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North Dakota Focuses on Accelerating Growth of Emerging Companies

Wednesday, May 24th, 2017

The last week of April, I visited the Fargo, North Dakota region as the guest of the North Dakota Department of Commerce’s Economic Development & Finance Division, which is charged with coordinating the state’s economic development resources to attract, retain and expand wealth. My host was Paul Lucy, former director of the Economic Development & Finance Division, and we visited several companies and met with heads of organizations working to accelerate the growth of emerging companies and retain successful existing companies.

For many people, the only impression they have of Fargo is based on the movie and subsequent TV series of the same name. I never saw the movie and haven’t watched the TV series, but have a cousin in Fargo who is always bragging about what is happening, especially what celerity is coming to perform. I learned that the Red River is the boundary between North Dakota and Minnesota, and about 230,000 people live in the greater Fargo/Moorhead region. It has one private and two public four-year universities, along with several community, technical, and business schools. With nearly 30,000 college students, it is a college town that rivals any in the nation.

As we began our first day of appointments, Paul said, “There are development projects in motion that have  a vision of making downtown Fargo a more vibrant place to live and work, which could lessen urban sprawl and result in more efficient investment in city infrastructure and services. An added bonus would be the preservation of more of North Dakota’s fertile farmland for agriculture production.”

Our first appointment was a breakfast meeting at Emerging Prairie, a co-working space in downtown Fargo. We met with Greg Tehven, Executive Director of Emerging Prairie. He said he grew up on a farm and is a 5th generation North Dakotan. When he was attending the University of Minnesota, he remembers that one of his professors recommended that North Dakota be turned back to the prairie because from 1930 – 2000 there was a “brain drain,” when the best and brightest left the state.

Greg said, “I never intended to go back to North Dakota when I graduated, but while I was an undergrad at the Carlson School of Management at the University of Minnesota in 2003, I co-founded Students Today, Leaders Forever. After graduating, I joined the Kilbourne Group and worked on a variety of projects to stimulate growth and entrepreneurship in downtown Fargo.

He explained, “I burned out and worked my way around the world in 2010. I had a Rotary Ambassador scholarship and got accepted to the University of Manchester to study social change in 2011. I had a year before I started school, so I worked for Doug Burgum for a year and discovered “urbanism.” When I gave a TEDx Talk in Minneapolis, I made a conscious choice that instead of studying social change, I wanted to practice social change.”

He said, “Three of my friends and I founded Emerging Prairie in 2013 to turn Fargo into a vibrant startup community. Our mission is to connect and celebrate the entrepreneurial ecosystem in Fargo-Moorhead. We do so by operating a wide variety of events and initiatives, such as the Drone Focus Monthly, the Prairie Den co-working and event space Hackathon, Meetup groups, and the Intern Experience. We have TEDx Fargo, an independently organized TED event, and 1 Million Cups Fargo, the largest and most active 1 Million Cups program in the country.

We support tech-based entrepreneurs. We are not very involved with manufacturing – most of our entrepreneurs are in software. We provide entrepreneurs: (1) a founders-only retreat (2) a platform to share their work and investment opportunities, and (3) access to consultants. I believe in transfer of information, but not a formal mentor relationship. We have to make it a “cool” climate for college students. We host midnight brunches and do a lot of weird and strange things. We have 144 members of our co-working space, modeled like a student union. We have no desire to maximize profits, but to maximize impact. Millennials are wired to maximize impact rather than maximize profits.”

He expanded, “We host the Ted Ex Fargo and will have about 2,000 people at the event this summer where the CEO of the Kauffman Foundation will speak. We host an Ecommerce conference in Moorhead. We support the drone industry and run a drone conference that started two years ago with 240 attendees the first year and 330 the second year. We expect about 600 people this year on May 31st. We host different other events and also operate an online publication that highlights the regions entrepreneurs and innovators that are turning Fargo into a flourishing tech hub. In 2016, we became a 501(c) 3 non-profit.”

Our next visit put what Greg has said into perspective. We visited the Greater Fargo Moorhead Economic Development Corporation (GFMEDC) where we met with James Gartin, President, Mark Vaux, Executive V.P, Business Development, and Lisa Gulland Nelson, V. P., Marketing and Public Relations. Mr. Gartin said, “Our goal is to be a key catalyst for business growth and prosperity for the region. As far back as five years ago, we felt that we had a difficult situation because of our workforce and ability to attract new companies with our extremely low unemployment rate that is currently3.4%. Every time we get a RFQ, the first thing we get asked is:  Do you have enough employees? We made a commitment early on that we weren’t going to take away employees from our existing employers. While we still work to attract companies to our region, we realized that if we need to work with our two universities to change the philosophy from ‘research for papers’ to ‘research for commercialization’ to facilitate start-up companies.”

He explained, “We have funded Emerging Prairie since its inception and are helping them to support entrepreneurism. We attend and support 1 Million Cups, where the entrepreneurial community meets with K-12 superintendants, organizes manufacturing tours for high schoolers, and recruits companies to our community.

He added, “Governor Doug Burgum’s son, Joe Burgum, is committed to making Fargo the best place on earth to live. He founded Folkways that is a community-building collective dedicated to supporting the region’s culture creators. He created the Red River Market,  successfully lobbied to bring the ride-sharing service Uber to North Dakota, and puts on a course to help entrepreneurs launch local businesses.”

He said, “At North Dakota State University’s Research and Technology Park, there is great collaboration to make it a leader in developing Intellectual Property. Entrepreneur magazine ranked Fargo in the top 10 for entrepreneurism. We have a number of ‘0-60’ speed companies in operation, and a lot more that are on the cusp. The most important thing is that our senior leaders are seeing a difference in the growth of business. We modeled our approach after Brad Feld’s book, Startup Communities: Building an Entrepreneurial Ecosystem in Your City, based on Boulder, Colorado. The start-up phase is ten years, and we are only 4-5 years into the program. Cities can’t push entrepreneurism. You can’t make people start companies, but you can help to build the ecosystem.”

The supplemental material I was provided revealed that the costs of doing business in North Dakota are around 15 percent less than the national average because of the following:

* Research and development tax credits

* Corporate income tax exemption

* Property tax exemptions for new or improved buildings

* No personal property or gross receipts taxes

* No sales tax on eligible services, manufacturing or computer/ telecommunications equipment

* Seed and angel capital investment tax credits

* Early-stage financing resources

* State-sponsored workforce training grants

The GFMEDC website states, “Some of our largest employers include divisional, regional, national and global headquarters & facilities for Microsoft Business Solutions, Bobcat Co., John Deere Electronic Solutions, Border States Electric Supply, RDO Equipment Co., Tech Mahindra, Titan Machinery, Nokia HERE and American Crystal Sugar.” The Microsoft campus came about when Great Plains Software, Inc. was acquired in 2001. There doesn’t seem to be a dominant manufacturing industry in Fargo, as the list of top manufacturers includes farm and construction equipment, power equipment, windows/doors, metal fabrication, steel, and composites.

We also discussed the challenges of solving the skills gap and attracting the next generation of manufacturing workers. Mr. Gartin said, “Tip Strategies out of Austin, TX did an economic development strategy study for us on how to grow economy and our workforce. We have funded the plan and are implementing it. We have some of the most unique workforce strategies in the country. Industry and education mesh. We have a very robust manufacturing Day that we handle. We have funded a Maker Space in Moorhead and helped NDSU create a Maker Space, job shadowing and internships. We have a Tri-College University consortium. Students can take classes and get credit at any of the colleges and pay the same rate. Last year, the two-year technical schools collaborated so that students can take classes at any one for the same rate.”

Tri-College University is a unique consortium that allows students enrolled at any one of its five member institutions to take courses at the others at no extra charge, and to apply the credits toward graduation requirements at the home campus. The five member colleges are:

  • Concordia College – Moorhead
  • Minnesota State University Moorhead
  • North Dakota State University – Fargo
  • Minnesota State Community & Technical College – Moorhead
  • North Dakota State College of Science – Wahpeton & Fargo

When I mentioned The Playbook for Teens program I have written about that mentors middle school girls to get them interested in STEM careers, he said, “We think it needs to start in elementary school in the second or third grade when students are starting to learn math. At NDSU, there is an Engineers in the Classroom program where engineering students work in classrooms to teach math. They matched first and second graders with an engineering student to work with them on project based learning. It was tested in an 8-week program, and every student jumped up two levels. This year, there is an engineering student in every classroom, and the students are about to be tested. This could be the opportunity to show that this works, so that we can apply for a Pew grant to fund the program.”

Mark Vaux said, “Our business development program is based on attraction, business retention, and expansion. We visit at least 150 companies on an annual basis looking for opportunities and challenges, so we can help them through the challenges and barriers to growth and recommend actions to take. If companies are buying new equipment or adding workers, there are state programs that will help them.”

Lisa Gulland Nelson described some of the Workforce programs they have:

  • Operation Intern – primary sector business are eligible for matching funds of up to $30,000 per legislative biennium or $3,000 per intern for hiring North Dakota college students or high school juniors or seniors.
  • New Jobs Training Program – matching grants to assist qualified North Dakota employers in training or upgrading their employees’ skills.

Overall, I was impressed with North Dakota’s policies to provide a favorable business climate for its businesses and wish that California would adopt some of these same policies. The Fargo region is smart to focus on emerging businesses to retain their college graduates and keep them from going to other states for jobs. My next article will cover the incubator at the NDSU Research & Technology Park.

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Posted in Accelerators/Incubators, Economic Development, Innovation, Jobs, Technology, Workforce Development | No Comments »

ToolingU-SME Report Reveals Manufacturers Are Not Addressing Skills Gap

Wednesday, December 14th, 2016

In 2011, I attended the imX Expo (interactive manufacturing eXperience) in Las Vegas when Tooling U-SME ” announced their Mission Critical: Workforce 2021 initiative and “sounded the alarm that the future success of manufacturing is at risk by the end of the decade if industry does not address the growing skills gap.” The event was sponsored by SME (formerly the Society of Manufacturing Engineers) and the American Machine Tool Distributors’ Association (AMTDA).

At that event, Tooling U-SME, “the world’s leading provider of training and workforce development solutions for manufacturing companies and educational institutions,” introduced a free one-of-a-kind “Workforce 2021 Assessment” tool for companies to use to assess and gauge their company’s performance because they had identified that there would be a critical shortage of skilled workers by 2021 that would threaten the future of manufacturing in America. “By answering a short series of questions about a company’s knowledge retention, readiness of future skill requirements, and the status of employee development programs, a company is able to assess their ability to meet current and future workforce challenges.”

In a September 5, 2016 commentary in The Hill contributor Grant Phillips wrote that the National Association of Manufacturers found there are “600,000 unfilled jobs in manufacturing primarily due to a lack of skilled labor. It is this skills mismatch that plagues the US labor market…”

On September 8, 2016, ToolingU-SME, released a report that showed the progress towards achieving the goal of the Mission Critical: Workforce 2021. Based on five years of insights from the Workforce 2021 Assessment tool, the report states, “the results are not encouraging. Responses show there has been little advancement. While it’s not too late, companies must take action now to ensure a healthier next decade.” The report quotes from report, “The Skills Gap in US Manufacturing: 2015 and Beyond” by Deloitte and The Manufacturing Institute, which states, “Over the next decade, nearly 3.5 million manufacturing jobs will likely need to be filled. The skills gap is expected to result in 2 million of those jobs remaining unfilled.”

ToolingU-SME Vice President Jeannine Kunz wrote in the cover letter, “only a very small number of worldclass organizations are prepared for the extreme talent gap predicted by the year 2021. Some of these companies started planning years ago to address the coming labor shortage. Others were forced to take reactionary steps when faced with a shrinking employee pool. Regardless, they started formal training programs, introduced apprenticeships, built relationships with educators and more…At Tooling U-SME, we are concerned that more manufacturers aren’t taking action since this has a big impact on the long-term health and competitiveness of the industry as a whole. There is a false sense of security among many manufacturers who are not recognizing these future challenges or investing in the development of their workforce today.”

The companies that responded to the survey fall into five categories:  procrastinator, strategist, role model, and visionary.

The procrastinators nearly make up the majority of the respondents because 49% said that “their company has not begun assessing their manufacturing employee’s current skills against skills they will require in the future.” In fact, only “1 out of 20 (5%) acknowledge conducting a complete assessment of all staff.” Since “nearly 9 out of 10 respondents (88%) said their company is having problems finding skilled works in manufacturing,” you would think there would be more urgency to address this problem. This problem will only get worse because “14% of respondents say they will lose a full quarter (25%) or more of their workforce to retirements in the next five years.”

