Trade Deficit Would Shrink with Stroke of a Pen

July 15th, 2014

Since NAFTA went into effect in 1994, the U. S. has generated the highest trade deficit in the world and the largest in the world’s recorded history. If you add the annual trade deficit in goods as shown on the Census Bureau website, the total is a staggering figure of -$10.347 trillion.

The United States now has a trade deficit with 88 countries according to data in the book, Buying Back America. Some deficits are small, but some are enormous. Our top six trading partners of Canada, China, Mexico, Japan, Germany, and South Korea represent 64% of our total trade deficit. In 2013, our total trade deficit in goods was $688.4 billion, of which China represented 46% at $318.4 billion. However, our 20-year total trade deficit with China since 1994 is a staggering -$3.287 trillion.

Now, the current Administration wants to cover up the evidence of the damage to our economy by changing the rules of how a manufacturer is defined instead of responding to the American public’s demand to know where products are manufactured so they can have the freedom to choose whether or not to buy “Made in USA” products.

On June 24, 2014, Robert E. Scott, Director of Trade and Manufacturing Policy Research for the Economic Policy Institute, conducted a webinar for the Coalition for a Prosperous America: “The Factoryless Goods Production Controversy (Foreign Goods Production) – How proposed government rule changes would classify foreign goods as U.S.-made.”

He explained that an Economic Policy Classification Committee (ECPC) formed by the Office of Management and Budget is proposing a Factoryless Goods Production (FGP) and Global Value Chain (GVC) rule to artificially inflate manufacturing production and reduce the trade deficit. This change would result in shrinking our trade deficit and growing our manufacturing output with the stroke of a pen, without adding any more real jobs or production.

The ECPC was formed to make recommendations for revising the North American Industrial Classification System (NAICS), created in 1997 as a unified Industrial classification system for the U.S., Mexico and Canada.

Traditionally, all production chain tasks were performed in one factory, in multiple factories of one firm, or by subcontract suppliers to that firm, as is the case for companies like Northrop Grumman that makes Unmanned Aircraft Systems in San Diego.

In the last 20 years, improvements in communications, technology and transportation, as well as global trade agreements and foreign investment in plants haveallowed product design, development, and manufacturing to be performed in different locations, including offshore in China and other Asian countries.

This has enabled a company to control production without directly performing any manufacturing process or transformation task in one of their facilities; e.g. Apple, Nike, AMD, and fabless semiconductor manufacturing. In fact, the top five semiconductor firms in 2013 were fabless companies: Qualcomm, Broadcom, AMD, Mediatek, and Nvidia. These companies focus on innovation, product development, marketing, and sales rather than manufacturing tasks.

There are currently three types of establishment classifications:

Type of Establishment Characteristics  
Integrated Manufacturer (IM)  Performs all the tasks of the production chain
Manufacturing Service Provider (MSP) Performs transformation tasks but does not perform production management tasks (may purchase inputs) 
Factoryless Goods Producer (FGP) Does not perform transformation tasks but performs all production management tasks (may or may not own parts)

These current classifications require the statisticians to choose where to put the FGPs and how to count production. They now have the choice of classifying them as wholesalers, manufacturers, or split based on the location of the transforming company.

Currently, Apple and Nike are classified as wholesalers since they do not perform any manufacturing transformation tasks in the U.S. This accurately reflects the fact that both Apple and Nike have offshored their manufacturing to China.

Under current policy, when a company like Apple ships component parts to China to be assembled in a Chinese factory (e.g. Foxconn) and then sends the product back to the U.S. to be sold here, the value of the imported iPhone minus the value of the exported parts counts as a net U.S. import of manufactured goods.

Under the ECPC proposal, Foxconn, now called a “manufacturing services provider,” would not be described as having manufactured the iPhones but as having provided services to Apple.

An additional concern is that the ECPC proposes to treat some goods exported by foreign factories as U.S. manufactured exports. For example, currently, when Apple ships iPhone parts to China to be assembled by Foxconn and then ships the finished product to another county, Apple’s export of these parts to China counts as the only U.S. export.

But, the ECPC proposed rule would classify the engineering, marketing and profit to Apple as U.S. production. A fully assembled iPhone sale to another country, such as Japan or a European Union country, would count as a “U.S. manufactured goods export,” less the cost of any imported parts.

The justification for this is that while China manufactured and exported the iPhones, they count as U.S. manufactured exports because they were under the control of a U.S. brand. This would create an artificial increase in U.S. manufactured exports and cover up the real U.S. manufacturing trade deficit.

Thus, if a U.S. based company offshores manufacturing work, much of it would be classified as U.S. production. Further, imported products from foreign contract manufacturers hired by a U.S. company will no longer be a “goods import” but rather a “manufacturing services import.” This means that products from Flextronics in Mexico, which makes components in Mexico for U.S. firms that are shipped to the U.S., would no longer be considered a “goods import” but a “services import.”

In addition, the ECPC proposal would result in a miraculous overnight increase in the number of U.S. “manufacturing” jobs. White-collar employees in firms like Apple would be re-branded as “factoryless goods producers” and counted as “manufacturing” workers. The change would also create a false increase in manufacturing wages, as many of the new-to-be-counted “manufacturing” jobs would be designers, programmers and brand managers at “factoryless goods producers” like Apple. As a result, reported manufacturing output would jump, as revenues from firms like Apple would be lumped in with the output of actual U.S. manufacturers.

This proposal would deceptively shrink the size of the reported U.S. manufacturing trade deficit while artificially inflating the number of U.S. manufacturing jobs. It would obscure the erosion of U.S. manufacturing, undermining efforts to improve the trade and economic policies for our country.

This proposal is fraudulent and would distort U.S. trade, labor, and gross domestic product statistics that show the need for a developing a manufacturing strategy in the U.S. The offshoring of U.S. manufacturing under years of bad trade policies should not be undone with a data trick.

The proposal from the Economic Classification Policy Committee (ECPC) to redefine U.S. manufacturing and trade statistics must be stopped. Only manufacturing performed within the U.S. should be considered U.S. goods production. If manufacturing occurs in another country, it simply is not U.S. production.

On May 22, 2014 the Office of Management & Budget solicited comments on these proposed revisions. You also can view the notice for this proposal in the Federal Register. The comment period ends July 21, 2014. You may email your comments today to to keep the “factoryless goods” proposal from becoming a reality. Or, to make taking action even easier, you can click here to customize and submit a pre-drafted comment provided by the Coalition for a Prosperous America.

Manufacturing Thrives in San Diego’s North County Region

July 8th, 2014

On the morning of July 1st, the San Diego North Economic Development Council (SDNEDC) hosted a North County Manufacturing Executive Roundtable at the City of Vista Civic Center. Over 100 professionals were welcomed by County Supervisor Dave Roberts and Lee Morrison of Bank of America. Bank of America and The Eastridge Group of Staffing Companies sponsored the Roundtable.

In an interview prior to the event, KPBS Morning Edition anchor Deb Welsh spoke to Carl Morgan, CEO of the San Diego North Economic Development Council. Morgan said. “Manufacturing is alive and well in San Diego’s North County.” He said the manufacturing executive roundtable would discuss why companies chose to locate and stay in the region. Ms. Morgan asked him what North County’s six key industry clusters are, and he responded that “the sports and active lifestyle, clean technology, biotechnology and medical and informational technology “are doing very, very well” besides the craft and brew industry.

Reo Carr, executive editor of the San Diego Business Journal, moderated the panel, which also discussed such topics as reshoring of manufacturing, environmental concerns, filling the gap between education and manufacturers’ need for skilled labor, sufficient, accessible transportation, and the economic incentives that are and should be available.

The six panelists were: Clark Crawford, VP Sales and Business Development, Soitec Solar, which manufacturersconcentrated photovoltaic (“CPV”) solar modules; Christine Jensen, special programs coordinator at Mira Costa College, which offers classes in biotechnology, engineering, and machining; Jeffrey McCain, CEO, McCain, Inc, a pioneer of advanced traffic control equipmentas well as a contract manufacturer; Michele Nash-Hoff, President, ElectroFab Sales and Chair, California Chapter of the Coalition for a Prosperous America; Chris Roth, vice president, Lee & Associates, the Nation’s largest broker owned commercial real estate services firm.; and Martin Wood, CEO, Delkin Devices, the largest US memory card manufacturer.

Crawford said that when his company (Soitec Solar Industries headquarted in Grenoble, France) decided to set up another manufacturing plant in the U.S., they were wooed to come to many states, including Texas, but they chose to move to California because California’s GO-Biz worked with them to identify possible site locations around the state and to define all statewide incentives that could be available to their company. GO-Biz participated in several rounds of site selection tours that helped to qualify the final locations, out of which they chose San Diego. They were able to get the former Sony building in Rancho Bernardo before it went on the open market. When fully operational, Soitec will directly employ 450 and indirectly support 1,000 jobs.

The other reason they chose California is that it is the largest market for solar energy, and California offers good financial incentives for residents and business to convert to solar energy.

Crawford mentioned that GO-Biz also worked with the California Employment Training Panel (ETP) staff to help qualify Soitec for training funds to help their company train and prepare employees for the high-skilled jobs at their newly established factory in San Diego. During my subsequent phone interview, Mr. Crawford told me they were awarded $300,000 in training funds by the California ETP, and they provided over 15,000 training hours to their San Diego employees. They completed the training in early April 2014.

