The latest issue of Manufacturing News is filled with the usual supposed doom and gloom of U.S.-based manufacturing, with one notable exception. We’ve complained publicly and privately about the balance, and it looks like editor Richard McCormick has listened… at least a bit. Even with that problem it is still a great newsletter and I’d recommend subscribing.
Daniel Luria, Research Director at the Michigan Manufacturing Technology Center, has an article titled Is Manufacturing Toast? Lucky for you non-subscribers it is one of the two free articles on the website. Mr. Luria goes through all the usual horrors of trying to compete with offshore low-cost labor countries, but then he really hits the nail on the head. He describes the hidden costs of outsourcing including long supply chains, in-transit inventories, and the like. Then he sums it up with some encouraging data:
At MMTC, we have concluded that the true landed cost advantage of a typical low-wage offshore producer is really more like 17 percent. But those are just averages. The lowwage country landed cost advantage could be 17 percent, but it can also be 7 percent, 27 percent or 37 percent depending on the type of business.
Just as important: How much of the cost gap could be eliminated by increasing productivity? By reducing inventory? By redesigning products? By a further drop in the value of the U.S. dollar?
Even though the average U.S. manufacturer’s costs are about 17 percent higher than the average low-wagecountry manufacturer’s landed cost, 20 percent of U.S.- based manufacturers already have lower costs than their low-wage-country competitors. In some industries, 35 percent of U.S. plants are lower-cost. Just as important, another 30 percent of U.S. manufacturers are within striking distance of LWC producers’ average landed cost.
That bears repeating:
20 percent of U.S.- based manufacturers already have lower costs than their low-wage-country competitors. Just as important, another 30 percent of U.S. manufacturers are within striking distance of LWC producers’ average landed cost.
So what the protectionist crowd is really saying is "let’s bail out the 50 percent that doesn’t get it." Or at least create a tariff smokescreen behind which they can continue to whine and complain… while the other 50 percent is busy competing.
As Pogo would say, "we have met the enemy and he is us." Not only are many companies crying for protection instead of working to improve their operations, but several U.S. multinationals are outright encouraging it. As Mr. Luria put it,
As we will see, only half the problem is that other nation’s manufacturers are “beating” ours; the other half is that, in industry after industry, U.S.-based large-firm customers — think GM, GE, Wal-Mart — are telling their American suppliers to increase their “offshore footprint.” Reluctantly or not, many suppliers are listening and sourcing more work offshore.
Sad, especially when truly innovative company after company has shown that they can compete globally from U.S.-based factories. And as Mr. Luria and the MMTC notes, 20 percent of U.S. manufacturers are and 30 percent are within striking distance.
I hope you’re working to become part of that crowd, and not part of the group that sits around complaining.
Steven Capozzola says
The bottom line is JOBS. The U.S. lost 46,000 manufacturing jobs in August 2007. More significantly, the ongoing losses are taking a cumulative toll on communities throughout the country. We need to adequately enforce our trade laws, and hold countries like China accountable for illegal trading practices such as currency manipulation. Otherwise, we’ll continue to shed manufacturing jobs.
http://www.manufacturethis.org
Mike M says
Steven-
WHY is the bottom line jobs? I think that’s a very dangerous viewpoint. Would you think that the bottom line with farming is jobs? Is it a bad thing that 98% of farmers are gone? I’d much rather live in a place where people that in previous generations would have been farmers are now being educated to become engineers than in some backward Amish nirvana with a bunch of farmers. The same twenty years from now. Domestic manufacturing output, yes even accounting for offshored intermediates, is up. Exports of domestic manufactured product is up. Efficiency has driven job cuts. Our generation’s job is to make sure we create new opportunities in new industries to accomodate them.
Richard McCormack says
I take exception to your comment that Manufacturing & Technology News is not “fair and balanced.”
We are not supported by advertisers. There are no ads for Wal-Mart, Staples, Home Depot or Bloomingdales in our pages, as there are in every large newspaper in the country. There are no issue ads from industry advocacy groups. There are no corporate ads as there are in Forbes, Barrons, Fortune, Business Week or the Wall Street Journal. There are no corporate sponsors. In other words, Manufacturing & Technology News is pure journalism. We are allowed to tell a story — giving voice to people who don’t have one, such as domestic manufacturers — without fear of reprisal from an important funding (advertising) source. If there is any journalistic medium that is fair and balanced, it is ours.
