Verit Advisors’ view is that despite certain headwinds, manufacturing has been experiencing a renaissance over the past several years and current market trends suggest that it has staying power. Technological advancements, the shrinking supply chain, shifting dynamics towards “re-shoring” due to changes in the Asian economy, and record corporate cash levels all support the notion of a sustained recovery for manufacturing in the U.S. Employee ownership, particularly prevalent in manufacturing companies, has also been shown to drive superior performance and wealth creation for workforces in the U.S.

A Sustained Resurgence of Domestic Manufacturing:

Manufacturing and innovation has set the U.S. apart from the rest of the world for more than a century and until recently has been one of the main drivers for wealth creation in the U.S. According to the National Association of Manufacturers and the Bureau of Economic Analysis, manufacturing in the U.S. contributes more than $2 trillion to the economy, accounts for 12% of GDP, employs nearly 18 million people (about 1-in-6 private sector jobs), and performs more than three quarters of all private sector R&D. In fact, U.S manufacturers are the most productive in the world, significantly surpassing worker productivity in other major manufacturing economies, leading to higher wages and living standards compared to the rest of the world.

Despite a minor dip in the most recent data, manufacturing has been on the mend for the last two to three years. The U.S. Census Bureau reports that inventories of manufactured durable goods have been up 22 of the last 23 months as of February 2015 (the most recently available data), indicating continued optimism in the space. Although new orders for non-transportation manufactured durable goods in the U.S. decreased slightly (less than one-half of one percent), the Institute for Supply Management’s manufacturing report shows the Purchasing Managers’ Index at 51.5% in February 2015, the 27th consecutive month of manufacturing growth. Readings over 50% indicates expansion in manufacturing.

The Changing Economics of Manufacturing:

Manufacturing, like many industries in the modern world, has been experiencing rapid and transformational change. John Hagel III et al., writing for Deloitte’s Leadership Center, indicates that exponential technological advances continues to erode barriers to entry and commercialization. New market entrants are using innovative manufacturing models to operate at smaller scales and compete with larger incumbents, which was not feasible as recently as 10-15 years ago. The distance between manufacturers and retailers/sales organizations is rapidly decreasing and requiring producers to increase their speed to market and customer engagement. There is a push to build to order rather than build to stock. These shifts are making it harder to create value in the traditional ways.

The continual need to capture value through innovation, original design, and speed to market are driving an uptick in capital investment funding according to a recent government report. BMO Harris suggests that with corporate cash at historic highs and the average age of plants and equipment at their highest levels in 50 and 15 years, respectively, there is a pent-up need and capacity for extensive infrastructure investment. Additionally, “re-shoring” continues to replace off-shoring as the dominant manufacturing trend as customers demand high-quality products with short lead times. Rising wages in Asia, higher shipping costs, and speed to market is causing companies to shift manufacturing closer to where products will be sold. This contraction of the supply chain has been dubbed “next-shoring,” allowing manufacturers to increase the speed of product replenishment.

One potential challenge to U.S. manufacturing lies in the non-competitiveness of the U.S. corporate tax system. The National Association of Manufacturers reports that the U.S. has a higher statutory corporate tax rate than all but one of the other top 135 nations, the United Arab Emirates. The U.S. has remained firm on its corporate tax rate for more than two decades while the rest of the world has significantly lowered tax rates. Moreover, the U.S. is the only G-7 nation that taxes the active foreign earnings of its companies. State and local governments also apply tax rates ranging from 0% to 12%. This corporate tax system puts manufacturing firms at a disadvantage inside and outside other countries. In the U.S., multinational companies have an incentive to invest abroad to create profits in lower tax rate countries. Domestically and internationally, manufacturers in the U.S. compete for revenues with firms with lower corporate tax rates. All told, the domestic tax system is putting a significant burden on manufacturers to remain competitive inside and outside the U.S.

The Impact of Employee Ownership on Manufacturing Companies:

Many innovative manufacturing companies have mitigated the inefficiencies of the current tax system by implementing employee ownership. Ernst & Young recently completed an exhaustive study on behalf of the Employee-Owned S Corporations of America, a Washington DC-based lobbying group, to study the effects of employee ownership on retirement plan value. The study found that manufacturing has the highest concentration of employee stock ownership plans (ESOPs) compared to other industries by far. In fact, 29% of all net ESOP assets are in manufacturing firms. The compound annual growth rate of total returns for S Corporation ESOP participants was 11.5% from 2002 to 2012, compared to 7.1% for the S&P 500. S Corporation ESOPs also had 56% higher distributions per participant compared to 401(k) plans over the same period and are more likely to offer more than one retirement plan to their employees.

As always, it is Verit’s vision to bring a fresh approach and customized solutions to advise private business owners on ownership transition.