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Regional Trade Shows Provide Value for Exhibitors and Attendees

Tuesday, May 8th, 2012

At a time when trade shows and exhibitions have been shrinking in size, combining with other shows, and even disappearing like NEPCON and WESCON, a successful 18th Del Mar Electronics and Design Show was held May 2nd and 3rd in the San Diego region.

According to the report, “Manufacturing & Industrial Exhibition & Event Marketing Trends & Outlook,” published by TradeShow Week and Skyline Exhibits, a survey of manufacturers revealed that manufacturing trade shows and exhibitions in the United States have been affected by the shift of production offshore since the year 2000.  Manufacturers are exhibiting at fewer events in North America and are heading to China to participate in trade shows. Many companies are scaling down the size of their booths and placing fewer, but more informed people in their booths. “Two out of three exhibitors believe that demographics are impacting their industry and shows and about half of this group indicates that attendance levels are lower as waves of executives and managers retire in the industry.”

While the demise of trade shows has been predicted because of the Internet and outsourcing offshore, DMEDS and other regional shows such as the Design-2-Part shows been able to buck the trend and provide value for exhibitors and attendees.

DMEDS is the only show in the San Diego region for the broad base of the manufacturing, electronics, and design industry to exhibit and attend.   It is large for a regional show with nearly 400 booths filling the two largest buildings and a tent between them at the Del Mar Fairgrounds.  It originated as a show where the majority of exhibitors were manufacturers’ representatives and distributors exhibited their product lines, primarily related to the electronics industry.  However, the number of manufacturers’ representatives and distributors exhibiting dwindled every year and the number of manufacturers displaying a wider range of products and services increased every year until reps and distributor exhibits comprised less than ten percent of the booths.

DMEDS is now a very different show than what it used to be and provides value for attendees by giving them the opportunity to meet and talk with a wide variety of potential sources.  Products displayed are as diverse as adhesives to wireless and portable products in the A to Z show directory index.  Some of the services available include 3D scanning, assembly, design engineering, contract manufacturing, research prototyping, test measurement and calibration, and training.  Custom fabrication services exhibited include: dip brazing, die and investment casting, forging, machining, plastic and rubber molding, sheet metal fabrication, vacuum and pressure forming, and welding.  You can still find electronic components, as well as fasteners, hardware, and tools.  My company, ElectroFab Sales, has participated in the show for 15 years, displaying the custom fabrication services of the companies we represent.

Most of the manufacturing exhibitors had parts, assemblies, and products on display at their booths so engineers could have examples of how their designs could be fabricated.  Browsing websites to find pictures of parts just isn’t the same as seeing actual parts in person.  Besides, engineers could ask questions about materials, design details, and tolerances that are not easily answered through contact on the Internet.

Free seminars on a broad range of topics were provided for attendees both days of the show.  I gave one of the presentations on “Returning Manufacturing to America, highlighting the Total Cost of Ownership worksheet that was developed by Harry Moser of the Reshoring Initiative.

An informal poll of attendees, visitors to our booth, and exhibitors in our building revealed that in the past year, all but one American company had one or more customers give them a chance to quote on making parts that were currently being made in China.  One purchasing agent told me that if pricing from an American company comes within 20% or less than the pricing from China, he is allowed to select a domestic source.  If more companies would use the TCO worksheet to do a true total cost analysis, American companies would have even greater opportunities to recapture business now being done in China.

The show location is centrally located in San Diego County, with easy access to a major interstate highway, and parking is also free.  What makes it even more popular is a free reception immediately after the show ends at 5 PM on the first day of the show, providing excellent networking opportunities with industry peers for exhibitors and attendees.   If you haven’t been to a DMEDS show for a few years, be sure to make it a priority to attend the next show in May 2013.

The dozen different Design-2-Part shows, produced by the Job Shop Company, are held regionally around the county and feature design, custom fabrication, and contract manufacturers located in the United States.  While some of these companies may also have a plant offshore, no offshore-only companies are allowed to exhibit in the show.  No sales representatives or distributors are allowed to have their own booths in the show.  The mission of Design-2-Part shows is to support and feature American manufacturers.

At the Design-2-Part shows, engineers get to see and touch actual parts built by the exhibitors. This gives them ideas to use for new products they are designing and shows them how other people have solved problems they may be encountering in their design phase.

I have been attending the Design-2-Part shows since 1982 when I started in sales, and the Long Beach show in October 2010 and Pasadena show in 2011 were exciting. The show attendance for both shows was up to the pre-recession levels of fall 2007.  Show management said the Long Beach show was one of the best Southern California shows in the history of the company, with attendance up 21 percent over the 2009 show in Pasadena and up ten percent over the 2008 show in Pomona.   The shows were so well attended that many exhibitors had trouble talking to all of the attendees that were visiting their booths.  The attendees weren’t just browsing, and many exhibitors had far more leads from these shows than the 2008 and 2009 shows.

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

Harry Moser of the Reshoring Initiative has been a featured speaker at some of the Design-2-Part shows around the country, and I have given presentations at three of the West Coast shows on returning manufacturing to America by doing a thorough TCO analysis.  As more and more companies learn how to utilize this worksheet, the “reshoring” trend will continue to grow.

As long as show exhibitors and attendees receive value from regional trade shows such as DMEDS and the Design-2-Part shows, they will continue to thrive and grow.  In our new age of digital communication, many realize that there is no substitute for the face-to-face interaction provided by this type of trade show. Be sure to put one of these shows on your calendar to attend in the future.

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Posted in Manufacturing, Outsourcing, Reshoring | No Comments »

Death by China is a Global Call to Action to Confront the Dragon

Tuesday, May 1st, 2012

Every once in a while a book comes along that puts all the pieces into a complete picture.  The well-written, easy-to-read book, Death by China, is one such book, and the picture it portrays is both revolting and frightening.   For too long, our business and political leaders have kowtowed to China, and the consequences have been disastrous.  The response of most American economists and government leaders’ to the economic imperialism of China has been either naïveté, cowardice, or sheer stupidity.  As a result, we Americans now face the risk of losing our national sovereignty, freedom, and way of life.  But the whole world is in danger, both from a political and environmental viewpoint.

