savingusmanufacturing.com

There are three propositions that will be on the California ballot November 2^nd that appear to be unrelated.  However, when you consider the background and purpose of these bills, the success or failure of these propositions could have a significant impact on California’s manufacturing industry, already struggling to survive through the tough economic times and unfriendly business climate in California.

Proposition 25, titled “On-Time Budget Act of 2010,” would change the legislative vote necessary to pass the budget from two-thirds to a majority vote (50 percent plus one).  It states that it would not change Proposition 13’s property tax limitations in any way and would not change the two-thirds vote requirement for the Legislature to raise taxes.  Legislators would forfeit their pay if the Legislature fails to pass the budget on time.   Proponents argue that for more than 20 years, the California Legislature has been unable to meet its constitutional duty to pass a budget by June 15 because of the requirement of a supermajority of two-thirds that is required to pass a budget.

A coalition of taxpayers and employers called Stop Hidden Taxes, sponsored by the California Chamber of Commerce and California Taxpayers Association are opponents of Proposition 25. They say it includes “hidden” ways to allow legislators to raise taxes as part of a budget bill with a simple majority vote.   Teresa Cassazza, president of the California Taxpayers’ Association said, “It should come as no surprise that the special interests behind this measure would try to sneak a measure by voters that makes it easier for the state Legislature to raise taxes on Californians.”

In contrast, Proposition 26, titled “Stop Hidden Taxes,” would increase the Legislative vote requirement to two-thirds for State levies and charges, with limited exceptions, and for certain taxes currently subject to majority vote.   It would require voters to approve, either by two-thirds or majority, local levies and charges with limited exceptions.  Proponents say that too often “taxes” are relabeled as “fees” by either the state Legislature or local agencies, allowing them to bypass requirements that previous ballot measures have instituted for public oversight of tax increases (either a two-thirds legislative majority vote or voter approval).  Proposition 26 would end this loophole by plainly defining what is a tax and what is a fee to ensure that any tax hikes are treated as such under the law.

Proposition 27 would eliminate the 14-member state redistricting commission that voters approved through Proposition 11 in the election of 2008.  It would consolidate authority for redistricting back with elected state representatives responsible for drawing congressional districts as was done in the past.  California voters haven’t benefited yet from the passage of Proposition 11 because redistricting is only done every ten years, the year after the Federal Census is conducted.  This means that the independent Commission will redraw the district lines in 2011using data from this year’s Census, and the newly drawn districts will go in effect for the 2012 election.

Now, how are these three propositions interconnected?  The proponents of Proposition 25 and 27 are one in the same.  They are the individuals, groups, and organizations that derive their wages or funding from government, whether it is a salary as a teacher, law enforcement officer, or firefighter or an organization such as California Head Start Association, Planning and Conversation League, or the Sierra Club.

The proponents of Proposition 26 are the opponents of Propositions 25 and 27.  They are a coalition of employers, small business owners, farmers, and industry organizations, such as the California Chamber of Commerce, California Restaurant Association, and the Howard Jarvis Taxpayers Association.  They are the individuals and companies that provide the tax revenues that fund the state government.

In essence, the two opposing sides of these issues are the people that benefit from the expenditure of government funds, and the people and businesses that provide the local and state revenues in the form of taxes and fees.

While it is true that Proposition 25 would eliminate the gridlock over the budget in the state Legislature, the price all Californians would pay would be handing a “blank check” to the ruling party in the state Legislature and its supporters.  We would have a state with one party rule without any “checks and balances” provided by the minority party

The reality is that elected representatives in the state legislature have gerrymandered the state to the point that all but a handful of districts are safe for the incumbent party of the district.  This means that the most extreme of either party gets elected to the state Legislature, and they don’t have to be accountable to independent and opposition party voters.  They only need to please their supporters, who will ensure their re-election or the election of a candidate of the same party when they are “termed out.”

This means that the state Legislature is more like a “jousting arena” in which the extreme of each party is elected to “carry the colors” of their supporters to do “battle” with the representatives of the opposing party.  The state Senate, where state budgets are approved, has been in Democratic control continuously since 1970 as has the Assembly, with the exception of a brief period from 1995 to 1996.  The only power the Republicans have had is the power to hold up the budget because of the requirement for the two-thirds majority vote.

The solution is to make every district a competitive district so candidates will be forced to move to the center to get elected and then be forced to work together in the state Legislature for the good of all Californians.  The best hope for this happening is the drawing of new district lines by the independent commission in 2011.

California has been losing its manufacturing base because of high taxes, undue regulations, workers’ compensation costs, a legal environment stacked against businesses, and lengthy and costly construction permitting requirements.  Irvine business relocation specialist Joseph Vranich has tracked 129 companies that have moved out of California, and I have tracked 32 companies out of my database that have moved out of California since 2001.