When asked why his company stays in California instead of moving to another state, McCain said, “California is currently the 8th largest economy in the world. A tremendous amount of our business, current and future, will come from this economy. Even though it is still difficult to find qualified employees, it is my experience that California is rich in qualified workforce, compared to other states.”

He added, “Our success depends greatly on the advantages of our workforce in Mexico. However, over the last 20 years, I have come to realize the culture in Mexico makes it difficult to do manufacturing that requires ingenuity and innovation. We will typically do our first articles and fixturing and any automation type manufacturing in the U.S. When it comes to labor intense, higher volume products, we can turn it over to the plant in Mexico where they can be very successful producing quality products. That allows the company to compete successfully, not only in the U.S. but also against offshore companies. The operation in Mexico, just over the last two years, has allowed us to grow our U.S. side, which has nearly 200 employees.”

In contrast, Martin Wood, stated, “We are solicited often by other States to move our manufacturing facility and jobs to NV, TX, FL, AZ and others. While it would be disruptive, in all cases, it would be like handing employees and the company a raise. Lower or zero State taxes is a big incentive to move. “

“While previous offers were less appealing, they are becoming more and more sophisticated involving real estate and grants, development and hiring help, and of course, no taxes for an extended period or permanently. Any business that is truly run for profit above all would be foolish to not at least consider these offers. We try not to let it consume us, and only entertain them on an annual basis. Right now, California edges out other states in our analysis, based on a number of support, service availability, and quality of life issues, but the gap is narrowing.”

“People in City, County and State Government should be aware this poaching is going on, and try to find a way to bring advantages to manufacturers in California and incentivize them to stay. We know we bring high paying employment wherever we go, and our customers are based worldwide. I see no reason these offers will not continue and expect them to get more and more appealing. Don’t get me wrong, I love California and my family is firmly entrenched here, but to truly own and manage a manufacturing business, you must make hard decisions and be right most of the time.”

Roth stated “the quality of life here in Southern California is a great incentive for companies to continue operating here even though [manufacturing companies] are not receiving the same type of incentives from the local and state governments.” This was one of the major points made in explaining why manufacturers tend to stay in California, despite the sometimes harsh business environment. Roth also stated that a key decision factor in contemplating company relocation is the difficulty entailed in moving employees and their families.

I commented that a company is more than a product; it is also the people who formed and comprise the existing company, and many times, employees aren’t willing to relocate to another state, and the company loses people key to its success. This is often what happens when an out-of-state company buys a San Diego regional company. Key employees don’t move with the company, and the acquisition becomes “buying a product” rather than “buying a company.” In addition, I pointed out that over 90% of California’s manufacturers are less than 100 people, and their customers are most local obtained through word of mouth and referrals. If they decide to move the company, it would be as if they started a new company from scratch.

When Reo Carr asked the question about reshoring, I explained that it started because of quality issues and expanded because of increases in wages in China over the last few years. I mentioned that China and other Asian nations don’t honor U.S. patent laws, which leads to intellectual property theft, hurting U.S. companies in the long run. The other panelists added their opinions as to why outsourcing manufacturing to China is becoming of a thing of the past (increasing wages, quality control, and logistics problems and problem-resolution) and why America is benefiting from the shift to returning manufacturing to America.

McCain confirmed that the contract manufacturing division of his business is benefitting from regional companies returning manufacturing to America.

In answer to the question about the impact of environmental and other regulations, I pointed out that we have been outsourcing our pollution to China and other Asian countries to escape the costs of regulation here. The consequences of industrialization with environmental regulations has been horrific for China and India, which I described one of the chapters in my book (Can American Manufacturing be Saved? Why we should and how we can) When asked about the environmental regulations that apply to his plant in Mexico, Mr. McCain said that Mexico is quickly catching up with the U. S.

A question from the audience about the shortage of local, trained machinists led into a discussion about two connected issues: workforce training and mass transit. Ms. Jensen shared that colleges are shifting in the programs they are now offering in an effort to meet the needs of employers. Mira Costa has both certificate and Associate degree courses in biotechnology, engineering, and manufacturing skills such as machining. She encouraged the companies to check with their local community colleges to inquire about the various programs available. I shared that there are now four high schools that provide up to two years of training to be a machinist and that for years and years, the San Diego Community College District has provided machining and welding training, as well as other manufacturing skills.

Wood said, “it is hard to find people to fill the positions they need, because most of [the blue collar laborers] live further south, in South County.” Crawford seconded that comment, saying that workers are coming from points south, as well…even from Mexico. McCain added mass transportation needs to improve to deal with the issue of where employees are traveling from to accommodate the job availability.

I pointed out that San Diego doesn’t have a “hub” center of manufacturing where everyone is going to work. The industrial business parks are scattered around the county (mainly in 13 of the 18 cities in San Diego County). Mass transit doesn’t work well for this type of region, and I don’t know how feasible it would ever be for mass transit to get workers coming from across the border to these scattered business parks.

In conclusion, the panelists shared that for the time being, the advantages of doing business in California outweighed the disadvantages. The biggest draw is still the quality of life the region offers, as well as the great weather. I shared that the successful company that stays in San Diego has a high dollar, high value, low to mid volume product, which has proprietary technology and lower labor content. When this type company does a Total Cost Analysis of doing business in San Diego/California, it pencils out positively. Crawford agreed that doing this kind of analysis is what enabled them to make the decision to locate Soitec in San Diego.

While it is hard to compete against the incentives and low or no taxes of some other states, we may have fewer companies making the decision to move out of California if more companies did this type of analysis. Of course, it would be even better if the governor and legislature actually proposed and passed legislation that would benefit manufacturers instead of adding to their costs of doing business in California.


California’s Unmanned Aircraft Systems (UAS) Summit Explores Potential Industry Growth

June 17th, 2014

The California UAS Summit held on Tuesday, June 10, 2014 in San Diego brought together thought leaders from government, trade organizations, military, academia and a diverse mix of private sector companies to explore how California can continue to be a world leader in unmanned aircraft systems and be positioned to support businesses in this industry while helping facilitate the FAA’s initiative to integrate UASs into National Air Space in a safe and responsible way, while allowing for innovation and the development of new and exciting uses.

Besides exploring the challenges facing the UAS industry and the economic and jobs impact to the state, the summit participants considered how to balance regulation with innovation and advance safety and security.

California is a Center of Excellence in the development, manufacturing, and testing of Unmanned Aircraft Systems. From industry leaders General Atomics, Kratos Defense Solutions, and Northrop Grumman’s Center for Unmanned Systems headquartered in San Diego, as well as The Boeing Company and AeroVironment in Los Angeles County, major UAS companies have a history in California. With the addition of numerous small and emerging companies throughout the state, like 3D Robotics and AirCover Solutions, California is the world leader in taking UAS into the commercial space, developing innovative systems and advancing capabilities in preparation for integration.

Even though California ranks as the #1 UAS region, it was not chosen as one of the designated test sites by the Federal Aviation Administration in December 2013. The six selected operators are: the University of Alaska, the state of Nevada, New York’s Griffiss International Airport, North Dakota Department of Commerce, Texas A&M University, and Virginia Polytechnic Institute and State University. Geographic and climatic diversity were key requirements for the selection, and the test sites were to begin operation within 180 days of the announcement to conduct research to help the FAA develop regulations and operational procedures for the safe integration of UAS into national airspace.

The coalition to develop an UAS Test Range in California was headed up by already established entity called the California Unmanned Systems Portal (Cal UAS Portal), based in Indian Wells. The coalition expanded in April 2013 to include the AUVSI San Diego Lindbergh Chapter, the San Diego Regional Economic Development Council (EDC), the San Diego Military Advisory Council (SDMAC), the Imperial County EDC, County of Imperial, Holtville Airport, Indian Wells Valley Airport District (IWVAD), and defense contractors including General Atomics, Cubic Corporation, and Epsilon Systems Solutions, Inc. The proposed UAS Test Site would have extended from the NAS China Lake/Edwards Air Force Area, West to the Pacific Ocean, South to the Mexican border and East to the Arizona border.

Currently, UAS are being used around the word in categories from A to Z, such as: aerial imaging/mapping, agricultural, Border Patrol surveillance, disaster management, environmental monitoring, law enforcement monitoring, oil and gas exploration, telecommunication, TV news coverage, sporting events, moviemaking, weather monitoring, and wildfire mapping.

The summit’s keynote speaker was Gretchen West, Executive Vice President, Association for Unmanned Vehicle Systems International (AUVSI) was. She said that AUVSI was started 42 years ago, has 30 chapters, and publishes two magazines, Mission Critical and Unmanned Systems, as well as a UAS directory and Robotics directory. AUVSI is active in public policy advocacy in Washington, D. C., and there is an Unmanned Systems Caucus in the House and Senate, as well as a Congressional Robotics Caucus.

She gave a brief overview of the UAS industry, and said that the FAA integration is the key to expanding opportunities for UASs in the U. S. The bill mandating that the FAA safely integrate UAS into national airspace passed in February 2012, and safe integration is supposed to be completed by September 30, 2015. Until then, commercial applications of UAS are prohibited in the U. S. The selection of the site for the UAS Center of Excellence will be made in March 2015.

One of the major problems for the UAS industry is the negative — and incorrect — public perception of drones as immoral killing machines or intrusive spy machines hovering at our windows. Because of this misperception portrayed by the news media, several states have outlawed use of UAS by either private citizens or law enforcement or both, and several other states have pending legislation. These bans would prohibit use of UAS for many of the above listed applications and would inhibit the growth of commercial usage of UAS.

