1Center or American Progress | Manuacturing Bonds
Manufacturing Bonds
Presenting a Bond Guarantee Program that Could HelpOur Small Manufacturing Companies Survive and Hire
Jordan Eizenga and James Hairston February 2012
Introduction
Manuacuring remains an inegral par o our economy. Manuacuring companiesprovide well-paying, middle-income jobs. U.S. manuacuring wages are, on average,19.3 percen higher han he privae-secor average even hough he secor employs anabove-average share o hose wihou a college educaion.
1
Manuacuring also drivesinnovaion. Manuacuring companies accoun or more han hal o all public andprivae research and developmen in he Unied Saes, he benes o which spill overino oher secors.
2
While U.S. manuacuring oday suers rom lower employmen levels and slowergrowh in oupu han in he pas, he secor is by no means a los cause. Much can bedone o bolser is compeiiveness. For one, he ederal governmen can help creae jobs and increase oupu by improving he perormance o manuacurers by increasingheir access o capial.Small manuacurers oday canno easily access nancing o resrucure, grow, andscale up heir businesses. Low-priced bank loans and lines o credi are more dicul oobain or small- and medium-sized manuacurers, he pool o venure capial is smallerhan i was years ago or sarup advanced manuacuring companies,
3
and access o bond markes can carry high borrowing and ransacion coss due o he small size o many manuacuring companies. Wihou sucien working capial, small- and medium-sized manuacurers may no be able o grow, which is bad or he economy and bad or job creaion. As one par o a broader sraegy o srenghen he manuacuring secor, we believe policymakersshould explore he idea o creaing a manuacuring bond guaranee program. Tis pro-gram would be available or hose rms ha paricipae in a revamped ManuacuringExension Parnership program, which is run by he Deparmen o Commerce’sNaional Insiue o Sandards and echnology.
2Center or American Progress | Manuacturing Bonds
Tis approach could be an inexpensive way o address boh he nancing gap and he jobs shorage in our economy, providing much-needed access o low-cos capial orsmall manuacurers o grow while allowing hem o become more producive, innova-ive, and compeiive by adoping bes pracices hrough he Manuacuring ExensionParnership. Tis issue brie deails our proposal.
The productivity challenge for small manufacturers
Troughou he pas decade, manuacuring oupu grew more slowly han he economy as a whole. Manuacuring’s conribuion o gross domesic produc—he larges mea-sure o growh in our economy—ell o 11 percen rom more han 14 percen beween1980 and 2010. Employmen in he manuacuring secor also ell paricularly hard inhe pas decade, as he secor as a whole los approximaely one-hird o is jobs.I would be wrong o asser ha he reason manuacuring jobs are leaving he UniedSaes is solely because o low-cos labor overseas. Counries such as Germany have vibran manuacuring secors ha produce a rade surplus despie oering wages ha,on average, are among he highes in he world. Tere are many reasons or he successo German manuacuring, bu he coninued adopion o innovaive pracices and heraining and hiring o skilled and well-paid workers has been criical.Te recipe or success in German manuacuring acually makes sense. Firms ha aremore producive and innovaive are able o inves in new equipmen and raining, as well as pay heir workers good wages. And rms wih higher-paid and more-skilled workers have higher employee reenion raes, which increases produciviy or he com-pany as more experienced employees are less prone o avoid making misakes.
4
Similarly, he uure success o he American manuacuring secor will depend onproduciviy increases ha allow or he creaion o well-paying jobs. Indeed, he UniedSaes already has manuacuring companies ha are very producive and oer high wages o heir employees. Ye he number o such companies is oo ew.
5
For many small- and medium-sized manuacuring rms, i is very dicul and cosly omake he kind o invesmens necessary o develop new producs, increase produciviy,and hire new employees. Operaional improvemens migh require muliple changes, which ogeher can be cosly or small manuacurers. As Susan Helper, an economis aCase Wesern Universiy, noes:
Changing to a new production paradigm is particularly expensive and dicult i changes are complementary, that is, i two modications made together yield greater perormance gains than the sum o the two modications made separately.
6
3Center or American Progress | Manuacturing Bonds
Te end resul is ha many low-produciviy, small manuacuring rms adop a sraegy o cuting coss by keeping wages down. Clearly he marke is no always providing herigh incenives or small manuacuring rms o make ecien decisions ha are acu-ally o heir long-erm bene.
Why small manufacturers need capital and lack access today
Manuacuring companies, by heir very naure, require more working capial han rmsin oher indusries. Te reason or his is ha i akes manuacurers a long ime o con- ver heir resources and invesmens ino cash ow hrough sales. Tis means ha manu-acuring rms have much o heir money ied up in invenory and oher pars o heir business or a long period o ime beore i generaes a reurn. For his reason, manuac-uring rms ofen require more working capial han do rms in oher indusries.
7
Te need or nancing is paricularly acue or small manuacurers a he beginning o he supply chain because hey end o operae a he behes o large, secondary manu-acurers. Due o “jus in ime” supply chain sraegies,
8
large, secondary manuacurers who exer greaer conrol over he supply chain require ha smaller, primary manuac-urers bear he coss associaed wih soring heir invenory unil he secondary manu-acurer requess hem. Tis reduces coss or larger manuacurers bu resuls in an evenlonger cash-conversion cycle or smaller, primary manuacurers.
9
Te mos common orm o capial or small manuacurers is deb, such as a line o credior a xed-erm bank loan. radiionally, manuacurers use real esae, business equip-men, invenory, and receivables as collaeral o obain nancing. Te problem is ha boh commercial and residenial real esae remain weak, and prices have ye o sabilizesince he bursing o he housing bubble in 2008. Couple his problem wih he broaderighening o credi and he relucance o banks o lend, and he resul is many smallmanuacuring rms are having diculy obaining he necessary working capial.
10
While many manuacurers are holding back on heir expansion plans because o heperceived lack o demand rom consumers and businesses in he U.S. and global econ-omy, here are manuacurers ha would expand i hey could. A 2010 whie paper orhe Naional Insiue o Sandards and echnology, which oversees he ManuacuringExension Parnership, noed ha:
Even manuacturers whose revenues, margins, prots, suppliers, and customers areunafected by the downturn in the economy… have ound it impossible to maintaintheir current borrowing base, let alone receive the nancing needed to grow. Tese rmsare being penalized by the devaluation o their property, plant, and equipment.
11
Search History:
Result 00 of 00
00 results for result for
p.
Manufacturing Bonds
Jordan Eizenga and James Hairston detail the benefits of creating a manufacturing bond guarantee program to the companies that remain integral to our economy.
202
Reads
0
Readcasts
7
Embed Views
More From This User
Notes
Load more