In the first chapter, “It’s Not China Bashing if It’s True,” co-authors Peter Navarro and Greg Autry portray the grim picture of the many tactics China uses to conduct unrestricted economic war against the United States in order to achieve its written goal of becoming the world’s super power of the 21st Century.

They write, “Even as thousands literally die from this onslaught of Chinese junk and poison, the American economy and its workers are suffering a no-less-painful ‘death to the American manufacturing base.’”  They corroborate the shrinking of the manufacturing industry that I wrote about in my book:  “America’s apparel, textile, and wood furniture industries have shrunk to half their size ? with textile jobs alone beaten down by 70%.” And, “other critical industries like chemicals, paper, steel, and tires are under similar siege.”

Navarro and Autry point out that as a consequence of China’s becoming the world’s “’factory floor,’ it must consume half of the world’s cement, nearly half of its steel, one-third of its copper, and a third of its aluminum.”  Even more alarming is the fact that “by the year 2035, China’s oil demand alone will exceed that of total oil production today for the entire world.”

To feed its voracious appetite for the world’s natural resources, China is practicing its own brand of colonialism that beings with a “Mephistophelean bargain:  lavish, low-interest loans to build up the country’s infrastructure in exchange for raw materials and access to local markets.”

The second chapter goes into detail on “death by Chinese poison.”  I’ve been careful in avoiding “made in China” products in the grocery store, but was horrified to find out that Chinese farmers produce 60% of our apple juice concentrate, 50% of our garlic, and a significant amount of “everything from canned pears and preserved mushrooms to honey and royal bee jelly.”

If that doesn’t make you sick enough thinking about how much mercury and other poisons you are accumulating in your body from eating these products, consider the fact that China now “produces 70% of the world’s penicillin, 50% of its aspirin, and 33% of its Tylenol.  Chinese drug companies have also captured much of the world market you in antibiotics, enzymes, primary amino acids, and vitamins. China has even cornered the world market for vitamin C — with 90% of market share ? even as it plays a dominant role in the production of vitamins A, B12, and E, besides many of the raw ingredients that go into multivitamins.”

While some of the poisons are accidental results of shoddy production methods, unsanitary processing, or soil toxicity due to a polluted environment, others are simply a way to boost profits by Chinese “’black hearts’ ? a term used by their own countrymen” ? to purposely increase their profits. Their retelling of stories you’ve read in the news will make you sick:

Melamine added to human and pet food products to increase protein levels, the adulteration of the life-saving anticoagulant drug Heparin, and lead and cadmium used in making toys and jewelry.  In addition, China is now “the world’s leading source of farm-raised fish and dominates the markets for catfish, tilapia, shrimp, and eel.”   It was horrifying to learn that China’s fish ponds are filled with water so polluted that it would be equivalent to sewer water in the U. S. and the Chinese put poultry cages over the ponds so that the fish can feed on poultry droppings.

This is why “Chinese foods and drugs always rank #1 of those flagged down at the border or recalled by both the U.S. Food and Drug Administration and the European Food Safety Authority.”  The authors point out that the “U. S. Food and Drug Administration is so grossly understaffed that although it regulates 80% of America’s food supply, it only inspects less than 1% of food imports.”

In the third chapter, the authors go on to “regale you with tale after tale of the myriad Chinese products that can sicken, maim, or kill you” so that you will be  become motivated to “call, write, or e-mail your Congressional representatives.”  They urge “all of us to stand up just like Peter Finch did in the movie Network and shout, “We’re mad as hell, and we won’t buy your ‘Chinese junk’ anymore.”

The book moves on in chapter 4 to explain how China uses “Weapons of Job Destruction” to gut the manufacturing industries in the United States.  Navarro and Autry specifically illustrate how the Chinese bureaucracy systematically targets American industries to take over market share and destroy their competition.  They explain how the Chinese Communist Party seeks to achieve economic imperialism through its “eight pillars”:

1. An elaborate web of illegal export subsidies;

2. A cleverly manipulated and grossly undervalued currency;

3. The blatant counterfeiting, piracy, and outright theft of America’s intellectual property 4. Engaging in massive environmental damage;

5. Ultra-lax worker health and safety standards;

6. Unlawful tariffs, quotas, and other export restrictions;

7. Predatory pricing and practices to push foreign rivals out of key resource markets and then gouge consumers with monopoly pricing;

8. “Great Walls of Protectionism” — to keep all foreign competitors from setting up shop in China.

The next chapter provides an explanation of how China uses the second pillar of currency manipulation, followed by the chapter, “Death by American Corporate Turncoat:  When Greenbacks Trump the Red, White, and Blue” describing how corporations offshored their manufacturing to reduce costs and increase profits.  I agree with their sentiment that there seems to be “no patriotism among American corporations” as judged by the examples of General Electric, Caterpillar, Apple, and many, many others.  Their original motives may have been fear of losing market share, greed or following “herd mentality.”  However, the loss of our manufacturing base is now compounded by China’s new demand mandating “forced technology transfer” wherein “American companies must surrender their intellectual property to their Chinese partners as a condition of market entry.”   The authors point out this facilitates “the dissemination of various technologies not just to the Chinese partner directly involved but also to the Chinese government and other potential Chinese competitors” … so that “Western companies, in effect, create their own Chinese competitors virtually overnight.”

