Innovation in Manufacturing Beats the Mirage of Cheap Labor

Strong leadership Can Point Toward the Future, Not the Past

What can innovation in manufacturing get you? How about greater productivity, shorter supply chains and less worry about labor costs?

That was my takeaway from a recent speech Vice President J.D. Vance made to the American Dynamism Summit. He championed the idea that for decades, businesses believed cheap labor was the key to manufacturing success. So executive teams pursued globalization. They offshored production, offshored expertise and separated the design of things from the making of things.

And what did chasing cheap labor like a mirage in the desert get us? Vulnerable supply chains, sluggish response times and a lost culture of innovation.

Now, with ReGlobalization, companies are pulling back from single-source supply chains, looking for alternatives beyond China. Some of that optionality could include manufacturing products in the United States, still the world’s largest consumer market.

However, unlike many of the talking heads on television, I know that we’re not going to “bring back” manufacturing. The United States can, however, transform manufacturing for future economic growth. Manufacturing innovation requires artificial intelligence, generative AI, machine learning and robotics. New production processes can redefine the playing field, making the U.S. manufacturing industry more competitive than ever before.

The Cheap Labor Drug vs. Innovation

Vance highlighted his belief that countries who started making things became good at designing them. As those countries advanced, they started producing more innovative products. Their processes and technologies rivaled and surpassed those in the U.S. The cheap labor drug hampered idea generation and technology innovation.

Take the semiconductor industry. The U.S. started out as the disruptive innovator. Innovations included inventing the transistor in the 1940s and the integrated circuit in the 1950s.

Now, Taiwan – through a culture of innovation, not theft – dominates the high end of the global semiconductor market. (The Guardian has a good history of how the small island country succeeded.)

Taiwan continues to innovate instead of chasing cheap labor in Vietnam or Africa or halfway across the world in Mexico.

It’s kind of like a geeky high school kid becoming a suave CEO type. Remember that awkward person with the thick glasses, always buried in books?

Fast forward a few years. Now, your high school colleague has ditched the glasses, hit the gym, gained confidence, earned a Ph.D. and is now running the show.

That’s what is happening with U.S. manufacturing. The old mode of dirty, inefficient factories relying on massive labor forces is gone. Business model innovations have made modern manufacturing sleek, intelligent and driven by technology. It’s about automation, precision and innovation.

With Skills, Expensive Labor Outperforms Cheaper Workers

Let me set up a hypothetical. Take two companies producing the same product.

Company A manufactures overseas, relying on 100 low-cost workers. Their margins depend on cheap labor, and every few years they chase the next lowest-cost location.

Company B, instead, produces domestically using 10 workers. But these aren’t just any workers. These employees, like in Taiwan’s semiconductor industry, are highly skilled. They operate state-of-the-art automation systems.

They each earn five, six, seven times as much as the overseas laborers. But fewer workers mean total labor costs are lower. And because innovation increases productivity, Company B is far more cost-efficient.

Even better, Company B produces closer to its customers, avoiding long, costly supply chains. Instead of spending money on freight, tariffs and delays, they invest in better processes, better products and better wages.

With that wages and benefits package, employees actually want to work at Company B. That means a lot in an age where many CEOs complain about worker shortages, Reuters reports.

This shift toward high-skill, high-productivity labor isn’t limited to just one industry. While automation and innovation make domestic production more competitive, labor costs still play a major role in where companies manufacture.

Take apparel manufacturing. For T-shirts, manufacturers can pay as little as a $1 per shirt in Bangladesh or China. That goes up to $15 or more per shirt in Western countries.

That makes manufacturing in the U.S. tough. But according to Devin Steele, owner of eTextilecommunications.com, a small number of apparel manufacturers are succeeding. Companies like TS Designs in Burlington, N.C., and Authentically American in Nashville, Tenn., compete in niche markets. They focus on sustainability, high-quality materials and ethical labor practices.

Innovation is also transforming other industries like electronics, customized consumer goods, aerospace and medical devices. In such industries, flexibility and speed can be competitive advantages.

The Right Strategic Shifts Can Bring Production Closer to Home

Think this only applies to hypotheticals or niche brand? Well, Bath & Body Works, a major retailer, spent years reshoring production to a dedicated “beauty park” near Columbus, Ohio. Previously, according to The Wall Street Journal, assembling a bottle of foaming hand soap required components from China, Canada and Virginia. The process took three months, and components traveled 13,000 miles.

Now, just a few miles separates the production of bottles, labels, soap and packaging. The process has slashed lead time to just 21 days.

The process started in 2008. And it involved complex negotiations with suppliers. The results? A streamlined process where the company makes most of its products on site.

The company reported $7.3 billion in global sales last year. And in a world of perpetual disruption, their reshoring model proved very helpful during the pandemic. Its on-site suppliers shared raw materials and workforce to ramp up the production of hand sanitizers and other essential goods.

That’s truly innovation in manufacturing, sourcing and supply chain.

Succumb to Innovation, Not Nostalgia

So, will we see more manufacturing in the United States than in the past? Absolutely.

But we won’t be reviving the old. We’ll be creating something entirely new.

Nostalgia might be great for sappy movies. But it’s not a great recipe for progress. Nobody wants to go work in an old-fashioned textile mill and catch brown lung disease.

Instead, companies that embrace AI, automation and advanced manufacturing technologies will lead the next industrial revolution. And that’s the kind of manufacturing worth investing in.

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