State of the Industry

Study details challenges and opportunities for manufacturing in Pennsylvania

By Alan Houser

Manufacturing has always been the backbone of Pennsylvania’s economy. With a medley of economic and competitive forces bearing weight on domestic manufacturers, Pennsylvania’s manufacturing base has experienced its share of aches and pains.

A newly released study on manufacturing in Pennsylvania, entitled “Manufacturing Pennsylvania’s Future: Regional Strategies that Build from Current Strengths and Address Competitive Challenges,” takes an in-depth look at the health of manufacturing in the commonwealth.

The study, commissioned by the Pennsylvania Industrial Resource Center (IRC) network and the Team Pennsylvania Foundation (www.teampa.com), assesses the current state of manufacturing in the commonwealth and identifies ways for the IRC network to better support their client base of the commonwealth’s small and mid-size manufacturing enterprises (SMEs). The IRCs commissioned the world’s largest consulting firm, Deloitte, to prepare the report.

The study shows that manufacturing productivity in the state grew from $61,385 per manufacturing employee in 1993 to $86,914 in 2003. Manufacturing wages grew at a compounded rate of 1.5 percent per year during this period.

Anybody even remotely aware of the state of the U.S. economy, however — particularly in the manufacturing sector — knows that these numbers don’t tell the whole story. Among the report’s findings: manufacturing output fell from its peak in 2000 of more than $70.5 billion dollars annually to the 2003 rate of $63.5 billion.

Average manufacturing wages fell at an annual rate of 3.5 percent during this time. While Pennsylvania’s manufacturing employment was nearly flat between 1993 and 2000, the state’s manufacturing employment declined from 862,300 in 2000 to 731,020 in 2003.

The story is not entirely negative, though. In many ways, Pennsylvania’s manufacturing sector did well despite the national and global upheavals that rocked manufacturing enterprises. Pennsylvania’s manufacturing sector continues to be a dominant employer and the top contributor to the state’s gross state product (GSP), accounting for more than 16 percent.

Manufacturing is the third-largest employer in the state, with wages remaining high (more than $45,000 per year) and total wages attributable to the sector remain substantial.

Identifying the Drivers
The Deloitte study identified 16 “driver industries” that account for nearly 50 percent of the state’s manufacturing output when measured over the last 10 years.

These driver industries include: pharmaceuticals; electrical equipment; plastics; printing; food; paper; basic chemicals; metal-working machinery; architectural and structural metals; machine shops; other fabricated metals; wood products; furniture; resin, rubber and fibers; glass; and medical equipment.

After identifying the key contributors to Pennsylvania’s manufacturing sector, Deloitte identified the driver industries for each IRC service area, and analyzed the performance of each of these driver industries. In doing so, the report revealed the trends in each industry’s performance during the past 10 years.

“It was evident in this study that the state's manufacturing drivers have shifted away from some of the traditional base industries, such as steel and railroad manufacturing, toward such emerging industries as pharmaceuticals, which has doubled in size over the past 10 years,” said Dennis Yablonsky, Secretary of the state’s Department of Community and Economic Development. “Based on the results of this research, it is clear there are plenty of opportunities for Pennsylvania's economy to continue to thrive and grow in the coming years across all regions. However, we cannot ignore the significant economic contributions of our more traditional industries. We must also focus attention toward sustaining these vital economic contributors.”

The Regional Mix
The client base of the seven Pennsylvania IRCs is based on geography — each IRC serves a different region of the state. The mix of manufacturing establishments within each IRC came about from a number of factors, including access to transportation, rural or urban character of each region, natural resources unique to each region, and available labor force.

The Deloitte report identifies the driver industries for each IRC service area, and analyzes those industries in each region based on three factors: specialization, technology intensity and growth.

Specialization
Specialization is a measure of the industry concentrations within a particular geographic area. A high specialization of an industry within a geographic area tends to indicate that the industry is a net exporter of goods. A low specialization tends to indicate that the industry produces products primarily for local consumption, and/or that the region imports products produced by that industry.

Highly specialized industries, such as the auto industry in Michigan, are wealth-creating engines within a region. Lack of specialized industries may indicate that a region does not have a competitive manufacturing sector.

The report cites pharmaceutical manufacturing as Pennsylvania’s premier specialized industry, with more than $6.6 billion in gross output in 2003, and a 5.2 percent growth rate between 1993 and 2003. Other industries concentrated in Pennsylvania include medical equipment, basic chemicals, resins and synthetic rubber, fabricated metal products, audio and video equipment, and electrical equipment.

Despite the success of the pharmaceutical sector, the concentration of specialized industries within Pennsylvania has declined over the past 10 years, as have the concentrations of all other states in the region except Indiana, Kentucky and Maryland (the remaining regional peer states are Ohio, Michigan, Virginia, New Jersey and New York). Pennsylvania ranks in the middle of its peers in terms of concentration of specialized industries. In particular, the commonwealth’s 16 driver industries have continued growing and concentrating.

Technology-Intensity
The report identified, among the driver industries, those categorized as “high technology intensive” or “low technology intensive.” Among “high technology intensive” industries, the report defined two sub-
categories. “Very intensive” technology industries employ at least five times the U.S. average of research and development workers and technologically oriented workers per thousand workers. “Moderate intensive” technology industries employ between two and five times the U.S. average in these areas.