If you aren’t outraged and concerned enough by the previous chapters, chapter 8 will do the trick.  In chapter 8, “Death by Blue Water Navy,” the authors document what China has been doing with the wealth they’ve accumulated from more than a decade of huge trade deficits ? building up their military might.  Consider this:  China’s army of 2.3 million “outnumbers the combined forces of Canada, Germany, the United States, and the United Kingdom.”    China’s 6,700 tanks “dwarf Taiwan’s 1,100, South Korea’s 2,300, and Vietnam’s 1,000 or so,” and even the U. S. only has “about 5,000 tanks.”  Navarro and Autry label China’s Air Force as the “best that the Chinese can buy with our ‘Walmart dollars’ or that its spies can steal.”  For example, the Shenyang J-11B “is a carbon copy knockoff of the Russion Sukhoi Su-27 and the J-15 “is the equally counterfeit twin of the Russian Su-33.”

China’s build up of its Navy to challenge the U. S. Navy is even more disturbing.  The dominance of the U. S. Navy in the Pacific has been the only thing keeping Taiwan safe from being subjugated by mainland China.  Navarro and Autry write that China’s “first goal is to push U. S. aircraft carrier fleets out of the Western Pacific ? and perhaps finally take Taiwan ?  and then to ultimately project hard power across the globe.”   The Chinese even have a new missile, the Dongfeng-21D, capable of hitting “a powerfully defended moving target with pinpoint precision,” meaning that it could destroy an American aircraft carrier.

The American manufacturing industry was responsible for producing the goods and equipment that enabled the U. S. to win WWII and defeat the Soviet Empire in the Cold War.  But, now the “factory floor” of the world is in China, and the U. S. no longer has the capacity to ramp up to produce enough of the goods and equipment that would be needed to defend our country in a war against China.

After defining the challenges America faces in competing in the “Century of the Dragon,” Navarro and Autry conclude with an outline of a clear and achievable path for America to tame the Dragon’s onslaught.  There are recommendations for everyone from government and business leaders down to individual Americans.  In my meeting with Mr. Autry after reading his book, he told me that he believes boycotting 10% or more of Chinese products may be enough to destabilize the economy enough to topple the Communist regime. Peter Navarro is a professor at the University of California, Irvine and Greg Autry is an instructor and doctoral student at the university.  Mr. Autry also serves as Senior Economist for the American Jobs Alliance, a non-partisan, non-profit organization formed in 2011 to create and support American jobs.  The mission of AJA is:

  • To encourage and facilitate an educational curriculum that cultivates and maximizes the innate creativity that resides within every human being to ensure the United States of America perpetuates its traditional “Innovative Spirit.”
  • To encourage and facilitate a better understanding of the history and functioning of the American or National System of free enterprise and the activities necessary for its preservation.
  • To, once again, MAKE, GROW and INVENT all items that are vital for the survival of this and future generations. American firms, individuals and our government must renew our dedication to investing in, as well as, protecting our “Engine of Innovation.”  We must boldly reclaim the title of “shop floor of the world” so that all Americans can share in our increased national wealth and have better paying jobs for generations to come.

You can join me in pledging to create and support American jobs and buy a “Boycott China, Buy American” bumper sticker at http://www.americanjobsalliance.com

Death by China is a book that everyone interested in securing the future of America must read.   Sign up to keep apprised of issues/events at http://www.deathbychina.com/updates and check out the Death by China Facebook page.

Posted in Economy, Manufacturing, National security, Outsourcing | 2 Comments »

“Reshoring” Opportunities Abound at Del Mar Electronics & Design Show

Tuesday, April 24th, 2012

If your company is considering ”reshoring” manufacturing of some parts, assemblies, or products to the U. S., then you should attend the 18th annual Del Mar Electronics & Design Show, which will be held at the Del Mar Fairgrounds (Map) Wednesday May 2nd, 10am – 5pm and Thursday May 3rd 10am – 3pm.  Admission to the show, the seminars, and parking at the show are ALL FREE.

This is the only industrial trade show for manufacturers held annually in the San Diego region so this is the best opportunity for companies to find local and regional suppliers to “reshore” manufacturing to the U. S.

To help your company analyze the true Total Cost of Ownership to determine whether or not you should be returning manufacturing to America, I will be giving a presentation on “Returning Manufacturing to America” at 10 AM on Wednesday May 2nd.    I will be considering:

  • Hidden costs of doing business offshore that comprise a true understanding of the “Total Cost of Ownership”
  • How you can calculate these costs utilizing the Total Cost of Ownership worksheet calculator developed by Harry Moser of the Reshoring Initiative
  • Case stories reviewing some of the problems companies have experienced in outsourcing offshore
  • Reasons why some companies are choosing to “reshore” manufacturing to the U.S.

For the past 15 years, manufacturers have outsourced their manufacturing offshore in Asia, especially in China, to reduce costs to keep or increase market share.  However, the supply chain dynamics are changing, and the cost savings of outsourcing to China are eroding due to higher labor rates and shipping costs.  In the last few years, there have also been many news reports about outsourcing horror stories regarding poison or tainted Chinese products, Chinese counterfeit parts, intellectual property infringement, quality problems, and lawsuits so many companies are rethinking their decision about manufacturing in China.

In August 2011, the Boston Consulting Group’s released their first report “Made in America, Again: Why Manufacturing Will Return to the U.S.,” explaining how rising wages and other forces are steadily eroding China’s once-overwhelming cost advantage as an export platform for North America.  By around 2015, BCG concluded that when higher U.S. worker productivity, supply chain and logistical advantages, and other factors are taken fully into account, it may start to be more economical to manufacture many goods in the U.S.

Now, a new BCG report, “U.S. Manufacturing Nears the Tipping Point, Which Industries, Why, and How Much?” released on March 22, 2012 by Harold L. Sirkin, Michael Zinser, Douglas Hohner, and Justin Rose has identified “seven industry groups that account for $200 billion in goods imported from China for which rising costs in China will likely prompt manufacturing of goods consumed in the U.S. to return to the U.S.”

