Archive for August, 2011

Will You Follow the Herd or be a Leader?

Tuesday, August 30th, 2011

When I succumbed to peer pressure as a teen ager and asked my mother if I could do something that “everyone else was doing,” her refrain would be “don’t be a sheep and follow the crowd; be a leader.”

The management of American manufacturing companies should have followed my mother’s advice of being a leader in their industry instead of following the “herd mentality” of outsourcing their manufacturing offshore to China to the detriment of the overall American manufacturing industry and the United States’ position as the world’s pre-eminent country.

A new report by the Boston Consulting Group, Made in America, Again – Why Manufacturing Will Return to the U. S., reveals that “China’s overwhelming manufacturing cost advantage over the U. S. is shrinking fast.”  The authors, Harold L. Sirkin, Michael Zinser, and Douglas Hohner, conclude that within five years, “rising Chinese wages, higher U. S. productivity, a weaker dollar, and other factors will virtually close the cost gap between the U. S. and China for many goods consumed in North America.”

Their report substantiates the Total Cost of Ownership worksheet calculator that Harry Moser, founder of the Reshoring Initiative, has developed and is teaching to managers of American manufacturers that want to be leaders in bringing manufacturing back to the United States.

The Boston Consulting Group makes the same recommendation as Moser:  conduct a rigorous, part-by-part, product-by-product analysis to fully account for total costs rather than just factory wages.  In doing so, they may discover that manufacturing in the U. S. is a more attractive option, especially for products sold in the U. S. market.   For products with high labor content that are destined for mainly Asian markets, manufacturing in China will remain the best choice because of economies of scale or technology.  They key idea is to recognize that China is no longer the default option to lower costs and increase profitability.

What is the basis for authors’ conclusion that manufacturing will return to the United States?  They say the key reasons for the shift are the following:

  • Wage and benefits have increased 15 to 20 percent per year at the average Chinese factory, which will slash China’s low-cost advantage over the U. S. from 55 percent today down to 39 percent by 2015, when adjusted for the higher productivity of U. S. workers.
  • When the Total Cost of Ownership factors such as transportation, duties, supply chain risks, cost of inventory, and other costs are calculated, the cost savings of manufacturing in China rather than some U. S. states will become minimal within five years.
  • “Automation and other measures to improve productivity in China won’t be enough to preserve the country’s cost advantage.  Indeed, they will undercut the primary attraction of outsourcing to China – access to low-cost labor.”
  • Demand of goods in Asia will increase rapidly due to rising income level so multinational companies are likely to devote more of their capacity in China to serving the Asian market and bring some production back to the U. S. to service the North American market.
  • “Manufacturing of some goods will shift from China to nations with lower labor costs, such as Vietnam, Indonesia, and Mexico.”  However, this will be limited by the supply of skilled workers, inadequate infrastructure, supply networks, as well as by political and intellectual property risks, corruption, and the risk to personal safety in those countries.

The BCG report presents an interesting perspective on the decline and forecast renaissance of American manufacturing.  They acknowledge the effect of Japan and the “Asian Tigers of Korea and Taiwan had on the shrinking of the American manufacturing industry, in which the U. S. share of the world’s manufacturing dropped from the high of around 40 percent in the early 1950s down to less than 20 percent today.  However, they point out that “U. S. industry and the economy responded with surprising flexibility to reemerge more competitive and productive than ever” by the late 1990s.

They opine that the “U. S. manufacturing sector is today in the midst of a similar process of readjustment in response to perhaps its greatest competitive threat ever?­the rise of China.”  As proof, they state that the “output of manufacturing is almost two and a half times its 1972 level in constant dollars, even though employment has dropped by 33 percent…the value of  U. S. manufacturing has increased by one-third, to $1.65 trillion, from 1997 to 2008?before the onset of the recession?thanks to the strongest productivity growth in the industrial world.”

The authors conclude that within five years, “the total cost of production for many products will be only about 10 to 15 percent less in Chinese coastal cities than in some parts of the U. S. where factories are likely to be built,” such as South Carolina, Alabama, and Tennessee.  When you add in the other factors of Total Cost of Ownership, the cost gap will be minimal.   Although some production is moving to Chinese cities in interior provinces to reduce costs, these regions lack the abundance of skilled workers, supply networks, and efficient transportation infrastructure of the coastal cities.  “As a result, they expect companies to begin building more capacity in the U. S. to supply North America.”  A few of their examples are:

  • NCR moved production of its ATM’s to a plant in Columbus, Georgia, that will employ 870 people by 2014.
  • The Coleman Company is moving production of its 16-quart wheeled plastic cooler from China to Wichita, Kansas.
  • Sleek Audio has moved production of its high-end headphones from Chinese suppliers to its plant in Manatee County, Florida.
  • Peerless Industries will consolidate all manufacturing of audio-visual mounting systems in Illinois, moving work from China in order to achieve cost efficiencies, shorter lead times, and local control over manufacturing processes.

