savingusmanufacturing.com

The manufacturing industry is like the seat of a three-legged stool.  One leg is manufacturers and what they can do to “save themselves.”  The second leg is people and what they can do as entrepreneurs, business owners, employees, consumers, and voters.  The third leg is what government at all levels can do by means of tax policies, regulation, incentives, and national trade policies.  This stool has been toppled over because only manufacturers have been trying to “save themselves.”  It will take the cooperative effort on the part of all three “legs” to save American manufacturing.

People are starting to wake up to the importance of manufacturing to the American economy.  They have already woken up to the fact that we’ve lost too many manufacturing jobs and that is causing our unemployment rate to stay so high.  They are waking up to the need to revitalize, rebuild, re-invent American manufacturing to “save” it.

On September 28, 2010, a Conference for the Renaissance of American Manufacturing was held in Washington D. C. attended by more than 200 manufacturing executives, legislators, union leaders, trade policy experts, and state and federal officials.   At this conference, Sen. Don Riegle Jr. of Michigan warned that the U. S. economy is on a “downhill trajectory” and “going at a velocity that is very dangerous… The people are screaming to the elected officials that they think we are on the wrong path – because we are on the wrong path.”

Gilbert Kaplan, president of the Committee to Support U. S. Trade Laws, said, “The decline of American manufacturing happened not because of some inevitable shift to a post-manufacturing economy as some argue, but because the United States has picked the wrong policies and not paid attention to preserving and growing manufacturing.  American urgently needs unequivocal and bi-partisan policies in support of reviving manufacturing, with clear performance goals and timelines for action.”

After the Conference, the Committee to Support U. S. Trade Laws, the Economic Strategy Institute, the New American’s Foundation’s U. S. Economy/Smart Globalization Initiative, and other groups released a Statement of Principles, recommendations for major reforms to the U. S. trade system, and recommendations for five specific legislative initiatives to revive American manufacturing.

The Statement of Principles included:

• Changing tax policies so that manufacturing in the United States is encouraged, not discouraged, and making sure that imports pay their fair share of taxes
• Creating tax policies that foster manufacturing investment by strengthening R&D and capital investment, and allowing for accelerated depreciation
• Providing grand and low-interest loans to companies that manufacture in the U. S. (as long as other countries’ governments are providing assistance to their industries)
• Encouraging a change in corporate culture so that manufacturing in the U. S. becomes a primary objective, and moving plants off-shore is discouraged.

Some of the recommendations for reforms to the U. S. trade system are:

• A “plus jobs and plus factories” requirement for all existing trade agreements and future agreements, in which it can be shown that the agreement on a net basis has created or will create jobs and factory builds in the U. S.
• A commitment to balance trade in the U. S. by a date certain in the future
• Stronger, sustained trade action against foreign subsidization of manufacturing
• Creation of an unfair trade strike force within the U. S. government
• Addressing the fact that many imported products are not bearing environmental and health care costs

The five specific legislative initiatives recommended are:

• Legislation to countervail currency undervaluations and enhance enforcement of trade case orders
• Rewriting U. S. trade laws in the next session to bring them up to date, deal with the realities of the 21^st century, and make sure they are effective in preserving and reviving U. S. manufacturing
• Rewriting tax laws to encourage manufacturing in the U. S. to ensure that imports pay their fair share of taxes and encourage R&D and capital formation for manufacturing
• Altering the governmental policy apparatus to provide a voice for manufacturing at senior levels
• Passage of a Manufacturing Education Act that will develop target vocational and technical training programs at both the secondary and post-secondary level in order to strengthen manufacturing education, and funding programs and institutions to improve the skills of career-changing adults interested in manufacturing jobs.

The first thing needed to solve a problem is to recognize that you have a problem.  Now that key leaders in industry and government recognize that we have a serious problem, we need to work together to solve it.  As Andy Grove, senior advisor to Intel and CEO/Chairman from 1987 until 2005), said, “…the imperative for change is real and the choice is simple.  If we want to remain a leading economy, we change on our own, or change will continue to be forced upon us.”

Intel has made their choice and announced it will build a new R&D wafer fab in Hillsboro, Oregon and upgrade other existing U. S. facilities for a total investment of between $6 billion and $8 billion.  What will your choice be – reviving American manufacturing or enhancing China’s dominance?

It’s said it’s always darkest before the dawn.  With continued high unemployment, escalating national debt, and soaring trade deficits with China, the economic news seems pretty dark.  Two events occurred last week that are like a bright dawn coming after a dark night.

