In U.S. Manufacturing Revival, Small Businesses Could Play Crucial Role

Can Small Businesses Bring Back U.S. Manufacturing?

Faribault, Minn., is a long way from Silicon Valley, and Faribault Woolen Mill Company may be a far cry from the typical startup. But when cousins Chuck and Paul Mooty first toured the vacant 147-year-old mill in July 2011, they knew the dilapidated building with a flooded basement and outdated equipment was the kind of business that could spark a manufacturing revival -- even a revolution.

"What we had here was a great Americana brand -- the oldest manufacturing entity in the state of Minnesota," Chuck Mooty said. "We had a very short window of time to take something and brush it off. We could have thought of all the reasons not to do it, but we took a leap of faith. We just had the feeling that someone had to step up and bring this thing back."

Chuck and Paul Mooty aren't the only ones giving manufacturing another shot. When President Barack Obama, in his State of the Union address, touted "an economy built on American manufacturing" and acknowledged the "huge opportunity at this moment to bring manufacturing back," manufacturing went from boring to buzzword overnight.

But Obama's examples of manufacturing success -- auto companies and Master Lock -- represent the old-school era of manufacturing. Instead, small manufacturers like Faribault and entrepreneurial thinkers like the Mootys may be the key to transforming manufacturing as we know it and bringing jobs back to the United States that big businesses handed off to foreign countries decades ago. Some experts believe that in this new wave of manufacturing, small businesses will be better able to compete with countries like China and with big U.S. companies, thanks to consumer demand for "made in America" products, groundbreaking technology, and the flattening of the global cost curve in terms of wages and production methods.

Vivek Wadhwa, academic, researcher, writer and entrepreneur, has no doubt that within two decades, the United States will return to manufacturing supremacy.

"China has, at the most, 10 years to enjoy the money it's making off manufacturing," Wadhwa said. "In the next five to 10 years, we'll see a major disruption happening in China, and in 10 to 20 years, there will be a hollowing out of China's manufacturing industry, just as there was in the U.S. If I were China, I'd be losing sleep right now."

Chuck Mooty believes entrepreneurs are key to this disruption. "The Chinas of the world were wonderful places for people to get value, but the middle market players are frustrated with rising costs of labor, energy and transporting products," he said. "This is the time for people to step up and take some risk and invest in ventures that can produce and manufacture products domestically. And it's important that manufacturing be not just viewed as big business but also as small business."

The Jobs Factor

With new technology like artificial intelligence, robotics and digital manufacturing changing the game, "the manufacturing of the past is gone," Wadhwa said. "And so are those repetitive, boring factory types of jobs. They won't exist. Manufacturing is coming back to the United States because we have the most skilled, creative, innovative people in the world."

Because of these advancements, Mark Perry, professor of economics at the University of Michigan-Flint, foresees a "pending renaissance in U.S. manufacturing," including an insourcing of "Manufacturing 2.0" jobs.

"The U.S. is still the world leader in terms of innovation, engineering design and patents," Perry explained. "China is good at assembly, the labor intensive parts, but the creativity happens here. We still have the advantage in entrepreneurship and innovation. This won't be like Michael Moore in 'Roger & Me.' 21st century manufacturing is headed away from heavy machinery and more toward robotics, design and high tech."

According to Perry, 109,000 net new manufacturing jobs were added in 2010 -- the first net additions since 1997. The turnaround continued in 2011 with another 225,000 net new manufacturing jobs added, although the current count of 12 million manufacturing jobs is still down about 7.5 million from its peak level in 1979.

The recent job growth has a lot to do with the narrowing of wages between the United States and China. "Until a few years ago, we had a manufacturing wage bubble in the U.S. that was clearly unsustainable," Perry says. "Those wages were out of line with the rest of the world, but because of the recession, the U.S. is much more competitive from a wage standpoint."