Technology-intensive industries provide several benefits, including a highly skilled, well-paid work force. The report analyzed each region’s employment in these industries against the state, region and nation.

The report found that Pennsylvania lags behind the nation in percentage of GSP produced by technology-intensive manufacturing industries.

Percentage of total GSP from technology-intensive industries is 12.5 percent in Pennsylvania, compared to 14.3 percent for the U.S. and 15 percent for Pennsylvania’s regional peer states.

When only very technology-intensive industries are considered (for example, pharmaceuticals), Pennsylvania fares better. According to the report, 3.6 percent of Pennsylvania’s manufacturing industries are very technology-intensive, compared to 2.3 percent of its regional peers.

However, Pennsylvania lags behind the U.S. figure of 4.4 percent total technology-intensive industries.

Portfolio Analysis
A key feature of the report is a portfolio analysis of the driver industries within each IRC service area. The mix of driver industries in each IRC region is analyzed based on three factors: output growth, specialization (concentration in the commonwealth versus other states) and level of technological intensity.

Specialized industries, because they sell nationally or internationally, create revenue from exports and tend to contribute particularly well to the state’s GSP. High-growth, specialized technical industries are likely to provide the foundation for future growth of manufacturing. In contrast, low-growth and commodity industry sectors are likely to remain low-value in the state’s manufacturing economy and are likely to be at risk from competitive pressures, including the offshore manufacturing of commodity goods.

Nevertheless, all categories are important, and the report offers recommendations to the IRCs and to public policy makers for supporting the mix of industries in each IRC region.

Jobs, Wages and Productivity
Within the state, although the share of Pennsylvania’s GSP from manufacturing decreased from 18.9 percent in 2000 to 16.1 percent in 2003, manufacturing continues to be the leading contributor to Pennsylvania’s GSP, at nearly $64 billion annually.

This is the largest share of any sector, and is significantly greater than the number-two sector, real estate and rental and leasing, at 9.9 percent of the state’s GSP in 2003. Sectors whose contributions to the state GSP rose since 2000 include real estate, finance and insurance, wholesale trade, and transportation and warehousing.

According to the report, Pennsylvania lost 133,000 manufacturing jobs since 1998. The report cites a number of reasons for the loss, including the recession, gains in productivity, foreign competition and the trend towards off-shore outsourcing. Manufacturing fell from the state’s largest employer in 2000 to third in 2003, behind public administration and health care/social assistance.

Average manufacturing wages in Pennsylvania stood at $44,994 in 2003. This figure is third lowest among eight peer states, ranging from Virginia’s $41,731 to Michigan’s $58,219 and New Jersey’s $60,874. The report speculated that the differences in average manufacturing wages between states is likely the result of cost-of-living differences (e.g., the cost of living is higher in much of New Jersey than in Erie), and the percentage of highly unionized industries (e.g., Michigan’s auto manufacturers), which tend to pay higher wages.

The report noted that “from an investment attraction standpoint, the state typically competes well when combining labor and logistics operating costs for those industries focused on Mid-Atlantic and Northeast markets.”

Despite gains in productivity, the average productivity of Pennsylvania manufacturers falls well short of the U.S. average.

In 2003, the average U.S. manufacturing job produced $96,549 in gross product. In Pennsylvania, the average real gross product per manufacturing job was $86,814, a difference of $9,735.

The report attributes this gap to price stagnation caused by production of a high percentage of commodity products, which tend to face price pressure from offshore competition and price sensitivity by buyers of manufactured products.

Recommendations
The report found that “the Pennsylvania Industrial Resource Centers continue to have a strong impact on the performance of the firms they serve and thus on the Pennsylvania economy.”

So that the IRCs can continue to support SMEs in a shifting manufacturing climate, the report recommended that the IRCs develop new capabilities to support the changing and emerging needs of SMEs in the following areas:

• Strategy – The IRCs should assist SMEs in developing business strategies in the face of changing market forces. SMEs need the means to react to competitive threats, including price pressure from offshore production and the marginalization of commodity manufacturing.
• Product Innovation – The IRCs should support SMEs in new product innovation and new product development, including market assessment, design and venture funding capabilities.
• Process Improvement – The IRCs should continue to expand and invest in process improvement capabilities to support improvements in productivity and quality.
• Advocacy and Research – the IRCs should support and grow education, advocacy and research capabilities for SMEs.

“Through the detailed analysis offered by this study, we have been able to examine closely, region by region, those sectors that are growing and those that are not, those that will benefit the most from support and those that will continue to drive our manufacturing economy,” said Yablonsky. “We now have the information we need to develop smart and effective strategies that can be applied with an extremely localized level of support moving forward.”

According to Steven G. Zylstra, President and CEO of Catalyst Connection, the IRC serving southwestern Pennsylvania, the report provides “A confirmation that manufacturing remains the most important sector in the commonwealth’s economy. Manufacturing still contributes more to the state’s GSP than any other sector, and creates the most wealth.

“Although manufacturing sector employment is now third, the sector has a significant economic multiplier effect. A manufacturing job will tend to support other jobs — including suppliers and service providers that cater both to the manufacturing sector and to the community as a whole,” said Zylstra “Other sectors, such as retail and service industries, do not generally provide this sort of economic multiplier effect. Considering the economic upheavals, the manufacturing sector is amazingly robust. It is imperative that we take the necessary actions to ensure its greater health.”