These examples corroborate what I’ve been seeing and wrote about in my book and subsequent blog articles about companies in the San Diego region.  For example, at a TechAmerica Operations Roundtable event last April, Luke Faulstick, COO of DJO Global said that they have brought back the manufacturing of their cold therapy unit from China, their printed circuit boards to a supplier in South Dakota, their textile manufacturing to North Carolina, and their screw machined parts to Texas.  He recommended that any company on the “lean” journey should rethink their outsourcing offshore.

The BCG report goes into quite a bit of detail about the factors that are starting to dramatically shift the manufacturing cost equation in favor of the U. S.  A key factor is that China’s average wages have become more volatile.  In 2010, “the giant contract manufacturer Foxconn International, which employs 920,000 people in China alone, doubled wages” after a string of worker suicides.

They assert that rising Chinese productivity will be insufficient to offset these wages increases because output will increase at only half the pace of the rise in wages.  Even though Chinese wages will still be much lower in 2015, labor content is only part of the cost of making a part so the savings could shrink to as low as 10 percent when other costs are included.

The price of labor is increasing so rapidly that manufacturers are automating their plants in China to reduce the labor content, but as the labor content is reduced, it reduces the advantage of keeping manufacturing in China for the low labor rates.

Another factor is the increasing cost of land in China for building factories.  For example, industrial land costs average $10.22 per square foot, but ranges up to $21 per square foot in Shenzhen.  In contrast, industrial land in Alabama ranges from $1.86 to $7.3 per square foot and $1.30 to $4.65 in Tennessee and North Carolina.

Other low-cost nations won’t be able to absorb all of the high labor content manufacturing moving from China because China has the highest proportion of able-bodied adults in the workforce (84 percent), and 28 percent of those workers are employed by industry.  The estimated 215 million industrial workers in China are 58 percent more than the industrial workforce of all of Southeast Asia and India combined.

The authors predict that “instead of pulling out of China, most multinational companies will orient more of their production to serve China and the rest of a growing Asia… The shifting cost structure between China and the U. S. will present more manufacturing and sourcing options.

U. S. manufacturers should undertake a thorough analysis of their global supply networks, factoring in worker productivity, transit costs, time-to-market considerations, logistical risks, energy costs, as well as other hidden costs of sourcing offshore.

The question is:  Are you going to be one of the leaders in bringing manufacturing back to the  U. S. or are you going to follow the “herd mentality” by continuing to outsource manufacturing in China?

Posted in General | No Comments »

Government Regulations Create Huge Costs for Manufacturers

Tuesday, August 23rd, 2011

Do you remember playing a game when you were a child where you tried your best not to walk on any cracks in the sidewalk so the “big bad bear” wouldn’t get you or you wouldn’t break your mother’s back?  If you lived in a city where the sidewalks were old, there were so many cracks that you had to tip toe to get by without stepping on any cracks.  Well, businesses today are being forced to play a similar game with government, and the “cracks” are getting so close together that it’s almost impossible to tip toe through the maze of “cracks” that come in the form of government regulations.

The Federal Register contains 81,405 pages of the federal rules and regulations that businesses are required to comply with.  Federal regulations strain the economy by creating huge costs that business are obligated to meet and serve as a hidden tax on the economy.

James Hamilton of Freedom Works wrote, “The cost of complying with federal regulation increases businesses’ expenses by billions of dollars every year.  Some of the compliance cost associated with federal regulation comes out of businesses’ profits, but much of the costs are passed down to consumers in form of higher prices.  Compliance costs associated with regulations cut into businesses’ profits, while higher prices increase the day to day expenses of all consumers.  Because regulations create artificial costs that must be paid by both producers and consumers, they cost the economy money and act as a drag on economic growth.”

Between 2001 and 2011, 38,700 new regulations were added to the Federal Register. Of the over 4,000 new regulations that are currently being developed by various departments and agencies, 224 are estimated to cost the economy more than $100 million each.  The Obama administration is greatly expanding regulation, with massive new regulations in the works at the Environmental Protection Agency and a host of yet to be written regulations covering financial services to comply with Dodd-Frank Financial Reform Bill.

A study by the Regulatory Studies Program at George Mason University’s Mercatus Center in 2001(“A Review and Synthesis of the Cost of Workplace Regulations”) found that workplace regulations have a significant cost.  The researchers surveyed 100 manufacturers in the United States, ranging from 7 employees to 65,400 employees.  The survey showed:

  • Complying with workplace regulations cost an average of $2.2 million per manufacturing firm or about $1,700 per employee
  • Smaller firms (less than 100 employees) faced higher costs than large firms (500 or more) with costs of $2,573 per employee and $1,530 per employee respectively

The survey revealed which types of regulations affect manufacturers the most:

  • Worker Health and Safety regulations, including OSHA, accounted for one-third the cost of compliance
  • Regulations governing employee benefits ranked second, making up 27% of the cost of compliance
  • Civil rights, labor standards, and labor-management relations regulations each made up about 10% of the cost of compliance

A study on “The Impact of Regulatory Costs on Small Firms” by W. Mark Crain, Lafayette College for the Small Business Administration Office of Advocacy showed that small businesses continue to bear a disproportionate share of the federal regulatory burden.  The cost of compliance with all federal regulations, economic, workplace, environmental, and tax is an average of $5,633 for all sized firms.  However, for companies under 20 employees, the cost was $7,647 compared to $5,282 for companies over 500 employees.  In the manufacturing sector, the cost per employee is $10,175; nearly double the average for all firms.  For small manufacturers, the cost is $21,919 per employee compared to $8,748 for large firms.  For medium-sized firms, the compliance cost per employee is $10,042.  In the service sector, regulatory costs differ little from small to larger firms.

