savingusmanufacturing.com

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.

The Committee to Support U. S. Trade Laws (CSUSTL) is organizing a “Conference on the Renaissance of American Manufacturing” at the National Press Club on September 28^th in Washington, D. C. to discuss how to get the United States back in business as a world leader in manufacturing and create political momentum going into the fall congressional elections that will lead to changes in government policies to benefit U. S. manufacturers and their workers. Other issues to be discussed include structural changes needed in the United States; what must be done to bring manufacturing back; how to make trade laws and trade agreements effective for the manufacturing sector; and the politics of rebuilding manufacturing.  The conference is open to the public.  To register, send an email to privas@kslaw.com.

The CSUSTL is an organization of companies, trade associations, labor unions, workers, and individuals committed to preserving and enhancing U. S. trade laws.  CSUSTL’s members span all sectors, including manufacturing, technology, agriculture, mining, energy, and services.  CSUSTL is dedicated to ensuring that the already weak trade laws are not further weakened through legislation or policy decisions in Washington, D. C., in international negotiations, or through dispute settlements at the World Trade Organization and elsewhere.

Gilbert Kaplan, president of CSUSTL, said “A lot of people are concerned about manufacturing all across the spectrum, in the Democratic and Republican parties. But we keep losing manufacturing jobs, and plants are moving off-shore.  The question is why haven’t we made progress and what do we need to do to make more progress?” (Friday, July 30, 2010 Manufacturing & Technology News)

As reported on September 9, 2009 in PRNewswire, CSUSTL submitted comments to the Office of the U. S. Trade Representative regarding the proposed U.S.-Korea Free Trade Agreement.  CSUSTL strongly objected to the antidumping (AD) and countervailing duty (CVD) provisions of the section on trade remedies, citing concerns that the proposed measures would result in changes to the related legal processes, ultimately jeopardizing the ability of U. S. business to seek relief when harmed by unfairly-priced foreign imports

Mr. David Hartquist, Executive Director of CSUSTL, remarked, “While there is no doubt that the Agreement offers some economic benefits to U. S. industry, there is a strong risk that these U.S.-Korea Free Trade Agreement provision could seriously put at risk the integrity and enforceability of U.S. AD/CVD laws, which should be at the core of U. S. trade policy . . . they would set a very dangerous precedent for future free trade agreements the United States may enter with other countries.”

On Thursday, August 5, 2010, CSUSTL commended U. S. Senators Ron Wyden (D-OR) and Olympia Snowe (R-ME) for their legislation introduced to combat the evasion of U. S. trade remedy laws through custom fraud.  CSUSTL President Gilbert Kaplan said, “Passing this legislation will give the U. S. government the tools it needs to prevent bad actors from committing fraud and evasion to avoid paying antidumping and countervailing duties.  This is particularly crucial for U. S. companies struggling to recover from the recession that have trade orders in place.  It is now more important than ever to have strong and enforceable trade laws in this country.”  The Enforcing Orders and Reducing Circumvention and Evasion Act of 2010 (ENFORCE Act) gives the Department of Commerce the authority to investigate possible circumvention of AD/CVD orders.  It establishes, for the first time, a procedure whereby U. S. industry can petition the U. S. government to investigate specific allegations of AD/CVD evasion.

Roger Schagrin, Chairman of CSUSTL’s Government Affairs Committee urged the House and Senate to “act on enforcement legislation this year, so that we can end evasion that reduces the utility of trade remedy orders and impedes economic recovery.”

The United States and the Republic of Korea signed the U.S.-Korea Free Trade Agreement on June 30, 2007, but Congress hasn’t ratified it yet.

During his presidential campaign, then Senator Barack Obama pledged to “create good paying jobs here in America” in a speech to the United Steelworkers Union in 2008, but now as President, “his insistence to forge ahead with a trade pact negotiated under the Bush administration and almost universally loathed in his own party has baffled some, who say it is a betrayal of his campaign promises on trade.”  While some Congressional Democrats have vowed to fight against the agreement, many critics are now calling for the agreement to be renegotiated instead of scrapped altogether.

In a letter to the president, Senators Sherrod Brown (D-OH) and Debbie Stabenow (D-MI) wrote, We believe the Administration must focus on driving a hard bargain with Korea – one that shows success in gaining market access while combating unfair trade practices, and providing a new framework that gives confidence to American producers and manufacturers that global trade deals product jobs and better living conditions at home and abroad.”

According to the Economic Policy Institute’s estimates, the agreement could cost as many as 159,000 American jobs and increase the trade deficit by $16.7 billion in just the first seven years.  With unemployment hovering around 10 percent and an employment gap of nearly 11 million jobs, the last thing needed is a trade agreement that will cost more American jobs and raise the trade deficit.

Would it be any different on trade issues if Republicans took back control of Congress in November?  Not according to Senate Minority Leader Mitch McConnell.  On August 2, 2010, he reportedly said that voters could expect less spending and government intervention and a renewed push to finish free trade deals with Colombia, South Korea and Panama.

It would seem that no matter which political party controls Congress, American manufacturers and their workers lose, either through oppressive regulations and taxes that drive jobs overseas or through free trade agreements that entice the export of jobs.  Will either party ever come to the realization that what the American people need is jobs?   If our elected representatives don’t wake up, it will not be possible to have an American manufacturing renaissance that would create the jobs our country needs.

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

The new Health Care Reform Act has vastly expanded the requirement for businesses to file IRS Form 1099s for all payments over $600 annually.  Current law requires a business to provide a completed 1099 form to any independent contractors, subcontractors, freelancers, etc. that are not employees or corporations to whom they made more than $600 in payments over the course of a year.  The new law extends this requirement to corporations as well.  This could mean that a business would have to provide a 1099 to their utility company and every other vendor to which they pay more than $600 a year for services.  For metal manufacturers, such as machine shops, sheet metal fabricators, stampers, and casting companies, this could mean they                            have to provide a 1099 for companies that provide surface finishing services such as painting, plating, or powder coating.

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

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

Complying with workplace regulations cost an average of $2.2 million per manufacturing firm or about $1,700 per employee

• Smaller firms (less than 100 employees) faced higher costs than large firms (500 or more) with costs of $2,573 per employee and $1,530 per employee respectively

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

• Worker Health and Safety regulations, including OSHA, accounted for one-third the cost of compliance

• Regulations governing employee benefits ranked second, making up 27 percent of the cost of compliance
• Civil rights, labor standards, and labor-management relations regulations each made up about 10 percent of the cost of compliance

If these amounts were extrapolated to all manufacturing firms in the United States, the total cost of compliance would be about $32 billion.

A 2005 study on “The Impact of Regulatory Costs on Small Firms” by W. Mark Crain, Lafayette College for the Small Business Administration Office of Advocacy showed that small businesses continue to bear a disproportionate share of the federal regulatory burden.  The cost of compliance with all federal economic, workplace, environmental, and tax regulations is an average of $5,633 for all sized firms.  However, for companies under 20 employees, the cost was $7,647 compared to $5,282 for companies over 500 employees.  In the manufacturing sector, the cost per employee is $10,175; nearly double the average for all firms.  For small manufacturers, the cost is $21,919 per employee compared to $8,748 for large firms.  For medium-sized firms, the compliance cost per employee is $10,042.  In the service sector, regulatory costs differ little from small to larger firms.

A recent NAM study showed that U. S. manufacturers face a 22 percent cost premium compared to its trading partners due to excessive regulation and other external costs.   U. S. manufacturers cite the massive amount of government regulation imposed on them, especially environmental regulation, as one of the prime reasons they have made the decision to outsource manufacturing offshore.   Countries such as China may have environmental and labor regulations on the books, but government officials who have been told to look the other way do not enforce them.

If Federal lawmakers want to “save American manufacturing,” they need to wake up to the fact that adding burdensome government laws and regulations will actually reduce the tax revenue the federal government receives by driving manufacturers to export jobs overseas.  There is some talk in Congress about repealing this provision of the Health Care Reform Act.  I certainly recommend that they do so, but this is just another example of the unintended consequences of lawmakers voting on bills they haven’t read.  It’s almost as if government is choking “the goose that lays its golden eggs.”

