Comments before the joint hearing of: Senate Economy, Business, & Jobs Caucus and the Senate Manufacturing Caucus

Manufacturing in Pennsylvania:
Opportunities and Challenges

September 28, 2016

 Room 8E-B East Wing - Main Capitol

Harrisburg, PA 

PRESENTED BY:

DAVID N. TAYLOR

President

Pennsylvania Manufacturers’ Association

My name is David N. Taylor and I am the President of the Pennsylvania Manufacturers’ Association. We are the statewide, nonprofit trade organization that represents the people who make things here in our commonwealth; supporting over $82 billion in gross state product, employing more than 565,000 hardworking Pennsylvanians on our shop floors, and sustaining millions of additional jobs through supply chains, distribution networks, and as suppliers of industrial services. It’s our privilege to be speaking before you, the joint committees of the Senate Economy, Business, and Jobs Caucus and the Senate Manufacturing Caucus on this, the eve week of Manufacturing Week in our commonwealth.

The goal of Pennsylvania policymakers should be to make it the smart business decision for employers to locate, expand, and hire here in this commonwealth rather than in one of our competitor states.  Likewise, the goal of federal policymakers ought to be to optimize conditions for economic growth in the United States so American businesses can compete worldwide.  In both instances, energy production from the Marcellus Shale natural gas formation offers the way forward for a century of prosperity for Pennsylvania and the nation.

Manufacturing is the engine that drives our economy.  It adds the most value, generating $82 billion in value-added every year, at roughly 12 percent of our gross state product. One of the most used misnomers when discussing manufacturing is that manufacturing activity in our commonwealth is rapidly declining. While raw employment numbers in the manufacturing sector have declined in the past two decades, the output – most accurately measured by gross state product – has remained relatively steady as a percentage of our overall economy. More and more manufacturers are enhancing their processes with complex machines made possible with technological advancements. As a result, today’s manufacturing jobs are high value, requiring fine-tuned expertise, with well above median wages and benefits that sustain hundreds of thousands of families throughout our commonwealth. Additionally, manufacturing also has the strongest multiplier effect on job creation, as the more than half-million manufacturing jobs on the plant floor sustain millions of additional Pennsylvania jobs in supply chains, distribution networks, and vendors of industrial services.

As manufacturing requires more and more technology, companies view the United States as a leader and choose to locate their operations here rather than overseas. In a 2016 Pricewaterhouse Coopers study on robotics in manufacturing, this point was made vivid in referencing a footwear manufacturer that had recently chosen to reshore their operations to the United States from Asia. The study stated:

 The company’s US plant is more automated than the company’s plants in Asia, employing robots to ‘rough’ leather before gluing to soles. “It costs the same to buy the same robot in China or the US, so, for US companies selling to the US market, customizing to consumers’ choice or preferences is a solid reason to bring manufacturing back to the US,” said Scott Paul, President of the Alliance for American Manufacturing, in an interview with PwC. “With automation technology, it makes it easier to be closer to the customer and perform better for that local customer. Whichever economy uses and exploits robots and automation the best will have a distinct global advantage. For competitive reasons, this is no time for US manufacturers to shy away from this technology,” Paul added.

The value of these news jobs is indisputable. As the 2016 study stated, “… robots could actually stimulate employment of humans—through not only their manufacturing, but also the talent needed to program, train, maintain and repair them. According to one study, global “robot driven” job creation could reach 1.5 million through 2016.” In responding to a survey, American manufacturers indicated that there would be 35 percent more opportunities for employment to engineer and operate machinery while only 27 percent indicated that a machine would replace a worker in the next three to five years. (Appendix A) While the growth and successes of industrial technology abound, this is not necessarily unique to Pennsylvania but is rather a national trend. Instead, the opportunities and challenges that exist here in Pennsylvania are unique to the energy industry and we must capitalize do our best to embrace this emerging trend.

Manufacturing requires energy and it’s our unique access to vast energy markets and energy-related products that will put Pennsylvania on the map of companies looking to reshore from overseas. No matter what is being made, manufacturers deploy a multi-stage process that uses energy to transform raw materials and/or component parts into a finished good.  For some manufacturers, energy is the largest cost input in their process. Abundant, affordable, available energy can help bring jobs back to the United States in general and Pennsylvania in particular.

Manufacturers especially depend on affordable natural gas and gas byproducts to remain globally competitive and it is a major reason for recent reshoring. Total natural gas demand is poised to increase by 40 percent over the next decade and researchers at the National Association of Manufacturers found the key drivers of this demand will be for manufacturing and power generation. Given the plethora of major projects in Pennsylvania, our demand could and should be greater than the aforesaid 40 percent. Not only are new pipeline projects being developed to transmit natural gas as a fuel source, but also the byproducts, that when refined, are manufactured goods themselves.

