Manufacturing Skills Gap and Challenges of Reshoring
By Jeremy Rice
Fast-growing companies are making important contributions to
the job market in the U.S. On average they employ 53 percent
more personnel than standard companies generating the same
annual revenue. However, the high growth of these companies
is fettered with uncertainties. Like any company in the growth
and expansion stage, fast growing companies are faced with
challenges pertaining to talent acquisition and retention, cash
flow management and so on.
Among the Inc. 5000, manufacturing ranked 11th out of 25 industries in terms of total job creation from 2010 to 2013.
Despite the favourable outlook, a pressing problem in the U.S. manufacturing industry is the significant gap between talent sought by manufacturers to grow their business, and the talent they are actually able to find. This sizeable gap is heading for an upward trajectory over the next decade. A combined study conducted by the Manufacturing Institute and Deloitte in 2015, predicts that there will be a need to fill more than 3.4 million manufacturing jobs over the next 10 years. However, more than half of these positions will remain unfilled due to the lack of unskilled workers.
Lack of quality workforce
The U.S. Bureau of Labor Statistics states that nearly 730,000 jobs were generated by the manufacturing sector since the end of 2010 and it is expected to add an additional 700,000 within the next 10 years, as a result of natural business expansion. Additionally, retirement of baby boomers will create another 2.7 million jobs, resulting in vacancies totaling approximately 3.4 million according to a survey conducted by the Manufacturing Institute. This will result in a skills gap with as many as 2 million jobs remaining unfilled.
Factors such as the loss of embedded knowledge among workers, a preconceived negative image of the manufacturing sector among younger generations, and lack of science, technology, engineering and math (STEM) skills have contributed to a shortage of skilled workers. The issue was raised25 years ago by the National Center on Education and the Economy, but- the well-documented problem- was swept under the carpet by American corporations in favor of immediate profits rather than investing in training
Outsourcing began to grow in the 80s, as large corporations began to eliminate functions that they did not consider to be core competencies. This stripping down led to the elimination of critical functions, and directly impacted apprenticeships. According to the U.S. Department of Labor, out of 410,000 registered apprentices, only 2 percent were related to manufacturing sectors.
Apprenticeship programs integrate theoretical knowledge with work-based, hands-on training and help develop industrial skills among students. They also enable students to have a fair understanding of the manufacturing industry and gauge its potential as a career. However, the current trend of job hopping makes companies wary of investing time and money in these programs. According to a survey by Future Workplace, 91 percent of Millennials expect to switch jobs in less than three years of joining.
According to the Manufacturing Institute survey, 80 percent of executives are willing to spend more money to compensate for the talent crisis. However, on an average, 6 out of 10 positions remain unfilled due to lack of skills. One way to combat the lack of training is by encouraging and incentivizing potential employees to invest in their own training and certification. This training, when combined with on the job training, creates a co-investment model that increases the likelihood of a successful employer-employee relationship. These solutions are most effective in fastest growing companies where hierarchal structures are often horizontal.
Despite growing calls for reshoring, (i.e. bringing back manufacturing jobs to the U.S.), outsourcing of manufacturing and service-related jobs continues to plague the U.S. economy. Offshoring of manufacturing activities began in the 1990s, resulting in a loss of 6 million American jobs during 1999 to2010. This period marked by uncertainty and unprecedented job loss has led to a general perception in the country that manufacturing is both a “dirty and dangerous” industry with poor job stability. In a survey conducted by the Fabricators & Manufacturers Association (FMA), 52 percent of teenagers said they had no interest in pursuing a career in manufacturing. Of the 52 percent, two thirds perceived manufacturing as a career which requires little or no skill from its workers and does not offer opportunities for growth. Fast growing companies which have not yet established a reputation for themselves or extra resources to attract and retain talent, find it even more difficult to convince the younger generation that they offer job safety and adequate growth.
According to the National Employment Law Project (NELP), manufacturing workers have been paid above the U.S. national average for 30 years from 1976 to2006. In the mid-1980s, wages of manufacturing workers peaked at 150 percent of the average private sector wage. However, by 2013 a negative trend in wage increment policies revealed that factory workers were earning 7.7 percent below than the median wage for all occupations.
It has become more prominent for manufacturers to hire parttime or temporary workers, who are typically paid less than direct hires. In the auto industry, workers employed by staffing companies, comprise about 14 percent of the entire workforce. They are typically paid 29 percent less than their direct-hire co-workers. These workers are often left out of government statistics, concealing an even harsher realty.
Of the total U.S. manufacturing workforce, nearly 600,000 workers earned an hourly wage of $9.60 or less; significantly lower than the minimum cost of living which is $20 per hour. This has contributed to a decline in interest for manufacturing jobs. High growth companies reeling under the cash crunch, find it extremely difficult to match their goals of hiring quality talent with budget constraints.
The Deloitte - Manufacturing Institute survey states that nearly 49 percent of respondents are considering reshoring some of their operations by 2020. This is largely driven by increased wages in offshoring destinations like China.
China’s wages have increased at a CAGR of 17 percent between 2001 and 2013, while those in India have reportedly increased by 20 percent in the same period. In contrast to this, wages in the U.S. grew by a modest 3 percent.
Factors like proximity between R&D, product development and manufacturing, helps in streamlining processes, reducing time to market, while cutting down costs due to supply chain complexity. This makes reshoring of factories a more attractive prospect.
According to the Reshoring Initiative, about 60,000 manufacturing jobs were added as a combination of Foreign Direct Investment (FDI) and the Reshoring Initiative last year. Approximately 30,000-50,000 jobs were offshored during this same period resulting in a net gain of at least 10,000 jobs.
Reshoring in globalisation
Access to foreign markets, is one of the major contributing factors that companies consider in the decision on whether they should have an overseas presence. This benefits the reputation and brand value of a company in a local area and thus market for its products. Therefore it is not possible for countries to completely reshore their businesses.
Emerging offshoring candidates: Rising wages in China have compelled companies to seek other Asian countries for their offshoring needs. Vietnam, which earned about USD 17.9 billion in exports of textiles and apparels has absorbed a huge share of apparel industry from China. According to A.T. Kearney’s U.S. Reshoring Index, the decline in textile business in China has been beneficial to countries like India, Bangladesh, and Vietnam. Nearshoring to Mexico has also been on the rise in recent times.
Change for the future
The manufacturing sector is currently undergoing a tremendous shift, with automation being touted as the future of the industry. 3-D printing, robotics, sensors, big data and artificial intelligence will allow every step of production to be accessed, monitored, controlled, modified and analysed in real-time. While setting up these sophisticated industries is capital intensive, they would provide businesses with longer durability and scalability as compared to labour intensive industries.
Workers must to understand complex algorithms, advanced computing, 3D modelling techniques and advanced robotics etc., which require an advanced technical skillset. High growth companies, already reeling under financial pressures will find it difficult to balance cash management with automation and labour requirements.
Companies that are able to seamlessly integrate automation with an advanced workforce would benefit from reshoring. Manufacturing companies should make efforts to counteract the negative perception of the industry among millennials by offering competitive wages and incentives. The U.S. government must encourage skill based training and apprenticeships through education and training. It is the responsibility of Manufacturers and the government to lay the foundation for mitigating the existing skills gap.