Three panels of speakers followed Ms. West. Panel #1 was “Large Industry – Manufacturing and Production – Economic impact, jobs & industry growth.” The panelists were:

RADM Christopher Ames (USN Ret), director, international strategic development, General Atomics Aeronautical Systems, Inc. – he said that there have been 17 variants of General Atomics’ Predator over the past 20 years, logging over 2.8 million flight hours. The challenge is to have access to U. S. national airspace. GA-ASI is developing and testing an air-to-air sense and avoid system.

VADM Jerry Beaman, (USN Ret), president, Kratos Defense, Unmanned Combat Aerial Systems Division – he said his company is focused on a jet powered UAS that will fill the high performance, high altitude market. Key features of their UASs will be ability to operate in a contested airspace and a GPS denied environment.

Albert Bosco, business development, unmanned airborne systems, The Boeing Company – he said, “UAS aren’t a panacea, so need to decide how, when, and where to use them.” UAS use by First Responders, environmental monitoring, and infrastructure monitoring may be major areas of focus.

Carl Johnson, vice president, unmanned systems, Northrop Grumman Corporation – he provided the highlight of this panel by showing the video of Northrop Grumman’s Global Hawk X47B landing successfully on an aircraft carrier.

Panel #2 was “Commercialization of Small and Medium UAS – Balancing privacy with innovation combat aerial systems division.” The panelists were:

Jill Meyers, senior manager, 3D Robotics – she said that while their headquarters is in Berkeley, they have engineering support in Sam Diego, marketing and video production in Austin, Texas, and manufacturing in Tijuana, Mexico. They have three “copter” models and an airplane, and have a DIY community of 54,000 active users of Droneshare in the Cloud. There is an innovation evolution occurring on autopilot software through their open source development.

Roy Minson, senior vice president and general manager, AeroVironment, Inc. – he said that AeroVironment makes small unmanned systems and have seven vehicles in the Smithsonian. He announced that this was the day the “FAA grants the first-ever over-land restricted type certificate to AeroVironment Puma AE UAS for use in day-to-day operations at the BP-operated Prudhoe Bay oil field on Alaska’s North Slope,” and that BP had selected AeroVironment for 3D mapping and other services at their North Slope operations over a multi-year period. AeroVironment flew a Puma AE drone on its first commercial flight Sunday to survey BP pipelines, roads and equipment at Prudhoe Bay, the largest oil field in the U.S., according to the FAA. Using the Puma’s sensors, BP hopes to target maintenance activities, in an effort to save time, improve safety and increase reliability in the sensitive North Slope environment.

Nelson Paez, CEO, DreamHammer – he said that Dreamhammer has developed an “operating system” for UAS, and their Drone OS has open applications built-in for specific industries.

Steven Bishop, Business Development, INSTU – he said that INSTU is a wholly owned subsidiary of Boeing that started as a company looking for tuna and now has two unmanned vehicles, the Integrator, and Scan Eagle, as well as ground control stations, and a UAS launcher, Skyhook. They also provide field operation and logistic services, payload, and training. They did a demo with Conoco in the Arctic in 2013.

Cliff Johnson, CEO, CTJ & Associates, LLC – he said that CTJA Unmanned Systems Engineering doesn’t sell into the U. S. at all; all of their customers are international. Their manufacturing is conducted in Portland, Oregon, but systems integration is done in San Diego. They have four vehicle platforms that utilize solar turbines, and the solar power is stored in ultra capacitors so the vehicles can fly up to 14 hours at night.

Panel #3 was “Campus Research and Development – Advancing technology for safety and security.”The panelistswere:

Charles Johnson,Senior Advisor for Unmanned and Autonomous Systems, Armstrong Flight Research Center – he said that the Armstrong Center has been working under contract to help the FAA review and analyze data to develop the rules for commercial use of UAS in the U. S.

Dr. Jason Miller, Senior Research Officer, Cal State University Channel Islands – he said that there is great interest at his campus in using UAS to monitor the Channel Islands, study the humpback whale, and study wildfires.

Dr. Vibhav Durgesh, Assistant Professor, Department of Mechanical Engineering, Cal State University Northridge – he heads up the aerodynamics lab that could provide airfoil data for UAS manufacturers.

Brandon Stark, Mechatronics, Embedded Systems and Automation (MESA) Labs, University of California Merced – he said that they see UAS as toolset for solving large problems, and they have a fleet of small unmanned platforms that monitor water and air quality, take soil samples, and other types of environmental monitoring.

Dr. John Kosmatka, Mechanical & Aerospace Engineering Department, University of California San Diego – he said that UCSD actually developed a UAS for the City of Napes, Italy and conducts research in applications, science missions, and sensor development.

“A lot of people are familiar with UAS in some of the military applications,” said Treggon Owens of Aerial Mob. “What they may not be familiar with is the first responder and rescue and agriculture. So, there’s a numerous amount of platforms – it really goes beyond what people usually think of a UAS. And that’s when you get into commercial applications.” Aerial Mob is one of the growing number of companies using new technology invented by the military. The company displayed thrilling images of UAS flights at the summit.

”It’s as big as our own imagination, really,” said Kevin Carroll of Connect. “The applications for unmanned systems are endless. It’s not going to supplant the existing world,” continued Carroll. “What it’s going to do is augment this world. And you’re looking at 17,000+ jobs in California. And these are very high-paying jobs, advanced manufacturing jobs. And then you look at the economic impact – it’s around $14 billion when you go out 10 years as they integrate the airspace.”

The panel discussions showed that the UAS industry is at a crossroads facing significant challenges in business, government, and law. The U. S. industry faces competition from foreign countries, many of whom have a more positive business climate. There are severe limitations in the civilian market in the U. S. until the FAA integration is complete. The challenges faced on the governmental side are: slow-to-develop rulemaking by the FAA, inconsistent support from federal, state and local authorities, and troublesome legislation at the state and local level that threatens to hamper the industry. Finally, there are many legal challenges facing the UAS industry: A near total ban on “commercial” drone operations, defined as any non-recreational use, unclear standards for designing, building and operating UASs, and undeveloped liability standards paired with unproven insurance products.

The current forecast is that California’s UAS industry is expected to create 18,161 jobs within a decade of airspace integration, which would have an estimated $14.37 million economic impact. However, this forecast would be reduced if California becomes one of the states that ban use of UAS by private industry and law enforcement. Now is the time to voice your support for the UAS industry to your elected representatives in California.

Free Trade is the source of our Trade Deficit and National debt

June 3rd, 2014

We all like to get something for free, so free trade sounds good. The question is: do we even have free trade? No, we do not. What we call free trade isn’t “free,” and it isn’t “good,” at least for most Americans. At best, it benefits large, multinational global corporations that have manufacturing facilities located in other countries. At its worst, it is the primary source of our trade deficit and loss of good paying manufacturing jobs, leading to an escalation of our national debt.

Brian Sullivan, Director of Sales, Marketing and Communications of the Tooling, Manufacturing & Technologies Association says, “We should rename ‘free trade’ because it isn’t free and it isn’t fair. Since it’s trade that’s regulated in favor of multinational special interest groups, why don’t we call it for what it is: How about ‘rigged market trade’ or ‘turn your back on your fellow countrymen trade’ or ‘throw American workers out on the street trade.’”

For more than the first 150 years of its history, the United States was a protectionist country in order to protect its fledgling manufacturing industries and then gain preeminence as an industrial nation in the 20th century.

After World War II, the U.S. switched from protectionism to free trade in order to rebuild the economies of Europe and Japan through the Marshall Plan and bind the economies of the non-Communist world to the United States for geopolitical reasons.

To accomplish these objectives, the General Agreement on Tariffs and Trade (GATT) was negotiated during the UN Conference on Trade and Employment, reflecting the failure of negotiating governments to create a proposed International Trade Organization. Originally signed by 23 countries at Geneva in 1947, GATT became the most effective instrument in the massive expansion of world trade in the second half of the 20th century.

GATT’s most important principle was trade without discrimination, in which member nations opened their markets equally to one another. Once a country and one of its trading partners agreed to reduce a tariff, that tariff cut was automatically extended to all GATT members. GATT also established uniform customs regulations and sought to eliminate import quotas. By 1995, when the World Trade Organization replaced GATT, 125 nations had signed its agreements, governing 90 percent of world trade.

In 1994, GATT was updated to include new obligations upon its signatories. One of the most significant changes was the creation of the World Trade Organization (WTO.) The 75 existing GATT members and the European Community became the founding members of the WTO on January 1, 1995. The other 52 GATT members rejoined the WTO in the following two years, the last being Congo in 1997. Since the founding of the WTO, a number of non-GATT members have joined, and there are now 157 members, including China. The main countries still outside it are Iran, North Korea, and some nations in Central Asia and North Africa.

A major benefit for GATT and WTO members was the reduction or elimination of tariffs. However, while the U. S. and other member countries complied with this provision, over the years, the other 156 members have replaced their tariffs with Value Added Taxes (VAT), which range from a low of 10% to a high of 24%, averaging 17%. The U. S. is the only member country that doesn’t have a VAT.