The ‘shale effect’ on manufacturing is already taking shape, making the United States, and more specifically Pennsylvania, a more attractive locale for business investment and reshoring.  According to a new analysis by Pricewaterhouse Coopers, shale gas development could provide manufacturers annual cost savings of $22.3 billion in 2030 and $34.1 billion in 2040 and 930,000 shale gas-driven manufacturing jobs created by 2030 and 1.41 million by 2040. Furthermore, according to the National Association of Manufacturers, “the combination of increased access to shale gas and the transmission lines that move that affordable energy to manufacturers across America meant 1.9 million jobs in 2015 alone.”

But to fully realize the potential of shale gas, Pennsylvania needs robust infrastructure for transmission. With 25-30% of the Marcellus wells drilled to date still not having takeaway capacity, new pipeline projects open and expand markets, sustaining and stabilizing the energy industry that is so vital to our commonwealth’s manufacturers. We must connect consumers and customers to the supply –here in Pennsylvania, in the greater Northeast United States.

Our challenge today is the availability of Pennsylvania energy because our transmission infrastructure is pointed in the wrong direction.  We have pipelines that are directed toward the Gulf of Mexico because that’s where Pennsylvania purchased natural gas from in the time before the Marcellus Shale formation was developed.  Even today, customers in southeastern Pennsylvania are buying natural gas from Louisiana and Texas because of insufficient pipeline from western Pennsylvania and northeastern Pennsylvania to the Philadelphia metropolitan area.  Because customers are paying for both the energy molecules and the cost of transmission, this means those Pennsylvania energy consumers are paying higher prices than they would if they were able to purchase natural gas from Pennsylvania.

But there’s an even greater opportunity that is being overlooked: in the western part of the Marcellus Shale formation, the natural gas (methane) comes out of the ground with large amounts of ethane, butane, propane, and natural gasoline.  These byproducts are valuable manufacturing inputs, which is why Royal Dutch Shell has committed to build a multibillion-dollar petrochemical facility in Beaver County. That plant – the only one of its kind in the entire northeastern United States – will “crack” a hydrogen molecule off the ethane to make ethylene. Ethylene is the precursor of every kind of paint, glaze, solvent, adhesive, coating, plastic, Styrofoam, and rubber that goes into every kind of consumer good that you and I purchase, handle, and use every day.  And each step of petrochemical processing is a manufacturing activity that adds more value. (Appendix B)

It’s difficult to imagine, but the manufacturing activity that could be made possible because of the abundant supply of energy and gas liquids will be bigger and create more prosperity than the drilling itself. Gas liquids are the building blocks of all modern manufacturing. As mentioned, ethane becomes ethylene, but also, butane becomes butylene and propane becomes propylene. (Appendix C)  This allows for the manufacturing of products such as polyethylene; a product the global leader BASF called “the most important plastic in modern manufacturing.” Every plastic, rubber, foam, coating, and cosmetic product could have its foundational footprint right here in Pennsylvania.

By shortening supply chains, every manufacturer in Pennsylvania that uses ethylene or ethylene-derived manufacturing inputs will save money, making their Pennsylvania plants more profitable and therefore more competitive. Businesses that use those inputs will have a significant reason to locate or expand in Pennsylvania to be closer to their source. The potential cost savings from more affordable energy and manufacturing inputs may lead companies to return to the United States from where they are operating overseas. These energy or energy-product intensive companies looking to reshore to the United States ought to look to Pennsylvania as a business location due to our proximity of necessary goods and to their market of customers.

Reflect back some generations ago to what made Pennsylvania so powerful in our industrial roots. In the beginning of the industrial era we were a leader in timber. Timber provided power and heat, but it also built buildings, bridges, and mills. Shortly thereafter, coal allowed for the creation of steel. That steel made here in Pennsylvania erected some of the most notable structures in history from the Brooklyn Bridge, to the Empire State Building, to the locks of the Panama Canal. The value was multiplied because timber and steel, while also being manufactured goods themselves, were the building blocks of prosperity and progress.

If state leaders optimize conditions for the growth of this new natural-gas-powered petrochemical manufacturing industry, Pennsylvania will experience a century of economic prosperity, generations of job opportunities, and population growth like we haven’t seen in decades.  Pennsylvania will help make America an energy superpower, strengthening our position in global affairs by helping our allies disentangle themselves from energy relationships with hostile powers like Russia. Closer economic relationships with our allies through energy will help us to draw closer with them in support of our shared national security interests.

But all of this depends of maximizing domestic energy production and allowing the private sector to build out the transmission infrastructure to deliver that energy and those feedstocks to Pennsylvania manufacturers.

Of course, we won’t miss what we never had, so this is the time for choosing.  We can take the necessary steps to achieve this petrochemical manufacturing opportunity – which will surely be bigger than the drilling – or we will allow it to slip away.

If Pennsylvania had been an independent country in the late 19th century, we would have been the third largest economy on earth behind only Great Britain and the rest of the United States.  The opportunity before us can return Pennsylvania to a place of preeminent industrial leadership in the nation and the world.

It’s up to us.

Appendix A:

 

Appendix B:

 

Appendix C: