Archive for May, 2013

Does it Matter Where Products are Made?

Tuesday, May 28th, 2013

We now live in a globalized economy, and many people say it doesn’t matter where something is made. They say that the industrialization of third world countries is good because it has provided jobs for millions of people and raised their standard of living. American consumers have benefitted from cheaper prices for the products they need and want. However, where products are made should matter to people who are concerned about the environment and the health and well-being of people around the world.

Manufacturing in America developed over a period of more than 200 years. It developed gradually, so there was the opportunity to learn about the hazards of industrialization on a smaller scale than has been possible with the rapid industrialization of developing countries. Pollution caused by specific industries affected small geographic areas, like West Virginia’s coal mining and Pennsylvania’s steel regions.

The Bill of Rights provided freedom of speech, freedom of the press, and the right to assemble, enabling affected communities and workers to address unsafe working conditions and pollution. Residents spoke out against pollution’s health effects in their communities. Workers formed unions to fight for better working conditions and higher wages, especially in hazardous occupations. Newspapers, and later radio and TV, made the public aware of what was happening in factories and mines. After sufficient pressure was put on elected officials at the local, state, and federal levels, laws were passed that improved working conditions, protected worker safety, and reduced pollution.

As a result, great strides on these issues were made in the U.S. in the 20th century. These efforts culminated in the establishment of the Environmental Protection Agency in December 1970, consolidating 15 components from five agencies for the purpose of grouping all environmental regulatory activities in a single agency.

Since then, the U.S. has developed a comprehensive body of law to protect the environment and prevent pollution. The EPA enforces more than 15 statutes or laws, including the Clean Air Act; the Clean Water Act; the Federal Food, Drug, and Cosmetics Act; the Endangered Species Act; the Pollution Prevention Act; and the Insecticide, Fungicide, and Rodenticides Act. In turn, each of the 50 states has its own body of law to comply with federal laws and regulations.

Cleaning up the nation’s air, water, and land hasn’t come cheap. Since passing these laws, the U.S. government has spent trillions of dollars to clean up and prevent pollution. Individuals, small businesses, and corporations paid the taxes that funded these programs. But businesses were hit with a double whammy. They not only had to pay taxes for the government to carry out its end of these programs, they had to pay cleanup costs for their own sites and buy the equipment to prevent future pollution. In addition, they had to hire and train personnel to implement and maintain mandated pollution prevention systems and procedures.

According to a Census Bureau report “Pollution Abatement Costs and Expenditures,” as a result of a survey of 20,000 plants last conducted in 2005, U.S. manufacturers spent $5.9 billion on pollution equipment, and another $20.7 billion on pollution prevention.

The EPA has achieved some major successes:

  • New cars are 98 percent cleaner than in 1970 in terms of smog-forming pollutants.
  • Dangerous air pollutants that cause smog, acid rain, lead poisoning have been reduced by 60 percent.
  • Levels of lead in children’s blood have declined 75 percent.
  • 60 percent of the nation’s waterways are safe for fishing and swimming.
  • 92 percent of Americans receive water that meets health standards.
  • 67 percent of contaminated Superfund sites nationwide have been cleaned up.

As a result, we now have cleaner air in our cities and cleaner and safer water in our streams, rivers, lakes, bays, and harbors than at any time since the Industrial Revolution began. These vast environmental improvements made in the last 40 years have benefitted every single American.

In contrast, India and China have been getting more polluted in the last 30 years as they have industrialized. Since 2006, Blacksmith Institute’s yearly reports have been instrumental in increasing public understanding of the health impacts posed by toxic pollution, and in some cases, have compelled cleanup work at pollution hotspots. Blacksmith Institute reports have been issued jointly with Green Cross Switzerland since 2007.