Economists Nicole V. Crain and W. Mark Crain study of the net cost of regulations determined  that in 2009 federal regulation cost businesses and consumers $1.75 trillion, or nearly 12% of America’s 2009 GDP.  As a comparison, in the same year, corporate pre-tax profits for all businesses totaled about $ 1.46 trillion.

The Health Care Reform Act that passed at the very end of 2009 vastly expanded the requirement for businesses to file IRS Form 1099s for all payments over $600 annually.  The previous law required a business to provide a completed 1099 form to any independent contractors, subcontractors, freelancers, etc. that are not employees and not corporations to whom they made more than $600 in payments over the course of a year.  The Health Care Reform Act law extends this requirement to corporations as well.

This means that a business would have to provide a 1099 to their utility company and every other vendor to which they pay more than $600 a year for services.  For metal manufacturers, such as machine shops, sheet metal fabricators, stampers, and casting companies, this could mean they would have to provide a 1099 for their vendors of metals, as well as companies that provide surface finishing services such as painting, plating, anodizing, or powder coating.

A survey by the National Association for the Self-Employed (NASE) found that self employed and micro-businesses (under 10 employees) are “expecting this new regulatory burden to greatly or somewhat increase the amount they spend on tax preparation.”  With over 40% of survey respondents still preparing their own taxes, this added workload will significantly increase the time business owners spent on tax preparation or force them to hire an accountant, adding to their cost of doing business.  This is another example how the indirect costs of complying with government rules and regulations are just as burdensome to businesses as are the direct costs of taxes and regulatory fees.

On August 4, 2011, National Association of Manufacturers (NAM) Vice President for Energy and Resources Policy Chip Yost released the following statement after the NAM filed comments on the Environmental Protection Agency’s (EPA) proposed Utility MACT rule:

“Affordable energy and jobs are top priorities for manufacturers, and the EPA’s proposed Utility MACT rule threatens to deal a lethal blow to both. The EPA’s Utility MACT proposal is yet another example of excessive overreach that will dampen economic growth and result in job losses.

If implemented, the finalized Cross-State Air Pollution Rule and the proposed Utility MACT rule will cost an estimated 1.44 million jobs by 2020. These two rules will increase retail electricity prices nationwide by 11.5 percent and cost the electric sector a staggering $18 billion per year to comply. This will stifle investment and severely damage our competitiveness at a time when our economic recovery has stalled and the unemployment rate hovers at 9.2 percent.”

In addition, in the past three weeks, the Obama administration has announced back-to-back new fuel economy standards for passenger vehicles and trucks.  New regulations will require a corporate average fuel economy (CAFE) of 54.5 miles per gallon for passenger vehicles by 2025, and new standards for trucks will require a 10 to 20 percent increase in fuel efficiency before 2018.

The Center for Automotive Research released its latest study focused on the impact of anticipated fuel economy and safety mandates on the U.S. automotive market and industry in 2025

A few of the report’s conclusions are:

  • The average increase in vehicle cost necessary to achieve the higher CAFE mandates range from $3,700 to over $9,000.
  • The higher mandates will increase vehicle prices that exceed the savings in fuel costs (over five years), even if gasoline costs $6.00 per gallon (in 2009 prices).
  • Consumers will shun these technology costs by holding onto their used vehicles longer, especially if fuel prices are low (e.g., $3.50 per gallon), resulting in lower sales and a loss of automotive employment. Over 260,000 jobs may be lost if the highest mandate is passed and fuel prices stay low at $3.50 (2009 prices).

The authors recommended moderation in raising fuel economy mandates and conducting a periodic review to assess the rate of technology development and cost reduction of advanced technologies leading up to 2025.  The full report is available at www.cargroup.org.

During a meeting with hundreds of manufacturing executives in town to press lawmakers for looser regulations, White House Chief of Staff William Daley listened to one executive after another air their grievances on environmental regulations.   “At one point, the room erupted in applause when Massachusetts manufacturing executive Doug Starrett, his voice shaking with emotion, accused the administration of blocking construction on one of his facilities to protect fish, saying government ‘throws sand into the gears of progress’…Daley said, “Sometimes you can’t defend the indefensible.”

The regulations mentioned here are examples of the unintended consequences of lawmakers voting on bills they haven’t read.  If Federal lawmakers want to “save American manufacturing,” they need to wake up to the fact that adding burdensome government laws and regulations will actually reduce the tax revenue the federal government receives by driving manufacturers to export jobs overseas.

 

 

Posted in General, Taxes/Regulations | 1 Comment »

What is the Secret behind China’s Cheap Prices?

Tuesday, August 16th, 2011

It might not be what you think it is.  Most people would say it’s no secret and that the answer is obvious – lower wages in China compared to the United States.  However, that answer is only partially true.  Why?  Because labor is only one part of the total cost of a product, and in many cases it’s as low as 20% of the total cost.