No president, no member of Congress or the U. S. Senate, no governor, and no member of state legislatures can create private sector jobs.  Government programs may help or hinder businesses, but they all require government employees to administer them.  Government jobs cost taxpayers money while private sector jobs generate tax revenue for government.

Data from the Federal Small Business Administration (SBA) shows that 99.9% of all businesses are small businesses and that 80% of all jobs are created by small businesses. About 99% of all manufacturers are small and medium-sized companies, employing more than nine million workers.  Since the recession began at the end of 2007, these companies have lost more than 850,000 jobs, which is 42% of the total jobs lost in the goods-producing sector.

The question is if we are in a recovery, even though weak, why aren’t businesses creating jobs?  The number one reason businesses aren’t expanding and hiring more people is that they are afraid.  They are afraid the weak recovery won’t last and we will have a “double dip” recession.  They are afraid of the increase in taxes when the Bush tax cuts sunset at the end of the year.  They are afraid of the cost to their businesses to comply with the Obama health care program.   They are afraid of the effect on the economy of the escalating national debt.  They are afraid of the possibility of Kerry-Lieberman cap-and-trade legislation passing Congress and being signed into law.  Even though the latter looks unlikely to pass this year, it could be revived in the next session just as the Obama health care bill was revived and passed earlier this year after seeming dead at the end of last year.

While the business outlook for manufactures improved for the fifth consecutive quarter according to the latest Manufacturing Index by the National Association of Manufacturers (NAM) and Industry Week, 58% of respondents said that uncertainty about the business outlook was delaying both their company’s plans to expand employment and their capital spending.  An additional 8% said it was delaying plans to expand employment and another 8% said it was delaying plans to expand capital spending.

After the Bush tax cuts sunset on December 31, 2010, individual tax rates will increase to nearly 40%.  About 68% of all manufacturers are organized as S-corporations or sole proprietorships that are taxed at the individual rate.  Increasing taxes would deal a painful blow to small businesses recovering from the economic recession.  According to NAM’s economic models, manufacturers would lose an additional 238,000 jobs by 2019 if these tax increases were enacted.

On January 1, 2011, the capital gains tax will jump up 33% – to 20% from 15%, and the tax on dividends will go up 164% – from 15% to 39.6%.  The death tax will go up from a tax rate of zero this year to a rate of 55% on estates of one million dollars or more.  This can have a devastating effect on the ability of small family-owned businesses to continue after the principal owner dies.  This exorbitant tax can force survivors to sell the business in order to pay the estate taxes and thus lose their family’s livelihood.

Many other tax cuts from the Bush administration will disappear, and a new set of tax hikes will appear, such as the elimination of the research and development tax credit and widening the application of the Alternative Minimum Tax so that more individuals pay it.  According to the Association for Tax Reform there will “literally be scores of tax hikes on businesses that will take place.  The Congressional Budget Office estimates that the expiration of the Bush tax cuts will cost taxpayers $115 billion next year alone and $2.6 trillion through 2020.

As reported in the July 23, 2010 Wall Street Journal, “Federal Reserve Chairman Ben Bernanke told lawmakers Thursday that the U. S. ‘should maintain or stimulus in the short term.’  Extending the Bush tax cuts ‘is one way’ way of doing that, he said.”   The article also reported, “pressure is growing on the administration from a small number of Democratic lawmakers to extend all the Bush cuts, which include taxes on investment income and capital gains.”

A study conducted by Science Applications International Corporation (SAIC) for the American Council for Capital Formation and the Small Business and Entrepreneurship Council assessed the impact of the proposed Kerry-Lieberman cap-and-trade bill on manufacturers jobs, energy prices, and the overall U. S. economy.  The analysis concluded that as many as 1.9 million jobs would be lost and the cumulative loss to the U. S. Gross Domestic Product (GDP) would be up to $2.1 trillion.    Residential electricity price would increase up to 42% and gasoline prices per gallon would go up 18%.  SBE Council President and CEO, Karen Kerrigan said, “Small business owners cannot create more jobs when costly policies such as Kerry-Lieberman take more of their hard-earned resources.”

