy, according to the Economic Policy Institute. For durable goods manufacturing (think cars and washing machines), the multiplier is more than seven.


Those multipliers may become even stronger because of another major priority of the current wave of reshoring: limiting trade risk by sourcing materials closer to manufacturing facilities.


“We are localizing all the supply,” says Wyner. “We have straps coming from eastern Massachusetts; we have nonwoven [fabric] coming from New Hampshire. This supply chain won’t cross borders. It’s flowing into the local economy.”


Rethinking efficiency and risk


Finding components and materials closer to home is key to the most pressing argument for bringing manufacturing of all kinds, and medical manufacturing in particular, back to the U.S. The risk of supply chains that stretch halfway across the globe and pass through a dozen different countries has been painfully highlighted over the past year, from those deadly PPE shortages to more recent massive disruptions of semiconductor supplies, to, well, a certain stubborn ship.


Those events are forcing a reassessment from U.S. firms used to simply looking for the lowest (often Chinese) bidder on critical components.


“Suddenly, the ability to get these things for a dime vs. a quarter is no longer so meaningful in the long term, when you have a breakdown of the supply chain in such a profound way,” says Andrew Fish of CenterState CEO, a nonprofit working to attract businesses to central New York State. Now, Fish says, the calculus is more complex: “How much [more] are you willing to pay to ensure you have what you need to operate?”


“Holy cow, it’s a completely different world out there,” agrees Rosemary Coates, cofounder and executive director of the nonprofit Reshoring Institute, which advises businesses seeking to bring manufacturing back to the U.S. Increasing awareness of the costs of supply-chain disruption, Coates says, has been key to a broad shift in mindset. “We’re no longer just focused on the economics. Now we’re focused on risk, in a way we’ve never been before.” Coates says that in the past year, she has received a surge of inquiries from businesses exploring reshoring.


Reshoring adds to resiliency, and savings, in emergencies. The lack of domestic PPE sources created a huge human toll, including the preventable deaths of critical health care workers. It also caused massive price spikes that directly undermined the economic benefits of offshoring. A nonmanufacturing parallel was Texas’s recent catastrophic power grid failure, the result of deregulation and disinvestment that was meant to save money in the long term but incurred huge human and financial costs when the system hit a bump in the road. Consumers were hit with nightmarish surprise bills, and more than 100 Texans were killed by the blackouts.


Whether you’re talking about energy, PPE, or semiconductors, avoiding massive short-term costs in a crisis requires paying “a premium so that [U.S.] manufacturers can afford to have idle capacity,” says Willy Shih, who studies supply chains at the Harvard Business School and has advocated for aggressive U.S. reshoring policy for more than a decade. The federal government is uniquely positioned to make those investments, but the necessary political will and commitment are often hard to come by.


“What always happens is the government…plunks a bunch of money down, and everyone says, ‘Great, I’ll go build up some capacity.’ But what manufacturers really need is stable demand,” says Shih.


Shawmut saw this firsthand. Wyner describes working furiously to piece together a supply chain involving 15 companies to produce medical gown materials under a government contract in mid-2020, only to have that contract lapse after just 90 days.


There are a few possible ways that federal government policy could help produce more stable demand. In the case of medical supplies, prioritizing American-made goods for the U.S. Strategic National Stockpile is one relatively easy move. But according to Shih, it’s only a short-term solution.


“When the strategic reserve gets up to some level, you stop buying,” says Shih. “Then…all the people who were employed making [those goods], what are they going to do?”


Neither companies nor consumers have individual incentives to shoulder the economic burden of maintaining idle capacity. Offshore manufacturing still offers short-term cost savings that CEOs ignore at the risk of shareholder revolt. Tariffs, trade restrictions, or other policies that pass the cost of resiliency on to consumers by making imports more expensive or less accessible are far less popular among the Democrats now in control than they were among the prior Republican regime.


Shih argues that long-term government contracts, rather than the one-time deals emerging from the pandemic so far, are necessary to maintain emergency capacity. Tinglong Dai, a professor of health care operations at Johns Hopkins, agrees: “We should look at FEMA supplies and other federal purchases. They should really buy domestically produced PPE to guarantee steady demand. This is an essential national security interest.” That approach would also promote local production with less direct impact on consumer prices than import controls.


One of President Biden’s first actions in office was an executive order to tighten the Made in America provisions of federal contracts. Coates describes the order as “directionally correct,” though concrete outcomes largely remain to be seen. Among other measures, she’d like to see changes to evaluation standards for procurement staff across government and private industry. Currently, “all procurement people in the U.S. are evaluated on how much money they save for their company or the government.” That often makes buying American goods contrary to their individual performance goals.


And there’s an even bigger hurdle: It’s still strangely difficult to determine what qualifies as “domestically produced,” particularly when it comes to medical equipment. “We don’t have a disclosure mechanism,” Dai says. “So not only hospitals and the general public don’t know, but even Congress and the FDA don’t know how many, for example, masks we’re capable of producing domestically.” Dai has relentlessly advocated for regulations making supply chains more transparent.


