Industry Market Trends

What's Behind the Declining Number of U.S. Factories?

Feb 12, 2013

Manufacturers continue to close facilities in the U.S., but new research suggests that factory closings are not due to a "runaway plant" epidemic. In fact, many companies are outsourcing parts, not labor, and opening new plants overseas to better target foreign markets. Domestically, they are harnessing efficiency methods to produce more from fewer plants.

Over the past decade, more factories have closed in the U.S. than have opened, resulting in a gradual net decline in the total number of domestic manufacturing plants. Although many attribute this trend to outsourcing, new research indicates that companies are not moving their manufacturing facilities abroad to take advantage of cheaper labor, but to make products for local markets overseas.

A recent report from the Manufacturers Alliance for Productivity and Innovation (MAPI) reveals that facilities aren't closing in the U.S. due to the "runaway plant" phenomenon, which involves shutting down domestic production and reopening facilities in foreign countries to ship products back to the U.S.

"Relatively few plants are shut down in the U.S. by an owner who opens up an identical facility abroad and supplies the U.S. market with imports from the foreign affiliate," Daniel J. Meckstroth, chief economist for MAPI, noted. "A widespread, more fundamental reason for plant closings and openings is the sourcing decision, where U.S. firms purchase intermediate goods and services-from domestic or foreign suppliers. The procurement decision should be based on cold, hard calculations of the total cost of ownership."

Meckstroth also pointed out that a relatively small percentage of products are being produced by foreign affiliates to be sold to the U.S market: "Only 11 percent of foreign affiliates' sales return to the U.S. - 9 percentage points to the U.S. parents and 2 percentage points to other U.S. customers. On the other hand, 89 percent of affiliates' sales are in their own countries to other non-U.S. customers."

Still, American factories are closing at a slow but steady pace. The "churn rate," or the difference between factory closings and factory openings, is in the red. For the past 13 years, an average of 3.5 percent of factories have closed each quarter, while 2.9 percent opened. This has had a harmful effect on the workforce. Between the first quarter of 2010 and the first quarter of 2012, there was a cumulative loss of 108,000 manufacturing jobs.

In 2011, Rep. Betty Sutton (D-Ohio) cited figures that showed domestic factories were shuttering faster than anyone had thought, noting that so many companies are seeking cheaper labor and fewer regulations abroad that "every day in the United States, we are losing 15 factories." Data from the Bureau of Labor Statistics showed that Sutton's claim was correct for a 10-year average.

The public perception of a crisis in manufacturing is typically triggered when iconic businesses close their flagship facilities. For example, the financial crisis saw huge companies closing shop in major American manufacturing hubs, such as General Motors in Janesville, Wisc., and Pontiac, Mich.; Toyota in Fremont, Calif.; and Chrysler in Twinsburg, Ohio.

So why are American factories really closing?

Many American plants increasingly rely on components sourced from foreign shores because unrestricted imports have driven down prices, and these savings have been passed along to end markets. As a result, losing a parts supply industry or ceasing to manufacture a particular product has become a fairly common occurrence in the U.S.

According to the New York Times, American manufacturers imported 25 percent of their components in 2011, as opposed to 17 percent in 1997. As an example of this number in practice, the Boeing Company once bought all of its components from American manufacturers or made them in stateside Boeing plants; now, Japanese subcontractors are building wings for many Boeing aircraft.

Some analysts claim the problem is exaggerated. In fact, they say the number of factory closings is not necessarily a bad thing for U.S. industry, as it may signal a move toward higher efficiency and productivity. In her syndicated column, Froma Harrop notes that it's not production capabilities but manufacturing jobs that are disappearing as companies invest in advanced technology.

"America still makes lots of stuff that can be produced with a handful of people running computerized equipment," Harrop explains. "What's different now is that the machines are getting more clever."

By also taking advantage of the benefits of localized production, such as reduced supply chain expenses and parts delivery times, manufacturers who have invested in computerized machine tools and robotics can function with greater cost-efficiency than if they offshored for cheap labor.

Others agree that efficiency and productivity are boosting American manufacturing, allowing companies to streamline operations.

"The story of American factories essentially boils down to this: They've managed to make more goods with fewer workers," the Chicago Sun-Times reports.

The combination of high technology and an educated workforce means that the U.S. has been increasing output and trimming costs while manufacturing more complex products. While this results in a slimmer workforce and fewer factories, U.S. manufacturing growth continues to outperform other nations' industrial sectors, including China's.