As long as the current administration views businesses as “the rich” that need to pay higher taxes, it will be difficult to create the jobs we need to reduce unemployment and foster real economic recovery.  Businesses are employers that provide jobs.  We don’t have an agricultural economy like we did in the Great Depression.  People can’t go back to living off farms when they lose their manufacturing jobs.  We need to help businesses succeed and grow, not put burdens on businesses in the form of tax increases and other onerous laws and regulations.

Government and non-government organizations provide lots of help for San Diego companies.  Whether you are an inventor working on your first product idea, an entrepreneur starting your first business, or an established company, there are a multitude of resources to help San Diego companies grow and succeed.  No matter what the type of business you are starting or have established, there is probably an organization in San Diego that can help you.

If you need basic business consulting, you can get help from the Small Business Administration-sponsored Service Corps of Retired Executives (SCORE) or from one of the government-funded Small Business Development Centers, one located in North County at Miracosta College and the other located in South County at Southwestern College.

If you are an inventor designing your first product, then you should attend the monthly meeting of the San Diego Inventors Forum to learn from and network with other inventors, service providers and successful entrepreneurs.  Topics covered at the meetings include entrepreneurship, all aspects of product development, patents, licensing, manufacturing, funding, and marketing.   An annual best invention competition provides small cash awards.

If you have a technology-based company, then CONNECT would be the best resource for you.  CONNECT was originally launched 25 years ago by the University of California at San Diego (UCSD) as a type of “incubator without walls” program and spun off as an independent non-profit organization a couple of years ago.  CONNECT’s Springboard program is a business creation and development program for innovators at all stages from lab to production, providing hand-on mentoring and coaching by more than 1,000 successful CEO’s, CFO’s and CMO’s in its Entrepreneurs-in-Residence Program. Companies that complete the Springboard program become eligible to present their “pitch” for funding to the Tech Coast Angels.

CONNECT also manages the San Diego chapter of the MIT Enterprise Forum where case studies of local companies are discussed and CEO presenters gain valuable advice to help their company set their course and meet challenges.  CONNECT also gives awards in its annual Most Innovative Product competition.

San Diego Sport Innovators (SDSI) is a new program initiated by CONNECT in the last year to accelerate the growth of San Diego’s vibrant sports economy.  SDSI provides mentoring, education, and capital funding opportunities for startups.  Former basketball star and coach, Bill Walton, became Executive Chairman of SDSI earlier this year.

CommNexus San Diego, formerly the San Diego Telecom Council, is a non-profit network of communications industry companies, defense industry companies, service providers, professional trade organizations, and local government.  CommNexus facilitates new business relationships through their CommNexus Marketlink^TM program and helps early-stage high tech companies through their non-profit incubator, EvoNexus^TM that provides mentoring, education, facilities, utilities, and other services.  The San Diego region has become known as “Silicone Beach” in the telecommunications industry.

There is another incubator for startup companies, the San Diego Technology Incubator, located on the campus of San Diego City College downtown.  SDTI is co-located with the Center for Applied Competitive Technologies, one of 12 centers located through the state to technical assistance, education, manufacturing training, and consulting services to contribute to continuous workforce development, technology deployment, and business development.

Another organization that provides resources for high-tech companies is TechAmerica San Diego, formerly AeA, the largest and strongest voice and resource for technology companies in the United States.  In addition to the usual trade association benefits, TechAmerica San Diego helps member companies through Roundtable groups for chairmen/presidents, operations, marketing, human resources, product development, and CFO’s.  The emphasis for the operations roundtable in which I have participated on the planning group for the past few years has been sharing best practices and tools for continuous improvement in the Lean/Six Sigma journey.

If you have a life sciences or medical industry company, then BIOCOM is the organization for you.  BIOCOM has become the largest regional life sciences association in the world.  BIOCOM

Works to attract investment dollars to its member companies, helps save members money when buying commodity products, helps build professional networks, works with local universities and colleges to partner on professional development courses, and works to provide the life science industry with favorable government policies on the local, state, and federal levels.