The first was the Design-2-Part Show held October 20-21 in Long Beach, California.  This show features design and contract manufacturers located in the United States.  While some of these companies may also have a plant offshore, no offshore-only companies are allowed to exhibit in the show.  The mission of The Job Shop Company that owns and puts on the dozen different Design2Part shows around the country is to support and feature American companies.

This year’s show was exciting!  It was the most well attended show since the fall of 2007, before the recession started.  Show management said it was one of the best southern California shows in the history of the company, with attendance up 21 percent over last year’s show in Pasadena and up10 percent over the 2008 show in Pomona.  In fact, it was so well attended that many exhibitors had trouble talking to all of the attendees that were visiting their booths.   The attendees weren’t just browsing, as many exhibitors had far more leads from this show than the two previous shows.

The demise of shows such as the Design-2-Part show was expected because of the Internet.  But there’s no substitute for the face-to-face interaction provided by trade shows.  At the Design2Part shows, engineers get to see and touch actual parts built by the exhibitors.  This gives them ideas to use for new products they are designing and shows them how other people have solved problems they may be encountering in their design phase.

What made it even more exciting this year was the number of attendees that came to the show looking for domestic sources for parts for new products or looking for a domestic source to replace an offshore vendor for parts for existing products, with some even bringing prints to quote.  We heard several stories about quality problems with offshore vendors that are making it no longer advantageous to source the parts offshore.  One company mentioned that because parts coming from China didn’t meet dimensional specifications, they had to rework the parts and modify assembly steps at their own cost.  When they contacted the Chinese vendor to return the parts, the Chinese vendors said, “We’ll be happy to accept a new order for the parts,” but wouldn’t give credit for the defective parts from the previous order.

Other factors mentioned in the decision to rethink sourcing offshore in China were the increases in wages as a result of the suicides and strikes during the summer, as well as increases in shipping costs.

The other event was the 17^th Annual TechAmerica (formerly AeA) High Tech Awards that were presented at a luncheon attended by over 600 people in San Diego on October 22^nd.  This event highlighted the creativeness and ingenuity of American companies, which is one of our greatest strengths in competing globally.   There were ten categories of awards this year with the addition of contract services for the first time.  Out of many dozens of applications, three to five finalists were selected for each category. The award winners in each category were:

Software:  Anakam Inc. provides integrated no-touch risk-based identity verification and multi-factor authentication solutions for government, healthcare, and commercial organizations.  Anakam was just acquired by Equifax Inc. earlier this month.

Internet/Web Commerce:  Anonymizer provides a proprietary set of solutions for the corporate online privacy sector.

Contract Services:  D&K Engineering provides full turnkey development and manufacturing services, as well as focused projects to address a specific client need anywhere along the product life cycle.

Computers & Related Products:  Z Microsystems provides field-ready computing technologies, focused on government and DoD, including a full range of deployable data storage systems.

Defense/IT Solutions: DefenseWeb Technologies helps government organizations address complex automation and information technology challenges through innovative software development.  DefenseWeb became a wholly owned subsidiary of Humana Inc.

Semiconductors, Industrial & Analytical Instrumentation:  Quantum Design provides automated temperature and magnetic field testing platforms for materials characterization.

Communications Products & Services:  Entropic Communications is a leading fabless semiconductor company that designs, develops, and markets system solutions to enable connected home entertainment.

Medical Device Technology/Instrumentation:  GenMark Diagnostics, Inc. provides the eSensor® XT-8 to perform multiplexed molecular diagnostics utilizing a micro fluidic system to accelerate target binding and improve time to result.

Clean Technology:  Reaction Design empowers transportation manufacturers and energy companies to achieve their clean technology goals with a comprehensive and east-to-use set of software simulation tools, chemical models, and expert consulting services.

Outstanding Emerging Growth (under $5 million revenue):  Seacoast Science, Inc. provides the next generation of chemical sensor and chemical detection devices for a variety of markets including leak detection, military, homeland security, air quality monitoring, and emission gas detection.

While the technology represented by these companies is amazingly cutting-edge, it is even more amazing that many were founded and have grown to be successful during the recession of the early 2000s and the most recent Great Recession in a state that has the 49^th worst business climate in the United States.  One new technology company starts every day of the year in San Diego, and high-tech companies represent six percent of all companies in San Diego and eleven percent of the workforce.