The report predicts that production of 10 to 30 percent of U.S. imports from China in these industries, which account for approximately 70 percent of goods that the U.S. imports from that nation, could shift to the U.S. before the end of the decade, adding $20 billion to $55 billion in output annually to the domestic economy.”  The tipping-point sectors are transportation goods, appliances and electrical equipment, furniture, plastic and rubber products, machinery, fabricated metal products, and computers and electronics.

BCG predicts that improved U.S. competitiveness and rising costs in China will put the U.S. in a strong position to add 2 million to 3 million jobs in a range of industries and an estimated $100 billion in annual output by the end of the decade which would reduce unemployment by 1.5 to 2 percentage points, and lower the nonoil-related merchandise deficit by 25 to 35 percent.

According to a new survey which BCG conducted in late February, “More than a third of U.S.-based manufacturing executives at companies with sales greater than $1 billion are planning to bring back production to the United States from China or are considering it.”

The top factors cited as driving future decisions on production locations:  labor costs (57 percent), product quality (41 percent), ease of doing business (29 percent), and proximity to customers (28 percent).  In addition, 92 percent said they believe that labor costs in China “will continue to escalate,” and 70 percent agreed that “sourcing in China is more costly than it looks on paper.”

In the new survey, “67 percent of respondents in rubber and plastic products, 42 percent in machinery, 41 percent in electronics, 40 percent in computers, and 35 percent in fabricated metal products said they expect that their companies will reshore production from China to the U.S.”

“Not long ago, many companies regarded China as the low-cost default option for manufacturing,” observed Michael Zinser, a BCG partner who leads the firm’s manufacturing work in the Americas. “This survey shows that companies are coming to the conclusion surprisingly fast that the U.S. is becoming more competitive when the total costs of manufacturing are accounted for.”  To request a summary of the survey findings, please contact David Fondiller at fondiller.david@bcg.com.

The Del Mar show will also feature a number of other free technical seminars.  A few of the topics are:  “Using LinkedIn as a Business Development Tool,” “New Energy Storage Options for the Transportation Sector,” “Best of SolidWorks Tips and Tricks,” and “Counterfeit Electronic Components Are No Longer a Threat; They are a Reality.”  For the full seminar schedule, go to www.vts.com.  In addition, all attendees are invited to the Post Time Party, Wednesday, May 2nd, from 5 – 7pm, with free refreshments provided thanks to sponsorship by Quality Systems Integrated Systems, Luscombe Engineering, Concisys Electronic Manufacturing Services, and National Test Equipment.

My company will be exhibiting products for the companies we represent at Booths 207 – 209 in the Bing Crosby Hall, which is to the left of the main entrance to the show.   We look forward to seeing you at the show!

 

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Posted in Manufacturing, Outsourcing, Reshoring | No Comments »

American Manufacturing Has Declined More Than Most Experts Have Thought

Tuesday, March 27th, 2012

A new report released by the Information Technology & Innovation Foundation (ITIF) presents a strong case that manufacturing has declined more during the last decade than it did during the Great Depression of the 1930s.  It’s gratifying to finally see a well-respected non-partisan “think tank” release a report based on empirical data that corroborates what those of working in the manufacturing industry have experienced, about which I have been speaking and writing since 2003.

One of the main points of the report is that during the Great Depression, we lost 30.9% of manufacturing jobs, but in the decade of 2000-2010, we lost 33.1% of manufacturing jobs.  It becomes more serious when you realize that in the Great Depression, manufacturing accounted for 43% of jobs lost and 34% of all jobs at the time, but now manufacturing only represents about 11% of all jobs, but nearly one-third of the job loss.  This percentage loss represents 5.7 million manufacturing jobs. The report states, “On average, 1,276 manufacturing jobs were lost every day for the past 12 years.   A net of 66,486 manufacturing establishments closed, from 404,758 in 2000 down to 338,273 in 2011. In other words, on each day since the year 2000, America had, on average, 17 fewer manufacturing establishments than it had the previous day.”

When you understand the multiplier effect of manufacturing jobs, creating 2-3 supporting jobs, this loss of manufacturing jobs represents 11 to 17 million jobs.  The report states, “In fact, in January 2012 there were more unemployed Americans (12.8 million) than there were Americans who worked in manufacturing (just under 12 million).”  No wonder we have the high local, state, and federal deficits that we are experiencing ? there are fewer taxpayers and more benefit collectors.

The two million manufacturing jobs we lost during the Great Recession was added to the over 3.7 million we had already lost.  After the recession ended, the report states “just 166,000, or 8.2 percent, returned. That leaves 91.8 percent of jobs to be recovered.  At the rate of growth in manufacturing jobs in 2011, it would take until at least 2020 for employment to return to where the economy was in terms of manufacturing jobs at the end of 2007.   In reality…U.S. manufacturing has been in a state of structural decline due to loss of U.S. competitiveness, not temporary decline based on the business cycle.”

It’s obvious that with unemployment at 8.3 percent, “all those jobs have not been recreated in other industries.”  If manufacturing declines further, there are no guarantees that other jobs will appear to replace those lost in manufacturing.  The authors validate what I’ve written in my book and previous articles:  “manufacturing jobs pay more; manufacturing is a source of good jobs for non-college-educated workers; and manufacturing is the key driver of innovation—without manufacturing, non-manufacturing innovation jobs (for example, research and design) will not thrive.”

For years, most economists, experts, and government officials have said that the decline in manufacturing is a natural outcome of our transformation from an industrial society to a post-industrial society. “This decline is often cited by defenders as “normal” and in line with what is happening in other countries. In this “post-industrial” view, advanced nations are transitioning from factories to services; the greater and faster the loss of manufacturing, the more successful nations are in mastering the transition.”