A VAT is a border adjustable consumption tax on goods and services. This means that virtually all of our trading partners tax our exports with their VATs, when our goods cross into their country, and rebate their VATs when their companies export. VATs are essentially a tariff by another name. Our trade agreements, such as NAFTA, CAFTA, and KORUS do not address VATs, and the WTO rules allow VATs. This means that U. S. companies are at a disadvantage in the global marketplace, so that so-called free trade has become “unfair trade” for U. S. companies.

According to Alan Uke’s book, Buying Back America, the United States now has a trade deficit with 88 countries. Of course, some deficits are small, but some are enormous, such as China. Our top six trading partners are: Canada, China, Mexico, Japan, Germany, and South Korea. These six countries represent 64% of our total trade deficit, but China alone represents 46% of the U. S. trade deficit of $688.4 billion. Our 2013 trade deficit with China was $318.4 billion, and we are on track to equal that in 2014.

Some may claim that we are still the leader in advanced technology products, but this is no longer true. The U. S. has been running a trade deficit in these products since 2002, which has grown to an astonishing average of $90 billion per year since 2010.

So how do our trade deficits add to the national debt? One way is that many products, especially consumer products, which were previously made in the U. S., are now made in China or other Asian countries, so we are importing these products instead of exporting them to other countries. The offshoring of manufacturing of so many products has resulted in the loss 5.8 million American manufacturing jobs and the closure of over 57,000 of manufacturing firms. These American workers and companies paid taxes that provided revenue to our government, so now we have less tax revenue and pay out benefits to unemployed workers, resulting in an escalating national debt.

Let us consider whether or not our most recent trade agreements have been beneficial to the U. S. The Korea U. S. Free Trade Agreement (KORUS FTA) went into effect on Mach 2012. The Office of the   U. S. Trade Representative for the Obama Administration touts, “Since the Korea agreement went into effect, U.S. exports to Korea are up for our manufactured goods, including autos, exports are up for a wide range of our agricultural products, and exports are up for our services.” However, the reality is that our imports continued to exceed our exports, and the U. S. trade deficit with Korea jumped from -$13.62 billion in 2011 to -$20.67 billion in 2013, which is a 64% increase in only one full year.

The U. S. has fared better with CAFTA-DR, the Central America-Dominican Republic trade agreement, which was signed on August 5, 2004. The trade balance with Costa Rica went from a plus of $188.2 million in 2005 to a deficit of $4.7 billion in 2013, but the Guatemala and Honduras trade balance went from deficits of $302 and 495 million to surpluses of $1.642 billion and $2.97 billion. The Dominican Republic trade balance stayed positive, growing from $115 million to 1.97 billion. If you balance out the deficits and surpluses, the U. S. comes out ahead for these countries.

Now we are faced with the prospects of an even more encompassing trade agreement, the Trans-Pacific Partnership (TPP), for which the Obama administration has conducted negotiations behind closed doors through the offices of U.S. Trade Representative Ron Kirk without any involvement with Congress.

Eleven nations have participated in the negotiations: Australia, Brunei, Canada, Chile, Malaysia, Mexico, New Zealand, Peru, Singapore, the United States and Vietnam. Japan announced its intention to join the agreement last spring. Because the TPP is intended as a “docking agreement,” other Pacific Rim countries could join over time, and the Philippines, Thailand, Colombia, and others have expressed interest.

What makes this agreement of even greater concern is that President Obama is seeking Fast Track Authority under the Trade Promotion Authority. Both Democrat and Republican Representatives in the House have expressed concern over delegating Congress’ constitutional authority over trade policy to the Executive Branch. I won’t repeat the points I have already made in my previous blog articles published last year on the dangers of the Trans-Pacific Partnership agreement and granting the president Fast Track Authority; however, I urge you to read my January article, “We Must Stop Fast Track Trade Authority from Being Granted!

Beyond stopping Fast Track Authority and the Trans-Pacific Partnership from being approved, we need to focus on achieving “balanced trade” in any future trade agreements. Until we change the goal of trade agreements, we should refrain from negotiating any trade agreement. The last thing we need is to increase our trade deficit more than it already is. In addition, we need to pass legislation addressing the predatory mercantilist activities of our current trading partners, such as currency manipulation, product dumping, and government subsidies. We should consider comprehensive tax reform that includes a border adjustable tax to address the unfair advantage caused by the rebate of VAT taxes. We should enact countervailing duty laws and County of Origin labeling on all manufactured products, including food.

I urge you to call your Congressional representative and Senators now to urge them to oppose granting Fast Track Authority and approving the Trans-Pacific Partnership Agreement.

Columbus Castings has learned how to survive and thrive in challenging marketl

May 20th, 2014

The metal casting industry has been one of the hardest hit by competition from China and India, but some companies have been able to survive and even prosper despite the combined onslaught of intense offshore competition and the Great Recession. That has now put them in the position to benefit from reshoring trend. I recently had the pleasure of interviewing Megan McCuan, Communications and Development Coordinator, of Columbus Castings in Columbus, Ohio, which is the largest single site steel foundry in North America.

Columbus Castings manufactures steel castings for the freight and passenger rail cars, locomotives, mining equipment, industrial magnets, construction equipment, agricultural equipment, and other heavy industrial industries. They produce high-quality industrial castings from 100 to70, 000 pounds. The company has about one million sq. ft. of space in 14-15 buildings, covering an area of 90 + acres, including 22 acres under roof, with access to 19 miles of rail. Columbus Castings currently has 695 employees, and most employees have long time experience. Some of their employees have been there for as long as 30-50 years.

The company’s roots date back to 1881 when the Murray-Hayden Foundry, a small iron foundry, served a growing agricultural based economy. The business flourished when it began manufacturing iron couplers for the infant rail industry and in 1891, the name was changed to the Buckeye Automatic Car Coupler Company.

As the American rail industry expanded, the operation was relocated to a larger facility, and the name was changed to the Buckeye Malleable Iron and Coupler Company to reflect its new emphasis on iron couplers. As the American rail industry growth boomed through the early 1900’s, the demand for iron couplers soon exceeded capacity, and the business moved to the present day location in 1902.

As the industry demand for stronger, tougher products, the foundry changed to steelmaking and the name of the business was changed to the Buckeye Steel Castings Company. In 1967, Buckeye Steel became the flagship company of Buckeye International Inc., which was formed as a parent company for purchasing other non-foundry related businesses. Buckeye International was acquired by Worthington Industries Inc. in 1980, in a stock for stock merger. Buckeye Steel remained an operating subsidiary of Worthington Industries until 1999, when it was sold to Key Equity Capital in a leveraged buy-out. Buckeye Steel operated as a stand-alone entity until December 2002, when bankruptcy was filed after the double blow of a weak freight rail market in 2000 followed by the devastating economic effects of 9/11 and the intense competition from China, which proved too much for the debt burdened business.

That could have been the end of the story, but the former President of Worthington Industries, Don Malenick, had different idea. Don had recently retired after 40 plus years from Worthington, where he had held the position of President for the final 26 years. He had an in-depth understanding of the potential value of the facility and also maintained his love for the steel industry in the Central Ohio area. He assembled a team of investors to purchase the assets of the business out of bankruptcy, as well as a team of veteran railroad foundry men to start the new business.

The new entity, Columbus Steel Castings, was based on a business model designed to be the lowest cost and highest integrity supplier of cast steel products in the industries it serves. The business was formed with a “pro-employee”, “union-free” philosophy, created to engage its employee’s talents to the fullest. When the business does well and makes a profit, then all eligible employees share in the success. As a “Pay for Performance” company, the wage and salary compensation is based on an employee’s contribution to the bottom line. Employees are incited to work hard as a team and find ways to do their jobs better, faster and safer.

The company experienced a slight upturn in their rail business from 2004 to 2007, while their industrial market was slow and steady. In 2008, Protostar Partners, LLC purchased Columbus Steel Castings and renamed the company Columbus Castings.

Their rail business slowed in the fall of 2008 after the economic crash that led to the Great Recession in 2009-2010. The demand for freight cars dropped during the recession, and they had to lay off employees.

In 2011, they implemented a new sales plan and focused on their quality and on-time delivery. They responded to the shift of their customers from coal cars to tankers for natural gas in 2012 when the natural gas industry boomed in the upper Midwest. They are currently marketing more to tank car customers and featuring new materials for sand castings for this market.

Richard T. Ruebusch took over as President and CEO in 2012 after having held numerous senior level executive level positions that included 14 years experience at global foundries. In order to be more competitive in the global economy, the company became ISO 9001:2008 Certified. They also started lean manufacturing training as both Mr. Ruebusch and their V. P. of Operations, Randy Parish, have extensive lean manufacturing backgrounds. As a result of implementing lean, the company has achieved a 30% improvement in cycle times and reduced their lead times. Columbus can now produce and ship average components in less than 12 days, ad large components take only around nine weeks.

While, China is still a big competitor for rail car components, the company is getting some work back from offshore. As oil prices increased, costs to ship massive steel castings from China reduced profit margins for their customers and long deliveries became a disadvantage. Columbus can produce and deliver high-quality steel castings in less time than it would take to ship them from overseas. Ms. McCuan said that Caterpillar had a factory in India and brought the work back to the U.S. in 2012, and Columbus was able to get part of the reshored business.

In November 2013, Columbus landed the largest order in its 130-year history. The deal with Nippon Sharyo USA Inc. for railcar undercarriages could be worth up to $70 million to the manufacturer and added more than 50 jobs at the foundry. Nippon’s end customer is Amtrak, which is in the midst of an extensive replacement of its passenger railcars. “If they exercise all their options, this will keep us at full capacity until 2021,” CEO Rick Ruebusch said. “In addition to the Nippon deal, the manufacturer also has orders from additional Amtrak suppliers CAF USA and Hyundai Rote Co. for the same railcar components.”

