Expansion and the kind of investment that will position Indiana’s manufacturing and logistics well for the future temporarily reduced the sector’s productivity grade to a C from a B in the Conexus annual report card evaluating the state's relative strengths.
The sector was evaluated in nine categories and received As in four of them: global reach, tax climate, manufacturing industry health and logistics industry health. It has had As in those categories for at least eight years, and Indiana is the only state in the country with As in both the manufacturing and logistics health categories.
Its productivity and innovation grade slipped partly because the sector is in a remarkable expansion period, according to Michael Hicks, director of the Ball State University’s Center for Business and Economic Research, which released the report June 7 with Conexus Indiana, a nonprofit formed to advance the industries.
The state’s manufacturing employment is experiencing the longest expansion in Indiana history, said Hicks, who also is the George and Frances Ball distinguished professor of economics and business research at Ball State.
“Indiana remains the premier advanced manufacturing and logistics state in the union, and this year’s scorecard reflects that continued expansion,” Mark Howell, Conexus president and CEO, said in a statement summarizing Indiana’s 2018 scorecard results. “We are excited that the report indicates our industries are in great health. Our annual breakfast event showcased the leadership and technology that is necessary to build on our state’s position as a longtime manufacturing and logistics powerhouse.”
The state’s location in the manufacturing-intensive Midwest contributes to its powerhouse status. Many important international manufacturers trace their origins to the region, and Hicks said it has developed infrastructure and public policy favorable for the industry.
Clusters of manufacturing expertise developed in the Midwest also have helped the industry flourish in the region. “The location of manufacturing actually has been very durable. One of the factors that would predict the location of manufacturing today would be the share of manufacturing 100 years ago,” he said.
The industry’s productivity and innovation has slumped across the country and that trend has been the most pronounced in regions with the heaviest concentration of advanced manufacturing.
“That’s partially a puzzle," Hicks said. "My suspicion is we’re going through a period of investment where the benefits haven’t been seen yet,” he said. But, because these automation investments eventually will yield productivity gains, “that should improve on its own.”
In Indiana, Purdue University's continued commercialization of manufacturing-related research and development will make an important contribution to the state’s manufacturing strength and productivity, he said.
Some production process improvements resulting from this innovation will eliminate some of the state’s manufacturing employment. But, by making manufacturing even more profitable in the state, they will boost Indiana’s gross domestic product, and “over the long run, the states that introduce most of these practices are going to do the best in manufacturing,” Hicks said.
More labor-intensive, lower value-added manufacturing processes tend to get replaced pretty quickly when automation becomes available for that purpose, he said, because health care benefits tend to cost the same for an employee making $10 an hour as they cost for a more skilled worker making $40 an hour.
The learning curve new employees go through tends to be longer for advanced manufacturing than for lower value-added manufacturing, particularly when products and components are made in a zero-defect environment for customers in avionics or industries with similarly demanding quality requirements.
The report card grade for Indiana’s manufacturing and logistics sector was unchanged this year from 2017 in all but one of the categories where it received less than an A. It fell to a B- from a B in the worker benefit costs category because of higher health care premiums.
Healthy Indiana Plan 2.0 accomplished that by reducing the number and share of residents in the state without health insurance, Hicks said. Some changes to the plan reduced participation in it, allowing health care premiums to rise again in the most recent grading period.
In the future, the work the state does to improve the quality and skill level of its workforce will have the greatest favorable impact among its various initiatives on its manufacturing and logistics sector.
“Almost all the long-term problems are going to be taken care of by having a trained and ready workforce, and everything else is a distant second,” Hicks said.
Indiana is in its fourth year of getting a C grade for its human capital, but that is up from a D in 2013. It is a category that could take 30 years to bump up to the next letter grade, and although the state is working very hard at improvement, Indiana has not yet seen the results it wants from that effort, Hicks said.
The effort requires a focus on local government and school system success with education and with building the kind of communities people want to move to, he said. Education systems must become more effective at making workers viable for long term careers, not just the next job, he said.