The highlights of the report are:

  • “Key findings from responses to the survey from manufacturers of all sizes
  • Insights on business pains, such as hiring needs, training resources, mentoring and talent development
  • Best practices to immediately start ensuring your workforce is ready for the next decade”

The key findings are:

  • “Less than one-third (29%) of respondents would characterize their company’s talent development as good or excellent”
  • “30% say their company has no community involvement (internships, co-op, etc) to help develop the proper skills of their incoming workers.”
  • “54% don’t budget for employee development”
  • “33% say their job-related training options are minimal”
  • “88% say their company is below average when it comes to offering outside resources to upgrade the skill sets of employees”

While 74% agree that training needs in the organization impact a wide range of levels throughout the company…3 out of 4 (75%) say their company does not offer a structured training program on manufacturing skills. In addition, “less than half (45%) say their company has personnel designated to manage training and employee development.”

The report identifies issues related to the skills gap that need to be addressed immediately:

  1. Incoming employees — finding them
  2. Incoming employees — training them
  3. Incumbent workers — upgrading their skills to keep up with changing technology

With regard to finding manufacturing employees, I commented that we need a national manufacturing database of skilled workers when I gave my presentation on how to solve the skills shortage to the Cincinnati Chamber of Commerce. Many workers that have been laid off due to transferring manufacturing offshore or plant closures have no idea where to go to find a new job in manufacturing. They take lower-paying jobs outside of manufacturing because they can’t uproot their family on the chance they could find a job at a manufacturer in another city.

The ToolingU-SME report urges manufacturing to establish training programs for both incoming workers and incumbent workers to upgrade their skills. The report identifies the following six steps for companies to take to get started immediately:

  1. “Build a business case for learning with senior management. Involve the right stakeholders in discussions and tie learning to performance so you can measure the results later. It is important to set expectations, get buy in and gather support for the program early on.
  2. Define and update your job roles with the required knowledge, skills and abilities needed to build strong performance on the job. This competency-based learning approach will lead to the positive return on investment (ROI) your stakeholders expect.
  3. Build career progressive models, showing growth from entry level to more senior levels. This modeling effort will improve employee engagement and retention, and allow the alignment of skills to pay.
  4. Benchmark incumbent employee competencies through knowledge and skills-based assessments to determine gaps in performance and build a training strategy to address them.
  5. Design a custom competency-based training curriculum using blended learning that consists of online and on-the-job training as well as other performance support.
  6. Ensure performance standards are measurable and trackable. These standards will validate you ROI investment.”

What struck me is that all of these steps are integral to a company becoming a Lean Company. They are nearly identical to the requirements of “Talent Development” that are incorporated into the journey of transforming a company into a Lean company. It would appear that from this survey that the majority of manufacturers have not begun their journey to becoming even a Lean manufacturer, much less a Lean Company.

My recommendation is to start by using the free Assessment tool of ToolingU-SME. Then you can decide what steps to take next. If your workers need specific manufacturing skills certification, then check out the classes offered by ToolingU-SME, either online or on-site.

Another source for training is the Manufacturing Extension Partnership Program (MEP), which is “a national network with hundreds of specialists who understand the needs of America’s small manufacturers. The nationwide network consists of manufacturing extension partnership centers located in all 50 states and Puerto Rico. MEP provides companies with services and access to public and private resources to enhance growth, improve productivity, reduce costs, and expand capacity.” Locate your nearest MEP here. The MEPs have a variety of training programs that are available at reduced cost to manufacturers. The California Manufacturing Technology Consulting (CMTC) is the designated MEP for California, and they offer training in Lean manufacturing and many other subjects that would incorporate the above steps.

In California, companies can apply directly for a training grant from the Employment Training Panel (ETP) to help defray the cos of training or they can join an active ETP Multiple Employer Contract (MEC).

Many community college systems around the country offer training in specific manufacturing skills. California also has nine Centers for Applied Competitive Technology funded by the Chancellor’s Office of the Community College system, which provides training in specific manufacturing skills as well as Lean Manufacturing.

A number of community colleges actually use the ToolingU-SME courses instead of developing their own curriculum. I have discussed some of the training offered at community colleges in California and other states in previous articles I have written. You can peruse these articles under the Training and Workforce Development categories on my website:  www.savingusmanufacturing.com.

As more manufacturing is reshored to America, it will be even more critical to have the skilled workers we need to make American manufacturing great again. Do not procrastinate any longer on addressing this important problem.

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Cincinnati Focuses on Re-industrialization to Create Prosperity

Thursday, December 8th, 2016

Last week, I spent two and a half days in Cincinnati, Ohio as the guest of Source Cincinnati, an independent, multi-year national social and media relations initiative that works to enhance perceptions of Cincinnati as a world-class Midwestern region. I met with Julie Calvert, Executive Director, during my visit, but my personal guide and host was Paul Fox, VP of Strategic Initiatives at Proctor & Gamble and “Executive on Loan” to Source Cincinnati for a year.

From Mr. Fox, I learned that Cincinnati is the third largest city in Ohio and had such interesting nicknames as “Porkopolis” in the past because it was the largest pork packing center in the world and the “Queen City of the West,” for its ideal location on the Ohio River and its rich culture and heritage of a predominantly German population who settled Cincinnati in the late 1700s.

After arriving late Tuesday afternoon, Mr. Fox and I had dinner with David Linger of TechSolve, and Scott Broughton, Center Director for Advantage Kentucky Alliance at the WKU Center for R&D at Western Kentucky University in Bowling Green, KY. TechSolve is a 30-year old consulting firm that is a State of Ohio Manufacturing Extension Partner (MEP) affiliate, and Advantage Kentucky Alliance (AKA) is the MEP for Kentucky. Mr. Linger just took over the reins as President and CEO on September 1, 2016 after Gary Conley retired from 20 years of service.

Mr. Linger, said “There are about 2,500 manufacturers in the Ohio region of metropolitan Cincinnati, and Cincinnati used to be known as the “Machine Tool Capital of the U. S.”, but very few machine tool companies exist today, including its most well-known machine tool company, Cincinnati Milacron,” after its machine tool line was sold to Unova. TechSolve provides manufacturing and health care consulting. It has a focus and strength in process improvement, machining, and innovation — applying these skills to help businesses find long-term solutions and promote problem-solving cultures.

Mr. Broughton said, “AKA is a not-for-profit partnership that provides assistance and training to help manufacturers of all sizes grow, improve their manufacturing and business strategies and processes, adopt advanced technologies, increase productivity, reduce costs, and improve competitiveness. Manufacturing in Eastern Kentucky was mainly related to the coal mining industry, and two-thirds of the companies have gone out of business. We have focused on helping the remaining manufacturers to understand their core competencies to market to new industries, such as aviation and automotive. Our services include:  business growth services, continuous improvement services, and workforce solution services.”

On Wednesday morning, we had breakfast with Laura Brunner, President/CEO, and Gail Paul Director of Communication Strategy of the Port of Greater Cincinnati Development Authority. She told me that the Port Authority was established by the City of Cincinnati and Hamilton County in 2001 and is the second largest inland port covering 26 miles from the Indiana/Ohio border. In 2008, the Port Authority was reformed and empowered to take a leadership position in regional economic development. It is a quasi-public agency that operates collaboratively with dozens of economic development, community and corporate partners.

Ms. Brunner presented me with a report prepared for me, titled “Manufacturing in the Greater Cincinnati Region. As background, “The Port Authority leverages its infrastructure strengths and development-related expertise to design and execute complex projects to improve property value, catalyze private investment and promote job creation.”

I was astounded when she told me, “The Cincinnati region has lost 67% of its manufacturing jobs.” The report states, “Manufacturing was a primary component of Cincinnati’s economy until its peak in 1969 when 43 percent of the workforce in Hamilton County was employed in manufacturing jobs. Today, lower-wage service-providing jobs far outnumber manufacturing jobs by about 7:1…From 1969-2015, the number of people employed in manufacturing decreased from 146,000 to 48,000.”

She said that the Port Authority Board of Directors has established a vision to transform Cincinnati to prosperity by 2022 through “repositioning undervalued properties and re-building neighborhoods.” The report she gave me states that the strategies for success are:

  • “Industrial Revitalization – redevelopment of 500 acres of underutilized industrial land along key transportation corridors
  • Neighborhood Revitalization – transform ten communities for lasting impact, including residential properties and commercial business districts
  • Public Finance Innovation – cultivate a nationally-recognized public finance program that supports economic and community development efforts

The projected Return on Investment for these strategies is:

500 industrial acres redeveloped 10 revitalized communities
8,000 new jobs 300 quality homes
$565 million in annual payroll 50 commercial acres with 400K SF
$550 million in capital investment 130 new businesses
$8 million in income taxes Increased property & income taxes
$14 million in real estate taxes Improved lives of residents

In June 2015, the PGCDA Board approved establishment of the industrial and neighborhood strategy, development of internal resources, communication strategy, and the financing and fundraising plan to support the strategies.”

The report states, “The proposed redevelopment of approximately 2,000 acres of industrial land through Hamilton County for Manufacturing uses will have a considerable impact on the Greater Cincinnati Region.”

The first sites for the Redevelopment Pilot program have been selected, and the first funds have been obtained for acquisition of land parcels, demolition/remediation of existing buildings, and site preparation. The first site is assembled and is scheduled to open in 2017.

In the meeting with Ms. Brunner and Paul, I was also provided a “Manufacturing Attractiveness Study” by Deloitte Consulting LLP presented on October 3, 2016 to the Greater Cincinnati Port Development Authority, TechSolve, and Cushman and Wakefield.

The study states, “The current lack of easily developable real estate (cleared, access to utilities, free from environmental concerns, etc.) in the Cincinnati area likely puts the city at a significant disadvantage for attracting manufacturing investments.

The Port Authority’s operations focus on transportation, community revitalization, public finance and real estate development makes it especially well-equipped to evaluate and address opportunities to redevelop and reposition sites formerly occupied by industrial operations.”

The Port Authority seeks “to achieve the following objectives:

  • Analyze the last 5 years of manufacturing deployments in the Ohio Region (Ohio and surrounding states)
  • Understand trends in urban manufacturing through case studies
  • Identify demand-side location factors that drive location decisions in the advanced manufacturing, food and flavoring, and Bio-Health (Life Sciences) industries
  • Understand the strengths/ weaknesses of Cincinnati as business location”

In analyzing the Manufacturing Investments for the Ohio Region from 2011-2016, the study revealed:

States # of Project Announcements Capital Investment Jobs Created
Indiana 350~ ~$13.4 ~37,000
Ohio 271 ~$17.6 ~34,000
Kentucky 230 ~$9.0 ~24,000

“Indiana, Ohio and Kentucky saw the most number of project announcements along with largest amounts of capital investment over the past five years.”

“The majority of the manufacturing investments in Ohio over the past 5 years are spread throughout rural areas within commutable distances of large metropolitan areas (Cincinnati, Dayton, Columbus, Akron and Cleveland.) Based on FDI data, 14 manufacturing projects were announced in Cincinnati within the past 5 years.”

The Deloitte study stated “Advanced manufacturers are highly interested in labor quality and availability as well as minimizing risk related to site development and neighboring use concerns.” The two highest factors are: “Labor Quality and Availability (engineers, technicians and operators) and Real Estate (Site readiness, Capacity and availability of utilities, and Neighboring use/pollution). Labor quality, labor availability and supply chain tend to be the key drivers for food industry in making location decisions.

The study showed that “A 1-hr drive time from downtown Cincinnati allows access to a significant labor force, with over 2.5 million in population.” The manufacturing industry represents 14.34% of the Cincinnati Metro economy. Persons with Associate degrees (20.12%), Bachelor degrees (11.97%), and graduate degrees (8.42%) represent 50.51% of the population, and another 45.71% of workers have a high school diploma (26.08%) or some college (19.63%).

Other advantages are: “When compared to the states surrounding Ohio, Ohio has a relatively low average industrial electricity price;” and “Cincinnati is located right in the heart of the most utilized truck routes in the country and has a relatively low percentage of roads requiring significant maintenance when compared to nearby states…”

The summary findings of the report were:

  • “Cincinnati has an advantage in the presence of industrial engineers, machinist and tool/ die makers, as well as a large supply of lower skilled production workers, giving the area a talent proposition to attract manufacturing deployments
  • However, a key driver of the evaluation process for manufacturing deployments is developable sites… Cincinnati currently lacks suitable real estate options to entice most manufacturing operations
  • Given Cincinnati’s availability in key manufacturing skill sets and low/average cost in several talent segments, an investment program to prepare site options would enhance its ability to attract manufacturing investment.”