These companies are an example of the entrepreneurial spirit and ingenuity of Americans and provide the best hope for a resurgence of American technology-based manufacturing and services in the face of challenging global competition.

The Manufacturing Institute and Deloitte Development LLC recently released their annual public view on manufacturing in a report titled, “Made in America?  What the Pubic thinks about manufacturing today.”

The report revealed that Americans continue to believe manufacturing is vitally important to our nation’s economy, with 78 percent saying it’s very important to our economic prosperity, 76 percent indicating that it is very important to our standard of living, and 65 percent believe it is important to our national security.  If the general public were aware of how much all branches of the military depend on the manufacturing industry for the development and production of products and systems for the defense of our country, the latter figure would be equally high, if not higher.

Americans think we have the skills and resources to compete globally.  In fact, they are “bullish on the skills and abilities of our workforce in the face of global competition.”  The three sources providing the U. S. manufacturing industry with the greatest competitive advantages are:  technology use and availability, a skilled workforce, and strong R&D capabilities.  Energy availability, natural resources and our infrastructure were the next three important attributes of U. S. competitiveness.

They “think the strength of the workforce is one of the most important factors to our success.”  The top three most important items to maintaining U. S. manufacturing competitiveness are: work ethic, a skilled workforce, and worker productivity

Americans want to strengthen the manufacturing industry, with 75 percent agreeing that the U.S. needs a more strategic approach to the development of its manufacturing base.  Seventy-three percent believe the U. S. should invest more in the manufacturing industry, and 68 percent believe that developing a strong manufacturing base should be a national priority.

At the same time, Americans are concerned about the future of the manufacturing industry, and over half (55 percent) believe that the long-term outlook for manufacturing in the U. S. will weaken.  This may explain the dichotomy of why 55 percent believe manufacturing provides careers that are both interesting and rewarding, and 44 percent believe that jobs offer a safe, clean environment, but only 30 percent would encourage their children to pursue a manufacturing career.

Americans are concerned that U. S. government policies are putting the manufacturing industry at a disadvantage in the global economy.  The top three areas of concern are:

• State and federal government leadership
• Tax rates on individuals
• Government business policies

The survey didn’t delve deeper into these three areas of concern by respondents.  An independent research company conducted the survey in June 2010 with a nationally representative sample of 1,055 Americans across the fifty states.

However, we can see that these three areas of concern have become key issues in the upcoming election in November.  The September 30^th issue of Manufacturing & Technology News contains an interview with Tom Mullikin, who helped organize the Nucor town hall meetings in the 2006 election and described voter anger in his 2007 book, Truck Stop Politics.  He said that his book “attempted to capture the rage of a class of voters who feel they are sliding backward through no fault of their own.  They are forced to downsize their expectations for achieving the American dream… They have a fairly accurate idea about why this is happening.”   He said that if you went to a truck stop and tried to explain why we haven’t effectively dealt with Chinese cheating, like currency manipulation, “you will be met by disbelief and outrage.  Capitol Hill has refused to deal with these issues for over a decade.  Issues such as the unstoppable flow of jobs to other countries, the constant currency manipulation that makes American goods too expensive to sell to our trading partners, and the subsidies some foreign manufacturers receive from their government.  The change the people of Truck Stop Politics were looking for is a change on these fundamental issues.”

He said, “this grassroots revolution has been years in the making… What every-day working Americans want to see is a government that ensures fair trade so they can have jobs, a clean environment and an ability to provide for their families.”  He predicts “a storm surge of electoral activity in November,” and that “you will continue to see volatility in the electorate until we elect Members of Congress with conviction enough to address the real and underlying issues.”

His comments about fair trade are borne out by a poll conducted between September 22nd and September 26th for NBC and the Wall Street Journal.  When asked if they believe that free trade agreements signed by the United States have led to the creation of U. S. jobs or the destruction of U. S. jobs, 69 percent said they cost the country jobs compared to 18 percent saying they created jobs.

When asked if they believe that free trade agreements helped the United States, hurt the United States or did not make much difference, 53 percent said they hurt, and only 17 percent said they helped.  When asked the same question in 1999, 30 percent said they hurt, and 39 percent said they helped.

Perhaps the loss of 5.5 million jobs in the last decade has had an influence on this change of opinion.  Let’s hope that American voters remember these issues when they go to the polls in November.