Dai also suggests long-term subsidies for medical suppliers may be in order. U.S. farm subsidies currently amount to more than $14 billion per year, often justified in terms of the food supply’s strategic importance. The same argument, it is now crystal clear, could be made for medical supplies: “If you look at the health impact [of shortages] during the pandemic,” says Dai, “it’s well beyond billions.”


The death of expertise


Those measures are not just about keeping physical factories at the ready, but maintaining worker skills and the ability to innovate that comes with them.


“Because we do not have…technicians around,” says Dai, “we lose the opportunity to modernize industry. GM, Ford, they all tried to help with PPE, but if you compare their production lines to [China’s] BYD, it’s almost like the U.S. is 50 years behind a Chinese production line.”


To put that in the context of broader debates about offshoring and jobs, it’s clear that automation has cut manufacturing headcounts. But disinvestment has eroded the U.S. talent pool needed to hang on to even those rarer, higher-end manufacturing operations.


Many of the current reshoring efforts are betting on technological innovation. Shawmut’s N95 masks, for instance, are lighter and easier to wear than the standard N95s coming from abroad. SiO2’s vaccine vials are made with a novel combination of plastic and glass, making them more durable and materials easier to source.


That points to another benefit of reshoring: Strategic investment is a powerful tool for fostering innovations, and controlling those innovations has both economic and geopolitical benefits. A surprising illustration comes from Cuba, a small, poor, and isolated nation that has managed to produce its own viable COVID-19 vaccine thanks to decades of strategic investment in its domestic biopharmaceuticals industry.


Of course, the U.S. is already a world leader in innovation. But there’s growing awareness that separating manufacturing from research, engineering, and other “knowledge work” can slow that innovation.


“We still have fantastic engineering capability [in the U.S.],” says Coates. “Where we’re lacking is in the executable skills. We lost a lot of plumbers, electricians, tool and die makers, machine tool operators. There was no need for those skills…so now we’re experiencing shortages.”


That talent shortage has, in some cases, left American industry noticeably less agile. In early 2020, for instance, Shih considered starting a PPE manufacturing facility at Harvard as a student project. He was surprised when, despite the global crunch, he was able to find a mask-making machine almost immediately—in China.


“And why is that?” he asks. “Because there are so many people [in China] who build machines and tools that stepped up to make mask-making machines. You have people who know how to make production equipment.” That talent pool simply doesn’t exist in the U.S. right now because of the degradation of what Shih called “the industrial commons” in a 2009 paper coauthored with Gary Pisano, a fellow Harvard Business School researcher.


One of that paper’s subtitles, “The world is not flat,” was an explicit rebuttal of Thomas Friedman’s 2005 pro-globalization book The World Is Flat. Friedman’s fundamental error, according to Shih and Pisano, was confusing lowered trade barriers with the practical reality that technical and scientific knowledge is “far more effectively transmitted face-to-face.” That ultimately creates geographic centers for particular industries with advantages for the nations or cities that can nurture them—and long-term consequences for those that fail to.


“When people offshore,” Shih says, “it kills off all the opportunity for [local] tool makers and others. So that commons that supports other manufacturers collapses.”


While factories on the ground are essential to rebuilding a sustainable U.S. manufacturing talent pool, educational initiatives will be essential in the meantime. “Nationally, we’re not doing enough to encourage the trade schools and journeymen to have programs on a regional basis to feed the labor pool that’s required,” says Eskander Yavar, a manufacturing consultant with BDO. Coates has seen promising signs from community colleges, which would receive $12 billion in added funding under the Biden administration’s proposed infrastructure plan.


Show me the money


Policy recommendations should be on the President’s desk by mid-May. While subsidies may be on the table to a degree unimaginable just a few years ago, reshoring advocates uniformly hope to see sustainable, market-focused solutions to boosting U.S. manufacturing.


“It doesn’t matter what kind of incentive the state gives [manufacturers], or what kind of short-term purchasing contract the federal government gives them,” says Andrew Fish. “If the market incentives aren’t there, it won’t happen.” Educational initiatives to build a more educated workforce and permanently strengthened Buy American provisions would be steps in that direction.


But, BDO’s Yavar warns, fostering American manufacturing is a complex, long-term effort that demands focus and consistency.


“Is this a solvable problem? Yes, it’s solvable. It’s just not easy. I’m pretty convinced this is a two-term issue. If the current administration isn’t consistent, we don’t solve it,” he says.

Shawmut Advanced Materials, at least, seems to be on the right track: In March, it announced a multiyear contract with Thermo Fisher Scientific to distribute its American-made N95 masks.


Author: David Morris

Original article: https://fortune-com.cdn.ampproject.org/c/s/fortune.com/2021/04/23/covid-global-supply-chain-biden-manufacturing-us-reshoring-jobs/amp/


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