Our next meeting was with Kimm Coyner, V. P. Business Development & Project Management of REDI Cincinnati, which was spun out of the Cincinnati Chamber in 2014 with the support of Jobs Ohio. REDI Cincinnati covers 15 counties ? five in Southwest Ohio, seven in northern Kentucky, and three in Southeast Indiana, through which the Ohio River runs in the center.

Ms. Coyner said, “REDI is solely focused on new capital investment and attracting and expanding manufacturing to create good paying jobs. We have 165 public and private members. Our team identifies opportunities to attract businesses to the region by developing relationships with companies and new markets – domestically and across the globe. We provide connections to the resources that take startups to the next level and grow existing businesses. We connect companies to the region’s assets, advantages and business leaders to secure Greater Cincinnati’s place as one of the world’s leading business centers.”

She told us that railroads were the key to industrial development of the region in the 19th Century to provide transportation beyond the river. She said, “While Cincinnati arguably stayed too long in the manufacture of carriages and missed out on being a primary automotive manufacturing center like Detroit, we remain a major tier 1 supplier to that industry with hundreds of manufacturers and a significant talent base. We have five key industry clusters:  Advanced Manufacturing, Information Technology, Food and Flavorings, BioHealth, and Shared Services. Advanced Manufacturing is made up of automotive, aerospace, chemicals and plastics and additive manufacturing/3D printing. Our region is the #1 supply state to Boeing and Airbus. We have nine Fortune 500 companies headquartered in Cincinnati, and four of the nine are manufacturers: AK Steel Holding, Ashland, Kroger and Procter & Gamble.”

I was subsequently emailed a list of the top ten employers, nine of which are manufacturers:

  • Kroger 21,646 employees
  • GE Aviation – 7,800 employees
  • AK Steel Holding Corp. – 2,400 employees
  • United Dairy Farmers – 2,029 employees
  • Ford Motor Co. – 1,650 employees
  • Mubea NA – 1,360 employees
  • Bosch Automotive Steering – 1,300 employees
  • Intelligrated Inc. – 1,100 employees
  • Hillenbrand Inc. – 1,080 employees
  • Milacron LLC – 1,020 employees

She added, “We participated with JobsOhio in a booth at the IMTS show in Chicago and focused on promoting Cincinnati as a site destination to companies from Germany.” She noted that Cincinnati has the second largest Oktoberfest outside of Munich, Germany. I told her that we have a strong German-American club in San Diego that puts on a good Oktoberfest featuring a band they bring from Germany.

It is obvious to me that Cincinnati leaders recognize the important role that manufacturing plays in a local and state economy. I had mentioned to everyone I met that manufacturing is the foundation of the middle class, and if we lose manufacturing, we will lose the middle class. Cincinnati learned this lesson the hard way, but I am confident that their new vision to re-industrialize Cincinnati will create good paying jobs for residents and restore prosperity to the Cincinnati region.

I was honored to be invited to give a presentation on “How to solve the skills shortage and attract the next generation of manufacturing workers” that was based on several articles I have written in the past four years (all are available at www.savingusmanufacturing.com under Workforce Development category). If Cincinnati’s leaders achieve their vision, more skilled workers will be needed. Specific recommendations I made were: (1) start to engage youth in middle school through summer camps, and robot contests (2) provide career technical pathways in high schools and community colleges, plan a Maker Faire, promote establishment of a Maker Place, and become more involved in future Manufacturing Day (www.MFGDAY.com).

These meetings provided so much information that I will devote my next article to my visits to local manufacturers:  GE Ceramic Matrix Composite Laboratory at the GE Aviation plant in Cincinnati, Balluff North America in Florence, KY, and TSS Technologies in West Chester, OH, as well as the Center for Intelligent Maintenance Systems at the University of Cincinnati.

 

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Coalition for a Prosperous America Summit Discusses How to Grow Economy

Thursday, December 8th, 2016

On October 13, 2016, the “Southern California Manufacturing Summit” was held at the Wedgewood Center in Aliso Viejo. The summit was hosted by the Coalition for a Prosperous America (CPA), with SDG&E/Sempra Utilities as the major sponsor, along with a long list of non-profit organizations, regional businesses and associations as sponsors and partners. The purpose of the summit was to learn and discuss how we can use Southern California’s advantages to re-grow manufacturing and create good paying jobs through smarter policies on trade, taxes, and the economy.

CPA is a unique alliance of manufacturing, agriculture, and labor working for smart trade policies and represents over three million households through our member associations and companies.
Since nearly all of our sponsors provide services that benefit manufacturers, we modified our format from previous summits to provide opportunities for our sponsors to tell about their services to promote networking among attendees.

Our first speaker was Greg Autry, Adjunct Professor of Entrepreneurship, Marshall School of Business, University of Southern California, who discussed “National Security Concerns with the Current U.S. Trade Regime.” Among the highlights of his presentation was his statement, “There are national security concerns with trade agreements. An economy that builds only F-35s is unsustainable – productive capacity is what wins real wars. Sophisticated systems require complex supply chains of supporting industries. They require experienced production engineers, machinists, and more.”

He recently prepared a report analyzing the competition and found that we are now outsourcing most of our space-related technology. He said, “NASA awards contracts for launch vehicles to Boeing and Space X, but chose to buy Russian lower stage engines. We have to choose if we are going to have a supply chain for the space industry. We cannot rely on China to produce what we need for our military and defense systems.

He added, “The International Space station was funded by the U. S. to the tune of $100 Billion of the $120 Billion that it cost. We should not be relying on Russia’s Mr. Putin to launch our satellites and space vehicles and provide us a seat to get to the international space station.”

Autry stated, “If you own stock in Alibaba, you actually own stock in a holding company in the set up in an offshore tax haven of the Cayman Islands, and the real owner behind Alibaba is the Chinese government. In contrast, he said, “It was the wealth he created at Amazon that enabled founder Jeff Bezos to now lead Blue Origin, which was selected by the United Launch Alliance to finish development of a new engine to replace the Russian made RD-180 rocket engine used by ULA’s Atlas 5 rocket.”

He pointed out that the Germans had the best technology in WWII, but didn’t win because we out produced them. Productive capacity is what wins wars. We wouldn’t be able to do the same for a future war as China has become the shop floor for too many American manufacturers. Take the U.S. F-22 airplane vs. the Chinese J20 airplane. We have 187 F-22s, and we stopped producing them because they were too expensive. China has several hundred J-20s, and they are still producing them.

He warned, “China has been an aggressive nation for thousands of years – it’s how the country grew from a small nation state. China has expanded their claim to territorial waters to include territory claimed by all of its immediate neighbors — Taiwan, South Korea, Vietnam, Japan, the Philippines, Japan and even New Zealand and Australia. China’s threat to these countries could eliminate getting supplies from Vietnam, Taiwan, and Korea, where companies are located that are now part of our supply chain for the military and space industry. We are going to lose our supply chain for the military and defense industry because the people in the State and Commerce Departments don’t talk to the Defense Department.”

After his presentation, July Lawton, President of The Lawton Group/TLC Staffing, explained that her company provides temporary to permanent staffing solutions for engineering, manufacturing, information technology, as well as the more traditional human resources, accounting, administrative, marketing, and healthcare positions.

Nicholas Testa, Jr., CFPIM, CSCP, CIRM, is founder and CEO of Acuity Consulting, Inc. a firm specializing in supply chain and operations management and systems consulting and training. He is president-elect of the APICS Orange County and described the types of supply chain education and training that APICS provides to its manufacturing industry members.

Economist Ian Fletcher, author of Free Trade Doesn’t Work” was the next speaker. A few highlights of his presentation were: “Free trade is trade without restrictions. Economic rivalry is taking place every day. There is rivalry for wealth and power. We live in America, and it does matter where you live. America’s trade deficit is averaging $500 B/year. Free trade is part of the cause of poverty, as well as family breakdowns. Free trade mostly destroys jobs. We are looking in a decline of quality rather than quantity of jobs. De-industrialization is occurring. Many major American companies are not American any longer; they are owned by foreign corporations. Boeing is losing manufacture of airplane wings to Mitsubishi. There is not a single airplane that doesn’t rely on parts from other countries.”

He stated, “Free trade simplified means there must be something good for both parties. Free trade is only one sided by the United States because many countries practice mercantilism. Trade is being manipulated to benefit our trading partners. The Euro currency has been manipulated to reduce the value of the currency of Germany to be lower by balancing it out with the economies of France, Italy, Spain, and Greece. The U.S. is being forced to compete with the state capitalism of Europe and Asia.”
He added, “Free traders say that trade deficit doesn’t a matter, but trade deficits mean that we consume more than we produce. David Ricardo’s theory of comparative advantage did not work when it was created and doesn’t work now. A nation needs some protection. Protectionism is really the American way. Alexander Hamilton was the founder of American protectionism. The U.S. had a protectionist policy until after WWII. Every country has done protectionism to succeed. He showed a chart showing the history of tariffs in the U. S.

 

 

 

 

 

He concluded, “After WWII, free trade became a policy because of the politics to win the Cold War. It is crumbling now because of politics. There are dangers in protectionism, but there are dangers in doing nothing. Treaties or trade agreements are basically about protecting property rights. The World Trade Organization has failed to enforce terms of current trade agreements and will not do any better with the proposed Trans Pacific Partnership Agreement.”

After the morning break, I provided a brief overview of California manufacturing prior to moderating our panel of manufacturers. California is the 8th largest economy in the world, and if it were a country, it would be equal to France. California lost 33.3% of manufacturing jobs between 2000 and 2009 compared to 29.8% nationwide, and lost 25% of its manufacturing firms.

I pointed out that even with its unfavorable overall business climate, California still ranks first in manufacturing for both jobs and output. However, since the Great Recession, California lags in manufacturing job growth at a 3.6% rate compared to the national 7.2% rate and a GDP growth rate in manufacturing of 11.2% in California compared to a 22.6% GDP growth in the U. S. as a whole.

On the positive side, California leads the nation in R&D and number of patents issued, and
California companies received $78.4 billion of VC dollars in 2015 (57% of U.S. total – up from 51% in 2010).

Mexico, Canada, China, and Japan are the top four export markets for California, and California represents 11% of total U. S. exports. California ranks second behind Texas in all exports, but
California ranks first among all 50 states in agricultural exports estimated at $13.6 billion per year. California is the biggest U. S. producer of nuts, dairy, ice cream, and wine. The top high tech export is computers and electronic products, which equals 26.1 % of all the state’s exports. Transportation goods are the second top export, consisting of airplanes, ships, unmanned vehicles, and underwater vehicles.

Besides the good weather, Southern California’s advantages are:

• Gateway to Pacific – two major ports – Long Beach and San Diego
• Major hub in western U.S. for air, rail roads & waterway transportation
• Skilled, educated workforce for ALL occupations
• Research Institutions and Universities
• Large inventor/entrepreneur pool
• Hundreds of business Incubators and Accelerators
• Angel investor networks
• Venture capital networks
• 18 Foreign Trade Zones
• Employment Training Panel funds for employee training
• Workforce Investment Boards

There is also an abundance of business resources in Southern California, such as the California Manufacturing Technology Consulting (designated California MEP), two Centers for Applied Competitive Technologies, several Small Business Development Centers and Economic Development Agencies, as well as many Chambers of Commerce and Business Councils.

I concluded with mentioning the opportunities we have to improve the California business climate, change our national tax and trade policies, return manufacturing to U.S. through reshoring, connect regional manufacturers with other U. S. suppliers, increase collaboration between manufacturers and community college to address workforce and skills gaps, and educate community/youth about career opportunities in manufacturing.

After my presentation, the following three panelists shared their stories:

James Hedgecock, Founder and President of Bounce Composites, which designs, engineers, and manufactures high-quality, durable composite goods for multiple industries, including wind energy, automotive, aerospace, and sporting goods. He shared that the company started out producing their own patented design of stand up paddleboards, but it has been tough to compete with offshore companies because of unfair trade practice. He said it was especially difficult to export to Mexico and Europe because Value Added Taxes (VATs) are added to the price of their products, making their product more expensive.

Robert Lane and Dave Mock, principals of Lane OPX, shared how they help companies optimize excellence through blending Lean Six Sigma principles, strategic business initiatives and participative management philosophies to grow organizations, and inspire high performing, motivated teams. By leveraging their deep experience in manufactur9ing, team dynamics, leadership development and organizational design, they have been able to power the turnaround of small to large companies. More recently, they have been able to help manufacturers return manufacturing to America from overseas.