Amidst the crowded ballot of initiatives for the November election is one that its proponents call the “California Jobs Initiative.”  The ballot title is much longer: “ Suspends Implementation of Air Pollution Control Law AB 32) Requiring Major Sources of Emissions to Report and Reduce Greenhouse Gas Emissions that Cause Global Warming Until Unemployment Drops to 5.5 Percent or Less for Full Year.”

While the majority of the $6.5 million funding in support of Proposition 23 initially came from oil companies outside of California:  Valero, Tesoro Companies, Flint Hills Resources, Marathon Petroleum Company, and Occidental Petroleum, the Howard Jarvis Taxpayers Association, Adam Smith Foundation, California Trucking Association, and California State Pipes Trade Association have donated substantially since the ballot initiative qualified.

The majority of the funding for the opposition campaign has come from a group called “Californians for Clean Energy and Jobs,” made up of wealthy individuals who are believers in global warming as a reality:  Thomas Steyer, Robert Fisher, Wendy Schmidt, Claire Perry, L. John Doerr, William Patterson, as well as such organizations as the Natural Resources Defense Council, the Green Tech Action Fund, and the California Teachers Association.

Thomas Steyer, founder of San Francisco-based hedge fund Farrallon Capital Management LLC, gave $2.5 million and promised another $2.5 million to come.  Steyer and his wife donated about $40 million to fund renewable energy research at Stanford University last year.

Governor Arnold Schwarzenegger is just as strongly opposed to Proposition 23, as he was supportive of AB 32.  He isn’t buying the report from California’s Legislative Analyst’s Office that shows near term job loss from implementing AB 32.

Opponents say that Proposition 23 would delay sensible measures to create a clean energy economy. William Sundstrom, Professor of Economics at Santa Clara University, said “The net impact on California’s employment picture is likely to be so small as to barely noticeable in the unemployment statistics…. Offsetting these transitional impacts will be new ‘green jobs’ in the renewable energy and energy efficiency sectors.  Clean technology is a growth industry, and California has been a significant beneficiary of that growth…”

James Birkelund, an attorney at Cleantech Law Partners, said, “California has invested billions of dollars in clean energy technology such as wind and solar, and is well positioned to lead the nation in the rapidly expanding renewable energy sector… California already had 500,000 workers employed in green jobs, and more than 12,000 clean tech companies call the state home.  It is estimated that Prop. 23 will reduce the state’s economic output by $80 billion and cut over half a million jobs by 2020.

On the other side, a new study released on October 6, 2010 by the non-profit Pacific Research Institute showed that passage of Proposition 23 would create about 1.3 million California jobs by 2020, with 500,000 of those jobs created by 2012, and 150,000 in 2011.  The study assumes that four consecutive quarters of 5.5 percent unemployment or less would not be observed, so that implementation of AB 32 would not resume.   If AB 32 is implemented, they project an employment loss equal to about 5 percent of the working age population, or more than a million jobs.

The California Trucking Association is strongly in favor of Prop. 23 because the California Air Resources Board (CARB) has imposed billions of dollars in high costs on trucking companies to comply with on-road and off-road diesel regulation, and fuel costs could increase another 32%, depending on how AB 32 is implemented.  A study authored by a former Executive Officer of CARB found that the Low Carbon Fuel Standard (AB 32 Scoping Plan Measure T-2) would increase gasoline and diesel costs by $3.7 billion a year with no detectable impact on global warming and a five ton per day increase in smog-forming emissions. The increase in fuel costs would apply to everyone purchasing gasoline and diesel fuel, not just businesses.

Valerie Liese, Chairwoman, California Trucking Association said, “Implementing AB 32 at this time would break the back of the trucking business in California.  That’s why the California Jobs Initiative is so important …Right now, that represents the difference between surviving this recession or going under for a lot of our members.

Law enforcement and firefighters have voiced their support.  Kevin Nida, President California State Firefighters Association said, “The economic crisis of the last few years has put a real strain on resources available to fund firefighters, emergency medical technicians and other public safety personnel throughout the state…The last thing we need is a law that will leave local governments with even less money to fund public safety.”

Small businesses have joined the campaign to support Prop. 23.  Reid Ennis, Ennis Inc., Lakeside, CA said, “We already are burdened with so many taxes and regulations, we barely exist.  We are down from 190 people to 46 and are losing money every month.  With California’s construction unemployment above 30% any more fuel cost increases, fees, or taxes, will destroy many more businesses.”

Michelle Grangetto, 5^th Axis, San Diego, CA, said, “…We machine parts for aerospace, military, and medical fields…another increase in electricity will force us to relocate to another state.”