Six cities in China and four cities in India were listed in the Blacksmith Institute’s “Dirty 30” of the 2007 report, “The World’s Worst Polluted Places.” This list was based on scoring criteria devised by an international panel including researchers from Johns Hopkins, Harvard, and Mt. Sinai Hospital, along with specialists from Green Cross Switzerland who participated in assessing more than 400 polluted sites.

It’s hard to describe the horrors of pollution in Chinese cities. Imagine living in Xiditou (pronounced shee-dee-tow), about 60 miles east of Beijing, where the Feng Chan River that runs through the town is now black as ink and clotted with debris. The local economy has doubled in just four years, but at a terrible cost. More than 100 factories occupy what were once fields of rice and cotton. These include dozens of local chemical plants, makers of toxins including sulfuric acid, and these factories disgorge wastewater directly into the river. Industrial poisons have leached into groundwater, contaminating drinking supplies. The air has a distinctively sour odor. The rate of cancer is now more than 18 times the national average.

According to the USA Today article, “Pollution Poisons China’s Progress,” of July 4, 2005, “People regard their drinking water as little better than liquid poison, but unable to afford bottled water for all their daily needs, most adults continue to drink it. They buy mineral water only for their children.”

Another horrible location is Tianying, in Anhui province, which is one of the largest lead production centers in China, with an output of half of the country’s total. Low-level technologies, illegal operations, and a lack of air-pollution control measures have caused severe lead poisoning. Lead concentrations in the air and soil are 8.5 to 10 times national standards. Local crops and wheat at farmers’ homes are also contaminated by lead dust, at 24 times the national standard.

The ironic note to these statistics is that China actually has more stringent restrictions on lead than the U.S. The difference is that neither the local nor the national government is enforcing the laws. Residents, particularly children, suffer from lead poisoning, which causes encephalopathy, lower IQs, short attention spans, learning disabilities, hyperactivity, hearing and vision problems, stomachaches, kidney malfunction, anemia, and premature births.

Perhaps you would like to live in Wanshan, China, termed the mercury capital of China because more than 60 percent of the country’s mercury deposits were discovered there. Mercury contamination extends throughout the city’s air, surface water, and soils. Concentrations in the soil range from 24 to 348 mg/kg, 16 to 232 times the national standard. To put this into perspective, the mercury from one fluorescent bulb can pollute 6,000 gallons of water beyond safe levels for drinking, and it only takes one teaspoon of mercury to contaminate a 20-acre lake – forever. Health hazards include kidney and gastrointestinal damage, neurological damage, and birth defects. Chronic exposure is fatal.

China is now the largest source of CO2 and SO2 emissions in the world (SO2 causes acid rain). Japan, South Korea, and the northwest region of the U.S. suffer from acid rain produced by China’s coal-fired power plants and higher CO2.readings from easterly trade winds.

The horrific effects of pollution in China and its staggering cost in human life, are a graphic example of why Chinese companies can outcompete American companies – not only because of their disparity in wages, but also because their government does not enforce the same environmental and social standards. As Americans, who place a high value on human life and protecting our environment, we wouldn’t have it any other way. But American manufacturing industries do pay a penalty competing against China.

During China’s rapid industrialization of the last 30 years, the U.S. has spent billions on technologies and equipment to clean up and prevent pollution. China had a golden opportunity to benefit from all the hard lessons learned by developed countries during their own industrialization. If China had purchased the pollution abatement equipment developed in the U.S., their industrialization would not have caused such horrendous pollution. Millions of lives would have been saved!

In the U.S., our landfills wouldn’t be filling up with discarded products from China that are so cheap that it is easier to throw them away than repair them. Wouldn’t it be worth paying more for “Made in USA” products that are higher quality and last longer?

Thus, if you are concerned about global pollution and want to save lives in both China and the U. S., you should choose to buy “Made in USA” products that have been produced in the most non-polluting manner that is technically feasible at present. My next article will take a look at India’s environment.