Mr. Wei-Yung Lee, CEO of Carlsbad Technology Inc. was our final panelist. Based in Carlsbad, California, Mr. Lee said that Carlsbad Tech was founded 1990 and is a subsidiary of Taiwan’s leading YungShin Pharmaceutical Co. The company began as a contract manufacturer of generic pharmaceuticals and has become an industry leader in manufacturing and distribution of generics, supplements, and medical devices. He said, “We have 150 employees and 15 are well-trained chemists. We have the capacity to produce 60 million capsules and 400 million tablets per year. Last year, we Launched our Comfort Vision™ contact lenses in the USA and have sold over 1 billion units in Asia. We are striving to become a global health bridge, bringing a world of innovative health products to the markets that need them. ”

After the panel, Jill Berg, President of Advanced Test Equipment Rentals, told about the products and services of her company. They rent, lease, and sell a large selection of test and measurement equipment and other types of lab equipment to companies all over the world. She announced that her company was hosting a San Diego Test Equipment Showcase on October 18th.

Then, Chris Marocchi, Field Operations Manager of California Manufacturing Technology Consulting (CMTC), explained that his organization is a non-profit consulting organization that just won the competition to provide Manufacturing Extension Program services for all of California. These services provide innovation and growth strategies along with operational enhancements to foster profitable growth for California companies. MEP services include: innovate new products, open new markets, improve workforce skills, increase product quality and reduce costs through Lean training, increase energy efficiency and green production, and optimize supply chain performance.

After our lunch break, I presented information on Lean Six Sigma Institute (LSSI) as neither of the principals was able to attend and I had obtained my Yellow Belt Certificate in Lean Six Sigma from LSSI in 2014. LSSI is boutique-style training and consulting company that uses training and coaching model to guide companies to manage Lean Six Sigma change, develop internal leaders, and sustain the results. LSSI’s is headquartered in Chula Vista California, but has satellite offices located in nine countries and employs over 60 expert consultants worldwide. Lean and six sigma principles and tools apply to virtually any process, and LSSI has successfully helped clients implement Lean Six Sigma in a variety of industries, such as manufacturing, retail, and healthcare.

Our key note speaker for the summit was Michael Stumo, CEO of the Coalition for a Prosperous America, speaking on “Growing SoCal Manufacturing.” Mr. Stumo stated, “CPA is a true coalition
of manufacturing, agriculture, labor, Republicans, Democrats, Progressives, Conservatives, and Independents. Our members are: Trade Associations, companies, farm organizations, Labor Unions, and individuals from all walks of life. Our non-Agriculture industries are: manufacturers, steel, tooling and machining, electronics, textiles, copper, aluminum, etc. Our mission is to balance trade and produce more in America to reclaim American prosperity.”

Mr. Stumo explained that there is a difference between service jobs and manufacturing jobs. According to Investopedia, “Examples of service sector jobs include housekeeping, psychotherapy, tax preparation, legal services, guided tours, nursing and teaching. There are very few “tradable” service jobs. By contrast, individuals employed in the industrial/manufacturing sector might produce goods such as cars, clothing and toys.”

He said, “There is also a difference in income and purchasing power between manufacturing and service jobs. When considering what industry sectors to prioritize for workforce and economic development efforts, it is important to look beyond basic employment numbers. This is because, while a sector might have a lot of jobs, it might not actually be producing a lot of income for the region, which is also very important for overall economic health and vitality.”

Mr. Stumo stated, “The problem is that as more manufacturing jobs leave, more productivity leaves as well. Unlike manufacturing, service-sector jobs have strict limits in terms of productivity. For example, a live performance of Beethoven’s 5th requires the same amount of performers/employees as when it was performed early in the 19th century. Compare that with the production of almost anything manufactured — the number of workers now required to produce a bolt of fabric, for example.”

He added, “There is a regional ripple effect of service vs. manufacturing jobs. At $4.4 trillion in total sales, manufacturing is by far the biggest income generator in our nation, despite a fairly rapid decline in employment. Yet, manufacturing still manages to far outperform all other industries in terms of pure income creation. Manufacturing generates more income per worker and has much bigger ripple effects, creating much more impact in a region while helping to raise wages in lower-productivity service sectors.”

He asked the rhetorical question, “What’s wrong with a service economy? He answered, “It shrinks manufacturing employment as well as the manufacturing sector’s ability to prop up wages. A labor market that loses wage pressures of high-productivity manufacturing industries will settle at wage rates lower than markets where this wage-boosting effect is present. Economic development policy makers should be careful about shunning manufacturing or other production sectors in favor of service sectors. This is a problem because 66% of U. S. workforce is without a four-year college degree.”

He concluded stating, “America is at a crossroads. We are losing an economic competition against other nations whose mercantilist strategies are destroying our manufacturing jobs, critical industries, and our standard of living, our national security, the security of our food supply, and our children’s futures. For the U. S. to become prosperous again, our future strategy must include the following:

• National Priority of Balanced Trade
• Strong enforcement
• Stop new trade agreements to force a re-think.
• Neutralize currency manipulation
• Tax reform with VAT/consumption taxes
• Consider tariffs to neutralize imbalances

We have a choice. We can continue our current trade and tax policies or we can develop and implement a comprehensive strategy that retains and reinforces our leadership in innovation, locates investment and production in the U. S. and raises employment by creating good paying jobs.”

As chair of the California chapter of CPA, I hope you will join our efforts to make America prosperous again.

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Posted in Economy, Jobs, Manufacturing, National security, Taxes/Regulations, Trade Policy | No Comments »

Why Should the U. S. Have a Specific Productivity Policy?

Wednesday, July 27th, 2016

This question is answered by  Robert D. Atkinson, President of the Information Technology & Innovation Foundation (ITIF) in Part II of the  report, “Think Like an Enterprise: Why Nations Need Comprehensive Productivity Strategies.” He states, “Rather than think of an economy as a large market with self-interested actors transacting on the basis of price and seeking to maximize productivity, it is more accurate to conceive of an economy as a large, integrated enterprise that requires coordination of activities that individual enterprises will not effectively undertake on their own.”

 

His opinion is contradictory to that of most Anglo-Saxon nation economists, whose policies are based on two major competing doctrines vying for influence: “neoclassical and neo-Keynesian economics, neither of which supports a national productivity policy.” In a nutshell, he states, “the neoclassical economic doctrine is focused on limiting government’s role in the economy, even as neo-Keynesians see the government’s main role as managing the business cycle and supporting a fairer distribution of income.” His definitions were so simple that even non-economists like me could understand them:

Neoclassical ? focuses on the “managing scarce resources in such a way that maximizes the net benefit from their use, and that produces the quantity and mix of goods and services most beneficial to society.”

Neo-Keynesian ? is “grounded in the core belief that demand for goods and services from business investment, government spending, and consumer spending drives growth.”

Atkinson particularly criticizes neoclassical economists because they “do not study how societies create new forms of production, products, and business models to expand productivity; rather, they study markets to see how commodities are exchanged.”

He criticizes neo-Keynesian economic policy prescriptions because they “revolve around increasing government spending to keep the economy at full employment and ensuring economic fairness and redistribution, because…their goal is not productivity growth, it is full employment.”

Atkinson states. “Thus, the first step for any policymaker seeking to maximize the economy’s productivity is to reject the conventional neoclassical and neo-Keynesian economic advice and embrace an alternative economic doctrine grounded in an understanding of the economy as an integrated, complex enterprise.”

He adds, “This approach is grounded in understanding that productivity is less about markets and more about organizations and systems, in particular about how technology is developed and deployed to drive productivity.”

Atkinson concludes, “Few conventional economists bother to “look inside the black box” of actual organizations or industries and crossindustry systems. Yet it is there that the keys to raising productivity and the keys to the right productivity policy will be found.” He comments that “conventional economics is of little help in understanding the sources of productivity growth, much less in providing useful or actionable advice on productivity policy.”

The rest of Part II discusses how “public goods, externalities and other enterprise failures, and system interdependencies for development and adoption of productivity-enhancing tools all mean that markets alone will not maximize productivity.”

Public goods are “a good or service provided without profit to all members of a society—to increase their productivity.” Some examples are transportation infrastructure such as roads, highways, bridges, airports, seaports or the education infrastructure for K–12 and higher education. Atkinson comments,”… though public goods are necessary, they are not sufficient.”

Atkinson comments that rather than maximizing productivity companies “can maximize profits from increasing revenues or reducing costs. Many companies focus less on boosting productivity and more on increasing revenues, either by getting more customers or increasing revenue per customer by selling products or services with higher margins.”

What he does not cover is that the best way for companies to boost productivity is to transform themselves into lean companies through the adoption and implementation of lean principles, tools, and strategies.

In addition, “some industries do not have strong incentives for driving productivity because “productivity increases hurt its implementers…In such industries, workers ‘control the means of Production’ and therefore productivity is a direct threat to their jobs.”

I found his brief discussion on the effect of system interdependencies on productivity interesting in how he shows that there is a relationship between product innovation and “interdependencies that are only observable and actionable at the industry or economy level.” For example, “when Apple developed the iPod, it needed customers with broadband Internet access and it needed music to be available for purchase online. Without either, the iPod would have gone the way of the Newton (an earlier, failed Apple attempt at creating a PDA).”

Market failure can stem “from markets tending to be poor at coordinating action when multiple parties need to act together synergistically and simultaneously. These chicken-or egg challenges must be overcome for productivity-enhancing innovation to occur in many technology platforms…Unless government plays a facilitating role, relying on markets alone can mean significantly delayed implementation.”

Atkinson identifies another challenge:  “Many technology solutions require mutual adoption and coordination for them to be effectively deployed… For example, when automobiles were first developed few paved roads had been built. Only after a certain number of autos were sold was demand strong enough that the government needed to build roads. But initially cars could be driven on dirt roads that horses used, so adoption could grow gradually in the absence of government construction

In Part III, Atkins lays out a comprehensive and actionable agenda for spurring productivity growth, which can be used as a guide to tailor national productivity policy policies. This agenda includes policy recommendations…and the ways in which governments need to organize themselves to advance effective productivity policies.”

He states, “The conventional theory holds that the only thing government can do is to remove barriers and fix policy failures so that firms reacting to price signals can do whatever they may choose to drive productivity. This overly passive framework ignores the complexity and enterprise-like nature of economies, which actually require more strategic productivity policies.” He recommends that an “effective productivity policy needs to go beyond the standard limits to embrace four other key components:”

  1. Incentives, including tax policies, to encourage organizations to adopt more and newer “tools” to drive productivity…In particular, governments should use the tax code to provide incentives for acquisition of new capital equipment
  2. .Policies to spur the advance and take-up of systemic, platform technologies that accelerate productivity across industries. Many of the information technologies central to driving future productivity have chicken-or-egg network effects which mean that adoption will lag unless governments adopt smart, technology-specific policies.
  3. A research and development strategy focused on spurring the development of productivity-enabling technologies, such as robotics…Governments need to focus a much larger share of their R&D budgets on advancing technologies that will reduce the need for labor.
  4. Sectoral productivity policies that reflect the unique differences between industries. In terms of productivity and productivity policy, industries differ in significant ways…Any effective national productivity policy will need to be grounded in analysis-based, sector-based productivity strategies.

Within these four policy components, Atkinson makes some recommendations that are more controversial, such as:

Roll back policies favoring small business – “special benefits to small business and discriminatory policies that place tax and regulatory burdens only on large businesses. He recommends, “To boost productivity, governments should embrace firm-size agnosticism in all policies.” (pages 70-73)

Replace the term informal with the accurate term the illegal economy – “individuals are breaking the law by not registering their businesses and paying taxes. Informality is a drag on productivity growth, not a progressive force.” (pages 73-74)

Set a reasonable set minimum wage indexed to inflation – this helps make it more economical for organizations to substitute capital for labor” and “in some sectors may expedite the adoption of automated equipment and new technology to increase labor productivity.” (page 81)

Atkinson warns, “Countries that protect entrenched, incumbent, or politically favored industries from market-based competition only damage their own country’s productivity and economic growth potential… This limits the ability of firms at the productivity frontier to take market share away from firms with lower productivity.”

Atkinson acknowledges that “The challenge is that few governments have designed their scientific research programs explicitly around advancing technologies to drive productivity. Instead, they follow the advice of neoclassical economists that governments should not pick particular technology areas and should focus on curiosity-directed basic science… if economies are to maximize productivity growth, they need to craft technology research agendas specifically around productivity.”

