271-Benefits of Intense Competition: Lower Prices and Better Products

No segment of our economy has been under more intense pressure than the manufacturing sector. Lower labor costs in many parts of the international economy have forced manufactured product prices down and shifted manufacturing jobs out of the United States. Competition has indeed been intense.

Over the years, we have done in depth studies of more than fifty industries who have faced intense competitive markets. We found both what you might expect and, also, what you wouldn’t expect. You would expect that costs in a difficult industry would fall as companies work to make a profit despite the falling prices that accompany intense competition. What you might not expect is that product quality and supporting service levels increase at the same time as costs and prices fall. Customers simply will not buy a poor product even if its pricing declines.

The broad measures of the manufacturing sector illustrate these same conclusions. Manufacturing in the U.S. is finally growing again. In 2010, manufacturing jobs increased for the first time since 1997. Today manufacturing is growing at three times the rate of the domestic economy. Consider, as well, the following facts as noted by Jerry Jasinowski, a former President of the National Association of Manufacturers:

• American exports of goods rose 21% in 2010. Conclusion: the quality of our goods is rising.

• Manufacturing output in the U.S. today is growing at twice the rate of the 1970s, in real terms. Conclusion: we are more cost competitive today than we were in the 1970s.

• Between 1987 and 2008, manufacturing productivity grew by more than 100%, while the rest of the business sector’s productivity increased by less than 60%. Conclusion: we get far more out of our manufacturing workforce today than we did in 1987 and than many other industries do today.

• Between 1995 and 2008, manufacturing prices decreased by 3%, while the overall price level in the economy increased by 33%. Conclusion: while product quality has improved, and costs have fallen, prices have also followed.

The overall picture the manufacturing sector portrays, over the last twenty-five years, is that hostile market conditions produce better products and lower prices for customers, both at the same time.

16 August 2011

Update:

The US manufacturing sector has seen mixed performance in terms of productivity, prices, and growth rates over the years from 2012 to 2022.  It has competed well when compared to its mature Western competitors and Japan. However, it faces stout competition from its Chinese and other Asian rivals.

Productivity: Productivity in the US manufacturing sector has grown slowly over the last decade. According to the Bureau of Labor Statistics, labor productivity in the manufacturing sector increased by an average of 1.3% per year between 2012 and 2022. This is slower than the growth seen in the 1990s and 2000s.  The US manufacturing sector has generally been more productive than its developed international competitors. According to the Bureau of Labor Statistics, labor productivity in the US manufacturing sector has been higher than that of many other developed countries, including Germany, Japan, and France.

Prices: Prices in the US manufacturing sector have been relatively stable over the last decade. According to the Bureau of Labor Statistics, the Producer Price Index for finished goods increased by an average of 1.5% per year between 2012 and 2022.  The US manufacturing sector has generally been more price competitive than its international competitors in developed countries. Data from the Bureau of Labor Statistics show that the Producer Price Index for finished goods in the US manufacturing sector has been lower than that of many other developed countries, including Germany, Japan, and France.

Growth rates: The US manufacturing has grown steadily over the last decade, with output increasing by about 18% between 2012 and 2022, according to the Bureau of Economic Analysis. However, this growth rate has been slower than in the 1990s and 2000s.  The manufacturing sector’s share of US GDP has been declining very slowly over the last decade. The US Bureau of Economic Analysis reported that the manufacturing sector represented 11.9% of GDP in 2019, down from 12.8% in 2010. In contrast, the US manufacturing sector has performed well compared to many of its international competitors. Data from the Bureau of Economic Analysis shows that the value of US manufacturing output has grown at a faster rate than that of many other developed countries, including Germany, Japan, and France.

Despite the relatively good performance of the US manufacturing sector against its export rivals in many developed countries, the US manufacturing sector faces stringent competition from other countries, particularly China and other countries in Asia. These countries have lower labor costs and a concentration on manufacturing, which has allowed them to grow their share of global manufacturing output.  As of 2021, China was the world’s largest manufacturing economy and exporter of goods. The US was the second largest manufacturing economy.  According to data from the National Bureau of Statistics of China, China exported $2.1 trillion worth of manufactured goods in 2019.  According to the US International Trade Administration, the US exported $1.5 trillion worth of manufactured goods in 2019.

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