Not to be overlooked is the San Diego Venture Group, providing education and networking opportunities for early-stage to well-established companies.  Month after month, 300-400 attendees show up for breakfast at 7:00 AM to network and enjoy a well-prepared presentation, forum, or panel discussion on topics of interest to entrepreneurs.  Entrepreneurs wear blue badges, service providers wear yellow badges, and investors wear green badges.  Of course, some investors want to “hide” as service providers, and some entrepreneurs also invest in other startup enterprises.

A new non-profit organization was formed in 2008 to accelerate San Diego as a world leader in the clean technology economy  — CleanTECH San Diego.  Its mission is to stimulate innovation and advance the adoption of clean technologies and sustainable industry practices for the economic, environmental, and social benefit of the greater San Diego region.

The above-mentioned organizations are by no means a complete list of government and non-government organizations that help business in the San Diego region.  Other organizations can be located using the Biz San Diego directory.

Although San Diego businesses have to contend with the same adverse business climate as the rest of California, the plethora of resources and help available still make it an attractive area for startup companies.  In fact, CONNECT reported in the Sunday, July 18, 2010, issue of the San Diego Union-Tribune that more than 300 technology startups were formed here in 2009 and another 57 startups were formed in the first quarter of 2010.  San Diego has always been a region of startup businesses, especially in the manufacturing and high-tech industries.  American entrepreneurism and inventiveness are the two strongest assets for saving American manufacturing.

The National Institute of Standards and Technology (NIST) is the agency that would get the least amount of funding of the three agencies mentioned in last week’s blog article about the America COMPETES Reauthorization Act of 2010.  However, it is the agency that has ongoing programs benefiting manufacturers, especially through the Manufacturing Extension Partnership (MEP), established in 1988.

The MEP program is a national network with thousands of specialists who understand the needs of manufacturing and small businesses. The MEP program has assisted more than 200,000 firms through a network of centers across the country to assist small-and medium-sized manufacturers adopt and use the latest and most efficient technologies, process, and business practices.

MEP is participating in Manufacture America events launched by the International Trade Administration’s Manufacturing and Services unit.  The Manufacture America program is designed to help American manufacturers rethink, retool, and rebuild their operations through exploring new products, markets, processes, and sources of finance.   A series of Manufacture America regional conferences will convene to allow manufacturers to:

• Learn how they can retool and rebuild through entering new market segments, new industries, or new supply chains and modernize processes to become more sustainable and efficient while lowering operations costs.
• Hear success stories form manufacturers who have successfully retooled.
• Learn about growing industries.
• Learn about export opportunities as well as how to export.
• Learn about resources and funding that are available to help rethink and retool, including technical assistance and financing.
• Discuss issues the manufacturers face with federal, state, and local governments
• Network with representatives from other companies.

The other events will take place between August and October in Morgantown, WV, Pittsburgh, PA, Detroit, MI, Canton, OH, and Chicago, IL.   These states are home to the industries that have been hit the hardest by the recession; namely the automotive and machine tool industries.  The problem with events such as this is that they don’t receive publicity so very few companies are aware of them.

If your company isn’t already involved with a MEP center or with the trade and commerce agencies of one of the states in which an event will be held, you wouldn’t hear about the Manufacture America events. There are MEP programs in nearly every state from Alabama to Wisconsin.  To locate the nearest MEP program, visit www.nist.gov/mep.

In California, two organizations administer the NIST MEP Program:

California Manufacturing Technology Consulting (CMTC) – serving southern California from San Diego up to Fresno County in central California.

Corporation for Manufacturing Excellence (Manex) – serving northern California.

Both organizations leverage NIST funds with California’s Employment Training Panel (ETP) funds to reduce the costs of training to employers.   Companies qualify for ETP funding if they pay into the unemployment insurance fund, have a 20 percent turnover rate or less, and have a manufacturing NAICS code or can prove they face out-of-state competition.   Their employees are eligible for training if they are residents of California, work full time (35 hours a week or more), meet the minimum wage requirements, which vary by county, and have been employed at least 90 days prior to the first day of training.

