MAPI report says U.S.-based manufacturers face a 20 percent structural cost disadvantage

By Jeff Berman, Group News Editor
October 26, 2011 - LM Editorial

With the United States manufacturing base accounting for roughly 11 percent of Gross Domestic Product (GDP), domestic manufacturers are not only dealing with a declining base on the home front, they are also facing major disadvantages when it comes to doing business in the United States compared to global competitors.

That was a chief finding of a recent report from The Manufacturers Alliance/MAPI and The Manufacturing Institute, entitled “The 2011 Structural Costs of Manufacturing in the United States.

This report, according to its authors, is the fourth in a series, which compares the structural costs of manufacturing in the U.S. to those of its 9 largest trading partners: Canada, Mexico, Japan, China, Germany, United Kingdom, Korea, Taiwan, and France.

And among its chief findings is that U.S.-based manufacturers face a 20 percent structural cost disadvantage in the global market compared to its top competition, which is up from 17.6 percent in 2008. The cost disadvantage in 2006 and 2003, was 31.6 percent and 22.4 percent, respectively.

In an interview with LM, MAPI Economic Consultant Jeremy Leonard said that the data for this report is based on a raw costs index, which is a ratio of wages and compensation to total value added in manufacturing.

“This captures the direct effect of wages exclusive of other employee benefits, and it also indirectly captures the costs of materials and capital intensity,” he said. “The denominator is value-added, not sales, so when your costs of intermediate goods goes up, your value-add is going to go down almost equally. For companies that are more capital-intensive than others, that is going to increase the value added relative to the wages you pay, because your workforce will be more productive with the initial capital equipment.”

The costs for things companies choose to use in their workforce, the materials they are going to buy, and the investments they choose to make are viewed by Leonard as the costs they can control and serve as a starting point for this analysis.

The 2011 structural cost disadvantage for U.S.-based manufacturers was not considered a surprising number by Leonard.

“Compared to 2006, for example, which had a very high [31.6 percent] number, the data in the U.S. for pollution abatement costs was very dated, because for a long time we used to collect data on pollution abatement costs on an annual basis through the mid-1990s, and we stopped collecting that data,” he said. “Just after the 2006 study the U.S. did another survey on those costs, which were significantly lower than previous ones. The dip you see is partly because in 2006 we felt we were spending more on pollution abatement than we actually were, because we were relying on numbers that were almost ten years out of date and is a caution for that specific data point.”

And the slight increase from 2008 to 2011 is more in line, given that healthcare costs continue to rise and the corporate tax rate has not changed over a long period of time. From a global competitive standpoint, though, Leonard said that competing companies have been much more able to hold the line on the business piece of healthcare spending than the United States has.

This has to do with the U.S. having an employer-centered financing of healthcare, while in most other countries healthcare is financed by general tax revenues, with businesses filling in the gaps for healthcare expenses not covered by the general system.

“Cost pressures for those private plans are increasing in other countries just like they are here,” said Leonard, “but at the same time you have tax rates generally going down in the rest of the world, which has a positive effect for businesses, because that means they are financing less healthcare because corporate taxes are going down and other sources of government revenue are funding these healthcare systems. That positive effect on business costs is more than off-setting the negative effect of rising private insurance costs that are happening all over the world.”

Global Economy Growth Outlook is Muted: Earlier today, The Manufacturers Alliance/MAPI released its Global Outlook—October 2011 report, which indicated that there are renewed risks that the global economy is facing are a continuation of the historic period of crisis that began with the collapse of the U.S. housing market in 2006 and 2007.

“That event revealed an underlying financial structure that can only be described as an accident waiting to happen, with unjustified and unsustainable leverage, off-balance sheet transactions, and counterparty risks that nearly toppled the U.S. financial system,” MAPI Economist Cliff Waldman said in a statement. “In what now appears to be a new phase of crisis, public finances are the subject of fear. The sovereign debt drama that began in the southern periphery of the Eurozone has grown in ways that have unnerved global financial markets.”

The report said that non-industrialized economies will grow by 2 percent by the end of 2012 and by 4.7 in many developing economies by the end of 2012. And it added that U.S. export growth is predicted to slow from 11.3 percent during 2010 to 8.1 percent during 2011 and then further to 7.7 percent in 2012. The slowdown in U.S. import growth is anticipated to drop from 12.5 percent in 2010 to 5.1 percent in 2011 and to 3.1 percent in 2012.

About the Author

Jeff Berman headshot
Jeff Berman
Group News Editor

Jeff Berman is Group News Editor for Logistics Management, Modern Materials Handling, and Supply Chain Management Review. Jeff works and lives in Cape Elizabeth, Maine, where he covers all aspects of the supply chain, logistics, freight transportation, and materials handling sectors on a daily basis. .(JavaScript must be enabled to view this email address).

Subscribe to Logistics Management magazine

Subscribe today. It's FREE!
Get timely insider information that you can use to better manage your
entire logistics operation.
Start your FREE subscription today!

Recent Entries

Seasonally-adjusted (SA) for-hire truck tonnage in October at 135.7 (2000=100) was up 1.9 percent compared to September’s 133.1, and the ATA’s not seasonally-adjusted (NSA) index, which represents the change in tonnage actually hauled by fleets before any seasonal adjustment was 139.8 in October, which was 0.9 percent ahead of September.

The average price per gallon of diesel gasoline fell 3.7 cents to $2.445 per gallon, according to data issued today by the Department of Energy’s Energy Information Administration (EIA). This marks the lowest weekly price for diesel since June 1, 2009, when it was at $2.352 per gallon.

In its report, entitled “Grey is the new Black,” JLL takes a close look at supply chain-related trends that can influence retailers’ approaches to Black Friday.

This year, it's all about the digital supply network. In this virtual conference, we will define the challenges currently facing supply chain organizations and offer solutions designed to transform linear operations into dynamic, automated networks that offer seamless communication, visibility, and the ability to respond and optimize processes at any given time.

In his opening comments assessing the economy at last week’s RailTrends conference hosted by Progressive Railroading magazine and independent railroad analyst Tony Hatch, FTR Senior analyst Larry Gross said the economy continues to slog ahead at a relatively tepid pace, coupled with some volatility in terms of overall GDP growth. And amid that slogging, Gross said there is currently an economic hand-off occurring between the industrial sector and the consumer sector.

Article Topics

News · Global Logistics · Manufacturing · All topics

About the Author

Jeff Berman, News Editor
Jeff Berman is Group News Editor for Logistics Management, Modern Materials Handling, and Supply Chain Management Review. Jeff works and lives in Cape Elizabeth, Maine, where he covers all aspects of the supply chain, logistics, freight transportation, and materials handling sectors on a daily basis. Contact Jeff Berman.


Post a comment
Commenting is not available in this channel entry.

© Copyright 2015 Peerless Media LLC, a division of EH Publishing, Inc • 111 Speen Street, Ste 200, Framingham, MA 01701 USA