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

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.