Let’s compare two simple products that are primarily made in China:  a stuffed toy animal for a baby and a Frisbee.  The stuffed animal is comprised of textile material for the cover, stuffing, two eyes and a nose.  The material must be cut into pieces, sewn together, and stuffed.  The nose, eyes, and mouth are usually a pattern of thread that is sewn on the face piece before the toy animal is sewn together and stuffed.  The cutting of the pieces may be done by hand or by machine, but the pieces are sewn together by a worker using a high speed sewing machine.  The stuffing is usually blown into the stuffed toy by a machine, but the insertion point is closed by hand.   This type of a product is considered to be a high labor content product with labor being about 70% of the total cost.

On the other hand, a Frisbee is made of plastic resin (beads or pellets of plastic) in a process that is called plastic injection molding in which the resin is heated in a molding machine to a viscous state and is then injected into a mold, after which the molded part is automatically popped out of the machine in a matter of seconds.  The mold can be designed to make several parts at once at the push of a button, and a fully automated machine can be set to run continuously 24 hours a day with very little monitoring by a worker.  The highest expense in producing a Frisbee is the cost of making the mold (also called tooling), and that cost is amortized into the piece price of the parts so that the higher the volume of production, the lower the cost of the amortized tooling that is added to the cost of the part.  A Frisbee is considered to be a low labor product at about 20% of the total cost.

What are other factors of the total cost for the “China price”?  First, there are the actual costs of the materials used to manufacture the product, which would be the textile material and stuffing for the toy animal and the plastic resin for the Frisbee.  Because of the high volume of materials and resins ordered by Chinese companies, the pricing would be as low as it could be.

Second, there are the wages for the workers directly involved in producing the parts.  Labor is abundant and cheap in China because even though 300,000 have risen into the middle class and above, this still leaves one billion people living at the poverty level.  At any one time, there are an estimated hundred million workers who are unemployed and underemployed, which is about equal to the number of Americans employed in full time jobs.

All employees in China have the right under law to join the ACFTU, which claims some 170 million members and is controlled by the Communist Party.  ACFTU has a monopoly on trade unionizing in China and creation of competing unions is illegal Party leaders have ensured that the ACFTU has a monopolist position.  They don’t want autonomous unions springing up, because of the potential threat to their authority.  In 2008, collective bargaining became a requirement of the Labor Contract Law that went into effect, forcing most companies – including most foreign owned ones – to create an ACFTU chaptered trade union within them.

However, there are about 1,000 protest demonstrations occurring every week in China, even at the risk of beatings, demotions, dismissal, and even torture.  As a result, wages have finally been rising by about 15% per year over the past four years.  It took some suicides by workers in the summer of 2010 to achieve additional improvement in wages and working conditions at plants that were more like prison camps with dormitories for workers to live on site and fences around the buildings so workers couldn’t leave the premises.

Third, there are the costs of compliance to health and safety regulation and environmental regulations.  These costs are less expensive in China than in the United States because the Chinese government imposes few health and safety or environmental regulations.  China doesn’t provide workman’s compensation insurance for their workers so workers hurt on the job don’t receive any compensation when they are injured to the point that they are disabled.  Although China has its own environmental protection agency, the environmental protection laws are generally ignored and not enforced, especially at the local level.  So, Chinese companies have the advantage of being able to dump just about any odious byproduct into the air or waterways.   Six of the top 20 most polluted cities of the world are in China, and China has been designated as the world’s most polluted nation in several studies.  There is one city in China where the land, air, and water are polluted with mercury so the residents are really the “living dead” because there is no cure for mercury poisoning, which is eventually fatal.  The World Health Organization estimates that 750,000 people a year die in China as a result of the effects of pollution.

Next, there is the cost of taxes and duties.  China is one of over 150 countries that utilize a Value Added Tax (VAT) system.  It is a tax only on the “value added” to a product, material, or service at every state of its manufacture or distribution.  The VAT rate is generally 17 percent, or 13 percent for some goods.  Chinese companies receive a VAT refund from the government for materials of products produced for export.   American imports to China are charged a VAT, but the U. S. doesn’t have a VAT to charge Chinese imports.

On top of this, China’s national government policies allow their manufacturers to use trade cheats.   For example, there are unbalanced tariffs, such as the 2.5% for a car entering America vs. 25% for a car coming into China.  In addition, the Chinese government requires foreign firms to have a Chinese “partner” company, who maintains the majority interest, takes most of the profits, and has the real control of the company.  More seriously, China now requires U. S. companies to share their technology and relocate their R&D centers to China if they want to have access to Chinese markets.

Above all, there is the ever-present currency manipulation, where China undervalues their currency by an estimated 30-40%, which simply makes every product that China ships out 30-40% cheaper than those of a potential American competitor.

Finally, China has a national strategy of what is called “dumping.” “Dumping” is defined as the act of a manufacturer in one country exporting a product to another country at a price that is either below the price it charges in its home market or is below its cost of production.

