Over the past few years, the phrase “manufacturing resurgence” has grown in popularity throughout the United States. Industry analysts have identified a variety of positive factors that suggest America may reclaim its bygone title of a manufacturing powerhouse.
Joe May, Managing Principal of Graham Partners, echoed the strength of this trend. He explained, “Manufacturing jobs have increased recently and industrial-production as a percent of GDP is rising.”
However, May was certain to add that the resurgence is not as one-dimensional as it seems. While manufacturing jobs are currently on the rise, the focus of American manufacturing has largely shifted from basic, labor-intensive goods to more sophisticated products. This transformation is a critical characteristic of America’s historical and future manufacturing presence.
May believes that the shifting dynamics in the costs of energy has helped spur the recent manufacturing resurgence. “The simultaneous rise in transportation cost for foreign-produced goods and the fall in energy costs in the US has led many manufacturers to rethink their foreign manufacturing efforts,” said May. “For many manufacturers, the cost of shipping goods from another country is beginning to negate the benefits.”
Transportation costs are not the only fixed cost on the rise. As China — and other developing countries — continues to grow, so too does the cost of labor. According to a recent report from the China Market Research Group, incomes in China have quadrupled over the past decade. In 2000, the average annual income was $760 per person. As of 2010, it was $3,000. The pace of growth is expected to continue or accelerate.
Without the clear economic benefits, many manufacturers are becoming less tolerant of the inherent risks that are introduced by international manufacturing. One of the biggest risks is to the supply chain. “Manufacturers are looking to avoid a variety of political, economic, or natural disasters that could impact the supply chain,” explained May. By onshoring and bringing production efforts closer to home, there are fewer events that can disrupt the process.
However, as manufacturers look to mitigate supply chain risks and higher labor costs, the United States is not the only option on the table. Thanks to favorable trade agreements, Mexico is being considered as nice alternatives for manufacturing needs. As Member Eric Rundall of Dura Motors explained last year, “OEMs are putting in additional capacity [in Mexico]. Looking globally, if you consider total labor cost and logistics, it’s cheaper than China. Unrestricted trade and proximity of customer destinations makes it more affordable.” According to a recent Economist article, “On present trends, by 2018 America will import more from Mexico than from any other country.”
Although manufacturing jobs are on the rise in the United States, May believes the manufacturing that left is not the same that is returning to the United States. According to May, America has undergone a form of manufacturing evolution over the past 50 years – one in favor of industrial technologies.
“The US has begun to focus on manufacturing more sophisticated products that are higher up the value chain,” said May. “Rather than manufacturing products with a large labor component in the cost structure, we are now focused on more high-tech products, such as measurement and control devices, across a wide variety of industry sectors, including aerospace, pharmaceuticals, medical products, etc.”
He continued, “The value of industrial production in the US is up by more than four times since 1960, despite a drop in manufacturing employment. Currently, each employee is generating almost 6x more output than an employee in 1960. As a result, I don’t think the low-value-add jobs of manufacturing will return. The US is a favorable home for this trend in manufacturing because we have the most skilled workforce in the world at our disposal.”
Given the current personality of US manufacturing, many investors are focused on the manufacturing firms with a technology focus. “Businesses with strong industrial technologies at the core are likely to experience the greatest gains from the ongoing resurgence,” explained May. “They are becoming quite attractive to investors.”
In addition to the growing investor demand, business exits are likely to rise as well. “Generally speaking, business owners that have weathered the storm of 2008 and 2009 will probably soon consider exits,” says May. “Most don’t want to be at the helm during the next downturn. Since you want to sell your business in a growing economy, I expect we will see an increase in exits over the next 18 months.”
Between the heightened supply and demand, manufacturing seems ripe for M&A activity. Despite the positive trends, May has not seen significant change in buyer dynamics. “We have not seen much in terms of new competition or new investors entering the manufacturing space.”
Trends on Axial support May’s sense. While the proportion of direct investors in manufacturing has remained relatively consistent, the average number of pursuits per deal has grown significantly – from 4.77 per deal in Q1-12 to 12.11 per deal in Q1-13. Whether new players will enter the space in the near-term remains to be seen.