In fact, Atkinson recommends that “Governments need to focus on identifying and funding many more research and engineering projects that are specifically targeted to developing Technology that can replace human labor.”

He explains, “Productivity policy cannot be fully effective unless it is grounded in a sophisticated understanding that industries differ significantly with regard to their productivity dynamics… Three key factors differentiate industries when it comes to considering productivity policy.” They are

  • Scale ? Industries differ in terms of average firm size.
  • Competition ? Industries differ in the extent to which they face competition.
  • Incentives ? The third factor is intensity of incentives for an industry to increase productivity.

This is why Atkinson recommends that “An effective national productivity policy needs to be based on an analysis of individual industries and when appropriate, broader production systems.”

In his conclusion, Atkinson recommends, “The single most important step governments can take to boost productivity is to make higher productivity the principal goal of economic policy, more important than managing the business cycle, defending liberty, or promoting equality.”

He adds, “National governments should also identify or establish one agency or laboratory whose main mission is to support development and adoption of productivity technology as well as of platform and sectoral productivity strategies. In the United States, this might be the National Institute of Standards and Technology.”

Finally, Atkinson states: “Productivity is the key to improving living standards—so policymakers should ignore conventional economists who say there is little government can do about it and instead make it the principal goal of economic policy.”

Even if you do not agree with all of his premises, recommendations, and conclusions, this is an important report that should be widely read and debated for some time to come.

 

 

This question is answered by  Robert D. Atkinson, President of the Information Technology & Innovation Foundation (ITIF) in Part II of the  report, “Think Like an Enterprise: Why Nations Need Comprehensive Productivity Strategies.” He states, “Rather than think of an economy as a large market with self-interested actors transacting on the basis of price and seeking to maximize productivity, it is more accurate to conceive of an economy as a large, integrated enterprise that requires coordination of activities that individual enterprises will not effectively undertake on their own.”

 

His opinion is contradictory to that of most Anglo-Saxon nation economists, whose policies are based on two major competing doctrines vying for influence: “neoclassical and neo-Keynesian economics, neither of which supports a national productivity policy.” In a nutshell, he states, “the neoclassical economic doctrine is focused on limiting government’s role in the economy, even as neo-Keynesians see the government’s main role as managing the business cycle and supporting a fairer distribution of income.” His definitions were so simple that even non-economists like me could understand them:

 

Neoclassical ? focuses on the “managing scarce resources in such a way that maximizes the net benefit from their use, and that produces the quantity and mix of goods and services most beneficial to society.”

 

Neo-Keynesian ? is “grounded in the core belief that demand for goods and services from business investment, government spending, and consumer spending drives growth.”

 

Atkinson particularly criticizes neoclassical economists because they “do not study how societies create new forms of production, products, and business models to expand productivity; rather, they study markets to see how commodities are exchanged.”

 

He criticizes neo-Keynesian economic policy prescriptions because they “revolve around increasing government spending to keep the economy at full employment and ensuring economic fairness and redistribution, because…their goal is not productivity growth, it is full employment.”

 

Atkinson states. “Thus, the first step for any policymaker seeking to maximize the economy’s productivity is to reject the conventional neoclassical and neo-Keynesian economic advice and embrace an alternative economic doctrine grounded in an understanding of the economy as an integrated, complex enterprise.”

 

He adds, “This approach is grounded in understanding that productivity is less about markets and more about organizations and systems, in particular about how technology is developed and deployed to drive productivity.”

 

Atkinson concludes, “Few conventional economists bother to “look inside the black box” of actual organizations or industries and crossindustry systems. Yet it is there that the keys to raising productivity and the keys to the right productivity policy will be found.” He comments that “conventional economics is of little help in understanding the sources of productivity growth, much less in providing useful or actionable advice on productivity policy.”

 

The rest of Part II discusses how “public goods, externalities and other enterprise failures, and system interdependencies for development and adoption of productivity-enhancing tools all mean that markets alone will not maximize productivity.”

 

Public goods are “a good or service provided without profit to all members of a society—to increase their productivity.” Some examples are transportation infrastructure such as roads, highways, bridges, airports, seaports or the education infrastructure for K–12 and higher education. Atkinson comments,”… though public goods are necessary, they are not sufficient.”

 

Atkinson comments that rather than maximizing productivity companies “can maximize profits from increasing revenues or reducing costs. Many companies focus less on boosting productivity and more on increasing revenues, either by getting more customers or increasing revenue per customer by selling products or services with higher margins.”

 

What he does not cover is that the best way for companies to boost productivity is to transform themselves into lean companies through the adoption and implementation of lean principles, tools, and strategies.

 

In addition, “some industries do not have strong incentives for driving productivity because “productivity increases hurt its implementers…In such industries, workers ‘control the means of

Production’ and therefore productivity is a direct threat to their jobs.”

 

I found his brief discussion on the effect of system interdependencies on productivity interesting in how he shows that there is a relationship between product innovation and “interdependencies that are only observable and actionable at the industry or economy level.” For example, “when Apple developed the iPod, it needed customers with broadband Internet access and it needed music to be available for purchase online. Without either, the iPod would have gone the way of the Newton (an earlier, failed Apple attempt at creating a PDA).”

 

Market failure can stem “from markets tending to be poor at coordinating action when multiple parties need to act together synergistically and simultaneously. These chicken-or egg challenges must be overcome for productivity-enhancing innovation to occur in many technology platforms…Unless government plays a facilitating role, relying on markets alone can mean significantly delayed implementation.”

 

Atkinson identifies another challenge:  “Many technology solutions require mutual adoption and coordination for them to be effectively deployed… For example, when automobiles were first developed few paved roads had been built. Only after a certain number of autos were sold was demand strong enough that the government needed to build roads. But initially cars could be driven on dirt roads that horses used, so adoption could grow gradually in the absence of government construction

 

In Part III, Atkins lays out a comprehensive and actionable agenda for spurring productivity growth, which can be used as a guide to tailor national productivity policy policies. This agenda includes policy recommendations…and the ways in which governments need to organize themselves to advance effective productivity policies.”

 

He states, “The conventional theory holds that the only thing government can do is to remove barriers and fix policy failures so that firms reacting to price signals can do whatever they may choose to drive productivity. This overly passive framework ignores the complexity and enterprise-like nature of economies, which actually require more strategic productivity policies.” He recommends that an “effective productivity policy needs to go beyond the standard limits to embrace four other key components:”

 

  1. Incentives, including tax policies, to encourage organizations to adopt more and newer “tools” to drive productivity…In particular, governments should use the tax code to provide incentives for acquisition of new capital equipment.

 

  1. Policies to spur the advance and take-up of systemic, platform technologies that accelerate productivity across industries. Many of the information technologies central to driving future productivity have chicken-or-egg network effects which mean that adoption will lag unless governments adopt smart, technology-specific policies.

 

  1. A research and development strategy focused on spurring the development of productivity-enabling technologies, such as robotics…Governments need to focus a much larger share of their R&D budgets on advancing technologies that will reduce the need for labor.

 

  1. Sectoral productivity policies that reflect the unique differences between industries. In terms of productivity and productivity policy, industries differ in significant ways…Any effective national productivity policy will need to be grounded in analysis-based, sector-based productivity strategies.

 

Within these four policy components, Atkinson makes some recommendations that are more controversial, such as:

 

Roll back policies favoring small business – “special benefits to small business and discriminatory policies that place tax and regulatory burdens only on large businesses. He recommends, “To boost productivity, governments should embrace firm-size agnosticism in all policies.” (pages 70-73)

 

Replace the term informal with the accurate term the illegal economy – “individuals are breaking the law by not registering their businesses and paying taxes. Informality is a drag on productivity growth, not a progressive force.” (pages 73-74)

 

Set a reasonable set minimum wage indexed to inflation – this helps make it more economical for organizations to substitute capital for labor” and “in some sectors may expedite the adoption of automated equipment and new technology to increase labor productivity.” (page 81)

 

Atkinson warns, “Countries that protect entrenched, incumbent, or politically favored industries from market-based competition only damage their own country’s productivity and economic growth potential… This limits the ability of firms at the productivity frontier to take market share away from firms with lower productivity.”

 

Atkinson acknowledges that “The challenge is that few governments have designed their scientific research programs explicitly around advancing technologies to drive productivity. Instead, they follow the advice of neoclassical economists that governments should not pick particular technology

areas and should focus on curiosity-directed basic science… if economies are to maximize productivity growth, they need to craft technology research agendas specifically around productivity.”

 

In fact, Atkinson recommends that “Governments need to focus on identifying and funding many more research and engineering projects that are specifically targeted to developing Technology that can replace human labor.”

 

He explains, “Productivity policy cannot be fully effective unless it is grounded in a sophisticated understanding that industries differ significantly with regard to their productivity dynamics… Three key factors differentiate industries when it comes to considering productivity policy.” They are

 

  • Scale ? Industries differ in terms of average firm size.
  • Competition ? Industries differ in the extent to which they face competition.
  • Incentives ? The third factor is intensity of incentives for an industry to increase productivity.

 

This is why Atkinson recommends that “An effective national productivity policy needs to be based on an analysis of individual industries and when appropriate, broader production systems.”

 

In his conclusion, Atkinson recommends, “The single most important step governments can take to boost productivity is to make higher productivity the principal goal of economic policy, more important than managing the business cycle, defending liberty, or promoting equality.”

 

He adds, “National governments should also identify or establish one agency or laboratory whose main mission is to support development and adoption of productivity technology as well as of platform and sectoral productivity strategies. In the United States, this might be the National Institute of Standards and Technology.”

 

Finally, Atkinson states: “Productivity is the key to improving living standards—so policymakers should ignore conventional economists who say there is little government can do about it and instead make it the principal goal of economic policy.”

 

Even if you do not agree with all of his premises, recommendations, and conclusions, this is an important report that should be widely read and debated for some time to come.

 

 

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Posted in Economic Development, Economy, Innovation, Jobs, Manufacturing | No Comments »

USITC Report Reveals TPP Will Shrink U. S. Manufacturing

Wednesday, June 1st, 2016

On May 18, 2016, the U.S. International Trade Commission (USITC) released their report, “Trans-Pacific Partnership Agreement: Likely Impact on the U.S. Economy and on Specific Industry Sectors,” relative to the Agreement that President Obama signed in February with Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam.

The USITC analysis concedes that the TPP will cause manufacturing to shrink in terms of employment, output and share of the US economy. Our manufacturing trade deficit will become worse.

Reaction to the USITC report has been mixed at best. “The U.S. Chamber Executive Vice President and Head of International Affairs Myron Brilliant welcomed the release of the U.S. International Trade Commission (ITC) report on the likely impact of the Trans-Pacific Partnership (TPP) on the U.S. economy with the following statement:

“While we have yet to fully digest the ITC’s assessment, the report at first glance provides substantive support for the Chamber’s view that the TPP is in our national economic interest. By eliminating thousands of tariffs and other barriers to the export of U.S.-made goods and services, the TPP will create new opportunities for American workers, farmers, ranchers, innovators, and companies.”

On the other side of the spectrum, AFL-CIO President Richard Trumka issued a statement, which in part said, “This ITC report is so damaging that any reasonable observer would have to wonder why the administration or Congress would spend even one more day trying to turn this disastrous proposal into a reality. Even though it’s based on unrealistic assumptions, the report could not even produce a positive result for U.S. manufacturing and U.S. workers. One of many shockers is just how meager the purported benefits of the TPP are. A mere .15% of GDP growth over 15 years is laughably small…”

The Politico Morning Trade blog of Friday, May 20, 2016 included this rebuttal:” FROMAN FIRES BACK: U.S. Trade Representative Michael Froman continued his effort to capitalize on the ITC report. Speaking to business owners by telephone Thursday, the top U.S. trade official pointed out that the independent commission “conservatively” estimated the TPP would boost both U.S. exports and national income by $57 billion by 2032 – gains that would continue annually.

“This was really the president’s direction, to make sure we’re doing trade right,” Froman said. “And that meant making sure the trade agreement worked for American workers, and we think we’ve achieved that in this agreement…Froman said the study focused heavily on tariffs and didn’t project the economic benefits of other major parts of the agreement, including rules on state-owned enterprises, labor and the environment.”

Coalition for a Prosperous America CEO Michael Stumo participated on a “listen only” basis during the business group conference call on May 20, 2016. Afterward, he commented on his blog, “Despite the fact that the report nullified Froman’s entire economic case for the TPP, you would never know it from his talk. Froman created a parallel universe which was enabled by the Business Forward group sponsoring the call.”