 

 

 

 

Posted in Cleantech, Manufacturing, Outsourcing | 1 Comment »

Why our Economy Struggles to Create Jobs

Tuesday, May 14th, 2013

There have been many opinions expounded via TV news shows, radio talk shows, newspapers, and magazines over the last four years as to why our economy has struggled to create jobs after the recession of 2007-2009 more than any other recession since WWII.

The economic collapse of the real estate and financial markets in 2008 had more impact on job losses than the recession of 2000-2001 caused by the dot.com bust because jobs related to real estate and construction represented a much higher component of employment than software/dot.com did at the time. During the recession of December 2007-June 2009, construction employment fell from 7,490,000 to 6,008,000, representing a loss of 1.5 million jobs or 19.8 percent of the construction workforce. It has remained less than 6 million as of April 2013 (Source:  Bureau of Labor Statistics).

When consumer demand dropped sharply because of so many people losing their jobs and homes, this eliminated the last thing keeping the domestic market floating on a bubble.

Since then, our economy has limped along at monthly average of a 1.5 to 2 percent growth rate in our Gross Domestic Product (GDP), which is not enough to create the amount of jobs we need. The main reasons why our economy is struggling to create jobs are:

Decline of U. S. Manufacturing

We lost 57,000 manufacturing firms and 5.7 million manufacturing jobs since the year 2000. According to the Bureau of Labor Statistics, we recouped about 500,000 jobs (489,000 or 4 percent) since the low in January 2010.

As I have discussed in both editions of my book and numerous blog articles, this loss of manufacturing firms and jobs was mainly the result of “predatory mercantilism”; i.e., unfair competition/product dumping by China and other Asian nations and the fact that a large number of multinational and American companies outsourced manufacturing offshore and/or set up plants in China and other parts of Asia. These companies literally outsourced American jobs in an attempt to compete with the “China price,” take advantage of less stringent environmental regulations, reduce taxes, and thereby maximize profits.

Transition to Service Economy

In addition to the many reasons previously discussed by myself and others, a key factor was revealed by the in-depth analysis of national and state data presented in the report, “Goods, Services, and the Pace of Economic Recovery” by Martha L. Olney and Aaron Pacitti, Berkeley Economic History Laboratory (BEHL), University of California, Berkeley March 2013.

Their hypothesis was:  Do service-based economies experience slower economic recoveries than goods-based economies? They argue that they do. They conclude that “service-dependent economies experience longer recoveries because they cannot respond to anticipated demand.” Thus, in a service-based economy, the recovery from a recession will take about one year longer than in a goods-based economy.

Why is this? They state, “An economy recovers from a downturn when businesses increase production. Both goods and services can be produced in response to actual demand. But only goods—and not services—can be produced in response to anticipated increases in demand, allowing optimistic forward-looking producers to inventory goods until anticipated buyers appear. Services cannot be inventoried. The more services an economy produces relative to goods, the more production is dependent upon only actual increases in demand, and the slower the recovery.”

Services have to be delivered in real-time by doctors, dentists, lawyers, accountants, web designers, graphic artists, etc. Even in the industrial realm, services such as engineering design, product testing, shipping, and delivery services are performed as needed. These services cannot be produced ahead of the need and “stored.”

The authors argue that there is a connection between the steady rise of services in the U.S. economy over the last half century and the slower pace of recovery from economic downturns. They state, “…as services become a larger share of output in an economy, more production is dependent on just actual and not also anticipated demand, slowing the pace of recovery from an economic downturn.”

The increase in the services share over the past 60 years has been striking. “In 1950, 40 percent of expenditures for U.S. GDP were for services and service-producing jobs were 48 percent of employment. By 2010, services constituted over 65 percent of expenditures for GDP and service-producing jobs were nearly 70 percent of employment.” The rise in services in the U.S. has led to longer recoveries, causing the current recovery to last about one year longer than it would have a half century ago.