Columbus utilizes “green” practices, such as thermal sand reclamation, and the company has two new design projects: one of which is a new “knuckle” that is a rail component that goes on the end of rail car to fasten it to another car. They are also working on reducing the weight of parts without reducing performance.

Their “Open Door” policy assures every employee an opportunity to voice his or her concerns about the business and their employment. The company’s management knows that their business is only as good as their people, and the development and recognition of the best people will assure continued growth and improvement of the company in the future.

Mr. Ruebush said, “The main factor contributing to the success of our company since recovering from the Great Recession was becoming a diverse manufacturer. In past times, our company was too focused on freight rail. We are building business levels in our industrial business unit, as well as in our mass transit (passenger rail) business as demonstrated with the recent largest order in the company’s history with the announcement of our $72MM contract with Amtrak and Nippon Sharyo.”

It certainly looks like Columbus Casting is well on its way to achieving its goal of being the best large steel casting company in the world. If the U. S. had a national manufacturing strategy that supported American manufacturers to help them become winners in the global trade wars, more American companies would be able to achieve the same kind of worthy goal for their industry. We need a strategy for prosperity for American-owned businesses and not just the large multinational corporations. It’s time for our elected leaders to address the predatory mercantilist trade policies of foreign countries, such as currency manipulation, product dumping, government subsidies, and intellectual property theft that put American manufacturers at a disadvantage in the global marketplace. This is the only way we will be able to create the higher paying manufacturing jobs we need to grow our middle class and reduce our trade deficit and national debt.

California’s Metalworking Industry is a Leader in Technology and Environmental Consciousness

May 13th, 2014

The California Metals Coalition (CMC) held their 41st annual meeting in Anaheim on May 8-9th, 2013. Over 150 business leaders from metalworking companies and the industry’s service providers attended the meeting. The California Metals Coalition membership is a diverse representation of the state’s metals industry. Membership in CMC is corporate, and the employees of each facility are individual members of the organization. The member companies are small businesses ? the average number of employees per company is only 50, so without an organization to be the voice and advocate for the metalworking industry in California, these companies and this industry would have no influence on statewide policies affecting them.

California’s metalworking industry began when metalworking facilities were established in1848 to manufacture the tools that led to the start of the gold rush and birth of our state in 1850. Today, California is home to 6,100 metalworking facilities, employing approximately 213,500 Californians, providing high-paying manufacturing jobs, health benefits, and a solid economic foundation to the Golden State. This level of employment represents 18% of California’s 1.2 million manufacturing jobs. This industry generates $12.2 billion in goods and services and $7.9 billion in wages for the economy.

The types of services provided by member companies includes: sand, permanent mold, investment, rubber/plaster mold, and die casting, machining, forging, metal fabrication and welding, metal stamping, metal finishing, metal raw materials, metal recycling, and tools and dies.

According to CMC data, in the metalworking industry, 8 out of 10 employees are considered ethnic minorities or reside in communities of concern. Living-wage employment for this diverse workforce can be found in working-class communities throughout the state because the average full-time hourly wage is $18.00 (not including benefits) or $37,000 per year. Jobs provided by this industry are the path to the middle class for many Californians.

What do these companies make? Metal manufacturers make the parts that go into solar panels, electric cars, medical devices, airplanes, unmanned vehicles, ships for the Navy and private companies, products for the military and defense industry, and thousands of other applications. Metalworking products and services are a direct reflection of the innovation and hard work put forth by California’s workforce and business owners.

Californians discard enough aluminum each day to build five Boeing 737 jets, and California metalworking companies recycle millions of tons of discarded metal each year. Metal is recycled and used as the primary material source to build components that fly our planes, housings that spin renewable-energy windmills, medical devices that keep our families safe, and defense items used by our troops. California metalworking companies recycle about 1,830,000 tons of metal per year, and every ton of waste that is recycled rather than disposed in landfill produces $275 more in goods and services.

The keynote speaker of the conference was Jerome Horton, Chairman of the Board of Equalization, who acknowledged the importance of this industry to the economy of California by mentioning some of the above data. He said that the BOE is helping California companies grow and had worked with the California Metals Coalition and other organizations to obtain the new manufacturers exemption tax credit that was signed into law by Governor Brown as part of Assembly Bill 93 and Senate Bill 90. This exemption will become effective July 1, 2014 and expires on July 1, 2022. It applies to specified NAICS codes, applicable to the whole metalworking industry and has a $200 million limitation. Tax-exempt property must be used 50% or more in one of the following activities:

  • Manufacturing, processing, refining, fabrication, or recycling tangible property
  • Research and development
  • Maintaining, repairing, measuring, or testing any qualified property
  • As a special purpose building and/or foundation

The BOE expanded the meaning of this tax credit to apply to tooling, whether it is retained or sold. Tooling must be either manufacturing by a company or purchased, be used in the manufacturing process, and have a life of over one year.

He also outlined the benefits of the new employee hiring credit that replaces the tax credits offered by Enterprise Zones that have been eliminated. This tax credit is based on wages of $12-$28/hour. There is a maximum of $56,000 per employee over five years, and the credit is equal to 35% each year.

The BOE has a much larger reserve than they need and are starting to refund monies to California companies. Last year the sales tax revenue increased from $52 billion to $56 billion, which helped enable the state budget to be balanced, but the State still has $300 billion in debt.

Kimberly Ritter-Martinez, Chief Economist for the Kyser Center for Economic Research at the Los Angeles Economic Development Corporation was the next speaker. She provided an overview and comparison of the national economy and the state economy. If California were a country, it would be the 9th largest economy measured by Gross Regional Product in the world. However, California is lagging the national average in creating jobs, so that the unemployment rate in March was 8.1% compared to 6.7% nationwide. Jobs in durable goods manufacturing only increased by .8% for the state. She predicted 2.4% growth in the State GRG in 2014, and 2.9% in 2015.

Although California is losing businesses to other states, the LAEDC has helped companies such as Space X and American Apparel stay in California.

Jack Broadbent, Executive Office of the Bay Area Air Quality Management District, was added to Thursday’s schedule of speakers as he had a conflict with attending on Friday as originally scheduled. The Bay area District was established in 1955, includes 9 counties with a population of seven million, and covers 5,540 square miles. The purpose of the Bay Area District was to improve air quality by reducing particulate matter, noxious odors, reduce visible emissions, and reduce future emissions. The California Air Pollution Control Officers Association (CAPCOA) was formed to coordinate the rules of many local and statewide agencies involved in air quality.

In 2013, two new rules were adopted after extensive consultation with industry and other stakeholders. Rule 12-13 applies to foundries and forges, and Rule 6-4 applies to metal recycling operations. The Bay Area District led the state in creating an Emissions Minimization Plan to focus on fugitive emissions by reducing particulate matter, toxics, and odors. It incorporates continuous improvement via on-going facility assessments and Plan updates. All the draft plans have been received, and the next step will be a determination of District completeness, a public review period, District review and approval, followed by facility implementation.

In the Q & A period, I asked if the air pollution being transported by the trade winds from China is being taken into consideration, and he said that they have had to adjust the base of the ambient air quality because of the transported pollution. He has been to China five times in the past three years, and he said that China’s particulate matter in their air is more than 10 times the U. S. standard.

Brian Johnson, Deputy Director of the Department of Toxic Substances Control (DTSC) was the next speaker. He briefly described the Hazardous Waste Management program and the new Policy and Program Support Division that was formed after restructuring last year. The metalworking industry is getting a great deal of attention by the legislature, regulators, and the community around specific metals sites. A Hazardous Waste Reduction Initiative was introduced into the legislature last year, and a Safer Emissions Products Initiative is on the horizon. The Department is using 17 categories of pollution burden data of Census Track ratings to prioritize their response to community complaints for specific metals sites.

The next topic was workmen’s compensation insurance, and State Senator Ted Gaines (R) who is a candidate for Insurance Commissioner described how his long experience as an insurance agent would be beneficial to working with the metalworking industry to improve this insurance program. A panel of five members of CMC shared their experiences with regard to this issue. Of note, is the fact that California has some of the highest workmen’s compensation rates of any other state for certain industries. For example, the California rate for die casting companies is 5 times the rate in Mississippi.

The issues discussed at this conference demonstrate why the metalworking industry is challenged in doing business in California. However, many of these companies, especially foundries and forgers, cannot easily pick up stakes and move to other states. The high cost of doing business in California has resulted in more companies going out of business rather than moving to another state.

Adding to these challenges has been the fierce competition this industry has experienced from China in the past decade. CMC Executive Director, James Simonelli, told me that in the year 2000, the industry had about 325,000 employees. This means that the current employment of 213,500 is 40% less than it was 14 years ago. The good news is that all of the attendees to whom I spoke were experiencing some “reshoring” of parts coming back from China.

When compared to manufacturing facilities around the world, California is the place to find the most technologically advanced, and environmentally conscious metal manufacturers. California’s metalworking industry is arguably the world’s leader for efficient, clean, and safe metal manufacturing.

Nearsourcing is the Next Best Thing to Reshoring

May 6th, 2014

The basic definition of nearsourcing is to source outside your own facility, but within your own region and not on the other side of the globe. Nearsourcing may have a different meaning depending on the region in which you are located in the United States. For the purposes of this article, the definition of nearsourcing means sourcing in Mexico, which is the meaning understood in California and in other states along the international border with Mexico.