The goal of “dumping” is to capture the market or destroy the competition for a particular product or commodity so the price to the end user or consumer is lowered way below the competition, often below cost. “Dumping” is one of the strategies China uses as a neomercantilist country.  Neomercantilism is a term used to describe a policy which encourages exports, discourages imports, controls capital movement and centralizes currency decisions in the hands of a central government. The objective of neo-mercantilist policies is to increase the level of foreign reserves held by the government, allowing more effective monetary and fiscal policy.

While dumping is not prohibited by the World Trade Organization (WTO) agreement, GATT Article VI allows countries to act against dumping where there is genuine (“material”) injury to the competing domestic industry.  Countries are allowed to act in a way that would normally break the GATT principals of binding a tariff and not discriminating between trading partners. Typically, antidumping action means charging extra import duty on a particular product from the exporting country in order to bring its price closer to the “normal value” or to remove the injury to domestic industry.

The number of U.S. dumping cases against imports from China is up, and more than 50 categories of goods from China are now subject to U.S. antidumping duties. Some of these product categories are: steel fence posts, iron pipe fittings, aluminum extrusions, tires, hand trucks, ironing tables, wooden bedroom furniture, and paper products.

Thus, the secret of China’s cheaper prices is a complex, national strategy of China to become the preeminent superpower of the 21st Century.  Sun Tzu, author of “The Art of War,” would be impressed with how his descendants have used his military strategies to dominate the world economy.

Posted in General, Trade Policy | 2 Comments »

What’s happening to U. S. Manufacturing?

Tuesday, August 9th, 2011

After dominating the globe for over 60 years as the world’s largest, most productive, and technologically advanced in the world, America’s manufacturing sector is in a decline in nearly all industries. America’s lead in a number of industries vanished years ago, and nearly all industries are facing potentially dangerous erosion.

No single indicator represents manufacturing capabilities or trends.  But several key indicators, when taken together, provide strong evidence that America’s manufacturing has greatly weakened in the last decade.  These are:  industrial output (as measured by share of Gross Domestic Product), industrial capacity, employment, number of manufacturers, balance of trade in goods, and import penetration rate.

 

The trend in employment and number of manufacturers is dramatic – 5.5 million manufacturing jobs and over 50,000 manufacturing companies gone since 2000.   The balance of trade in goods has grown steadily since 1979, growing from a deficit of $25.5 billion in 1980 to $645.8 billion in 2010, which was down from a high of $835.7 billion in 2006 (Balance of Payment basis.)   Manufacturing’s share of the Gross Domestic Products had taken a serious downward trend – dropping from a high of 28% in 1965 to 11% in 2010.

What about capacity and important penetration?  They are tied together because the capacity of American companies to manufacture products is impacted by the import penetration of the products of other countries in the U. S. market.    There has been an across-the-board increase in the import penetration rate for 114 high-tech and capital-intensive manufacturing sectors – from 21.4% of domestic consumption to 34.3 percent between 1997 and 2007.

Let’s take a look at a few industries.  For example, if you were to go to a store to buy a set of glasses, you would have trouble finding a set made in the U. S.  That’s because America’s oldest industry, glassware, is down to two companies that manufacture in the United States:  Libbey Glass Inc. of Toledo, Ohio, and Anchor Hocking of Lancaster, Ohio.  In 2009, nearly every major domestic competitor was either out of business, in Chapter 11, or up for sale.  Corning Consumer Products and Oneida had already changed to outsourcing offshore instead of manufacturing their own product lines.  Beginning in late 2003, Oneida closed five factories in the U. S., Mexico, Italy and China.

Libbey Glass CEO John Meier blames “unfair trade” and the fact that the U.S. government is allowing foreign governments “to get away with subsidizing their producers and not enforcing their laws . . .” The U.S. glass industry has been swamped by imports.  In 1996, imports from China and Turkey accounted for 12 percent of the U.S. market, but by 2006, imports were up to 53 percent of the U. S. market.

According to the U.S. International Trade Commission (ITC), another U.S. industry has virtually disappeared – the industry that makes travel goods out of textiles.  In 2006, the total U.S. market for travel goods with an outer surface of textile materials was estimated at approximately $3 billion wholesale.  The nine remaining U. S. firms identified by the ITC in this industry reported totaled revenues of $37 million in 2006.  Thus, U.S. producers commanded only a one percent share of the U.S. market.  This primarily reflected a decline in shipments to commercial markets. These nine companies said that at least 70 percent of their business goes to the U.S. military and government, but this market represents less than five percent of domestic production of such goods.  China has become the preferred source for offshore production, since the removal of U.S. import quotas on textile travel goods in 2002, because of its low-cost labor, fabric, and accessories.  In 2006, China accounted for 80 to 90 percent of imports of textile travel goods to the United States.

This same International Trade Commission report stated that the United States has completely lost the capability to make high-tech warm and water-resistant clothing for the commercial market often called performance outerwear.  Skiers, hikers, mountain climbers, bikers, firemen, policemen, military personnel, and those in hazardous environments use performance outerwear. The ITC identified 13 companies making high-tech jackets and pants, but six said they produce strictly for the U.S. government and military.  Only two said they produce solely for the commercial market.  Conflicting estimates for the U. S industry share of the commercial market range from less than five percent to 1.3 percent of the U.S. commercial market for performance outerwear.  The report noted that most companies in this industry had moved production offshore primarily to Asia, namely China and Vietnam, where the technology used to produce such garments, such as seam sealing and laser cutting, is prevalent.