While wages in China are increasing by 15 to 20 percent a year, and have doubled in the past four or five years, U.S. wages rose 1.4 percent from December 2010 to December 2011. Though the gap is shrinking, it is still substantial -- U.S. Bureau of Labor Statistics estimates peg average U.S. manufacturing wages at $19.13 per hour in December 2011, while Perry estimates the average manufacturing wage in China is $2.18 per hour. But "there have been significant productivity gains for U.S. workers," Perry said, "so adjusted for worker productivity, the $19 might be a better value."

Creating domestic jobs was an integral part of Chuck and Paul Mooty's vision. "We have the ability to do something [with this business] that is meaningful," Chuck said.

About 100 employees were laid off when Faribault Mill closed in 2009, and when the Mootys restarted the mill, they hired about 35 employees, about three quarters of whom were former mill employees. They plan to have the mill back up to 100 employees in 2012.

"It was important for us to hire people back," Chuck said. "They were excited to come back and work for the company they loved. It was a huge advantage to them emotionally as well as financially."

Local Vs. Global

Although huge corporations like Apple get lured by the advantages of using Chinese manufacturers such as Foxconn, small businesses may be approaching a crux where manufacturing locally is the more sensible business decision.

"It's not only rising labor costs, but also rising land costs in China, that increases the cost of production there for U.S. manufacturers," Perry said. "There are other economic factors contributing to the reshoring of production, including long delivery times and rising delivery costs for overseas production, quality control issues, the physical separation of design and production personnel and a lack of safeguards on intellectual property outside the U.S."

Manufacturing domestically may not yet make sense for all small businesses, however. "Some companies producing very high labor-content goods like clothing and footwear may still prefer low-wage labor in China to producing in the U.S.," Perry said. "Or they may shift production from China to other Asian countries like Vietnam, Indonesia, Philippines, Cambodia for lower wages than China. It might be the more advanced manufacturing that will shift back here the fastest."

But Wadhwa believes that technological advancements could be key to small business keeping manufacturing close to home -- and keeping costs down.

"Small businesses manufacturing their products in China typically don't have the scale to be able to optimize their supply chains and gain the scale to do manufacturing in the U.S.," Wadhwa said. "This will change when 3D printing technologies become cheaper, however. With 3D manufacturing, it's actually cheaper to manufacture close to where you are."

"What we're doing now," he continued, "is shipping materials to China and then shipping the finished goods back. It doesn't make sense. If you can produce where your raw materials are or where your markets are, you save tremendously on shipping costs. China can't compete with that."

As far as benefits on the consumer end, "people are more sensitive now to the economic conditions in the United States and feeling more patriotic," Perry said. "Small businesses can take advantage of that. In a weak economy, given the high unemployment rate, the 'made in the USA' label is a definite advantage."

According to a recent nationwide survey conducted by The New York Times, 52 percent of the public considered it very important that the products they buy are made in the United States.

"What we've heard from our customers is how much they want to support domestic products and how glad they are that someone is producing these here," Chuck Mooty confirmed. "There's a wave of emotion to support this, and it's helpful to us at a time when we need that kind of support."

As the shop local movement fuels small-business manufacturing, Wadhwa believes small manufacturers will synergistically reward customers with better products and services than they've ever received, or maybe even expected.

"If people can manufacture their own shoes, watches, phones, toys or clothes, they don't need to rely on the big guys that manufacture everything for everyone," Wadhwa said. "They can customize according to their needs. They can go to a local store and have custom goods made just for them by entrepreneurs. If people had a choice to shop local and could afford to get customized products, they'd much rather do that. Who wants to go to Walmart and buy the same cheap, mass-produced junk?"

With innovators entering the market, Wadhwa envisions manufacturing that's more creative, local, personal -- basically, more entrepreneurial. "In the next five to 10 years," he said, "that's the transition that will happen."

The Mootys hope Faribault can participate in and capitalize on that transition. "If we don't focus on manufacturing, how can we start creating opportunities for people who love to produce goods and have a talent for doing so?" Chuck Mooty said. "This is something we need to do."

"Our theme is the revival of American excellence, and we feel as confident as ever in this being a viable goal."

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