As much as it is would be desirable for all the manufacturing we lost to offshoring in China to return to the United States, it is an unrealistic expectation in the global economy. As logistics costs continue to increase worldwide, sourcing regionally will become the most reasonable course of action for companies with a global market.

Although reshoring through returning manufacturing to America is gaining momentum as wages and logistics costs rise in China, there is still a substantial cost differential for high volume and/or high labor content products. What is a good solution to this problem? Nearsourcing to Mexico may be the right answer.

Nearsourcing to Mexico by U. S. manufacturers began in the 1965 after the “maquila program was initiated in 1965 during the Diaz Ordaz presidency as a means of attracting foreign investment, increasing exports, and fostering industrialization along the U.S./Mexico border” By the mid 1980s there were thousands of maquiladoras in cities along Mexico’s border with the U. S. Some of my first customers when I started my rep agency in 1985 were maquiladoras owned by U. S. corporations in Tijuana, Baja California, Mexico.

For many years, Americans crossed the border to work in the maquiladora plants as engineers, purchasing agents, department heads, and plant managers, but gradually Americans were replaced by Mexican nationals, first the engineers, then purchasing agents, then department heads, and more recently as plant or general managers.

Prior to NAFTA, all production that was generated in the Mexican plants had to return to the country of origin or had to go to a third country. During the first phase of NAFTA from 1994-2000, the maquiladoras continued to benefit from the waiver of Mexican import duties on raw materials while also benefitting from the preferential duty rates on those products that satisfy NAFTA rules of origin. Since then, duties on raw materials that originate in non-NAFTA countries increased, but not as much as originally anticipated. During the second phase of NAFTA, changing rules made it gradually more difficult to sell to the maquiladoras because persons wishing to conduct business at maquiladoras had  to purchase a FN certificate (by the day or year), provide written proof of an appointment, and within a few years, have a passport. If a company was caught having a visitor that didn’t have written proof of an advance appointment, the company was fined. Thus, it became illegal to do what is called “cold calling” on prospects without an appointment.

During the early 2000s, the maquila industry was hit hard by the U. S. recession of 2001-2002, and hundreds of maquiladoras closed along the border. Since I read, write, and speak Spanish, I subscribed to a maquila industry newsletter, and every issue was filled with names of companies that were closing plants in Mexico. Many foreign companies in Tijuana abandoned the equipment in their plants to be sold in auction to pay benefits to the Mexican government for employees that had lost their jobs when the plants closed. I had a business acquaintance who survived the U. S. recession by acting as the Mexican government’s representative to handle the auctions.

The recession coincided with China becoming part of the World Trade Organization and the beginning of the trend to move manufacturing to China. Many U. S., Japanese, and Korean companies chose to move manufacturing to China rather than resume manufacturing in Mexico. The effects of the recession of 2008-2009 were not as severe as the previous recession on the maquila industry, but it meant that it took nearly the whole decade of the 2000s for the maquila industry in the Baja California, Mexico cities of Tijuana, Tecate, and Mexicali to get back to the level of manufacturing they had in the year 2000.

In my opinion, the San Diego region lost less manufacturing to China than other parts of California and the U.S. because so many regional manufacturers already had long-established plants in Tijuana and Mexicali and didn’t see enough cost savings to move manufacturing to China. This was aided by the fact that San Diego’s manufacturing industry has always had more high mix, low volume products than either Silicon Valley or the Los Angeles region.

There was one industry that could not move manufacturing to China and that has remained especially strong in Baja California:  the aerospace and defense industry. According to the report “Aerospace & Defense Manufacturing in Mexico,” released in August 2013. “Mexico is home to more than 260 aerospace manufacturing facilities and a 31,000 strong, highly-skilled direct industry workforce.” Major U. S. defense companies such as BAE Systems, Lockheed Martin, and Delphi established plants in Mexico during the late 19890s and early 1990s. Baja California leads with 28% of Mexico’s aerospace and defense industry exports, and Baja California has the only Binational Aerospace Cluster in Mexico.

“Mexico currently attracts 5% of the total number of licenses granted by the State Department of the United States for the production of dual use goods and technologies.” Mexico has been proactive in pursuing more aerospace and defense business by joining the Bilateral Aviation Safety Agreement (BASA) between the U. S. and Mexico, the international Wassenaar Arrangement (WA), and the Nuclear Suppliers Group.

Some of San Diego’s aerospace and defense industries that have manufacturing plants in Baja California include:  BAE Systems, Cubic Corporation, Gulfstream, Lockheed Martin, and UTC Aerospace Systems. Other U. S. aerospace and defense manufacturers in Baja California are Delphi Connection Systems, Eaton Aerospace, and Honeywell. The state of Queretaro, a few hours south of Mexico City, is home to such companies as Bombardier Aerospace, GE Infrastructure, ITR, Curtiss Wright, and Eurocopter.

Under NAFTA, the Buy American Act requirement for the U. S. Department of Defense to purchase products that contain a minimum of 50% of U. S. produced content is waived, so defense and aerospace companies are allowed to purchase products made in Mexico and Canada.

Also, under “the Manufacturing, Maquiladora and Export Service Decree, the IMMEX program allows for goods, raw materials and components to be imported into Mexico on a temporary basis, duty-free and VAT-free, as long as they are returned abroad within the established timeframes (most are 18 mos.”

In addition, a Special Aerospace Tariff Section 9806.00.06 “allows for free imports to assemble and manufacture aircraft or aircraft parts when companies have the Certificate of Approval to Produce issued by the Ministry of communications and Transportation.” Section 9806.00.05 allows “gods for repair or maintenance of aircraft or aircraft parts…to also be free of tariffs and have administrative advantages for companies.”

You may ask when nearsourcing is the best decision if you cannot achieve enough cost savings to return manufacturing to the U. S. It may be the best decision in the following cases:

  • Proximity to U. S. customers is important
  • Product labor content is between 20-30%
  • High mix, variable products, mid volume production
  • Intellectual Property protection is important
  • Faster delivery/responsiveness than from Asia
  • Product has substantial U.S. part content
  • Mexico/Latin America are key markets
  • NAFTA benefits fit your products

For California manufacturers, especially in southern California and San Diego, the main advantages of nearsourcing in Baja California compared to China and other parts from Asia are:

  • Right across the border from San Diego
  • Minimal Intellectual Property risk  because of strong Mexican Intellectual Property laws
  • Labor costs are now 14.6% cheaper than China
  • Lower utility rates
  • Direct connection to major transportation centers
  • Industrial real estate lease rates that are 1/3 less than China
  • Mexico’s workforce is highly skilled and educated
  • Low average turnover rate of 2.6% reported in 2011
  • Mexico graduates more engineers/year than U.S. (about 115,000 vs. about 50,000)

As a strong advocate for American manufacturing, I want as much as manufacturing as possible to reshore to create more good paying jobs in order to rebuild our middle class. However, I would rather see U. S. companies nearsource parts in Mexico than source them halfway around the world in China. The Mexican government isn’t using the U. S. dollars they gain from our trade deficit to build up their military, and Mexico doesn’t have any nuclear missiles aimed at the U. S. as does China. It is an advantage to our country if Mexico creates more good-paying jobs in the manufacturing industry to grow their middle class. To me, nearsourcing to Mexico seems like a win-win solution for strengthening the middle class of both countries.

Del Mar Electronics & Design Show – “Innovation…Through Face-to-Face Interaction

April 22nd, 2014

Don’t miss the Del Mar Electronics and Design Show on April 30th and May 1st at the Del Mar Fairgrounds. The show is an annual trade show and convention for people who design, manufacture, and test products. The two-day event is free for industry professionals and will be held at the Del Mar Fair Grounds with plentiful free parking and easy highway access. Show hours are 10:00 AM – 5:00 PM Wednesday, April 30th and 10:00 AM – 3:00 PM, Thursday May 1st. For more information or to register, visit

Over the last 18 years, the show has evolved from a sales rep/distributor show to become a major exhibition of local, regional, and national manufacturing companies and organizations.

Program Manager Douglas Bodenstab stated “Manufacturing in America is experiencing resurgence due to many factors, especially the new and exciting technologies that are abundant here in Southern California, and this event is riding that wave.”

New technologies will be displayed on the show floor with over 500 exhibitors. Dozens of free seminars will be provided on both show days. A few of the topics to be presented are:

How Does 3D Printing Apply to your Business?
3D Printing – Overview of Available Technologies & Commercial Applications
Computer-Aided Engineering for the Electronics  Industry
Telepresence Robots for Factory Support
Lithium Battery Technology Update
Optimizing Crowd Sourcing Funding Success Using Engineering Methodologies

I will be one of the keynote speakers at the show on the topic of American Manufacturing Trends:  “Reshoring,” Nearsourcing & Technical Training at 10:00 AM Wednesday, April 30th, Room D in the Mission Tower building, (across from the show registration).

Cost savings of outsourcing in China are eroding from higher labor rates and shipping costs. Quality problems, counterfeit parts & IP theft cause companies to rethink where to source. I will discuss the latest trends of nearsourcing and reshoring and how to calculate Total Cost of Ownership using Reshoring Initiative’s worksheet, sharing a few case stories of companies reshoring. In addition, I will describe the availability of technical training in the region to address shortage of skilled manufacturing workers.