The air conditioning industry is facing the same challenges from China that the machine tool industry is facing.  The September 28, 2008 issue of Manufacturing & Technology News reported that “the last U.S. manufacturer of air-conditioning window units is moving its production to Mexico.  Frederich Air Conditioning Company has announced its intention to close its San Antonio manufacturing plant and move the work to Monterrey, Mexico . . . The company says that low-priced air conditioners from China are forcing it to move out of the United States.”

This was only two months after Lennox International announced that it would shift production of Lennox air conditioners from two U.S. Plants (Marshalltown, Iowa and Grenada, Mississippi) to a new plant in Saltillo, Mexico. Lennox CEO Todd Bluedorn said, “We must produce quality products at lower costs to compete and grow our business.”

The trend is even more serious for the manufacturing industries that supply products, components, and technologies that the Pentagon considers import to defense.  University of Texas at Austin engineering professor Michael Webber evaluated the economic health of sixteen industrial sectors within the defense industrial system.  Of the sixteen industries he examined, thirteen showed significant signs of erosion, especially since 2001.

The American machine tool industry is facing intense competition from foreign competitors, especially China.  Machine tools are used to cut and form metal, used in nearly all manufacturing involving metals, from autos to airplanes.  Foreign penetration of the U. S. market rose steadily from about 30% in 1982 to 72% in 2008.   The U. S. fell from the world’s third largest machine tool producer in 2000 to seventh in 2008 (behind Japan, Germany, China, Italy, Taiwan, and Korea.

The U. S. loss of competitiveness in the manufacturing of five-axis machine tools exemplifies the serious erosion of this industry.  Five-axis machine tools are among the most technologically advanced machine tools used in the production components in the aerospace, gas & diesel engines, automobile parts, medical, and heavy industrial equipment industries.  Only six U. S. companies capable of making fix-axis machines remain, compares to at least 20 in China and 22 in Taiwan.

The importance of semiconductors to today’s military is well understood.  Preserving a world-class domestic semiconductor industry is vital to our national security.  However, the industry lost nearly 1,200 plants of all sizes between 1998 to2000, a 17% drop.  The U. S. share of global semiconductor capacity fell to 17% in 2007 and down to 14% in 2009.   Of the sixteen semiconductor fabs under construction around the world in 2009, only one was being built in the United States.   The U. S. led the world in closure of fab plants between 2008 to 2009 – 19 out of 42.   These losses have been driven by the migration of microelectronic manufacturing to low-cost foreign locations, such as Taiwan, Singapore, China, and Korea.

These are just a few examples of the erosion of U. S. industries that could be included in this article.  There is hardly a day that goes by without news of some company either closing a plant, having a mass layoff, or going completely out of business.

General Electric chairman and CEO, Jeffrey Immelt, commented, “Over the last five years, we have really positioned ourselves as a global company . . . the world has never been more independent from the U.S. economy . . . The U.S. economy is still important, but not like it was five, 10 or 20 years ago.” Immelt said that globalization is “profound.  It’s irrefutable and it’s irreversible.” He later added that the fate of the U.S. economy “is going to be decided in the next three to five years.”

The future looks dim for U.S. manufacturing if we continue on the same path.  The trends discussed above show that we need to elevate revitalizing American manufacturing to a very high priority among policy makers.  The fate of the U.S. economy will be decided in the next four to five years.  The question is:  Do we continue on the course to becoming a third-world country, importing finished goods and exporting raw materials, or will we rebuild our manufacturing base and once again become the premier industrial leader?  If we descend into being a third-world country, then we will lose our position as the world’s super power and our ability to defend our nation.

Posted in General | No Comments »

How Free Trade Agreements Lead to Job Loss and Wealth Gaps

Tuesday, August 2nd, 2011

Since the year 2000, the United States has lost over 5.5 million manufacturing jobs, nearly 50,000 manufacturing companies, and racked up an annual trade deficit with China of $273 million in 2010, up from $83.8 million in 2000.  These escalating trade deficits with China have far-reaching effects, particularly on American workers.  This article will examine the impact of free trade with China as documented in two of the annual reports submitted to Congress by the bi-partisan, 12 member U. S.-China Economic and Security Review Commission (USCC).

The 2007 report included a case study of the local impact of trade with China on North Carolina.  The USCC report stated “the accelerating decline in North Carolina’s manufacturing employment is due in large measure to increasing competition from imports mostly from China . . . The combination of China’s 2001 admission to the World Trade Organization (WTO), which gave it quota-free access to U.S. markets for its textile and clothing exports, and the subsequent U.S. grant of Most-Favored (Trading) Nation status that lowered most tariffs on Chinese imports, battered North Carolina’s textile and apparel industries, and they never recovered.”