Let us consider some of the highlights discussed in the 792-page report. The Executive Summary that the USITC “used a dynamic computable general equilibrium model to determine the impact of TPP relative to a baseline projection that does not include TPP….The model estimated that TPP would have positive effects, albeit small as a percentage of the overall size of the U.S. economy” by year 15 [2032].” The main findings were:

  • S. annual real income would be $57.3 billion (0.23 percent) higher than the baseline projections (which statistically means zero growth).
  • Real GDP would be $42.7 billion (0.15 percent) higher (again, statistically zero).
  • Employment would be 0.07 percent higher (128,000 full-time equivalents).
  • S. exports and U.S. imports would be $27.2 billion (1.0 percent) and $48.9 billion (1.1 percent) higher, respectively, relative to baseline projections.
  • S. exports to new FTA partners would grow by $34.6 billion (18.7 percent).
  • S. imports from those countries would grow by $23.4 billion (10.4 percent).
  • Output in manufacturing, natural resources, and energy would be $10.8 billion (0.1 percent) lower with the TPP than without the agreement.

Do you notice that the first four projections are less than 1 percent? Our economy has been limping along at only 1.5 percent growth in GDP, which is considered terrible. Yet, the TPP is only estimated to increase GDP by 0.15 percent in 15 years, or 0.01 percent each year. How could anyone be excited about this level of growth? For the first time, the USITC projected a worsening trade deficit with the world, which nullifies any meager net export benefit with new TPP countries. Page 21 admits that the overall U. S. trade deficit will worsen by $21.7B.

The Coalition for a Prosperous America released a flyer, “USITC Report: No Economic Upside to Trans-Pacific Partnership – Manufacturing Decline and Worsened Trade Performance” that states, “TPP Will Only Create 128,000 Jobs in 15 Years. That’s less than the 160,000 jobs created in April 2016…The US International Trade Commission projects increased national income less than one quarter of one percent [0.23%] – well within the margin of error and a statically meaningless growth over 15 years.”

The flyer points out that “the report is still too optimistic because it makes these false assumptions:

  • TPP countries will not manipulate currency
  • Job losers will immediately gain new jobs with no transition costs
  • TPP countries will stop all mercantilistic state-capitalism strategies”

Returning to the rosy projections, the USITC report states, “Among broad sectors of the U.S. economy, agriculture and food would see the greatest percentage gain relative to the baseline projections: Output would be $10.0 billion, or 0.5 percent, higher by year 15.” That is about equal to just one-year’s worth of sorghum production!

The Executive Summary states that the services sector represents the largest share of the U.S. economy, and it would expand the most:

  • “U.S. imports of services would be 1.2 percent higher
  • S. exports of services would be 0.6 percent higher
  • Services sector would have a gain of $42.3 billion (0.1 percent) in output
  • Employment would be 0.1 percent higher.”

If the service sector is supposed to expand the most and it is only 0.1 percent, why does page 34 state that the Services trade balance will worsen by $2.2B? This doesn’t sound good to me, especially when all of the projected benefits of past agreements were proved to be way too optimistic.

Chapter 4 discusses the impact on Manufactured Goods and Natural Resource and Energy Products. The Introduction states, “The TPP Agreement is likely to have a limited impact on U.S. production and trade of manufactured goods and natural resource and energy (MNRE) products. The U.S. manufacturing sector is already more liberalized than other sectors, such as agriculture and services, and duties are generally low.” This means that because duties are already low, the TPP will be less beneficial to the manufacturing sector.

Even with the “most optimistic possible” scenario for its projections, you noticed above that “Output in manufacturing, natural resources, and energy would be $10.8 billion (0.1 percent) lower with the TPP than without the agreement.”

This means that U.S. manufacturing will decline, and the manufacturing trade deficit will worsen by $24B (pages 30-31). Manufacturing employment will decrease by 0.2% (0.2% is 240,000 workers based on 12M mfg employment in 2013). Obviously, the 128,000 jobs the TPP is supposed to create in 15 years will not be the higher paying manufacturing jobs.

Chapter 4 also “examines in more depth five sectors for which there will be significant U.S. trade liberalization with the full implementation of TPP: (1) passenger vehicles; (2) textiles and apparel; (3) footwear; (4) chemicals; and (5) titanium metal.”

Passenger Vehicles: Buried in 40 pages of discussion, the report states that “Overall U.S. passenger vehicle exports would increase by more than 2 percent ($2.9 billion), and parts exports would increase by 1.5 percent ($2.1 billion) by year 30, relative to the baseline estimate.” However, ” (page 232)

“U. S. passenger vehicle imports would increase by $4.3 billion above the baseline upon full implementation of the agreement (table 4.15). Imports from Japan would increase by $1.6 billion, and imports from NAFTA partners would increase by $1.8 billion, making up the majority of the increase. Parts imports would increase by $4.5 billion, with imports from NAFTA partners increasing by $5.5 billion.” (page 249)

Textiles: “TPP would result in a 1.4 percent ($1.9 billion) increase in U.S. imports of apparel over the 2032 baseline (i.e., expected level of imports in 2032 without TPP), and a 0.3 percent ($10 million) increase in U.S. exports.” (page 254)

Footwear: “…U.S. imports from all TPP countries would rise by $1.6 billion (23.4 percent). Most of this increase would be accounted for by imports of footwear from Vietnam, the second-largest supplier overall and the biggest TPP supplier of footwear to the U.S. market.” (pages 272-273)

Chemicals: “…U.S. exports of chemical products, including pharmaceuticals, would be $1.9 billion (0.7 percent) higher than 2032 baseline estimates and U.S. imports would be $5.3 billion (1.3 percent) higher than the baseline, due in part to tariff reductions.” (page 284)

Titanium: The most significant detrimental effect of the TPP would be on the Titanium industry. The report states, ” U.S. titanium metal641 imports from TPP members, according to Commission estimates, would likely increase by $202.1 million (109.7 percent) as compared to the 2032 baseline. U.S. output would decrease by $202.4 million (1.2 percent) and employment would similarly decline by 1.3 percent, as compared to the 2032 baseline. Japan is the principal source of U.S. titanium imports,642 despite a 15 percent U.S. import duty on both unwrought titanium (i.e., titanium sponge, ingot, billet, and powders) and wrought titanium (e.g., bars, sheets, and tubes) (box 4.12), and would benefit the most from the removal of duties. U.S. exports of titanium would be slightly lower—other TPP members already apply low or zero duties on imports of these products.” (pages 292-293)

Since all other above industry sectors would be adversely affected by the TPP), it strengthens my opposition to it being approved by Congress. If you work in the manufacturing industry, I strongly recommend that you contact your Congressional Representative and urge them to oppose approval of the TPP. We don’t need a further decline of U. S. manufacturing and more loss of manufacturing jobs!

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Reshoring has Become an Economic Development Strategy

Tuesday, May 24th, 2016

As a result of my writing and speaking about returning manufacturing to America through reshoring, I recently received information from the International Economic Development Council (IEDC) inviting me to educate my audience on the findings of their research and the tools and resources available when manufacturers are considering reshoring.

The IEDC is a non-profit membership organization serving economic developers with more than 4,700 members. Their mission as economic developers is to “promote economic well-being and quality of life for their communities, by creating, retaining and expanding jobs that facilitate growth, enhance wealth and provide a stable tax base.”

Last year, the IEDC received a grant from the U.S. Economic Development Administration to “examine current reshoring practices and create materials to spread awareness of reshoring trends, tools and resources that are available to ease the process.” For the past 16 months, IEDC has conducted research on why companies are choosing to reshore and what resources are available to assist American companies that are considering reshoring. In the past year, IEDC has provided educational training sessions with reshoring experts, such as Harry Moser of the Reshoring Initiative, for economic developers.

IDEC also created the Reshoring American Jobs webpage, a project funded by the U.S. Economic Development Administration (EDA). “It is the go-to place to learn about and find resources to support activities encouraging reshoring in communities. Economic developers will find the latest news, case studies, and in-depth research on reshoring activity to help them stay in-the-know on reshoring trends information.” The micro site is divided into three sections:

Understanding Reshoring” discusses the critical role reshoring plays in strengthening the economy, identifies challenges to reshoring, and highlights lessons learned from communities that have worked with reshored companies.”

  • Defining the Reshoring Discussion” White Paper
  • National Assessment of Reshoring Activities
  • Webinars: Defining the Reshoring Discussion, Reshoring Tools….They’re Out There
  • Tools for Reshoring “provides resources and best practices in reshoring American jobs to aid economic developers in assisting reshoring companies.”
  • Reshoring in the Media “tracks the latest discussions on trends covered by popular and trade media. The content will help demystify the reshoring movement and serves as a practical reference for economic development professionals.”

In March 2016, IEDC published a 30-page white paper on “Defining the Reshoring Discussion,” in which the introduction and historical perspective states, “…as foreign countries strengthened their manufacturing competitiveness over the years, American manufacturers struggled to maintain their cost and productivity advantages on a global scale. Some American manufacturers adjusted to foreign competition by shifting their focus to complex, high-value products and industries—and increasing manufacturing investment, output, and employment. Others either closed U.S.-based factories or sought cost savings by offshoring some, or all, of their operations to less expensive foreign locations. Shortly after China joined the World Trade Organization at the end of 2001, a large exodus of U.S. manufacturers occurred.”

Now, however, supply chain dynamics have changed, and the report states, “…the cost savings that American firms had enjoyed began to erode around the year 2010. Changing macro-economic factors, such as labor and transportation cost increases, absorbed much of the savings from which manufacturers had previously benefited. Also, after experiencing offshoring firsthand, many companies found that hidden costs often outweighed the cost benefits of manufacturing overseas. Some of these hidden costs that were not always considered include factors such as increased costs of monitoring and quality control, uncertain protection of intellectual property, and lengthy supply chains.”

While the white paper presents a broad overview of the discussion of reshoring, some common themes emerged from their review of resources:

  • “The decision to reshore is often described as a response by business to both macroeconomic and internal business-related factors.
  • The term reshoring is used to describe a range of activities that occur in numerous industries, not just manufacturing.
  • A company’s decision to reshore can be encouraged through the creation of favorable business conditions, a skilled workforce, and incentives that encourage innovative manufacturing practices.
  • Reshored jobs will likely be different from the jobs that existed before offshoring gained momentum or jobs that currently exist offshore.”

The reason economic development agencies have become interested in reshoring is that “The impacts of reshoring extend beyond individual companies and provide benefits for entire regions as the effects multiply through local economies.”

From an economic development viewpoint, “it is important to understand that reshoring is fundamentally a location decision. In this sense, a company’s decision to stay in the U.S. or relocate will be based on its total operation costs in a given location.”

The white paper highlights some of the findings of the data from 25 national economies research studied by the Boston Consulting Group (BCG) from 2004 to 2014. The BCG study

found that the following factors significantly impact manufacturing location decisions:

  • Increased wages – “China’s wages rose 15 to 20 percent per year at the average Chinese factory”
  • Fluctuating currency value – “when compared against the U.S. dollar, the Chinese yuan increased in value by 35 percent
  • “Labor productivity, which is measured as the gains in output per manufacturing Worker”
  • “Reduction of energy costs from 2004 to 2014, especially in energy-dependent industries such as iron and steel and chemicals industries”

Naturally, the white paper mentions the work of Harry Moser, founder of the Reshoring Initiative, in developing the Total Cost of Ownership Estimator™ in an effort “to help decision-makers estimate total costs of outsourced parts or products by aggregating, then quantifying all cost and risk factors into a single cost.”

The paper then discusses the different definitions of reshoring from a popular understanding to a more academic definition. The most common definition is “the return of Manufacturing to the U.S.” From an economic development perspective, the following definition may be more appropriate: “a manufacturing location decision that is a change in policy from a previous decision to locate manufacturing offshore from the firm’s home location.” (Ken Cottrill in his article titled “Reshoring: New Day, False Dawn, or Something Else.”) Cottrill divides reshoring into four categories:

“In-house reshoring refers to the relocation of manufacturing activities, which were being performed in facilities owned abroad, back to facilities in the U.S.”

“Relocating in-house manufacturing activities, which were being performed in facilities abroad, back to U.S.-based suppliers, is labeled “reshoring for outsourcing.”

Outsourced reshoring describes the process of relocating manufacturing activities from offshore suppliers back to U.S.-based suppliers.

Reshoring for Insourcing is “when a company relocates manufacturing activities being outsourced to offshore suppliers back to its U.S.-based facilities, it is considered reshoring for insourcing.”

The authors comment that reshoring applies to industries other than manufacturing, such as the information technology (IT) sector, stating that ”challenges such as time zone differences, identity theft, privacy concerns, and issues with utility infrastructure abroad led more companies to return their IT operations to the U.S.”

