Manufacturing A Home in California

By: Dr. Lynn Reaser

Manufacturing has started to stage a recovery around the country and California has been no exception.  Part of the upswing reflects the upturn from a devastating recession.  Longer term trends may also be at work as companies rethink their outsourcing strategies.

Emergence from the Depths of the Downturn

California’s loss of factory jobs was both deep and long.  Starting in early 2007, the state suffered consistent monthly losses for a full three years until some flickers of light appeared early last year.  From the peak of February 2007 to the low point of September 2010, the state’s manufacturing jobs plummeted 16%.  This was almost double the 9% peak-to-trough loss experienced for total nonfarm payrolls in the state.  Although little consolation, California’s 16% factory job loss was actually less than the 18% reduction posted nationally.

California’s recovery in manufacturing jobs was initially bumpy last year, with a month or two of improvement followed by one or two months of setback.  Beginning in October, a more consistent upswing has developed.  Through April of this year, California has now added jobs for seven consecutive months, bringing the cumulative gain to over 17,000 jobs over that time period.

Companies Rethink the Offshoring Option

The global landscape facing manufacturers continue to change, which could have important implications for both the United States and California.  For a number of years, firms relentlessly pursued one strategy:  “Locate operations in China.”

While many firms will continue to start and expand facilities in China, especially to serve the Chinese market, a number of manufacturers are considering other options for sales in the U.S.  Several factors are at work:

  • Rapidly rising wage costs in China.  With annual wage gains running around 15-17% per year, Boston Consulting Group estimates that by 2015 much of the cost advantage of China over the U.S. after adjusting for productivity and exchange rates will have disappeared.
  • High oil prices.  If oil prices remain at around $100 a barrel or higher, firms will need to factor in significant transportation costs as a negative in importing goods from foreign sources.
  • Supply chain risk.  Japan’s earthquake and tsunami underscored the risks of long and complex supply chains.  A consolidation of those links may be in order.
  • Customized products.  Many American firms are focusing on higher valued-added products involving niche markets in order to be competitive.  This often requires a closer proximity to customers where designers and engineers can work directly to customer specifications.
  • Rapid response to market changes.  A close proximity to markets can also allow manufacturers to monitor and respond to shifts in consumer tastes with new and different products.
  • Better inventory management.  Local suppliers can improve the likelihood of achieving optimal inventory levels as changes in demand dictate either sizable increases or declines in holdings of parts, supplies, and finished goods.

Considering these various factors, firms may continue to look outside the U.S., including in countries such as Viet Nam, India, and Mexico.  However, a number will opt to maintain operations in the United States, expand their American facilities, or establish new plants in this country.

California should be able to participate in some of this manufacturing renaissance because of its edge in technology and innovation along with the knowledge, skill level, and productivity of its workforce.  However, in order to be truly competitive, the state must focus on reducing its regulatory and tax burden.


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