The other keynote speaker is Daniel O’Leary, Award Winning Author & USC Marshall School of Business Professor, who will present “Social Media and the Supply Chain” at 4:00  PM on April 30th in Room B in the Mission Towers building.

This presentation will investigate capabilities of social media, such as Facebook, Twitter, Delicious, Digg. and others, for their current and potential impact on the supply chain. In particular, this talk will examine the use of social media to capture the impact on supply chain events, analyze the use of social media in the supply chain to build relationships among supply chain participants, and investigate the of use of social media to mitigate and manage the impact of supply chain disruptions.

My company, ElectroFab Sales, will be exhibiting at Booths 207 – 209 in the Bing Crosby Hall at the show. We will have sample parts on display for:

Century Rubber Company - molded and die cut rubber parts, conductive rubber keypads, ISO certified
Bolero Plastics – plastic vacuum and pressure forming, precision plastics machining, and fabrication including secondary operations such as routing stamping, painting, EFI/RFI shielding, silk screening and assembly.
Mina Product Development Company – rapid 3D & SLA prototyping, cast urethane and cast silicone, injection molding of small to medium parts in thermoplastic & elastomeric materials, assembly & special packaging
True Position Machining – CNC and manual machining, turn and mill)

Three of the companies we represent will have their own booths in the Exhibit Hall:  A&G Industries, Alva Manufacturing, and A Squared Technologies. Please drop by all of our booths.

San Diego’s Maritime Industry is Becoming Increasingly Important to the Region

April 15th, 2014

While we all know that San Diego has a world-class port that is the gateway to the Pacific and the growing markets of Asia and Latin America, most don’t realize that its maritime industry “represents one of the most unique regional economies in the world with more than 1,400 companies producing over $14 billion of direct sales and a workforce of almost 46,000 spread across an array of traditional and technology-oriented sectors.” The knowledge of how important that the maritime industry clusters has become to the regional economy was made clear to me when  I recently came across a report that was released in 2012:  the San Diego Maritime Industry Report, sponsored by the San Diego Workforce Partnership, (SDWP) San Diego Regional Economic Development Corporation (SDREDC), and The Maritime Alliance (TMA).

The survey portion of the project was conducted over a period of four weeks during May and June 2012. It involved quantitative economic analysis of data from proprietary business resources (such as Info-USA and Dun and Bradstreet), standard data from the BLS and Census Bureau, and first-hand information from San Diego-based ERISS Corporation through numerous in-person and telephone interviews and both a telephone and an online survey of more than 230 companies.

San Diego’s Maritime Industry and related economic activity comprise what is being called the “Blue Economy.” The maritime technology or “Blue Tech” cluster  “includes nearly 200 separate NAICS (North American Industry Classification System) codes and includes businesses in sectors as obvious as fishing and as surprising as metal forging.”

The 84-page report divides the Blue Economy into three general categories of the functional organization of San Diego’s Maritime Industry:

  • The traditional maritime space, in which industries are exclusively maritime, such as fishing and ship building
  • The traditional maritime space, in which an industry includes maritime and non-maritime activity, such as construction industries capable of working on ports
  • The maritime technology space, or “Blue Tech”

The analysis suggests an estimated 46,000 employees work in San Diego’s Maritime Industry:

  • Total employment (September, 2011) 45,778
  • Traditional maritime exclusive industries 8,176
  • Maritime technology industries “Blue Tech” 18,948
  • Other maritime 18,654  (in traditional industries that include maritime activities but are not exclusively maritime)

Shipbuilding and ship repair provide the most jobs, 6,127, followed by Testing Laboratories, 3,689, R&D in Physical, Engineering, & Life Sciences (exc. Biotechnology), 3,376, and Engineering services, 3,228.

Based on the survey, “the projected total employment growth between 2011 and 2020 is for nearly 6,000 new jobs, or 12 percent of the current total (though fast growth, new technologies, and new opportunities could yield significantly higher numbers.)”

Total revenue was estimated at slightly more than $14 billion (direct spend only) in 2011:

  • Traditional maritime exclusive industries $ 1,403,082,257
  • Maritime technology industries   $ 6,165,840,257
  • Other maritime   $ 6,465,162,848

Source: ERISS; Info-USA; U.S. Bureau of Labor Statistics, Quarterly Census of Employment and Wages; Dun and Bradstreet; Corporation Wiki

The report states, “The region’s focus on the high-technology aspects of the Blue Economy is increasingly well-placed. Technology is becoming ever more enmeshed in even the most traditional maritime activities…The role of technology in San Diego’s maritime economy is also unique because of the close relationship with the U.S. Navy and the need for innovation for the Defense Department and defense industries.”

The Maritime Alliance undertook “yeomen’s efforts to define the totality of the Maritime Technology Cluster – really a sub-set of the larger Blue Economy – similar to how maritime technology clusters around the world seem to identify their industry activity as an innovation industry with close and overlapping relationships to the spheres of traditional maritime activity. Their efforts resulted in 14 sectors for the San Diego Maritime Technology Cluster map with many sub-sectors:”

  • Aquaculture and Fishing
  • Biomedicine
  • Boat and Shipbuilding
  • Cables and Connectors
  • Defense and Security
  • Desalination and Water Treatment
  • Marine Recreation
  • Ocean Energy and Minerals
  • Ocean Science and Observation
  • Ports and Marine Transportation
  • Robotics and Submarines
  • Telecommunications
  • Very Large Floating Platforms
  • Weather and Climate Science

The report made the following general observations about San Diego’s “Blue Tech” industry:

  • Highly differentiated  – 14 sectors in San Diego; 71 sub-sectors
  • Prevalence of multi-use technologies from small, specialized firms
  • Typically high gross margins
  • Largely self-reliant – traditionally modest users of bank debt and outside equity
  • Largely invisible in local markets / limited public & government awareness
  • Little baseline economic data due to non-specific NAICS codes
  • Highly export-oriented – typically 40-60 percent for most companies
  • Markets exist in virtually every country around the world
  • Growth in most sectors strongly outpaces world economic growth

These sectors can largely be used to describe the overall Maritime Industry and doing so “ helps to emphasize the increasing connectedness and overlap between the traditional and technology dimensions of San Diego’s maritime businesses…to leverage shared assets and opportunities, from formal investments all the way to informal instances of collaboration among stakeholders. “

While commercial fishing in the region is much smaller than in its heyday, the industry has the potential to double in size over the next decade. Plans have been made to provide ongoing support for commercial fishing, and recommendations have been incorporated in the Commercial Fisheries Revitalization and Coastal Public Access Plan that took three years to complete. The Port of San Diego staff has begun implementation. Implementation will take several years and cost several million dollars.

For about “one-third of the 22 companies that participated in live interviews, energy, especially offshore oil and gas, directly or indirectly, represented major, if not dominant customers. Most of these firms have few or no local customers. Their customers are either foreign firms or, if U.S. firms, located in either the Gulf of Mexico or foreign waters.” This sector has a high-growth potential market.

San Diego is the world leader in desalination and reverse osmosis technology, which was patented in San Diego in 1964. “More than 3,000 professionals and workers are employed by companies in the region which includes two of the three global market-share leaders in membrane supply.”

“San Diego has a long history in underwater vehicles and maritime robotics, initially driven by the Navy’s needs. The major Navy lab in San Diego (SPAWAR Systems Center Pacific) developed ten manned underwater vehicles and nearly two dozen unmanned vehicles.” Private companies have developed various kinds of UUVs (Unmanned Underwater Vehicles), such as the underwater vehicle models of SeaBotix Inc., the world’s leading MiniROV manufacturer.

The report states, “Workforce development has a critical role to play when cluster strategies consider the practical challenges and opportunities within any region…workers at the top of the income and education spectrum are no longer a central facet of what cluster strategies can offer a region…An occupational strategy for the Maritime Industry must be necessarily unique. On the one hand, the industry composition is too diverse to look for industry-driven occupational patterns as a driving rationale. On the other hand, that diversity includes both the kinds of firms that headline The Maritime Alliance’s membership and those that rely critically on workers who are skilled but unlikely to hold a bachelor’s degree.”

Most of the small, high-tech firms interviewed primarily recruited individuals with college or advanced degrees, with very high concentrations of various engineering disciplines. They reported considerable talent availability, particularly due to the recession. “The primary recruiting concern was lack of maritime-specific experience and training. Lack of undersea experience was especially noted by several firms. A few firms expressed concern about a growing shortage of software developers and programmers.”

The company interviews revealed the following common trends and challenges:

  •  Firms saw considerable opportunity, especially in offshore markets, but some of the most attractive deals are seen as too large or too complex for small companies to pursue effectively by themselves.
  • Strong global competition is emerging, especially from firms with considerable foreign government support or from large firms with access to significant private or public capital resources.
  • A large number expressed concerns about California’s regulatory burden, as well as that of the U.S. Environmental Protection Agency (EPA).
  • Many were very concerned about threats to the working waterfront and saw residential and tourism interests eating away at industrial and commercial uses of the waterfront.

Many supported strong local advocacy in support of reducing the state burden on maritime activity, easing commercial regulation on surveying and mapping activity and on recreational yachts over 300 tons, as well as harmonizing California ballast water regulations with those promulgated by the International Maritime Organization, until a common suite of U.S. regulations are issued. Shipyards claimed that they face overlapping and sometimes conflicting regulations and oversight from multiple agencies and that San Diego is worse than the rest of California.