The white paper contains several pages describing what is currently being done to encourage reshoring by government programs such as the Make It in America Challenge and National Network for Manufacturing Innovation (NNMI), which are too lengthy to discuss in this short article. However, I do want to describe the following tools that can be useful to economic development professionals as well as companies in the reshoring process:

Assess Costs Everywhere (ACE) Tool: This U.S. Department of Commerce tool was developed within the Economics and Statistics Administration, in partnership with the NIST-MEP, and with support from various agencies within the U.S. Department of Commerce, the United States Patent and Trademark Office, and SelectUSA. “The tool provides a framework for manufacturers to assess total costs by identifying and discussing 10 cost and risk factors. These include: labor wage fluctuations; travel and oversight; shipping time; product quality; inputs such as energy costs; intellectual property protection; regulatory compliance; political and security risks; and trade financing costs.” ACE also provides case studies and links to public and private resources.

National Excess Manufacturing Capacity Catalog (NEXCAP): This resource was developed by the University of Michigan and “provides a catalog of vacant manufacturing facilities as well as critical data on skilled workforce supply, community assets, and other information pertinent to location decisionmaking.” It was funded by the Economic Development Administration.

U.S. Cluster Mapping Project: This is another project funded by the EDA and led by Harvard Business School’s Institute for Strategy and Competitiveness by “conducting research and publishing data records on industry clusters and regional business environments in the United States…[allows] users to share and discuss best practices in economic development, policy and innovation.”

The paper discusses the importance of “industrial commons,” a term coined by Harvard Business School’s Gary P. Pisano and Willy C. Shih in 2009,which refers” to a foundation of knowledge and capabilities that is shared within an industry sector in a particular geographic area. This includes technical, design, and operational capabilities as well as “R&D know-how, advanced process development and engineering skills, and manufacturing competencies related to a specific technology.”

Next, it discusses the impact of innovation and one point particularly worth noting is: “Manufacturing outputs have more than doubled since 1972, in constant dollars, even with a 33 percent reduction in employment…Improved output and efficiency is largely attributed to technological advancements that increase productivity and decrease labor-intensive activities. As gaps between wages in developed and developing economies continue to shrink, U.S. manufacturers will need to focus on innovation, using technology to improve productivity and reserving labor for value-added activities.”

In the section considering the need for more workforce development and what could be done in the future to encourage reshoring, “Mark Muro, Senior Fellow and Director of the Metropolitan Policy Program at the Brookings Institution, argues that offering incentives focused solely on manufacturing reshoring is not enough… the focus should be on building the vibrancy of the critical advanced manufacturing industry sector. Muro argues that the U.S. must strengthen the depth of the nation’s regional advanced industry ecosystems…he calls for governments, companies, and individuals to work collectively to rebuild the nation’s local skills pools, industrial innovation capacity, and supply chains.”

While no in-depth studies have been conducted on the potential effect of reshoring on creating jobs, the paper provides the following chart showing estimates under various scenarios (recreated):

Scenario Description Source Jobs Reshored Cumulative Total Jobs
Using TCI analysis Reshoring Initiative 500,000 1,000,000
If Chinese Wage Trends continue at 18%/year Boston Consulting Group 1,000,000 2,000,000
Adoption of better U. S. training, increased process improvements & competitive tax rates Federal Government’s Advanced Manufacturing Partnership 2,000,000 4,000,000
End of foreign currency manipulation Almost all manufacturing groups 3,000,000 6,000,000
Cumulative Total jobs is based on a two support jobs created for every manufacturing job reshored

The paper states, “The brightest reshoring prospects involve those that can profit from the current manufacturing environment. This would include manufacturers that depend on natural gas, require minimal labor, and need flexibility in production to meet changing customer needs.”

The authors’ conclusion in the paper echoes a conclusion in the second edition my book published in 2012:   They conclude that “there are opportunities for various levels of government, the private sector, and partnerships between the two to create an environment to support the manufacturers who can reshore.” Let’s not waste another four years coming to the same conclusion.

 

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Is Bi-partisan Tax Reform Possible?

Wednesday, April 27th, 2016

Tis the season of talk about tax reform. Every presidential election cycle, the candidates all propose some kind of tax reform. However, once the new president is elected, Congress does not do anything because tax reform becomes the “third rail” to special interests who lobby for or against reforms that would affect them. The last comprehensive tax reform that Congress passed was the Tax Reform Act of 1986, more than a generation ago. Thus, we must pose the question: Is it possible for Congress to pass bi-partisan tax reform.

First, let’s separate fact from the rhetoric:

Rhetoric: Corporations play games to keep from paying their fair share of taxes.

Fact: Out of the 34 countries in the Organization for Economic Co-operation and Development (OECD), a group that includes most advanced, industrialized nations, America ranks first with a 39.1 percent corporate tax rate, compared to an OECD average of 24.1 percent. However, the effective rate for 2014 was 27.9 percent, which was second highest behind New Zealand among OECD countries and 15th-highest among the 189 countries measured. Effective tax rate takes into consideration the tax deductions allowed corporations to reduce the pool of taxable profits.

Some corporations aren’t paying their fair share of taxes because multinational corporations that have subsidiaries or divisions in other countries use legal accounting strategies to transfer profits to lower corporate tax rate countries or set up shell corporations in tax haven countries. This means that American corporations whose only facility is in the U. S. bear the brunt of our high taxes, making it more difficult for them to compete in the global marketplace.

One of the strategies used is what is called “Corporate inversion” by Investopedia, which refers to re-incorporating a company overseas in order to reduce the tax burden on income earned abroad. Corporate inversion as a strategy is used by companies that receive a significant portion of their income from foreign sources, since that income is taxed both abroad and in the country of incorporation. Companies undertaking this strategy are likely to select a country that has lower tax rates and less stringent corporate governance requirements.
How can we get these multinational corporations to pay their fair share of taxes in the United States?

Well, we can follow the example of states that have passed bi-partisan tax reform to address the problem of getting corporations to pay a fair share of taxes in their state. The solution was “apportionment” of corporate income taxes that is a share of taxes to be paid by a corporation to a state based on a particular formula. According to a Policy Brief by the Institute on Taxation and Economic Policy, all but the five states that don’t have a corporate income tax (Nevada, South Dakota, Texas, Washington, and Wyoming) have adopted some type of formula for state apportionment of corporate taxes.

  • “First, if a corporation does not conduct at least a minimal amount of business in a particular state, that state is not allowed to tax the corporation at all. Corporations that have sufficient contact in a state to be taxable are said to have “nexus” with that state.
  • Second, each state where a corporation has nexus must devise rules for dividing the corporation’s profits into an in-state portion and an out-of-state portion — a process known as “apportionment.” The state can then only tax the in-state portion.”

About half the states with a corporate income tax adopted the model legislation worked out in the 1950s, called the Uniform Division of Income for Tax Purposes Act (UDITPA). UDITPA recommends the following three factors to determine the share of a corporation’s profits that can be taxed by a state:

  • “The percentage of a corporation’s nationwide property that is located in a state.
  • The percentage of a corporation’s nationwide sales made to residents of a state.
  • The percentage of a corporation’s nationwide payroll paid to residents of a state.”

Only two states use the percentage of property tax since local government jurisdictions already impose a property tax, and state governments don’t want to encourage corporations to relocate to other states by doubling up on property tax. Only eight states still use the unmodified formula, and many have moved to just sales. Most of the rest of the states have increased the weight on sales, and 18 states “double weight” the sales tax percentage.

One of our members of the Coalition for a Prosperous America, Bill Parks, is a passionate advocate of corporate tax reform at the federal level based on the Sales Factor Apportionment Framework. Mr. Parks is a retired finance professor and founder of NRS Inc., an Idaho-based paddle sports accessory maker. He asserts that “Tax reform proposals won’t fix our broken corporate system… [because] they fail to fix the unfairness of domestic companies paying more tax than multinational enterprises in identical circumstances.”

He explains that multinational enterprises (MNEs) can use cost accounting practices to transfer costs and profits within the company to achieve different goals. “Currently MNEs manipulate loopholes in our tax system to avoid paying U. S. taxes… MNEs can legitimately choose a cost that reduces or increases the profits of its subsidiaries in different countries. Because the United States is a relatively high-tax country, MNEs will choose the costs that minimize profits in the United States and maximize them in what are usually lower-tax countries.”

The way his plan would work is that the amount of corporate taxes that a multinational company would pay “would be determined solely on the percent of that company’s world-wide sales made to U. S. customers. Foreign MNEs would also be taxed the same way on their U. S. income leveling the playing field between domestic firms and foreign and domestic MNEs.”

For example, if a MNE’s share of worldwide sales in the United States is 40%, then the company would pay taxes on 40% of its sales. Mr. Parks states that the advantages of his plan are:

  • “Inversions [and transfer pricing] for tax purposes become pointless because the company would pay the same tax no matter what its base.
  • It would encourage exports because all exports are fully excluded from corporate income tax.
  • It simplifies the calculation for federal, state, and local taxes because the profit to be taxed by the U. S. is determined by a simple formula.
  • Reduces or eliminates the tax incentives to locate jobs, factories, and corporate headquarters offshore, boosting employment and U. S. tax revenue.
  • Ends the disguised income taxes which are actually royalty payments.
  • Allow Congress to raise revenue without raising rates because it stops U. S. and foreign multinationals from being able to place their profits offshore to avoid U. S. taxes.”

A couple of additional benefits listed at www.salesfactor.org are:

  • “Removing the incentives for multinational corporations to leave their profits in off-shore tax havens.
  • Maintaining Congress’ ability to lower rates and/or increase revenue.”

Bill concludes that “Sales Factor Apportionment is simpler and more effective than our current system which attempts ? and often fails ? to tax the worldwide business activities or U. S. corporations. Because it is based on sales, not payroll or assets, it is a difficult system to game. Companies can easily move certain business operations and assets out of the U. S., but few, if any, would be willing to give up sales to the world’s largest market.”

Mr. Parks was part of my team visiting the offices of Congressional Representatives in Washington, D. C. the week of April 11th, and several Representatives appeared quite interested in the Sales Factor Apportionment tax proposal he described. Mr. Parks is the author of a much more in-depth article in the April 4, 2016 issue of Tax Notes (available only by subscription), and I am happy that he gave me permission to write about this topic for my audience. For further information, you may email him at Bill@nrs.com. You can also read the results of several studies on SFA at www.salesfactor.org.

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Posted in Economy, Jobs, Manufacturing, Taxes/Regulations | No Comments »

CPA’s Balanced Trade Message has Impact on Congress

Wednesday, April 27th, 2016

I just returned last Friday night from the Coalition for a Prosperous America‘s 9th annual Fly-In to Washington, D. C. It was my 4th time to participate with CPA members from across the country to meet with Congressional Representatives and/or their staff. I noticed a big difference in the reception we got during our visits compared to my first trip. The Coalition for a Prosperous America is a nonprofit organization representing the interests of 2.7 million households through our agricultural, manufacturing and labor members, and I’ve been a member since 2011.

In his report, CEO Michael Stumo wrote, “It was an amazing experience to finally have the wind at our backs instead of facing headwinds…CPA is taken very seriously by congressional offices. They trust what we say. One-fourth of our meetings included the congressman/woman themselves, which is significant and a new high for us. Senior staffers attended our meetings rather than junior staffers as was the case only a few years ago.”

However, we have not just been doing an annual visit to D. C. once a year since 2008. Teams of CPA members led by Michael Stumo have made visits to D. C. once or twice a month since January 2015. Here in California, teams of members led by me have visited the offices of 37 of the 53 Representatives from one to six times since 2013. In addition, CPA has co-hosted four manufacturing summits in California starting in 2013 ? two in San Diego, one in Orange County, and our recent one in Sacramento in February. The same kinds of activities have taken place in other states where CPA has a state chapter, such as Ohio, New York, and Pennsylvania.

In all of our visits, either in district or in D. C., we have constantly focused part of our message on simply establishing why our huge trade deficit not only matters, but is core to our national economic malaise. As I have written in past articles, our annual trade deficit over the past 20 years has a relationship to our national debt and is a major cause of the loss of 5.8 million manufacturing jobs and the nearly 95 million people that are no longer part of the workforce.

For years, we have been emphasizing the following:

  1. Trade deficits matter, they kill jobs and growth: This may sound obvious to you and me, but many Representatives and their staffer did not believe trade deficits mattered in the past. They were unwilling to admit the serious consequences in having a huge deficit in goods. So, if trade deficits were not a problem, there was no need to pursue a solution. Michael Stumo wrote, “This past week showed we have largely won that argument. We can only grow jobs and our economy if we focus upon a national strategy to balance trade by identifying the biggest trade cheating problems and aggressively fixing them.”