San Bernardino County Supervisor, Brad Mitzelfelt said, “Our top priority has to be job creation…With more than 2.2 million people out of work in the state and the jobless rate at close to 15 percent in some counties including San Bernardino, Prop. 23 represents a common-sense approach to protecting jobs and holding the line on costs for California’s struggling families.”

When the California Global Warming Solutions Act of 2006 (AB 32) was passed in 2006, California’s economy was booming, with unemployment at only 4.8 percent.  Now California’s unemployment is at 12.4 percent statewide, and we’ve lost over 50,000 manufacturing jobs since the recession began at the end of 2007.   Over the last several years, hundreds of manufacturers have relocated to Nevada and Oregon where there is no state income tax, workers’ compensation costs are much lower, and the cost of regulatory compliance is also much lower.

Now is not the time to make it harder for California companies to stay in business and stay in California.  County Supervisor Mitzelfelt said it best — a “yes” vote on Prop. 23 makes sense.  Passage of Prop. 23 will save more California businesses than it will hurt in the clean energy technology industry.

Since saving American manufacturing has become my main mission in life and the focus of this blog, I have reviewed the Republican’s “A Pledge to America” with that viewpoint in mind.

The Republican pledge includes five major plans that they will work to achieve if they take over control of Congress and the U. S. Senate as a result of the upcoming elections in November.

These plans are:

• A plan to create jobs, end economic uncertainty, and make America more competitive – includes a pledge to permanently stop all tax increases, give small businesses a 20% tax deduction, repeal the mandate to report purchases that run more than $600 to the IRS included in the health care reform, and require congressional approval of any new federal regulation that has an annual cost to our economy of $100 million or more.

• A plan to stop out-of-control spending and reduce the size of government – includes canceling unspent “stimulus” funds, blocking attempts to extend the timeline for spending “stimulus” funds, rolling back government spending to pre-stimulus levels, setting strict budget caps to limit federal spending annually, cutting Congress’ budget, holding weekly votes on spending cuts (YouCut initiative), ending TARP (Troubled Asset Relief Program, ending government control of Fannie Mae and Freddie Mac, and imposing a net federal hiring freeze on non-security employees.
• A plan to repeal and replace the government takeover of health care – includes repeal of the Health Care Act of 2010 and replacing it with medical liability reform, allowing consumers to purchase health insurance across state lines, expand Health Savings Accounts (HSAs), and make it illegal for insurers to deny coverage to someone with prior coverage on the basis of a pre-existing condition, eliminate annual and lifetime spending caps, and prevent insurers from dropping coverage when a person gets sick.
• A plan to reform Congress and restore trust – includes pledge to publish the text of a bill online for at least three days before it comes to a vote in the House, require each bill moving through Congress to include a clause citing the specific constitutional authority upon which the bill is justified, allow any lawmaker, Democrat or Republican, to offer amendments to reduce spending, and end the practice of packaging unpopular bills with “must-pass” legislation by advancing major legislation one issue at a time.
• A plan to keep our nation secure at home and abroad – includes passing “clean troop funding bills (not attached to other policy issues or pork-barrel projects), prevent the government from importing terrorists onto American soil, ensure that foreign terrorists are tried in military, not civilian court, fully fund missile defense, require tough enforcement of sanctions against Iran, establish operational control of the border, work with state and local officials to enforce immigration laws, and strengthen Visa security.

The merits of the specific plans in the Republicans “Pledge” will be hotly debated in the future, but the urgent need to prevent tax hikes from going in effect on January 1, 2011 will be decided by the “lame duck” Congress after the election.  Who’s to say they will do what’s right?  These tax hikes will not only hurt businesses, especially small businesses, but millions of average Americans.  An analysis by Deloitte Tax LLP shows that a family of four with a household income of $50,000 a year will pay $2,900 more in taxes in 2011, and the same family making $100,000 a year will see its taxes rise by $4,500.  Even more crucial is to eliminate the restoration of the exorbitant 55% Death Tax, which would be the death knell to family-owned small businesses when the principal owner dies and the survivors have to sell the business to pay the taxes.