California lost 25 percent of its manufacturing jobs between 2000 and 2007, and we know it has only gotten worse since then.  The California Economic Development Department reported that we lost another 23,400 jobs between July 2009 and July 2010.  The unemployment rate of 12.3 percent is now higher than the national average of 9.6 percent.

Make sure you understand all of the ramifications before you decide how to vote on these propositions.  How you vote this fall on these propositions may determine whether the exodus of manufacturers accelerates or diminishes.  The busines you help keep in California or the job you save by how you vote may be your own.

Outsourcing to China or setting up manufacturing plants in China has offered a variety of advantages to businesses over the past decade, ranging from reduced wages to lower costs from less stringent environmental and regulatory compliance.  The question is whether these advantages will continue to make China more attractive than expanding in the United States.  The challenge for multinational companies will be to design a global footprint and determine which business processes are best suited to outsourcing and which should remain in the United States.  The question for smaller companies is whether outsourcing to China is worth the time, effort, and risk.  The decision process is often a balancing act, and the dynamics can change unexpectedly and rapidly.  The dynamics began to change in 2005 and will continue to change over the next several years.

Four years ago, Business Week ran a story, “How Rising Wages are Changing the Game in China” that noted that in 2005 wages surged 40 percent.  In 2007, the wages in China rose another 30 percent and have continued to rise an average of 15 percent a year since a 2008 labor contract law went into effect January 2008.

Thirty years of pro-market reform and explosive economic growth made China into a manufacturing superpower.  But now China may be facing the inevitable consequence of that economic ascendance —  labor unrest.  In recent months, a wave of strikes in China has hit Japanese companies and their suppliers.  The strikes affected more than 100 companies, including Honda Motor Company and Toyota.  The strikes were concentrated in southern China, which produces many of the country’s exports.  The strikers mostly belonged to China’s 150 million strong migrant labor workforce, which flows from villages to cities and industrial regions looking for work.

Foxconn Technology Group, which is the world’s largest contract manufacturer of electronics goods such as iPhone and iPads, more than doubled the basic worker pay to 2,000 yuan ($293) a month for their Chinese workers after ten worker suicides.  Foxconn plans to charge more for their products and will speed up factory automation programs to cover wage increases.

Marc Chandler, global head of currency strategy at Brown Brothers Harriman, opines that Fordism may be coming to China.  Fordism refers to a type of political economy, which recognizes that despite great disparities in power, workers need to earn high enough wages to purchase the products they create in order to complete circuit of production.

The second force pushing wages higher is that the supply of migrant workers has reportedly fallen by 20 percent from its peak.  As a result, some companies are moving production to the interior of China where many migrant workers come from to secure lower wage workers.   In addition, the working age of the Chinese population, laborers between the ages of 15 and 64, peaked this year.  This birth bulge was a major reason that China instituted its One Child policy 30 years ago.  Thus, with every passing year, the number of workers in that age group will shrink in size.

The effect of higher wages will only have a significant impact if the labor content of a product manufactured or assembled in China is high compared to cost of raw materials and components.

Makers of toys, trinkets, Christmas trees, and cheap shoes have folded by the thousands or moved away to Vietnam, Indonesia, or Cambodia.   However, even with higher wages, Chinese wages are estimated to be about three percent of manufacturing wages in the U. S.

Another factor is that the rising cost of fuel has increased shipping costs by 71 percent over the past four years.  Delivery times have also increased because container-shipping companies have reduced routes and reduced the number of ships per route.  The ports in Asia are filling up with decommissioned freighters.

The August 18, 2010 issue of “Today’s Machining World” reported that Wham-O Corporation, maker of Frisbees, Hula Hoops, and Slip ‘n Slide, decided to bring half of its Frisbee production and some production of its other products back to the United States.  Wham-O’s products take up a lot of container space per dollar value.  These products are not labor-intensive, primarily produced by injection molding presses.  They are cheap, light, and bulky so a container of Frisbees may hold only $5,000 worth of product.  When container costs from China rose by 50 percent to $4,500 from as low as $3,000 at the bottom of the recession, the cost advantage of manufacturing in China disappeared according to Kyle Aguilar, President of Wham-O.

Higher labor costs and higher shipping costs aren’t the only factors contributing to China losing its luster as an outsourcing location.  Quality problems are the number one factor bringing some manufacturing back to the United States.  Quality control issues have the potential to cost companies millions in terms of lost customers, potential litigation, and the logistics of shipping a defect product back to where it came from (if the Chinese company will take it back and give credit).  General Electric, Caterpillar, NCR, and Diagnostic Devices have all moved production back to the U. S. for one reason or another.