During the period of 2001 -2007, the number and proportion of jobs in the North Carolina services sector increased.  This shift put downward pressure on wages because manufacturing historically paid substantially higher wages than the services sector.  The shift also reduced the number of workers receiving such fringe benefits as retirement and health insurance, in part because some of the displaced workers were able to find only part-time jobs that often do not offer benefits.

Because a greater proportion of North Carolina’s workforce had manufacturing jobs than any other state, North Carolina’s workforce was more vulnerable to competition from imports than the workforces of other states.  North Carolina’s manufacturing economy was made even more vulnerable by its concentration in the import-sensitive sectors of textiles, apparel, and furniture.   According to the National Council of Textile Organizations, the U. S. textile industry dropped from the worlds second in basic manufacturing industries in 1991 with $244 billion in sales, down to third in 2002 with $60 billion in sales.11 North Carolina is one of the southeast states that had a large number of textile companies.

The North Carolina Employment Security Commission’s Labor Market Information Division followed the employment prospects of 4,820 workers laid off from bankrupt Pillowtex in 2003, which was the largest mass layoff in North Carolina history.  “About 40 percent of the laid-off workers had not yet found work, three years after they lost their jobs, and for those who have, take-home pay isn’t as much as they were making at Pillowtex.”  The article reported that North Carolina has been the most impacted state in the nation by layoffs due to trade.  Between 2004 and 2006, almost 39,000 North Carolina workers were certified by the Trade Adjustment Assistance program as having lost jobs to trade, more than 10 percent of the U.S. total of 387,755.”

According to the Social Science Research Institute (SSRI) of Duke University in North Carolina, there
were 2,153 textile and apparel plants in North Carolina employing 233,715 people in 1996.  By 2006, the apparel industry had experienced a 70% decline in jobs and 55% loss of plants.  The textile industry by comparison had only lost 63% of jobs and 32% of plants from 1996 to 2006.

“Trade agreements can profoundly affect state and regional economies and particular industries.  While trade agreements that lower import barriers among America’s trading partners have the potential to benefit American exporters, North Carolina appears to have realized few if any substantial benefits from China’s admission to the WTO, and the net effect of trade with China since its accession appears to be negative overall for North Carolina’s economy.”  It isn’t just people losing jobs and not being able to find other employment that pays as well as their former jobs, “hundreds of small towns throughout North Carolina impacted by plant closures are dying.”

How does the downturn in the textile industry in the South affect other regions of the country?  San Diego is a long way from North Carolina so you wouldn’t expect there would be much impact.  However, the San Diego region has a large number of companies manufacturing sporting vehicles, such as dune buggies, go-karts, mini-motorcycles, etc.  The connection is that the Southeast has traditionally been the largest market for go-karts, and the majority of U.S. textile companies were located in the Southeast.  A San Diego company that has manufactured parts for go-karts for over 40 years revealed that their sales of go-kart parts had dropped significantly in the past ten years in the Southeast.  Go-karting is mainly a hobby of blue-collar workers, such as textile workers.  Many of the thousands of workers who lost their jobs in the textile and apparel industry were not able to find equally well-paying jobs in other manufacturing sectors.  The average weekly salary for a U.S. textile worker was $487 in 2002, 38 percent more than the average salary of $301 for a worker in a retail store, such as Wal-Mart.  When a family’s disposable income drops drastically, money for non-essentials, such as go-karts is cut or goes away altogether.

The loss of these well-paid manufacturing jobs in North Carolina’s textile industry may have resulted in families losing their homes and/or being forced to relocate to other areas of the country to find jobs.  Taking lower paying jobs in their own communities may have resulted in families no longer being in the middle class income range.  And, those who haven’t been able to find any work or only part-time work may have even dropped down to the poverty level.

What about all the jobs that were supposed to be created in the green and clean technology industries?  Is our free trade agreement with China as part of the World Trade Organization having an effect on these industries also? This is of particular concern because the Obama Administration has repeatedly emphasized green technology’s role in job creation and highlighted green technology in its 2010 National Export Initiative, which is intended to double the level of U.S. exports within five years.  According to the U.S. Department of Commerce, the green sector has the potential to fuel economic growth in the immediate future.  More than two dozen states have also identified green technology’s potential to create jobs and to revitalize manufacturing areas that have been damaged by imports, outsourcing, and the loss of export markets abroad.

The USCC’s 2010 Annual Report to Congress discussed China’s green energy policies and efforts to promote alternative energy sectors as part of its analysis of the U.S.-China relationship in several areas.

 

One key development in 2009 was a ban in China on deployment of turbines of less than 1,000 kilowatts for most projects, on the grounds of inefficiencies.  The ban had a discriminatory effect on imported turbines, since most of the smaller models are produced by European and American companies.  Larger wind turbines are more expensive and require substantial new investment to build but require comparatively less maintenance and can be more efficient, because they require fewer installations.  But the larger wind turbines require new investment by manufacturers.  Many foundries in the United States, for example, are reluctant to invest in new, larger molds for the larger turbine casings unless they can be guaranteed a substantial production run.  Chinese state-owned foundries are under no such profit constraints.