There is no need to “reinvent the wheel” to determine what is needed to create jobs.  Manufacturing jobs are the foundation of our economy, and we need to restore our manufacturing base to create jobs.  Not all of the recommendations of the Manufacturing Initiative reported in the 2004 “Manufacturing in America:  A Comprehensive Strategy to Address the Challenges to U S. Manufacturers” have been implemented.  The Interagency Working group set up by this Initiative released a report on topics for the federal government’s manufacturing research programs in March 2008, “Manufacturing the Future – Federal Priorities for Manufacturing R & D.”  Many more recommendations of how to restore America’s manufacturing base are summarized in chapter 10 of my book, Can American Manufacturing be Saved?  Why we should and how we can.

The U. S. tax system needs to be improved to make U. S. businesses more competitive in the global economy.  On July 26, 2007, the Treasury Department hosted a conference on Global Competitiveness and Business Tax Reform that brought together distinguished leaders to discuss the topic.  As follow-up to this conference, on December 20, 2007, the U. S. Department of the Treasury released a 124-page report titled “Approaches t Improve the Competitiveness of the U. S. Business Tax System for the 21^st century.  None of the recommendations have been passed by Congress since the report was released so this report should be dusted off and used as a starting point for revamping our tax system.

In addition, the first plan speaks about “…repealing job-killing policies…”  Does this include repealing ruinous one-sided free trade agreements where American workers are expected to compete with foreign workers making a tiny fraction of what an American worker makes in order to survive in America?  As long as China, India, and other cheap labor countries are permitted to wage unrestricted economic warfare against the America worker in the form of predatory mercantilism, we will continue to witness ever-increasing unemployment in our country.  There is nothing in the “Pledge” that addresses this problem.

While Democrats drive jobs overseas from excessive regulation and taxation, Republicans have enticed jobs overseas by promoting free trade agreements.  It is a policy that benefits consumers in the short run, until they lose their jobs.  But, it greatly benefits international business interests in the long run, which profit handsomely at the expense of American workers.  Will Republicans remain in lock step with the pied pipers of free trade by insisting on negotiating more free trade agreements?  Will Republicans continue to ignore the damage to the competitiveness of American companies from Chinese currency manipulation?  Will Republicans continue to allow China to impose tariffs and other restrictions on U. S. imports to their country without imposing tariffs on Chinese goods?

Just last week, on September 26^th, Chinese government officials said that it would slap a hefty tariff on U. S. chicken imports to combat what it says are unfairly low prices.  New import duties ranging from 50.3% to as much as 105.4% took effect the next day and will last for five years. The tariffs apply to chicken parts and whole birds, but not to live chickens or cooked products such as chicken sausage.  China was the largest importer of U. S. chicken in 2009 at $752.5 million.

The Republican “Pledge” is a good start to getting our country back on track, but it’s not enough to save American manufacturing.  It would undo much of the damage done by the Obama administration and Democratic controlled Congress and Senate in the last 20 months, especially if they succeed in repealing the Health Care Act of 2010.

We need to stop the downhill slide of our economy that has been occurring since the year 2000 when China became part of the World Trade Organization after being granted Most Favored Nation status by the United States.  While we’ve lost 5.5 million manufacturing jobs in the U. S. since the year 2000, 3.5 million occurred before the Obama administration came into power.  The end result has been an unsustainable escalation of the U. S. trade deficit with China and an equally unsustainable national debt to China from our staggering budget deficits.

Republicans need to go beyond the proposed actions in the “Pledge” to make real changes in our national policies with regard to trade so that American manufacturers have a more level playing field in which to compete in the global economy.  We can’t continue to export our wealth and be able to remain a first-world country.  We must restore our manufacturing base and help small businesses succeed and grow to create the jobs we need to remain a sovereign nation.  How you vote this fall will determine the course of our nation.   I urge you to make the right choice.

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.

The aerospace industry in California fared relatively well when compared to the overall manufacturing sector according to a recent study by the Northern California Center of Excellence and the Center for Applied Competitive Technologies at Cerritos College.  Between 2004 and 2008, the aerospace industry added over 5,500 jobs, but then experienced a sharp decline in 2009 with the loss of nearly 14,500 jobs over the previous year.  Between 2004 and 2009, the aerospace industry declined only 5 percent compared to 12 percent for the overall manufacturing sector.

California is responsible for about 25 percent of the aerospace industry in the U. S. Besides the strong supplier presence, California has more NASA centers than any other state and has a higher education system that provides a pipeline of skilled workers.  The clustering of aerospace supplier industries promotes knowledge transfer and innovation, reduces operating expenditures, and attracts new aerospace businesses to the state.  There are also four air force bases that support research, design, and testing of commercial and military aerospace systems (Edwards, Vandenberg, Los Angeles, and Air Force Plant 42.)