You say that our publication is “filled with the usual supposed doom and gloom of U.S.-based manufacturing.” Correct. It is. Have you looked at the trade deficit lately? Have you driven through Saginaw, South Philadelphia or anywhere in the Midwest of the United States of America lately? It is beyond sad what has happened to this country. Our bridges over the Mighty Mississippi are falling down. Do you think anybody has tied such despair and disrepair to the loss of the wealth-producing side of our economy — our manufacturing sector?
Did you read the recent International Trade Commission report on U.S. production of high-tech outerwear? It says the United States has NO production of warm clothing. It is winter. It is cold. We don’t make any warm clothing for a population of 300 million people?
The Confederate Army was marching north to invade Pennsylvania in late June, 1963, when it heard a rumor that there was a train car-load of shoes in Gettysburg. Many soldiers in the Confederate Army didn’t have shoes. So a brigade marched east along Cashtown Road to check it out, and ran squarely into the Union Force. From the banks of the Susquehanna River overlooking Harrisburg, Lee’s forward forces turned around, marched to the hamlet called Gettysburg and fought the penultimate battle in American history, resulting in the loss of 56,000 men. More American soldiers died on that battlefield in 15 minutes than have died in five years of fighting in Iraq.
All for the want of shoes.
The United States currently does not produce shoes.
Are i-Pods more important than shoes. I think not.
Gloom and doom?
Other U.S. industries are in serious trouble: printed circuit boards; machine tools; furniture; metal castings; consumer electronics. The U.S. population is not using any less of these things, we’re just not making them. The country not creating wealth, and that makes me mad.
Our 15-year-old publication spent the entire decade of the 90s writing about lean, statistical process control, six sigma, TOC, Baldrige, ISO 9000, best manufacturing practices, re-engineering and the rebirth of American industry. At the time it was news. If a company hasn’t figured out those concepts and applied them, they’re likely already gone, or they will be soon: and they deserve to be. As a news organization, our job is to cover the news, which is profound: products designed and built in the United States can be imported at a cost that is 75 percent less and made by people who are paid 3 percent of the average American wage. Those industries are not regulated; they are subsidized, and carry no legacy costs.
Doom and gloom? If we as editors of a publication titled “Manufacturing & Technology News” don’t cover this, who will?
Finally, the argument that manufacturing jobs are going to follow the same trend as agricultural jobs should be dispelled as myth. The richest person in American eats no more than me. But I can assure you, the richest person in America consumes many times more manufactured products than I ever will. Moreover, when you allow people to make the comparison between agriculture and manufacturing, you better counsel them to count everyone who is directly employed by the fruits of agriculture: the people building and supplying the tractors and equipment, the suppliers of gasoline and diesel, fertilizer, consulting services, banks, commodities traders, government bureaucrats, trucking firms, supermarkets, restaurants, the waiters, busboys and dishwashers. There might be fewer people on the farm, but there are a hell of a lot more people in the “food” industry than ever before.
Somehow the United States is going to have to pay off its trade deficit. It’s not going to happen by selling bundled sub-prime loans.
NAM president John Engler recently pointed out that there are 500 major chemical plants being built throughout the world; one of which is in the United States. Our publication reported that as a “fact.” I have never seen it reported anywhere else. We made no inference as to what it meant to America’s future prosperity.
kevin says
Richard,
In a strange (or interesting?) way, our anger is actually very similar. I think we both want the same thing.
I am also very angry at U.S. companies that chase low labor overseas. I am fed up with the likes of Whirlpool that lay off thousands at plants in Indiana and Ohio, then hire them back at plants in Mexico… completely ignorant of the knowledge, experience, and therefore good ideas that they have lost. I’ve ranted and raved about these “outsourcing lemmings” in the blog on an almost constant basis. See the following for the Whirlpool example:
http://www.evolvingexcellence.com/blog/2006/12/understanding_l.html
I actually laugh at their ignorance.