The authors concede that there is “some truth to the post-industrialists’ view.  Advanced economies naturally see manufacturing jobs contribute to a smaller share of total employment, since manufacturing productivity is typically higher than non-manufacturing productivity.  But normally the loss is modest and gradual, in contrast to the United States where in the last decade it was sudden and steep.”  In addition, “advanced nations do lose some lower-value-added, lower-skill, commodity-based manufacturing to lower-wage nations.   But …they also increase their demand for the higher-value-added products that developed nations should naturally produce…the process of global integration does not and should not naturally lead to the deindustrialization of developed economies, but rather to the transformation of their industrial bases toward more complex, higher-value-added production.”

These same experts have denied that manufacturing has been in decline, arguing that manufacturing became incredibly productive just like agriculture did a century earlier so that fewer workers are needed in the industry.  The authors state that “Virtually everyone makes the argument that massive manufacturing job decline is a sign of success: manufacturers are using technology to automate work and to become more efficient…Manufacturing is like agriculture” has been the dominant story.  The United States produces more food than ever, but because farming has become so efficient, it requires a very small share of U.S. workers to grow and harvest the food. So while manufacturing productivity growth may be tough on workers, job loss is seen as a sign of strength, not weakness.”

It’s true that job loss could be result of increased productivity, but what these experts have ignored is that manufacturing’s share of the Gross Domestic Product (GD) declined from 15% in 2000 to 11.0% in 2009.   While manufacturing has declined as a share of GDP in the United States and some other nations, such as Canada, Italy, Spain, and the United Kingdom,” it is stable or even growing in many others (including Austria, China, Finland, Germany, Japan, Korea, the Netherlands, and Switzerland.)”

The ITIF report dispels the myth that increased productivity is the reason for the job loss with a review of the productivity of various manufacturing industry sectors, showing that in 2010, “13 of the 19 manufacturing sectors (employing 55 percent of manufacturing workers) were producing less than they there were in 2000 in terms of inflation-adjusted output.”

In addition, the authors assert that “the government’s official calculation of manufacturing output growth, and by definition productivity, is significantly overstated.  ” Correcting for biases in the official data, ITIF finds that from 2000 to 2010, U.S. manufacturing labor productivity growth was overstated by a remarkable 122 percent. Moreover, manufacturing output, instead of increasing at the reported 16 percent rate, in fact fell by 11 percent over the period.”  This was during a period when the U. S. GDP increased by 17 percent.

Besides, the report states that “it is not clear how productivity could be the culprit behind the large share of job loss in the 2000s when manufacturing labor productivity (as measured by the official value added data) was not substantially different in the 1990s than it was in the 2000s.  During the 1990s, manufacturing jobs fell by one percent, while labor productivity increased by 53 percent. In the 2000s, manufacturing jobs fell by 33 percent while productivity increased by 66 percent…the 2000s productivity number is actually significantly overstated, even more so than the 1990s figure. Adjusting for bias in the data, the actual productivity growth in the 2000s was just 32 percent.”

The authors provide evidence that “there are serious problems with how the U.S. government measures manufacturing output that cause it to significantly overstate output and, by extension, productivity.   In order to see how productivity and output are overstated, it is necessary to understand both concepts.”

Their explanation is too complicated to consider in this short article, but is well worth reading in the report.  They conclude “that there are substantial upward biases in the U.S. government’s official statistics and that real manufacturing output and productivity growth is significantly overstated. The most serious bias relates to the computers and electronics industry (NAICS 334)—its output is vastly overstated. Correcting for these statistical biases, we see that the base of U.S. manufacturing has eroded faster over the past decade than at any time since WWII, when the United States began compiling the statistics.”

I can substantiate this conclusion from my experience as a manufacturers’ representative for American companies who perform fabrication services, such as plastic and rubber molding, metal stamping and casting, machining, and sheet metal fabrication for other American manufacturers.  While many of the manufacturers in my sales territory of southern California may still be assembling their products in the U. S., many of the components and subassemblies they are using have been produced offshore.  Obviously, it takes fewer American workers to produce the end product because part of the work was actually done by foreign workers.

The problem is that there is no way for the government to track the value of the components and subassemblies that have been produced elsewhere from the value of the product that is sold by the American company. Therefore, the value of the whole product is counted as American productivity without deducting the value of the parts produced outside of the U. S.  You can see how American productivity becomes inflated.

I hope this report will convince the majority of economists, experts, and government officials recognize that manufacturing is truly in serious decline so that they will look at what are the main reasons:  outsourcing manufacturing offshore and the economic warfare being waged by China against the U. S.

 

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Posted in Economy, Manufacturing, Outsourcing | No Comments »

Will the AME, NAM and NACFAM Alliance Revitalize Manufacturing?

Tuesday, March 6th, 2012

The Association for Manufacturing Excellence (AME) is joining with leading organizations, such as the National Association of Manufacturers (NAM), and the National Council For Advanced Manufacturing (NACFAM) to form an alliance to revitalize manufacturing and grow the economy, while improving the standard of living of all citizens in North America.  These organizations are inviting public and private sectors to come together to build on the NAM study, A Manufacturing Renaissance: Four Goals for Economic Growth.

The AME white paper “Challenges Facing the Manufacturing Industry…” states “The strategy calls for putting people, schools, businesses and the government to work; producing literate career-ready citizens capable of joining the workforce; and enabling manufacturers to once again lead the designing, building and exporting of quality products and services around the globe.” The top three priorities are:

  • Build a better educated and trained workforce
  • Promote product and process innovation, as well as research and development
  • Improve global competitiveness for companies

AME advocates that each priority “must be considered in developing public policies that support the revitalization of the manufacturing sector, and policy-makers must consider these elements in shaping future public policy and legislation.”   The goal is to help companies and our education systems transform themselves by using more innovative processes to become more competitive to put people back to work in making things in America.

