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As Manufacturing Mood Slips, Policymakers Should Take Heed

October 12, 2015

Indiana’s manufacturing sector continues to generate its share of economic development victories: The recent news that Subaru of Indiana will invest another $140 million and create 1,200 new jobs at its Lafayette plant is a major vote of confidence. The decision by BAE to stay and expand in Fort Wayne is another positive story, and we could list other examples where state and local officials deserve kudos for “closing the deal” with Hoosier manufacturers.

But evidence suggests that the positive outlook of Subaru and other growing companies is the exception rather than the rule in today’s manufacturing economy. Findings from our annual Indiana Manufacturing Survey suggest that the climate in the nation’s most manufacturing-intensive state is somber about the future and cautious about new investment.

Katz, Sapper & Miller works with the IU Kelley School of Business in Indianapolis to conduct the annual Indiana Manufacturing Survey, in partnership with the Indiana Manufacturers Association and Conexus Indiana. Respondents range from small machine shops to global corporations, making industrial equipment, automotive electronics, lifesaving medical products, cutting-edge aerospace technologies and more.

From this diverse sample, we identify the common concerns and priorities of Indiana’s largest industry. For the last few years, manufacturing optimism trended up, as companies capitalized on the economic recovery. But over the last year, the post-recession bounce seems to have cooled … and so has manufacturing sentiment.

In short, many of the companies in the survey still see opportunity in their markets – but feel under siege by government rulemaking, rising costs, skill shortages and overseas competition.

The federal government is a recurring culprit as manufacturers identify barriers to growth. Nearly nine of 10 respondents agree that Washington, D.C., is not doing a good job of supporting the sector, with a litany of complaints that include regulatory excess, taxes and the ongoing effects of healthcare reform. Indiana manufacturers are particularly concerned about environmental mandates: three related issues – energy efficiency standards, environmental regulation overall and efforts to curb carbon emissions – were rated extremely or somewhat important by more than 80 percent.

On the other hand, eight of 10 responding companies believe that Indiana policies are mostly supportive of manufacturing (while keeping a wary eye on corporate and property taxes). The most notable shortcoming is a familiar one – a homegrown shortage of skilled workers to fill open positions in today’s more advanced, high-tech factories.

Strong majorities report a moderate or severe shortage of skilled production workers, production support, scientists and design engineers; all of these ranked more serious than 2014.

There’s widespread consensus that workforce is Indiana’s biggest economic development disadvantage, and we’ve seen promising action among state government, post-secondary and vocational education, and industry groups. Growing employers like Subaru are proactively forming partnerships with higher education, admitting on the heels of its expansion announcement that it will be a “challenge” to find qualified Hoosiers to fill its new positions.

Indiana’s current efforts simply aren’t yet meeting workforce demands, forcing many companies to rely on costly overtime and internal training programs.

Indiana prides itself on providing a low-cost environment, but labor is among the largest expenses for most manufacturers, and the inability to recruit new employees imposes a high cost in missed opportunities. Productivity and innovation are essential to competing in the global economy, and these come from highly skilled, highly motivated workers.

It adds up to pessimism writ large: Despite reports of greater exports and international companies like Subaru investing in Indiana, most responding companies don’t believe that U.S. manufacturing will ever again lead the world. These attitudes can change, but we have to take heed – starting with stronger commitment and investment in human capital.

We shared these insights with corporate and civic leaders, policymakers, and economic observers at a public briefing in Indianapolis on Oct. 6. If you missed the event and want to learn more about the challenges and opportunities revealed in the 2015 Indiana Manufacturing Survey, you can download the full report here. 

This article was co-authored by Jason Patch, chair of KSM’s Manufacturing and Distribution Services Group, and Steve Jones, an associate professor of finance and chair of the Evening MBA Program at Indiana University’s Kelley School of Business-Indianapolis

Jason Patch Partner-in-Charge, Audit

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