Policy Recommendations

While these are too numerous and detailed to consider in depth in this brief article one of the most important was that it was recommended that the SDREDC focus on attracting and promoting high wage, high value-added, capital and R&D intensive firms and operations, with five focus areas for initial priority attention:

  1. Target offshore energy, and potentially offshore minerals extraction, as a priority cluster strategy effort. The range of companies in the San Diego region with deep expertise and technologies focused on operations in hostile ocean environments face an exciting array of opportunities.
  2. Launch a focused effort to take advantage of (and protect San Diego from) changing DoD strategy and restructuring.
  3. Strengthen organizational participation in the existing TMA Seafood (Aquaculture and Fishing) Working Group that brings together the fishing, processing, aquaculture, and other related interests to determine if the strong mutual interests identified can be leveraged into a seafood strategy for the region or the state.
  4. Aggressively promote shipbuilding, repair, and refit as this is a relatively robust local industry.
  5. Enhance seaborne trade and the associated land-based, logistics infrastructure.

The respondents expressed strong concerns that the various maritime organizations were not doing enough collectively to “protect the working waterfront.” Some of the recommendations included:

  •   Create joint-use facilities such as a world-class testing facility that firms could access
  •  Create incubator space for young firms, which would include access to shared equipment and facilities
  • Create a network of existing specialized facilities, equipment, and other assets that could be made available to smaller firms (for a fee)
  • Create a core marine biology facility for joint use (similar to an existing North Carolina initiative)

Finally, there was strong interest in more networking and collaboration between the Navy and private industry, between large firms and small firms, and among the many maritime-related organizations in the San Diego region. The consensus was that that the San Diego community does not think big enough in the maritime space. A clear recommendation was made for the San Diego maritime community to come up with a big idea and make it happen (such as the Maritime Center of Excellence).

We are in danger of losing our country’s assets!

April 8th, 2014

We Americans blithely ignore the long-term effects of allowing foreign corporations to purchase the assets of our country in the form of companies, land, and resources. We are selling off our ability to produce wealth by allowing so many American corporations to be purchased by foreign corporations. It is not just foreign companies buying our assets that is the problem ? it is the state-owned and massively subsidized companies of China that are dangerous because China uses its state-owned enterprises as a strategic tool of the state. By pretending they are private companies abiding by free-market rules to our detriment makes us the biggest chumps on the planet. German economist Fredrich List, wrote, “The power of producing wealth is…infinitely more important than wealth itself.”

How many Americans paid attention to the news last year that Smithfield Foods was acquired by a Chinese corporation? Last September, shareholders approved the sale of the company to Shuanghui International Holdings Limited, the biggest meat processor in China. Smithfield Foods is the world’s largest pork producer, and Americans must now face the danger of polluted Chinese food since our FDA only inspects 2% of our food imports.

In the December 15, 2013, New York Post, Diane Francis, author of “Merger of the Century: Why Canada and America Should Become One Country” wrote “Currently, American authorities only evaluate foreign takeovers on the basis of national-security issues or shareholder rights and securities laws. But these criteria are inadequate. A fairer test in the case of Smithfield, and future buyout attempts by China, should also require reciprocity: Only corporations from countries that allow Americans to buy large companies should be allowed to buy large American companies. That is why Washington must impose new foreign ownership restrictions based on the principle of reciprocity. The rule must be that foreigners can only buy companies if Americans can make similar buyouts in their countries”.

How many are aware that the chain of AMC Theaters is now owned by Chinese Corporation? Dalian Wanda Group Company owned by China’s richest man, billionaire real estate developer, Wang Jianlin, bought AMC Theatres in May 2012, creating the world’s largest theater chain. This means that the Chinese will now be in a position to shape public opinion and mold the minds of our children through entertainment media.

In January 2014, Motorola Mobility was sold by Google to Chinese corporation, Lenovo, which means that the nation that invented smart phones is just about entirely out of the business of producing smart phones in America. Lenovo is the same company that bought IBM’s line of personal computers in 2004. This acquisition will give one of China’s most prominent technology companies a broader foothold in the U. S.

Through strategic purchases, China is positioning itself to be our energy supplier as well. Since 2009, Chinese companies have invested billions of dollars acquiring significant percentages of shares of energy companies, such as The AES Corporation, Chesapeake Energy, and Oil & Gas Assets. In 2010, China Communications Construction Company bought 100% of Friede Goldman United, and in 2012, A-Tech Wind Power (Jiangxi) bought 100% of Cirrus Wind Energy.

Chinese companies are even acquiring healthcare companies:  WuXiu Pharma Tech bought AppTec Laboratory Services, and Mindray Medical International bought Datascope Corporation in 2008; BGI-Shenzhen bought Complete Genomics in 2012, and Mindray Medical International bought Zonare Medical Systems in 2013.

Wall Street and the finance industry are not immune from acquisitions by Chinese corporations:  Shenzhen New World Group bought Sheraton Universal Hotel in 2011; China Aviation Industrial Fund bought International Lease Finance Corporation in 2012; and Fosun bought One Chase Manhattan Plaza in 2013.

One of the earliest acquisitions by a Chinese corporation was when the Hoover brand was sold to Hong Kong, China-based firm Techtronic Industries after Maytag that owned Hoover was acquired by Whirlpool in 2006.

The acquisition of American companies by foreign corporations isn’t something new. Many prominent companies founded in America have been bought by corporations from the United Kingdom, France, Germany, Italy, and other European countries in the latter half of the 20th Century. Most American don’t realize that such iconic American companies as BF Goodrich and RCA are now owned by French corporations, and that Carnation and Gerber are now owned by Swiss corporations.

Most foreign countries don’t allow 100% foreign ownership of their businesses, but sadly, the United States does not exercise the same prudence. We sell our companies to them, and they almost never sell theirs to us. This tilted playing field has gutted America’s economic power.

What is enabling Chinese companies to go on a buying spree of American assets? Trade deficits – our ever-increasing trade deficit with China over the past 20 years is transferring America’s wealth to China and making millionaires out of many Chinese. In 1994, our trade deficit with China was $29.5 billion, and it grew to $83.8 by 2001 when China was granted “Most Favored Nation” status and admitted to the World Trade Organization. By 2004, it had doubled to $162.3 billion. After a slight dip in 2009 during the depths of the Great Recession, the trade deficit grew to $318.4 billion in 2013. If you add the annual trade deficits for the past 20 years, it totals $3.15 trillion. China now has over one billion serious savers and more than a million millionaires whose assets when combined provide billions to spend to buy our assets.

In addition, it is our trade deficit with Japan that has enabled Japanese corporations to go a buying spree of American assets since the 1980s when such companies as Columbia Pictures Entertainment was acquired by the Sony Corporation of Japan in 1989, and Bridgestone Corporation of Japan bought Firestone in 1988. However, our highest trade deficit with Japan of $84.3 billion in 2007 was nearly one third of our current trade deficit with China. While we are still transferring wealth to Japan, it is a democracy and doesn’t have armed missiles pointed in our direction.

In theory, we have the means to protect ourselves from this. CFIUS, the Committee on Foreign Investment in the United States, has the power to regulate, approve and deny these purchases. However, it is rare for the CFIUS to block deals. “During 2011, the most recent year with data available, the CFIUS was notified 111 times of deals that fell under its purview. Of those 111 covered deals, 40 were investigated and just five were withdrawn during that investigation…This year, Chinese companies have bought 10 companies worth $10.5 billion, says Thomson Reuters. That’s more than 20% of the 484 U.S. companies that have been bought by foreign companies this year worth $43.6 billion, Thomson Reuters says.”

The 2013 Annual Report to Congress by the U.S.-China Economic and Security Review Commission states, “China presents new challenges for CFIUS, because investment by SOEs can blur the line between national security and economic security. The possibility of government intent or coordinated strategy behind Chinese investments raises national security concerns. For example, Chinese companies’ attempts to acquire technology track closely the government’s plan to move up the value-added chain. There is also an inherent tension among state and federal agencies in the United States regarding FDI from China. The federal government tends to be concerned with maintaining national security and protecting a rules-based, nondiscriminatory investment regime. The state governments are more concerned with local economic benefits, such as an expanded tax base and increased local employment, rather than a national strategic issue, especially as job growth has stagnated.”

The report, continues, “China has amassed the world’s largest trove of dollar-denominated assets. Although the true composition of China’s foreign exchange reserves, valued at $3.66 trillion, is a state secret, outside observers estimate that about 70 percent is in dollars. In recent years, China has become less risk averse and more willing to invest directly in U.S. land, factories, and businesses.”

Did we let the USSR buy our companies during the Cold War? No, we didn’t! We realized that we would be helping our enemy. This was pretty simple, common sense, but we don’t seem to have this same common sense when dealing with China.

China has a written plan to become the Super Power of the 21st Century. With regard to China’s military buildup, the report states, “PLA modernization is altering the security balance in the Asia Pacific, challenging decades of U.S. military preeminence in the region…The PLA is rapidly expanding and diversifying its ability to strike U.S. bases, ships, and aircraft throughout the Asia Pacific region, including those that it previously could not reach, such as U.S. military facilities on Guam.

It is time to wake up to the real dangers of our dangerously high trade deficits with China. The Communist Chinese government is not our friend. They are a geopolitical rival that is striving to replace the United States as the global hegemony. We should not let Chinese corporations acquire any more of our energy companies or technology-based companies if we want to maintain our national sovereignty.