End of NASA’s Manned Flight Program

The official retirement of the Space Shuttle program in 2011 resulted in a 19 percent drop in employment from 2007 to 2010 according to the Commerce Department’s Bureau of Industry and Security (BIS) industrial base assessment of the 536 companies in NASA’s manned space flight supply chain. If this steep a drop in employment occurred before the retirement of the Space Shuttle, it will be far worse by the time of the next assessment now that the program has ended.

Of the 536 companies, 50 percent of them are manufacturing companies, of which 21 percent are based in California, and 9 percent based in Florida. The report said that companies that supplied the Space Shuttle and Constellation launch program are facing “large-scale layoffs and facility closures across both industry and government.”

Near the Kennedy Space Center, more than 7,400 people in Brevard County, Florida alone lost their jobs when the shuttle program ended. The mainly contractor positions cut by NASA accounted for just under 5% of the county’s private sectors jobs. Thousands of formerly well-paid engineers and other workers around the country are still struggling to find jobs to replace the careers that flourished during the space shuttle program.

The machinery and tools used to support a manned space program are in danger of being discarded. In a separate assessment of the space flight industry, BIS found that 52 companies that were major suppliers (Tier I) had 48,623 pieces of tools and machinery, 91 percent of which had been paid for by the government. This classifies them as “Government-Furnished Property” so that the General Services Administration can process them by being transferred, sold, scrapped, or donated.

The danger is that the U. S. government may never be able to re-establish a manned space flight program to support ongoing missions to the International Space Station once the supplier base of the manned space flight program has been decimated. At the present, the U. S. has no way of sending astronauts to space in its own vehicles, and NASA is relying on the Soviet-made Soyuz capsules to send U.S. astronauts to space station. Thus, the United States may never again be a leader of space exploration.

Wind Down of War on Terrorism

The end of the Cold war with the Soviet Union resulted in a major downsizing of the military-industrial complex in the early 1990s, causing the recession of 1991-1992 and hundreds of thousands of lost jobs. Likewise, the withdrawal of troops from Iraq and the ramp down of troops in Afghanistan are having a similar effect on the defense/military industry, with a resulting loss of funding for new programs, cutbacks in existing programs, and job loss.

Sequestration

The additional cuts in the Defense Department’s procurement are taking a toll on some critical industries such as ship repair. In February, the Navy canceled all FY 2013 ship repair contracts that had been awarded to San Diego ship repair companies but not yet started. How many companies can survive having all their new contracts canceled?

What can we do?

It is interesting to note that one of the policy recommendations of the authors of the Berkeley report on goods vs. service’ corroborate some that I have presented previously:

“Therefore we believe that industrial policy aimed at restoring the country’s manufacturing sector could be beneficial. For example, tax policy that provides large re-shoring tax credits for goods-producing firms and levies large tax penalties on firms that offshore goods production could increase the share of goods in total output.”

Additional recommendations the authors make are:

  • Targeted investment in public goods and infrastructure would accomplish the same end.
  • Full employment policies and direct job creation programs could be enacted.
  • Targeted and aggressive fiscal spending and an employer of last resort program that guarantees full employment.

The authors conclude, “Longer and slower recoveries place a greater strain on state and federal budgets by decreasing tax revenue and increasing expenditures on automatic stabilizers. States will be forced to cut spending since all states with the exception of Vermont are required by law to run a balanced budget.” We have certainly seen this conclusion take effect as one state after another faces a staggering budget deficit, and our federal deficit has skyrocketed since 2009.

In the past two years, the general public and more economists and policymakers have begun to recognize the importance of U. S. manufacturing. Manufacturing is the foundation of our economy and is crucial to providing the quantity and quality of higher paying jobs we need.

It is high time for Congress and the Obama administration to develop a comprehensive national manufacturing strategy for the United States. Until we make a national manufacturing strategy a top priority, our economy will continue to struggle to create jobs.

 

Posted in Economy, Jobs, Manufacturing | 1 Comment »

Is Reshoring a Myth or Reality?