The quality problems with products made in China are demonstrated by the product recalls by the Consumer Product Safety Commission week after week, month after month, and year after year.  For example, in the August 2010 list of product recalls, 70.8 percent – 17 of 24 – were for products made in China.  Only one product recall was for a product made in USA.  This ratio of recalls of Made in China to Made in USA products is roughly the same report after report.

There is no question that outsourcing to China and other countries will continue for the foreseeable future, especially for the multinational companies that have products to sell within the countries in which they have set up manufacturing operations.  Manufacturing products locally for consumption within a foreign country will be crucial to profitability as transportation costs continue to increase globally.

The best locations for outsourcing will change over time just as they have in the past 50 years.  The purely financial benefits of lower cost in China will erode over time.   The challenge for Americans is how to keep as many companies as possible manufacturing their products in the United States in order to maintain our middle class and protect our national security.

Many people have questioned whether the American Recovery and Reinvestment Act (ARRA), commonly referred to as the economic stimulus bill signed into law by President Obama on February 17, 2009, actually created any real jobs.  Well, the answer is “yes,” it did in San Diego County.

Out of the $787 billion in stimulus funds, $53 billion went to education and training, of which $3.45 billion was designated for job training.  In San Diego County, the ARRA stimulus funds enabled the San Diego Workforce Partnership to offer two new programs through three training subcontractors:

• Manpower – covering North and East County

• Occupational Training Services – covering the San Diego Metro area
• Comprehensive Training Systems – covering south Metro and South County

These program are designed to help laid-off workers and unemployed persons find work and help employers find the qualified workers they need, while providing financial reimbursement to help cover training costs.  The training options are summarized below:

On-the-Job-Training (OJT)

The OJT training program is designed to help businesses hire and train persons who do not have sufficient experience and knowledge in the jobs for which they are being hired.  The employer’s training expenses will be paid as a percentage of the wages the new hire earns during the contracted training period.  Program guidelines include:

• Subcontractors recruit applicants based on company job specifications.

• Employers make the hiring decision.
• Employers are reimbursed up to 50% of the employee’s wages for costs associated with training (usually four to six weeks of full-time work.)
• Subcontractor develops a mutually agreed-upon training plan that identifies skills necessary for the job.

Customized Training (CT)

The CT program is designed to meet the special requirements of an employer or group of employers to hire and train employees or to upgrade the skills of employed workers to prevent lay-offs.  Program guidelines include:

• Employers select the training provider and pay not less than 50% of the cost of training.
• Employers are reimbursed for the balance of the cost of the training.
• Employers and training provider recruit applicants based on company’s job specifications.
• Employers make the hiring and employee training decisions.
• Employers and training provider develop a mutually agreed-upon training plan that identifies the skills necessary for the job or job retention.

The San Diego Workforce Partnership awarded a total of $2 million to their three training subcontractors, and these subcontractors, in turn, have trained 221 people that are now placed in jobs.  About 60 companies have participated in the training thus far, and the program ends June 30, 2011 if the funding hasn’t been used up prior to that time.

Individual job seekers wishing to become part of the OJT or CT programs must be a member of one of the County’s Career Centers and be “job ready,” which means they have a good resume, know how to interview effectively, and have appropriate references.   Those who are not yet “job ready” must take classes at their Career Center to get ready.   The benefits for a job seeker of participating in the OJT program is that they can inform a prospective employer of the OJT program during the interview process, which may enhance the likelihood of their being hired for the position if they don’t have all of the specific jobs skill for a particular job. There are 11 Career Centers in San Diego County.  To locate the nearest one to you to make an appointment to become a client, go to www.sandiegoatwork.com.  There are 1867 comprehensive One-stop Career Centers, and 1134 affiliate One-stop Career Centers in the United States.   To locate the Career Center closest to you, go to www.servicelocator.org or call 1-877-US2-JOBS (1-877-872-5627).

Some of the positions currently available for on-the-job training in San Diego County are:  warehouse clerk, precision assemblers, maintenance worker, machinist programmers, Certified Nurse Assistants, and mechanical, manufacturing, and software engineers.

Besides the reimbursement for training costs, the advantages to employers of participating in the OJT program is that the training subcontractors pre-screen the job seekers and handle the paperwork involved in the program.  This can be a huge relief to employers that are short-staffed in this tough economy.

In addition, all of the community colleges in San Diego County offer short term, non-credit vocational workshops as part of their Continuing Education programs.   For example, the Grossmont-Cuyamaca Community College District is offering the following free classes:  “Career Exploration; Ready, Set, Work; Successful Small Business Management; Introduction to Computers; Introduction to Internet; and Introduction to Spreadsheets.  To sign up, go to www.gcccd.edu/ce

As employers, don’t miss out on this opportunity to find qualified employees for your company with some help in funding the training they may need to fill your open position.  As job seekers, don’t miss out on this opportunity to get help in finding a job.