I  strongly agree with AME’s viewpoint that we need to revitalize American manufacturing because “manufacturing is very critical to economic growth, prosperity and a higher standard of living.”  This is because manufacturing jobs have a multiplier effect-? every manufacturing job creates three to four other jobs.  Manufacturing creates more wealth than any other sector in the economy.  “Manufacturing pays higher wages and provides greater benefits, on average, than other industries. It performs almost two-thirds of private sector research and development, creates the highest number of jobs to support the industry while serving the surrounding communities, and contributes to more than 50 percent of the country’s total exports.”

The White Paper notes that we’ve lost nearly six million manufacturing jobs in the United States since January 2000, for an average of about 54,000 per month, according to the Bureau of Labor Statistics.  We also lost 56,190 manufacturing facilities from 2001 to 2010, or about 15 per day.

AME has issued a call for action to policy-makers, industry professionals and academic leaders to play critical roles in revitalizing the economy through the rebirth of manufacturing jobs.  To do this, we need to ensure the supply of educated citizens, necessary physical infrastructure, and a favorable tax and regulatory framework that fosters increased collaboration between public and private sector partners.

AME has been leading the “Revitalization of Manufacturing” initiative, wherein AME and their allied organizations have been reaching out to policy-makers nationwide, and encouraging them to join or develop efforts focusing on local and state job creation.  AME states that “itt is imperative that policy-makers recognize the importance of an industry that has been the backbone of the North American economy.  To date, AME has received more than 400 signatures of support from state and federal policy-makers, industry trade associations and operations executives representing manufacturers across North America.”

AME advocates “a renewed emphasis on making businesses more competitive by developing the educational and training infrastructure to produce qualified individuals to fill these new opportunities.”   To accomplish these initiatives, AME is joining with leading organizations to adopt the three priorities by:

Reforming public education to produce career ready citizens – Parents, teachers and business leaders need to recognize that other nations are both out-educating us and out-competing us.  Some of the ongoing initiatives by manufacturing organizations to help reform public education are:

  • The Manufacturing Institute’s Roadmap to Education Reform for Manufacturing, a comprehensive blueprint for education reform
  • American Productivity and Quality Center’s (APQC) Education North Star program that helps school districts do more with less by transforming education through process and performance management
  • Career Pathways,  a program that encourages students to consider a career in manufacturing and help prepare them by using the Manufacturing Pathway Map

Last fall, I wrote about a number of programs sponsored by other organizations to interest and prepare youth for careers in manufacturing in the article, “How Can we Attract Youth to Manufacturing Careers?”

Establishing consortiums of like-minded individuals with the same mission to help sustain and grow businesses through sharing technology and innovative ideas.  AME recommends that businesses “grow a culture that achieves results through engaging their people” to “develop pragmatic, working-level leaders who can pull it all together.”  In addition, businesses “need to foster rapid advancement of technology and innovation by establishing regional consortiums to help bring jobs back home.”

“AME Northern Kentucky/Cincinnati Consortium is the first building block of the AME Consortia network, and the organizations plans to deploy at least 10 more in 2012.  AME also has alliance partners, like the Virginia Business Excellence Consortium.”

Reshoring by making better informed business decisions  to keep and bring jobs back home – the Reshoring Initiative was founded by Harry Moser in 2010.  He is collaborating with AME to promote reshoring as part of the “Revitalization of Manufacturing” initiative.  AME recommends that companies use the Total Cost of Ownership (TCO) analysis tool Mr. Moser developed “to effectively compare total cost of local and offshore sources, enabling them to make informed business decisions. ‘We are committed to changing the sourcing paradigm from ‘off-shored is cheaper’ to ‘local reduces the total cost of ownership,’ said Moser.”

Redeploying Training Within Industry (TWI) programs to train or retrain workers to have the skills to work in advanced manufacturing jobs to revitalize manufacturing and re-energize the economy.  First created during WWII to replace workers who left the factories and went off to war, the TWI programs were revived in 2001 by the Central New York Technology Development Organization, a member of the U.S. Manufacturers Extension Partnership (MEP), after which the TWI Institute was formed to oversee the global deployment of the program.

AME’s White Paper only identifies the TWI programs, but I wrote about training programs sponsored by other organizations, such as the Society of Manufacturing Engineers’ Tooling U and The Fabricators and Manufacturers Association, International in my article, ”What’s Being Done to Address the Lack of Skilled Workers?

In order to be more globally competitive, AME recommends that companies use Lean Certification, an internationally recognized certification process developed by the Society of Manufacturing Engineers (SME), AME, Shingo Prize, and the American Society for Quality (ASQ), which establishes the standard for continuous improvement and Lean practices.

The White Paper states that at its 2012 national board meeting, “AME reaffirmed its commitment to helping small-and medium-sized businesses create more manufacturing jobs, and the organization’s strategic plans address the challenges facing manufacturing by formulating counter-measurements to address them with its public and private alliance partners.”

In conclusion, the White Paper states, …the public and private sectors must come together to build an integrated plan supportive of these initiatives, especially NAM’s Manufacturing Strategy for Jobs and Competitiveness and Roadmap to Education Reform for Manufacturing; the LEARN Act; and the Reshoring Initiative.  These will ultimately revitalize the industry and grow the economy.”

I have repeatedly said in my book and blog articles that it will take the efforts of the public and private sectors, as well as individual Americans, to first save and then revitalize American manufacturing.  I agree that these strategies will be beneficial, but they will not be enough to accomplish this goal.   First of all, I do not agree that the challenges to accomplish this goal are the “four major challenges on which its future depends and has been failing to meet… globalization, the revolution in information technology, the nation’s chronic deficits and its pattern of energy consumption” that are quoted from Thomas L. Friedman and Michael Mandelbaum’s book, That Used to Be Us, How America Fell Behind in the World It Invented and How We Can Come Back.

These are all realities that must be addressed, but they are not the main challenges that face America’s manufacturing industry.  The main challenge can be summed up in one word:  China.  By this I mean China’s predatory mercantilism in the form of currency manipulation, export subsidies, theft of intellectual property, product “dumping,” export restrictions on raw materials, and more recently, technology transfer and rare earth hoarding.