Tuesday, May 7th, 2013

When I first started talking about saving America manufacturing and returning manufacturing to America four years ago after the first edition of my book, Can American Manufacturing be Saved? Why we should and how we can, came out, I was met with a great deal of skepticism. Some typical comments were:  “I don’t think we can.” “It’s too late.” “I wish we could.” “We need to.” Very few thought we actually could return manufacturing to America.

A lot has changed in four years. At last week’s Del Mar Design and Electronics Show (DMEDS) in San Diego, CA, a very successful fellow manufacturers’ sales rep, stopped me in the parking lot and said, “I used to think you were nuts, but you were right. Manufacturing is returning to America.” While this manufacturers’ representative sales agency is headquartered in southern California, it has affiliate companies in Mexico, Malaysia, China (Beijing, Shanghai, and Shenzhen) and Taiwan (Taipei and Hsinchu) so I did not take this admission lightly.

The theme of this year’s DMEDS was “The Re-Birth of American Manufacturing, and it featured a full-day Reshoring track. This track began with my presentation on “Reshoring: Bringing Manufacturing Back to America Using Total Cost Analysis and ended with “Reshoring:  What is a Fit and How Can it Save Your Company Money?” This track also featured “Lean Manufacturing is the Path to Operational Excellence,” “3D Printing:  What it is, Isn’t, Will Be and Won’t Be,” and “Save Your Factory with Robotic Automation.”

While there were offshore companies exhibiting at DMEDS, it was dominated by U. S. manufacturers, regional contract manufacturers, and local sales reps and distributors. The buzz at the show was that manufacturing is returning to America, and every contract manufacturer I spoke to at the show had experienced a “reshoring” event.

In the past year, there have been numerous articles debating whether “reshoring” is a myth or really happening. For example, the cover article of the April 22, 2013 issue of Time magazine was “Made in USA – Manufacturing is Back ? But Where are the Jobs? The first page of the article is full of pictures of products that have returned from offshore, representing an unbelievable cross section of consumer goods, ranging from toys such as the Frisbee. Slinky and Crayola crayons to electric mixers, barbecues, saws, hammers, and many more.

The reason the article poses the questions about how many jobs are being created by the return of manufacturing to America is that the manufacturing plants of the present and future have more machines and fewer workers than in the past. Robotics, automation, and lean manufacturing are helping companies do more with fewer people, and the rapidly improving technology of additive manufacturing is changing the way parts are being made.

The article featured a glimpse of manufacturing’s future in the stories of two companies:

  • ExOne, near Pittsburgh, PA, providing Digital Part Materialization (DPM) that transforms engineering design files directly into fully functional objects using 3D printing machines
  • GE’s highly automated battery factory in Schenectady, NY.

ExOne needs only two workers and a design engineer per shift to support its 12 metal-printing machines. The GE plant produces Durathon sodium batteries that are large and powerful enough to power cell phone towers. Because of being highly automated, the plant only employs 370 high-tech workers in a 200,000 sq. ft. facility.

What was most encouraging to me was that the article reported that Ashley Furniture is building a new plant south of Winston-Salem, NC that will employ 500 people. This is an industry that even I doubted would ever come back to the U.S.

Key statistics pointed out in the article were that China’s average hourly wage was only $0.50 in 2000 but is projected to be $4.50 by 2015. This is probably a conservative estimate because China’s wages rose by 15-20% over the last five years but are expected to increase by another 60% in 2013 alone. Another factor noted is that the cost to ship a 40-ft. container from China to the West Coast rose from $1,184 in 2009 to $2,302 this year. These facts corroborate the Boston Consulting Group’s 2011 report that there will be a convergence in the total costs between China and the U. S. by 2015.

 

This quote from GE CEO Jeff Immelt concluded the article:  “Will U.S. manufacturing go from 9% to 30% of all jobs? That’s unlikely. But could you see a steady increase in jobs over the next quarters and year? I think that will happen.” I agree and so does Harry Moser, founder of the Reshoring Initiative and developer of the Total Cost of OwnershipTM spreadsheet.

