At Saw Mill Capital L.L.C., a middle-market private equity firm in Briarcliff Manor, partner Scott Budoff sees “a budding renaissance” in American manufacturing.
Shifting trade winds have begun to bring back manufacturing operations from China to America in a reversal of the outsourcing trend that has cost the U.S. about 6 million factory jobs in the past decade. In the next decade, that shift could create an estimated 1 million jobs in the reinvigorated U.S. industry and another 2 million support jobs.
At his 15-year-old firm, a control investor in manufacturing, specialty distribution and industrial service companies valued at $25 million to $200 million, “Our activity level is off the chart,” Budoff told an audience of manufacturing and finance professionals in Rye, where he was keynote speaker at the fifth annual manufacturing and logistics conference of the Association for Corporate Growth New York. In the first half of 2012, “The quality of deals is as good as I”™ve seen it in six, seven years,” he said.
Manufacturing profits reached a historic high in the U.S. in 2011, he said. President Obama pointed to the creation of 334,000 industry jobs since 2010 as signaling a “manufacturing renaissance,” and nearly 500,000 manufacturing jobs have been created in the last 2 1/2 years, Budoff said. Those hiring gains, though, are dwarfed by the approximately 8 million manufacturing jobs that have been shed in the U.S. since the late 1970s.
Despite a 37 percent employment decline in manufacturing since 1980, manufacturing output in the same period grew by 84 percent, Budoff said. The U.S. has more than tripled its manufacturing productivity since 1979 and remains second only to China in it global production share.
“In the last year, there”™s been a tremendous amount of change going on in manufacturing,” Budoff said. The change is driven by China and the U.S. and is expected to accelerate. Budoff in his remarks referred to a 2011 report by the Boston Consulting Group, “Made in America, Again.”
Analysts in that report said the cost gap between the U.S. and China will virtually close within five years for many goods consumed in North America. That cost leveling is due to a combination of rising Chinese wages, higher U.S. productivity, a weaker dollar and shipping and inventory factors.
Southern states, rather than New York and the Northeast, will be among the least expensive production sites in the industrialized world. Analysts expect companies to be building more capacity in the U.S. to supply North America, especially for production with relatively small labor costs and modest volumes, such as auto parts, construction equipment and appliances.
China, according to the BCG report, will remain an important manufacturing platform for Asia and Europe and for textiles and other goods with relatively high labor content and produced in high volumes.
During this decade, manufacturing will shift from “low-cost country” to “local production for local consumption,” Budoff told his Rye audience. Companies heavily vested in manufacturing in China might be putting excessive risk on their supply chain, he said. For some companies, a long-term strategy of Chinese manufacturing for export here is “a failed strategy,” he said.
Boston Consulting Group analysts said companies should do a “rigorous, product-by-product analysis of their global supply networks that fully accounts for total costs, rather than just factory wages,” as the U.S. becomes a more attractive manufacturing option.
Analysts cautioned that the reallocation of global manufacturing is in its very early phases and will vary from industry to industry. “But we believe that it will become more pronounced over the next five years, especially as companies face decisions about where to add future capacity.”
For manufacturing investors such as Saw Mill Capital, “The competitive environment is fierce” in middle-market acquisitions, Budoff said.
Private equity investors are sitting on $425 billion of “dry powder,” he said, while financing only 13 percent of middle-market mergers and acquisitions. With “lots and lots of buyers” looking to make deals, properties are trading at “about 1½ times of what they would in normal times,” Budoff said.
While lenders are looking to work with private equity companies on deals, lending remains “a very choppy market where things very quickly change from positive to negative,” Budoff said.
The budding manufacturing renaissance in the U.S. does face potential obstacles in its way.
“Technology transfer to China is a central trend,” Budoff said. “Protecting that intellectual property is critical” for U.S. companies.
“The single biggest challenge the U.S. manufacturing market will face over the next 10 years is the skills gap,” he said. With a shortage of qualified workers, companies must change their attitude and improve their training programs for skilled positions. “Finding skilled workers will be difficult and competition will be stiff,” he said.
In a 2011 survey of workforce talent by the Manpower Group, 52 percent of U.S employers reported difficulty filling open positions.
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