As long as companies that are members of AME, NAM, and NACFAM, such as Westinghouse, General Electric, and Caterpillar, choose to close factories in the United States to offshore manufacturing to China for the illusion of selling to the 1.3 billion Chinese consumers, we will continue to lose manufacturing jobs.

As long as these organizations and their member companies advocate so-called free trade policies and are afraid to stand up to China’s predatory mercantilism and urge our elected officials to demand that China adhere to the terms of its admission into the World Trade Organization, our huge trade deficits will continue to escalate.

These companies must stop being Chinese apologists and appeasers just to add more profit to their bottom line.  They need to realize that complying with China’s demand for technology transfer in order to build or establish a plant in China is destroying the future of their own companies.

Now is the time for action.  The best thing that AME, NAM and NACFAM members could do is to take a pledge to not close any more plants in the U. S. to set up manufacturing in China.  Then, we would really be able to revitalize American Manufacturing.

 

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Why is it Important to Lower Corporate Tax Rates?

Tuesday, January 24th, 2012

Last fall the Manufacturers Alliance/MAPI and the National Associations of Manufacturers Manufacturing Institute released a report on their analysis of production costs in the United States relative to its top nine trading partners ? Canada, Mexico, Japan, China, Germany, United Kingdom, Korea, Taiwan, and France.  The report revealed that on a trade-weighted basis, the U. S. tax rate is 8.6 percentage points higher than its trading partners in the 2011 cost study, considerably higher than the 5.6 percentage points of the first cost study in 2003.

While the U. S. federal and state combined tax rate has remained the same, every other country in the study has lowered corporate tax rates at least once since 1997, and most countries have done so several times.  The result is that the U.S. rate is now second-highest to Japan in the Organization for Economic Co-operation and Development (OECD).  The increase in the foreign advantage since the 2008 tax study is due to rate reductions in Canada (36 percent to 31 percent), Germany (38.4 percent to 29.4 percent) and Taiwan (25 percent to 17 percent).

If you think that a reduction in corporate tax rates would only benefit the large, multinational corporations doing business globally, think again.  According to last MAPI/MI report, “Facts About Modern Manufacturing,” produced in 2009, 95 percent of the 286,039 manufacturers were companies of under 100 employees.

It isn’t just manufacturing corporations and their trade associations that recommend a reduction in corporate taxes.  On July 26, 2007, the Treasury Department hosted a conference on Global Competitiveness and Business Tax Reform that brought together distinguished leaders and experts to discuss how the U.S. business tax system could be improved to make U.S. businesses more competitive. As a follow-up to this conference, on December 20, 2007, the U.S. Department of the Treasury released a 121-page report titled “Approaches to Improve the Competitiveness of the U.S. Business Tax System for the 21st Century.”

The report acknowledges that, “Globalization … has resulted in increased cross-border trade and the establishment of production facilities and distribution networks around the globe. Businesses now operate more freely across borders and business location and investment decisions are more sensitive to tax considerations than in the past.” Further, as globalization has increased, “nations’ tax systems have become a greater factor in the success of global companies.” The report notes, “Many of our major trading partners have lowered their corporate tax rates, some dramatically.”

In the 1980s, the United States had a low corporate tax rate compared to other countries, but now has the second highest. Japan has the highest corporate tax rate at 39.54 percent. According to the OECD, Ireland’s tax is lowest at 12.5 percent, while most of the other major industrial nations have corporate tax rates ranging from 19 to 30 percent.

The Treasury Department says, “As other nations modernize their business tax systems to recognize the realities of the global economy, U.S. companies increasingly suffer a competitive disadvantage. The U.S. business tax system imposes a burden on U.S. companies and U.S. workers by raising the cost of investment in the United States and burdening U.S. firms as they compete with other firms in foreign markets.”

The report states that the U. S., tax system “discourages investment in the United States” and “may also slow the pace of technological innovation.  The pace of innovation is a key determinant of economic growth, and innovation tends to take place where the investment climate is best…Given this interplay between innovation and capital accumulation, allowing     U. S. corporate taxes to become more burdensome relative to the rest of the world could result in a cumulative effect in which U. S. firms fall increasingly behind those in other nations.”

The study concludes that the current system of business taxation in the United States is making the country uncompetitive globally and needs to be overhauled. A new tax system aimed at improving the global competitiveness of U.S. companies could raise GDP by 2 to 2.5 percent.  Rather than present particular recommendations, the report examines the strengths and weaknesses of the three major approaches presented:

Replacing the business income tax system with a Business Activity Tax (BAT)

  • The BAT tax base would be gross receipts from sales of goods and services minus purchases of goods and services (including purchases of capital items) from other businesses.
  • Wages and other forms of employee compensation (such as fringe benefits) would not be deductible.
  • Interest would be removed from the tax base – it would neither be included as income nor deductible.
  • Individual taxes on dividends and capital gains would be retained.  Interest income received by individuals would be taxed at the current 15 percent dividends and capital gains rates.

Broadening the business tax base and lowering the statutory tax rate/providing expensing

  • The top federal business tax rate would be lowered to 28 percent.
  • If accelerated depreciation were retained, the rate would drop only to 31 percent.
  • Acquisitions of new investment could be partially expensed (35% could be written off immediately)

Specific areas of our current business tax system that could be addressed

  • Multiple taxation of corporations (corporate capital gains and dividends receive deduction)
  • Tax bias favoring debt finance
  • Taxation of international income
  • Treatment of losses
  • Book-tax conformity

If the business tax rate were lowered to 31 percent, it would mean that the United States would have the third highest tax rate, while a 28 percent corporate tax rate, would mean the United States would have the fifth-highest tax rate.  The report acknowledges that these lower rates might not be enough as other countries are continually changing their tax systems to gain competitive advantage.  The Treasury Department study says, “Thus, it remains unclear whether a revenue neutral reform would provide a reduction in business taxes sufficient to enhance the competitiveness of U.S. businesses.”