 

Mr. Moser’s organization promotes and tracks cases of reshoring across the U.S. He estimates that between 2010 and 2012, about 50,000 jobs were created in the U.S. because of the trend—which equates to 10% of the 500,000 manufacturing jobs created in the past three years.

 

On the myth side of the debate, the 2012 Hackett Group’s report, “Reshoring Global Manufacturing:  Myths and Realities” by Michel Janssen, Erik Dorr and David P. Sievers

states, “By next year, China’s cost advantage over manufacturers in industrialized nations and competing low-cost destinations will evaporate.” However, they conclude that “few of the low-skill Chinese manufacturing jobs will ever return to advanced economies; most will simply move to other low-cost countries.

 

Using hard data from their 2012 Supply Chain Optimization study, they analyzed the trend in “reshoring” of manufacturing capacity, and their findings debunk the myth that manufacturing capacity is returning in a big way to Western countries as a result of rising costs in China. The report states, “The reality is that the net amount of capacity coming back barely offsets the amount that continues to be sent offshore.”

The report also offers recommendations on how companies should plot their manufacturing sourcing strategies. Interestingly, their recommendations incorporate some of the factors that Mr. Moser and I include as part of a Total Cost of Ownership analysis, such as “integrate the views of manufacturing, procurement, finance and business-unit leadership,” “Establish a game plan to deal with risk: Geopolitical, supply base, environmental and commodity risks are a given,” “Establish a proactive approach to anticipate risks, creating mitigation plans with clear triggers for implementation,” and “Broaden the decision making approach beyond total landed cost.”

The Hackett Group’s definition of “Total landed cost” is not as broad and encompassing as the definition of Total Cost of Ownership I provide in the 2009 edition of my book and that Mr. Moser uses in the TCO spreadsheet he developed in 2010. Their definition is “Total landed cost is the set of end-to end supply chain costs to transform raw materials and components into a finished good ready for sale. Key components include: raw material and component costs, manufacturing costs (fixed and variable), transportation and logistics, inventory carrying cost, and taxes and duties.

My definition of TCO includes the “hidden costs of doing business offshore,” such as Intellectual Property theft, danger of counterfeit parts, the risk factors of political instability, natural disasters, riots, strikes, technological depth and reserve capacity of suppliers, currency fluctuation. Mr. Moser’s TCO spreadsheet includes calculations for factors such as Intellectual Property risk, political instability risk, effect on innovation, product liability risk, annual wage inflation, and currency appreciation.

While the number of companies bringing products lines back to America is increasing, I have to admit that as manufacturers’ sales reps for all American companies; we are still losing business to China for individual parts our principals are quoting. Just recently, we lost several rubber parts that our rubber molder has made for a customer in our territory for 15 years. Our customer had been purchased by a multinational awhile back that has a subsidiary in China, so the new management decided to tool up these parts in China and discontinue ordering them from our molder. I am sure that the decision was made based on the lower piece price without doing a TCO analysis.

You can help your company get the most value for its dollars and help return manufacturing to America by doing the following:

  • Use the TCO spreadsheet available for free at www.reshorenow.org
  • Use the archived webinars to inform staff and customers
  • Work with groups being trained on TCO – Manufacturing Extension Program (MEPs) sites around the country
  • Prepare your workforce for reshoring
  • Submit cases of reshoring for publication and posting using the Reshoring Initiative’s  template
  • Sponsor the Reshoring Initiative

I strongly believe that if more companies would learn to understand and utilize the TCO estimator spreadsheet of the “Reshoring Initiative,” they would realize that the best value for their company is to source their parts, assemblies, and products in America. Doing this would help return manufacturing to America to create a far higher percentage of jobs than the 10% that have been brought back to America thus far and help maintain more manufacturing in U. S.

 

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