http://www.evolvingexcellence.com/blog/2006/09/time_to_strap_o.html
I am very angry at U.S. companies like Nucor that spend more time complaining about “competitive burdens” instead of focusing inward to improve their operations. It doesn’t mean those burdens aren’t real, but I believe most if not all of them can be offset by simply manufacturing better. At the same time one of their German competitors has decided to build a new steel mill, complete with the raw refining, in Alabama. They will be importing raw ore from Brazil and processing it in Alabama instead of processing it in Brazil and then finish rolling it in Alabama. So are utilities higher? Apparently not. Is demand dry in the U.S.? Apparently not. See
http://www.evolvingexcellence.com/blog/2007/05/nucor_look_over.html
I am also very angry at people that say “traditional” industries like textiles, clothing, and furniture can’t compete globally from U.S.-based factories. I can give you several examples of companies that do. I even did a whole post on how you can “dress yourself” using clothing made in the U.S.. And it’s not just high-end clothing… take a look at American Apparel in LA that makes basic t-shirts and underwear, and employs several thousand people at well above minimum wage (which is obviously many multiples of what is paid in Vietnam) and provides benefits… but delivers clothing cheaper than the offshore companies. Because they looked inward and improved. See
http://www.evolvingexcellence.com/blog/2007/01/dressing_lean.html
And last summer I even moderated a panel discussion at Northwestern/Kellogg on “onshoring as a competitive advantage.” Panel members included execs from Harley-Davidson, Joseph Abboud, and others that are competing globally from U.S. factories. The topic went against conventional wisdom, and I think it went well as some of the steam came out of the next panel discussion, which was “how to outsource to China!” See
http://www.evolvingexcellence.com/blog/2007/05/a_tide_against_.html
But at the same time I have to dispute that “manufacturing is in trouble.” Yes, I actually do get to Saginaw quite often as my mother in-law lives there. My father in-law was laid off by Delphi after 30 years. But dollar manufacturing output continues to grow, and at the same time jobs are way down. That is a very real human impact, and I have several blog posts decrying that reality. For a while I tried to argue that it wasn’t due to productivity improvements, but was due to offshored intermediates not being accounted for correctly. I enlisted the help of some of our best economists, personally, and together we realized that it really is productivity and the effect of offshoring was only a couple percentage points. That discussion actually got the blog some notoriety on several TV business shows such as The Street. See
http://www.evolvingexcellence.com/blog/2006/12/productivity_my.html
I dispute your claim that manufacturing jobs and farm jobs can’t be considered analogous, and that the “distribution” (or whatever) jobs for farm goods offsets direct the loss of direct farmers. I could make the same argument for technology goods, with the advent of Best Buy, Amazon, etc being similar examples.
In my opinion we must do a few things:
– stop complaining and actually start taking the hard steps of looking inward to be competitive. It does work. A friend of me is a global ops VP for General Electric. At a conference a few weeks ago he told me that they have just moved a couple plants BACK to the U.S. after a combination of domestic operation improvements and Chinese wage inflation made total landed cost of the offshored product only 5% different that U.S. manufactured product. If we simply complain, we will miss this opportunity to compete before the foreign competition also learns about operational excellence, and delivers a double whammy.
– recognize that there is value in experience that creates knowledge and creativity, even if traditional accounting systems don’t recognize it
– live with the fact that productivity is going to continue to mean fewer direct manufacturing jobs, even as total dollar output continues to rise. Those displaced workers need to be retrained and redeployed. We are doing a pathetic job at that now.
– continue to invest, privately and perhaps even publicly, in R&D and innovation. That is the true growth engine. Reducing tariffs, putting up trade barriers, ensuring proper currency valuation… those are temporary. If we remove those “burdens” but don’t improve, our advantage (or parity if you view it that way) will be very short lived.
Thanks for the comment. I do believe that the likes of NAM are necessary, as the competitive burdens and negative policy activities are real. But resolving those burdens will only lead to short-term improvements, and the chances of some resolution is often minimal. In the meantime U.S. companies should look inward and improve, just as their overseas competitors are starting to do. It works, and is demonstrated over and over to more than offset those competitive burdens. And they need to do it now, before it is too late.
I also hope you didn’t miss the numerous times where I’ve commented very favorably on Manufacturing News articles!
Kevin
Ken says
Great response, Kevin. But you missed one thing: your original post was actually making the point that Manufacturing News IS fair and balanced, not biased! You were complementing them (ok, for a change) and got whacked! Go figure.