Business

Investors are learning to love industry again

Industry is back. For the last several decades, the sector has been overlooked and underinvested in, as Wall Street embraced Silicon Valley, services and all things technology-related. Manufacturing, particularly in rich countries like the US, was regarded as a “has been” business. Fewer and fewer wanted to invest or work in it. The inevitable decline of factory jobs became an economic truism.

Now, in our post-neoliberal, deglobalising world, things are changing. As resilience replaces efficiency as a business mantra, countries and companies are bolstering industrial capacity in strategic sectors such as semiconductors, electric vehicles, clean technology and agriculture, even as a changing global wage landscape and energy arbitrage are bringing the production of lower margin goods such as textiles or furniture closer to home.

But in the US, an even broader post-Covid resurgence in manufacturing is under way. While American manufacturers cut 1.36mn jobs during the pandemic, August data shows that they’ve now added back 1.43mn, an increase of 67,000 workers. And the gains are spread widely across geographies and sectors.

Part of this is about a federal push for domestic purchasing. Part of it is about supply chain delays that favour more domestic production. And some of it is also about continued decoupling from China, as well as the current inflation in transport costs. But beyond this, there is something overlooked and under-reported: the hidden strength of private, middle-market, often family-owned US manufacturers.

As someone familiar with the factory floor — my father ran auto components production lines for several companies in the Midwest, and eventually started his own business — I’ve always thought that the “decline of industry in the US” story was overblown.

Beyond the headlines of disaster in Detroit or the hollowing out of the rustbelt, there have always been plenty of smaller, community-based industrial firms, far from the pressures of Wall Street, that were able to stay competitive by investing more in technology and making an effort to upskill local labour.

Now many business leaders are starting to agree. Asutosh Padhi, the managing partner for McKinsey North America, recently co-wrote a book with colleagues entitled The Titanium Economy, about these undervalued, over-performing middle market manufacturing businesses, 80 per cent of which are private. The authors believe they will be the darlings of the future. They typically have sales ranging from $1bn to $10bn, from 2,000 to 20,000 employees and posted a compound annual revenue growth rate (CAGR) of 4.2 per cent between 2013-2018, outpacing the S&P 500 by 1.3 per cent.

These are the companies that make what’s “around us everywhere we look — in our cars, our mobile phones, our jewellery, sports equipment, surgical tools and more.” These companies receive less than 1 per cent of venture capital funding, and yet, as Padhi tells me, “if you want strong, year on year growth, they are the place to be”. 

Why are these often overlooked companies so successful? In part because they take the long view, something that’s easier to do when you are private. Research shows that private companies invest double the amount of money into things like R&D, training, and other forms of long-term productive capital expenditure than similar public companies, which often see their share prices fall when they invest in the future rather than paying back dividends or buying back shares. As Padhi rightly puts it, “there’s a difference between a good stock and a good company”.

But it’s also about being best in class. That means investing in the latest industrial technology, following the edicts of “lean manufacturing” to increase quality and productivity, and using local supply chains to innovate more quickly and better manage risk. Businesses that operate this way know what German and Japanese world-beaters do: getting tight teams of engineers, scientists, labourers and managers working in proximity yields the best results.

I’ve spent the past week in the Carolinas, looking at companies in the textile supply chain that are working in exactly this way. Not only are they bolstering their business at home, but in some cases they are grabbing more global market share as companies in Europe move business to the US to benefit from lower energy prices. Some German automakers, for example, are moving more production to North America to avoid disruption from the war in Ukraine.

The McKinsey partners conclude that “as more advanced tech becomes prevalent in industrial products and processes”, more jobs will return to the US. That’s great news for the American economy, since titanium economy companies pay on average more than double the salary paid to workers in the service sector ($63,000 as opposed to $30,000 annually). There are also the highest number of open jobs at every level in these companies, which are spread across communities throughout the country.

Those of us that grew up in such places always knew this. Investors are now learning it too. As the tech bubble deflates, I predict market interest in industrials will grow.

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