A few large firms, such as Northrop Grumman and Lockheed Martin, which produce aircraft for the military and private organizations, dominate the aerospace industry. These large firms subcontract with smaller suppliers to manufacture or design parts for the aircraft systems. The aerospace industry is comprised of the following industry groups:

• Aircraft manufacturing
• Aircraft engines and engine parts
• Other aircraft parts and equipment
• Aircraft support
• Missiles, space vehicles and parts
• Search, detection and navigation instruments

In 2008, there were about 5,300 aerospace companies located in California, with the majority located in Los Angeles County (1,850), followed by Orange County (790), the Silicon Valley (610), and the San Diego and Imperial Region (450).

The study divided the state into ten regions, with Los Angeles, Orange, San Diego/Imperial, and the Inland Empire, and South Central providing the most jobs.  While four of the top five regions lost jobs, the San Diego/Imperial region gained over 3,000 jobs, indicating a unique competitive position relative to the other regions.

The aerospace industry generated over $27 billion in sales in 2009, with the Los Angeles region generating 42 percent of the total revenue.  Orange County Silicon Valley, and the San Diego and Imperial region were high performers in terms of generating revenue.

Between 2009 and 2014, the ten fastest-growing aerospace occupations are: machinists, aircraft mechanics/service technicians, computer-controlled machine tool operators, industrial engineers, computer software engineers, business operation specialists, aerospace engineers, and engineering and other managers.  A bachelor’s degree is required for six of the ten occupations, with the remaining four occupations requiring work experience, on-the-job training or a vocational training certificate.

The problem with the machinist occupation is that there is already a shortage of skilled machinists that will be exacerbated as the baby boom generation retires, and there are few vocational training or apprenticeship programs to generate the skilled workers to replace the retirees.  For example, there is only one college in San Diego that provides a training program for machinists, San Diego City College.  A student can get a certificate in machine technology or an A. S. degree.  The entry-level salary in San Diego for the lowest paid occupation of a computer-controlled machine tool operator is $12 – $15 per hour depending on the size of the company.  The program graduates about 20 – 25 students per year.

The highest paid of these occupations is engineering managers, with median earnings at $62 per hour or approximately $129,000 per year, but of course, there are very few of these positions.  The aircraft mechanics/service technician occupation provides good wages at $27 per hour or about $57,000 per year and has a large number of projected job openings over the next five years.

The aerospace manufacturing industry is expected to experience slow growth in the next five  years, regaining less than half of the jobs lost in the previous five years.  Orange County and the San Diego and Imperial region are expected to experience the largest gain with the addition of about 1,550 and 1.630 jobs respectively.  Unfortunately, the region with almost 50 percent of current employment, Los Angeles is expected to continue to decline by about 4 percent or nearly 3,300 jobs by 2014.

The purpose of the study was to assess and map the workforce and economic trends of the aerospace sector for ten regions in California.  The information will be used b the California Community College’s Centers for Applied Competitive Technologies (CACT) to determine how to best serve the industry.  The CACTs specialize in providing workforce training and technical consultation to help businesses solve operational, personnel, and technical problems in the manufacturing environment.  The CACTs offer technology education, manufacturing training, and consulting services that contribute to continuous workforce development, technology deployment, and business development.  The goal of the CACTs is to provide companies the technical expertise they need to compete successfully in changing markets and the global economy.  There are 12 CACTs statewide, six of which are located in the top aerospace industry regions.  To learn more, please visit http://www.makingitincalifornia.com/

In the California budget crisis of 2009, legislators voted to impose the highest-ever tax increase to ostensibly balance the budget and eliminate the $20 billion deficit.  This was supposed to be a temporary two-year increase in sales, income, and car taxes.  As part of the compromise for the 2009 budget agreement, there were certain corporate tax breaks scheduled to take effect in 2010.

Faced with another more than $20 billion budget deficit after nearly three years of recession and continued mismanagement of state finances, the Democrat majority in the legislature now want to repeal the corporate tax breaks, delay rolling back the income tax surcharge, and increase alcohol taxes, along with a host of other proposed taxes and fee increases.