“U.S. firms are losing global market share in the green technology sector, mostly to China, with solar panel manufacturing experiencing a particularly severe loss.  As various sources have noted, China became the largest producer of solar panels in the world in 2008, shipping 2,600 megawatts of photovoltaic panels, enough for about one-third of annual world supply.”

U.S. and Chinese firms are both engaged in active research and development for electric vehicles and their fuel cells or batteries.  To spur the entry of electric vehicles into the market, China has created a mandate for increased vehicle emissions standards in the next ten years, with plans to reduce gasoline consumption by vehicles 60 percent by 2020.  This is expected to spur the development of an electric vehicle market.

Recent reports have noted that China is considering a new technology transfer requirement for foreign automakers.  China’s Ministry of Industry and Information Technology is ‘‘preparing a 10-year plan aimed at turning China into ‘the world’s leader’ in developing and producing battery-powered cars and hybrids,’’ according to executives at four foreign car producers familiar with the plan.

In the area of alternative energy, China is following a familiar pattern of choosing an industry sector and showering it with a comprehensive mixture of subsidies and incentives.  In this case, China also intends to establish certain alternative energy industries as ‘‘national champions’’ able to dominate world export markets.  China has already developed the world’s largest manufacturing capacity in solar panels.  Its capacity is far larger than that needed to satisfy domestic demand; 90 percent of the solar panels manufactured in China are exported.  China also has a large number of installed wind turbines and is rapidly developing new technology for a growing global market.  China’s domestic wind turbine industry operates behind a protectionist barrier.  Only the largest wind turbines may be installed in China.  This excludes many U.S. and European turbines, which are typically smaller.

What have been the long term effects of the loss of manufacturing jobs on America’s working class?  On July 25, 2011, the Pew Research Center released a report based on their analysis of new census data, which shows that the wealth gaps between whites and minorities have grown to their widest levels in a quarter-century.  I believe that this is the direct result of the loss of manufacturing jobs in the last decade, exacerbated by the loss of jobs in the construction industry since 2007 with the burst of the real estate bubble.

The numbers are based on the Census Bureau’s Survey of Income and Program Participation, which sampled more than 36,000 households on wealth from September-December 2009.  Census first began publishing wealth data from this survey, broken down by race and ethnicity, in 1984.

Household wealth is the sum of assets (houses, cars, bank accounts, stocks and mutual funds, retirement accounts, etc.) minus the sum of debt (mortgages, auto loans, credit card debt, etc.).  It is different from household income, which measures the annual inflow of wages, interest, profits and other sources of earning.  Wealth gaps between whites, blacks and Hispanics have always been much greater than income gaps.

The median wealth of white U.S. households in 2009 was $113,149, compared with $6,325 for Hispanics and $5,677 for blacks, according to the analysis released Tuesday by the Pew Research Center. Those ratios, roughly 20 to 1 for blacks and 18 to 1 for Hispanics, far exceed the low mark of 7 to 1 for both groups reached in 1995, when the nation’s economic expansion lifted many low-income groups to the middle class.  The white-black wealth gap is also the widest since the census began tracking such data in 1984, when the ratio was roughly 12 to 1.

According to the Pew study, the housing boom of the early to mid-2000s boosted the wealth of Hispanics in particular, who were disproportionately employed in the thriving construction industry.  “After reaching a median wealth of $18,359 in 2005, the wealth of Hispanics …declined by 66 percent by 2009…  Among blacks, who now have the highest unemployment rate at 16.2 percent, their household wealth fell 53 percent from $12,124 to $5,677.”

“Typically in recessions, minorities suffer from being last hired and first fired. They are likely to lose jobs more rapidly at the beginning of the recession, and are far slower to gain jobs as the economy recovers,” said Harrison, who is now a sociologist at Howard University. “One suspects that blacks who lost jobs in the recession, or who have tried to help family members or relatives who did, have now spent whatever savings or other cashable assets they had.”

Asians lost their top ranking to whites in median household wealth, dropping from $168,103 in 2005 to $78,066 in 2009. Like Hispanics, many Asians were concentrated in states like California hit hard by the housing downturn. More recent arrivals of new Asian immigrants, who tend to be poor, also pushed down their median wealth.

In San Diego, the factory floor is comprised primarily of Asians, Vietnamese, Cambodian, Laotian, and Hmong, many of whose families came to the United States as refugees, with little formal education.  The balance of manufacturing workers is mainly Hispanics, with a small percentage of whites and blacks.  In other parts of the country, this mix of factory workers may comprise a higher number of working class whites and blacks who were able to get jobs in manufacturing with only a high school diploma or GED.

For the past 60 years, the manufacturing sector offered the best opportunity for persons with only a high school diploma or GED to have upward mobility — starting at an entry level wage, but having the opportunity to advance to better paying jobs through experience, training, and education.  With millions of manufacturing jobs gone, the opportunity to live the American dream is disappearing.  As a nation, we are in danger of becoming a two-class society of rich and poor, haves and have-nots, with the rapidly disappearing middle class.  We must stop this slide into becoming a third-world country.   It’s time for us to review our unilateral free trade agreement with China that only seems to benefit China at the cost of jobs and even whole industries in the United States.

Posted in Cleantech, Outsourcing, Trade Policy | No Comments »