Our teams distributed a flyer titled, “Balanced Trade: Fighting the New Mercantilism” recommending that Congress establish a national goal to balance trade over a reasonable period of time by means of:

  • Direct trade negotiators to pursue trade deficit reduction as a primary negotiating objective.
  • Review past agreements for compliance with this objective. Renegotiate those that fail the test.
  • Utilize tax, fiscal and monetary policies to achieve the goal.
  • Aggressively and systematically attack and neutralize foreign mercantilism.
  1. Past trade agreements have not improved our trade performance: For years, we have heard this line from the establishment and Congressional Representatives: “Trade agreements establish American leadership, grow exports and create jobs.” The refrain was: “Trade is beneficial. We are increasing exports, and we have a surplus in services.” The only time I heard this refrain this year was by a legislative assistant in Senator Dianne Feinstein’s office.

We were able to trounce this argument this year by distributing a flyer that clearly showed the poor trade performance of our past agreements through visual aids CPA spent a lot of time developing (see below). We clearly showed that modern foreign mercantilism has moved beyond the tariff and non-tariff barrier provisions in trade deals. Indeed, those deals often made our trade problems worse. For example, our trade deficit with Korea has nearly doubled since it went into effect in 2012 (from $14.7 billion to $28.4 billion in 2015.)

The TPP will likely make America worse off: CPA read and digested the pro-TPP studies by Petri and Plummer, Peterson Institute for International Economics, Working Paper 16-2, Jan 2016 and the “Global Economic Prospects: Potential Macroeconomic Implications of the Trans-Pacific Partnership,” by the World Bank, Jan 2016. These reports tried to hide the problems and exaggerate gains. Our CPA teams distributed a flyer that “displayed the results through insightful infographics showing that any projected gains were embarrassingly meager and fundamentally implausible”[because] “The studies assume, without analysis, (a) no currency misalignment, (b) no foreign border taxes that replace tariffs, (c) no industrial subsidies and state-influenced enterprises, and (d) no mercantilism.” As Michael Stumo wrote, “These assumptions are untrue. Therefore, we cannot achieve the meager growth projected. We showed how those studies were built upon a series of demonstrably false assumptions to produce those meager gains. Then we showed why losses to American workers, industry and the economy were nearly certain when you eliminated the false assumptions.”


This year we also proposed tax reform that can fix some major foreign trade cheating on a large scale. As Michael Stumo, wrote, “Tax reform is a challenge because K Street lobbyists rig the game for special interests and no connection is made with our success in producing here and winning the international trade competition. However, we made significant gains in showing how we can fight foreign consumption taxes that act as tariffs by smartly adding a US consumption tax and funding the reduction of other regressive taxes and costs to fix the problem. We also showed how we can fix the corporate income tax system with sales factor apportionment to halt tax haven abuse by transnationals, incentivize US domestic production, and make foreign companies pay their fair share of income tax when selling into the lucrative American market.”

The good news is that everyone we saw seemed to agree that the TPP does not have the votes to pass before the election. The danger will be in the “Lame Duck” session. We seem to be in a far better position to prevent future passage than we were last year at this time with regard to passage of the “Fast Track” Trade Promotion Authority. Michael Stumo, wrote, “We almost beat Fast Track last June. Indeed we won the first votes in regulation time but lost in overtime when the Empire Struck Back. Now, it seems that the anti-Fast Track block is holding strong and quite a lot of pro-Fast Track congressional members have either declared opposition to TPP or are leaning against it.”

Michael added, “GOP House leadership pushed Fast Track through last year but they seem to view TPP as toxic now. The GOP rank and file are letting House leadership know they do not want to vote on TPP at any time in the foreseeable future. The Senate side is less solid and has always posed the bigger challenge. Senate majority leadership wants changes to TPP but still wants get to ‘yes.’ However, the changes being demanded are difficult (but perhaps not impossible) to deliver.”

We are being helped by the stand against trade agreements by two of the major presidential candidates, Trump and Sanders, who bring up our broken trade policy in almost every speech. “Trade has become one of the few, rare ‘voting issues’… an issue that actually moves voters to support or oppose a candidate.”

While this has been a several year battle, we haven’t won yet and still have a lot to do. The establishment will continue say that the voters simply don’t understand the “greater good.” Pundits will continue to write many “reasoned” articles about why the voters should support trade agreements such as the TPP. But the success of Trump and Sanders shows that the establishment has not only lost its clout, it is actively disbelieved by many now.

Help us to grow this movement and increase our effectiveness. Encourage your friends and colleagues to participate. Let’s keep up the good fight!

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Posted in Economy, Jobs, Manufacturing, Taxes/Regulations, Trade Policy | No Comments »

How Could the Trans Pacific Partnership Affect you or your Business

Tuesday, April 19th, 2016

On February 4, 2016, President Obama signed the Trans Pacific Partnership Agreement on behalf of the United States. The TPP agreement has been in negotiation behind closed doors since 2010 between the United States and 11 other countries around the Pacific Rim: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. The TPP is a “docking agreement” so other countries could be added without the approval of Congress. India, China, and Korea have expressed interest in joining the TPP.

Our elected representatives in Congress had no involvement in writing the TPP – it was written by the staff of the U. S. Trade Representative office, with over 600 corporate advisors (think corporate lawyers) helping them write it. It contains more than 5,500 pages, and no member of Congress could view it as it was being negotiated until late 2014. Even then, they could not take any staff with them and were not allowed to take pen, pencil, paper, or a camera when they went to view it at the U. S. T. R.’s office.

The full text of the TPP was finally released to the public to review in November 2015, and it now awaits Congressional approval. According to the rules established by the Trade Promotion Authority (TPA) that passed Congress narrowly in June 2015, Congress will only be allowed 45 days for committee analysis after the bill is introduced, only 15 days after that is completed to bring it up for a floor vote, and only 20 hours of debate in the House and Senate. The TPA does not allow any amendments, filibuster, or cloture. Notice that the TPP is called an “Agreement,” as was NAFTA, CAFTA, KORUS, and every other trade deal in the past 22 years. The purpose for this is to get around the requirement of the two-thirds vote of the Senate to approve a Treaty that is required under Article 1, Section 8 of the Treaty clause in the U. S. Constitution. The TPP requires only a simple majority vote (50% + one.)

Supporters of the TPP say that it represents 40% of the world’s economic activity (GDP), but they fail to mention that the U. S. and its current trading partners represent 80% of that 40%. The other five countries represent the other 20%, with Japan alone being 17.7% of that total.

The current goal of trade agreements as given by Congress to the U.S.T.R is to “remove trade barriers,” such as tariffs, quotas, etc. and increase U. S. exports. The U. S. cut tariffs and opened our markets by means of these trade agreements. However, our trading partners didn’t really open their markets to us. They played another game ? mercantilism, featuring rampant global currency devaluation, consumption taxes called Value Added Taxes (VATs) that are tariffs by another name, massive subsidies to their industries, and industrial policies that favor their domestic supply chains.

In brief, the effect to the United States of this unbalanced trade has been:

  • Loss of >600,000 mfg. jobs from NAFTA
  • Loss of 3.2 million mfg. jobs between 2000 – 2010 from China’s entry into WTO
  • Loss of >60,000 mfg. jobs since Korea-US Agreement went into effect in 2012
  • Loss of an estimated 3.4 million U. S. service & call center jobs since 2000
  • Loss of an estimated 700,000 public sector jobs (2008-2013)
  • Racked up cumulative trade deficit of $12 trillion in goods (average $500 billion each year) since 1994

As a result, we now have the worst trade deficit in U. S. history, and we are off to even a higher deficit this year based on the trade figures released for January ($45.9 billion) and February ($47.1 billion). As a recent example of the effect of trade agreements on our total trade deficit, our trade deficit with Korea has nearly doubled in less than four years, increasing from $14.7 billion in 2012 to $28.4 billion in 2015. Proponents of KORUS promised that it would create 70,000 jobs and $10 billion in exports.

As mentioned in a previous article, proponents of the TPP aren’t even giving such rosy predictions. The Peterson Institute’s analysis of the TPP states: “…GDP is projected to fall slightly (-0.54 percent), employment to decline by 448,000 jobs…”

What are some of the ways the TPP could affect you or your business?

Buy American Act would essentially be made Null and Void: The worst effect would be to those businesses who sell to the government, whether it be local, state, or federal because under the TPP procurement chapter, the U.S. would have to agree to waive Buy America procurement policies for all companies operating in TPP countries. This means that all companies operating in any country signing the agreement would be provided access equal to domestic firms to bid on government procurement contracts at the local, state, and federal level. There are many companies that survived the recession and continue in business today because of the Buy American provisions for government procurement, especially defense and military. The TPP could be a deathblow for companies that rely on defense and military contracts. However, it would also affect procurement for infrastructure projects, such as bridges and freeways, as well as construction of local, state, or federal facilities.

Of course, this means that U. S. companies could bid on government procurement projects in TPP countries, but the trading benefit is miniscule. The U. S. government procurement market is 7X the size of current TPP partner countries (+550 billion vs. $55 -70 billion.) It is also highly unlikely that U. S. companies would be the low bidder against domestic companies in these TPP countries because of the vast difference in wages in countries such as Vietnam, where the average wage is 55 cents/hour. Past trade agreements has resulted in an average annual wage loss of 5.5% for full-time workers without college degrees, and U. S. wages have been stagnant for decades, growing by only about 2% per year since 2008. The result has been increased wage inequality from low to high wage earners.

Product Labeling could be Made Illegal: If you like to know if your food is safe, then you won’t like the fact that “Country of Origin,” “Non-GMO,” or “Organic” labeling could be viewed as a “barrier to trade” and thus be deemed illegal. According to Food & Water Watch, around 90% of the shrimp and catfish that Americans eat are imported. They warn, “The TPP will increase imports of potentially unsafe and minimally inspected fish and seafood products, exposing consumers to more and more dangerous seafood.” Many TPP countries are farm-raising seafood in polluted water using chemicals and antibiotics prohibited in the U. S. Farmed seafood from Malaysia, Vietnam, and China is being raised in water quality equivalent to U. S. sewers. Today, the FDA only inspects 2% of seafood, fruits and vegetables, and the USDA only inspects 4-5% of meat & poultry. Increased imports of food from TPP trading partners could swamp FDA and USDA inspections, so that even less is inspected.

TPP would Increase Immigration: If you are concerned about jobs for yourself or family members, then you won’t like the fact that the TPP increases “the number of L1 visas and the number of tourist visas, which can be used for business purposes.” Any service provider (phone service, security, engineers, lawyers, architects or any company providing a service) can enter into a TPP partner country and provide that service. Companies don’t have to hire Americans or pay American wages – they can bring in own workers and pay less than the American minimum wage.

TPP would Increase Job Losses in Key Industries: If you work in the automotive or textile industries, you may lose your job. The Center for Automotive Research projects a loss of 91,500 U. S. auto jobs to Japan with the reduction of 225,000 automobiles produced in the U. S. Also, the National Council of Textile Industries projects a loss of 522,000 jobs in the U. S. textile and related sectors to Vietnam.

TPP would Reduce Reshoring: Because TPP will reduce tariffs in trading partner countries, such as Vietnam, it will make the Total Cost of Ownership analysis to return manufacturing to America more difficult to justify. The high U. S. dollar has already diminished reshoring in the past year, so Harry Moser, Founder and President of the Reshoring Initiative, recently told me that “The combination of the high USD and TPP will reduce the rate of reshoring by an estimated 20 – 50%.”

Remember that the TPP is missing any provisions to address the mercantilist policies practiced by our trading partners: currency manipulation, Value Added Taxes that are both a hidden tariff and a hidden export subsidy, government subsidies/state owned enterprises, and “product dumping.”

 America is at a crossroads. We can either continue down the path of increasing trade deficits and increasing national debt by allowing anything mined, manufactured, grown, or serviced to be outsourced to countries with predatory trade policies. Or, we can forge a new path by developing and implementing a national strategy to win the international competition for good jobs, sustained economic growth and strong domestic supply chains. If you support the latter path, then add your voice to mine and millions of others in urging Congress not to approve the TPP in either the regular session before the Presidential election or the “lame duck” session after the election.

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Posted in Country of Origin, Inellectual Property, Jobs, Manufacturing, National security, Reshoring, Trade Policy | No Comments »

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