To help Democrats repeal the corporate tax breaks, the California Tax Reform Association qualified Proposition 24, originally referred to as the “California Corporate Loophole Repeal Initiative” or “The Tax Fairness Act.”  The official title is “Repeals Recent Legislation That Would Allow Businesses to Lower Their Tax Liability.” The California Teachers Association is the main sponsor of Proposition 24 and donated $500,000 to kick-off the initiative process and pay for the pay-per-signature petition drive to collect the required signatures to qualify the initiative for the ballot.

The supporters of Proposition 24 tout that it would end $1.3 billion in special tax loopholes for big corporations that don’t require the creation or protection of a single job in California and ensures that big corporations pay their fair share of state taxes at a time when the state is making drastic budget cuts to public schools, health care, and public safety.

The tax breaks to be repealed include:

• The “single-sales factor” that allows multi-state corporations to choose whether they will be taxed on their total sales occurring in California or on a combination of their sales and their operations …including payrolls and property.”
• “Loss carry-backs” that allow corporations that are experiencing losses in California’s current economy to get refunds for taxes paid up to two years previously.
• “Tax credit-sharing” that allows companies with more tax credits that they can use to distribute the tax credits to affiliates.

A study by Charles Swenson, a Marshall School of Business professor at the University of Southern California finds the use of a “single-sales factor” would create nearly 144,000 jobs and increase state tax revenue b $411 million.  Swenson concludes it would “stimulate business and industrial growth in the state as measured by increased employment, help attract business into the state, help retain and expand business and industry and create increased job opportunities for all Californians.”

California businesses already find it harder to compete because of the increasingly unfriendly business climate.  California ranks 48^th in the 2009 Small Business Tax Index by the Small Business & Entrepreneurship Council (SBE Council).  This low overall ranking was based on California’s ranking in the following specific taxes rates:

• 4^th highest personal income tax rates (10.55)

• Highest state gas and diesel taxes (.0486)
• 3^rd highest capital gains tax (10.55)
• 8^th highest corporate capital gains tax rates
• 9^th highest corporate income tax rates

In December 2008, Governor Schwarzenegger appointed a 14-member bi-partisan Commission on the 21^st Century Economy to make recommendations on ways to update and improve California’s out-dated revenue system to make it more reflective of our state’s economy.   After ten public hearings held through the state, hundreds of hours of expert and public testimony, and rigorous analysis and debate by the members of the Commission, a final report was released on September 29, 2009.  The report contains recommendations that would dramatically overhaul the state’s tax structure.  The full report may be viewed at the following website:  http://www.cotce.ca.gov./ There is no evidence that anything has been done in the last year by the State legislature to implement any of the reforms in California’s revenue and tax system that were recommended in the report.

The road forward to restored prosperity must include a more business-friendly environment where California businesses can grow and create new jobs.  Unemployed people and struggling businesses cannot generate adequate tax revenues to fund schools, transportation, health care, and other government services.  Increasing taxes by repealing tax breaks for corporations will hurt businesses already struggling and encourage more companies to relocate to other more hospitable states.  With California’s unemployment rate at 12.6 percent and some two million Californians out of a job, the last thing needed is the loss of more jobs.

Remember that California is a state of small business, over 90 percent employing less than 100 people.  We aren’t a state of large corporations with “deep pockets.”  On July 5, 2010, the Los Angeles Business Journal reported that state tax regulators estimate that about 120,000 businesses would lose these breaks if voters approve Proposition 24.  In this same article, Ben Nielsen of Cambridge of California, a furniture manufacturer in Gardena, said, “We’re barely surviving now as it is, with the economy as tough as it is and the foreign competition.  Those tax breaks were our hope for the future.  If they hadn’t been enacted, I would already have closed my doors.  Take them away, and I’ll probably have to shut down and throw 27 people out of work.”

A group called “Stop the Jobs Tax” is opposed to the initiative.  More than 500 businesses and associations have joined the coalition to oppose Proposition 24.  Some of the more well known organizations are:  California Taxpayers Association, California Association of Independent Businesses, California Chamber of Commerce, BIOCOM, CONNECT, California Manufacturers & Technology Association, and the San Diego Regional Chamber of Commerce.  A few of the long list of companies includes:  Abbott, Biogen Idec, Genentech, Gen-Probe, Hewlett Packard, Intel, Johnson & Johnson, Qualcomm, The Walt Disney Company, and Time Warner.  If you would like to join the opposition group to Proposition 24, sign up at www.StopProp24.com.

Rather than repealing a couple of tax breaks for corporations, we desperately need sound tax and regulatory reform to improve California’s business climate and help pull California out of the recession to put people back to work.