Both organizations provide industrial services that are divided into practice areas that specifically support manufacturers:

• Strategic Business
• Lean Enterprise
• Information Technology
• Energy Services
• Quality
• Supply Chain Management

CMTC also operates the Small Manufacturers Advantage ™ program in which a no-fee assessment is conducted and a written report of improvement recommendations is provided.  The report includes the assessment, a roadmap, self-implementation tools, relevant articles, and a listing of other California business resources.  The report is designed in a format for self-implementation, but a follow-on “Jump Start” program of consulting by CMTC professionals can be scheduled at no cost.

When budget deficits are so high at the federal and state level, we can’t waste taxpayer money with programs and events that don’t reach the people that would benefit from them.  Now is the time for agencies and organizations receiving government funding to think “out of the box” and use new channels of communication to make people aware of events and programs that would be beneficial to them.  It’s time for all of us to be more proactive in keeping informed about programs and events that could benefit our businesses.  One such site is www.manufacturing.gov

On May 28, 2010, the House of Representatives passed the America COMPETES Reauthorization Act of 2010 (H.R. 5116) on the third try.  The bill would authorize $85.6 billion over five years for research and education programs at key federal agencies in an effort to boost U. S. competitiveness.  The bill moved over to the Senate, and on June 29^th, the Senate referred it to the Committee on Commerce, Science, and Transportation.

The original America COMPETES bill was passed in 2007 as a bipartisan effort in response to the 2005 National Academy of Sciences’ report, “Rising Above the Gathering Storm.  This Act authorized appropriations through FY 2010, and the reauthorization Act would authorize appropriations through FY 2015.  The goal of the original Act was to provide enough funding to double the federal budgets for the physical sciences and engineering over the next five years.  It also established the Advanced Research Projects Agency for Energy (ARPA-E)

The National Science Foundation, the Department of Energy Office Science, and the National Institute of Standards and Technology were appropriated 10.6 billion in FY 2008, 11.8 billion in 2009, and 12.3 billion for FY 2010.  These three agencies were highlighted for their support of economic competitiveness-related basic research.  However, these agencies were actually appropriated one to two billion less for FY 2008 through FY 2010 than the funding plan contained in the 2007 Act.   The reauthorization Act funding plan is even more conservative, only increasing funding for these agencies by 8.4% year over year, meaning that the goal of doubling the 2007 funding for the physical sciences and engineering is not even achieved by 2015.

Federal R& D funding declined between 1985 and 2004, dropping from 1.25 percent of the U.S. GDP to .080 percent in 2004.  What is even more serious is that technology R&D represented 48 percent and life sciences represented 36 percent.  By 2005, technology R&D represented only 32 percent and life sciences represented 54 percent.

Increasing federal R&D spending in technology is critical to maintaining American competitiveness in a global economy.  The maintenance of an effective U. S. R&D network is essential for attracting private domestic and foreign R&D funds and the subsequent manufacturing that results from the innovation process, which increases U S. value-added resulting in economic growth.

Innovation is the hallmark of U. S. manufacturing, and it requires a certain mass of interconnected activities, which like a snowball rolling downhill, grows in size as it proceeds towards end users.  R&D is required to keep the ball rolling to ensure more successes than failures.

Innovation resulting from federally funded research is responsible for the Internet, web browsers, the Mouse, fiber optics, MRI scanners, Doppler radars, global positioning satellites, and Nanotechnology just to name a few.  Consumers have benefited greatly from the large selection and quality of manufacturing goods available as a result of the innovative new products resulting from R&D.

America’s manufacturing innovation process leads to investments in equipment and people, to productivity gains, the spreading of beneficial technology to other sectors, and to new and improved products and processes.  It is an intricate process that begins with R&D.  This intricate process generates growth and higher living standards than any other economic sector.  But, it requires a critical mass to generate this wealth.  If the U. S. manufacturing base continues to shrink at its present rate, the critical mass will be lost.  The manufacturing innovation process will shift to other global centers.

It is imperative that the Senate pass the American COMPETES Reauthorization Act of 2010 without any further cuts in R&D funding.  Doubling or even tripling federal R&D funding for physical sciences and engineering is essential to saving American manufacturing and maintaining America’s competitiveness and national security.   Contact your senator today to support this critical bill.  All you have to do is click on www.senate.gov and type in your zip code, and you are automatically directed to your senator.