The Executive Summary also comments on the importance of individual income tax rates. Roughly 30 percent of all business taxes are paid through the individual income tax on business income earned by owners of flow-through entities (sole proprietorships, partnerships, and S corporations). These businesses and their owners benefited from the 2001 and 2003 income tax rate reductions. This sector has more than doubled its share of all business receipts since the early 1980s and plays a more important role in the U.S. economy, accounting for one-third of salaries and wages. Moreover, flow-through income is concentrated in the top two tax brackets, with this group receiving more than 70 percent of flow-through income and paying more than 80 percent of the taxes on this income.

The Executive Summary concludes that “now is the time for the United States to re-evaluate its business tax system to ensure that U.S. businesses and U.S. workers are as competitive as possible and Americans continue to enjoy rising living standards.”

Unfortunately, the recommendations of the Treasury Department haven’t been addressed by Congress in legislation in the more than four years since the report was released.

At the same time that we address the corporate tax rate, we need to close a huge tax loophole that multinational corporations are enjoying at the expense of American workers and which is a big incentive for U. S. firms to invest abroad in countries with low tax rates.

In June 2006, James Kvaal, who had been a policy adviser in the Clinton White House and was then a third-year student at Harvard Law School, published a paper “Shipping Jobs Overseas: How the Tax Code Subsidized Foreign Investment and How to Fix It.”  In this well-researched paper, Kvaal points out that “American multinationals can defer U.S. taxes indefinitely as long as profits are held in a foreign subsidiary.  Taxes are only due when the money is returned to the U.S. parent corporation.  The result is like an IRA for multinationals’ foreign investments: foreign profits accumulate tax-free.  U.S. taxes are effectively voluntary on foreign investments.”

There’s no rule saying American companies ever have to bring that money home.  As long as they reinvest earnings overseas, they pay only the host country’s (usually lower) tax rate.  Many companies just put the money they make overseas back into their foreign operations, which means more economic growth for other countries, and less here at home.  Kvaal wrote that “when multinationals choose to return profits to the U.S. they can offset any foreign taxes against their U.S. tax. … As a result, the effective tax rate on foreign non-financial income is below 5 percent, well below the statutory rate of 35 percent.”

He recommends changing the tax code to a “partial exemption system” that “would tax foreign income only if a foreign government failed to tax it under a comparable tax system. As a result, all corporate income would be taxed at a reasonable rate once and only once.” He opines that this system would reduce incentives to invest in low-tax countries, simplify the taxation of corporate profits, and reduce tax competition by removing the benefit of tax havens. He urged immediate action “to ensure that our tax code no longer exacerbates incentives to move offshore.”

The importance of low tax rates to the success of start-up companies is emphasized by Henry Northhaft, CEO of Tessera Corporation, in his book Great Again, co-authored by David Kline. They wrote, “… lower tax rates on the last dollar earned encourage individuals and businesses to work harder, take more entrepreneurial risks, and expand their operations because they can keep more of the fruits of that added labor or activity … a reduction in the marginal tax rate of 1 percentage point increases the rate of start-up formation by 1.5 percent and reduces the change of start-up failure by more than 8 percent. … Tax rates don’t just influence how much investment and growth a firm will choose to undertake.  In an increasingly globalized economy, they also profoundly affect where a business will chose to invest or expand … the relative tax and regulatory burdens on U.S. start-ups have grown exponentially, whereas those on European and other foreign ventures have declined sharply.”

Nothhaft “As a result, America now has the highest corporate rate in the world (with the lone exception of Japan). At 39.2 percent, it’s more than 50 percent higher than the OECD average of 25.5 percent. … A number of empirical studies by OECD economists and others have discovered that the best “revenue-maximizing” tax rate – the rate that brings in more total revenues than either a lower or a higher tax rate – is around 25 percent.”

Comprehensive tax reform is needed because under the current system multinational corporations are favored over domestic companies.  Taxes can foster economic growth or hinder it.  Our domestic economic growth is being hindered by the current tax system and must be addressed by Congress in the near future if we want to help American compete successfully in the global economy and create more jobs.

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China Poses Increasing Threat to U. S. Economy and National Security

Tuesday, November 29th, 2011

Last week the U.S.-China Economic and Security Review Commission submitted their annual report to Congress.  The Commission was created on October 30, 2000, by the Floyd D. Spence National Defense Authorization Act of 2001.  The 418-page unclassified report reveals the increasing threat that China poses to the U. S. economy and national security, so one can only imagine how much more serious threats were detailed in the separate classified report that was also submitted.  The report covers the following areas (abbreviated):

•Proliferation Practices—The role of China in the proliferation of weapons of mass destruction and other weapons (including dual-use technologies);

• Economic Transfers—The qualitative and quantitative nature of the transfer of U. S. production activities to China, including the relocation of high technology, manufacturing, and research and development facilities, the impact of such transfers on U. S. national security, the adequacy of U. S. export control laws, and the effect of such transfers on U. S. economic security and employment;

• Energy—The effect of the large and growing economy of China on world energy supplies and the role the U. S. can play (including joint research and development efforts and technological assistance), in influencing the energy policy of China;

• U. S. Capital Markets—The extent of access to and use of U. S. capital markets by China, including whether or not existing disclosure and transparency rules are adequate to identify China companies engaged in harmful activities;

• Regional Economic and Security Impacts—The triangular economic and security relationship among the United States, [Taiwan] and China (including the military modernization and force deployments of China aimed at [Taiwan);

• U. S.–China Bilateral Programs—Science and technology programs, the degree of noncompliance by China with agreements between the U. S. and China on prison labor imports and intellectual property rights, and U. S. enforcement policies with respect to such agreements;

• World Trade Organization Compliance—The compliance of China with its accession agreement to the World Trade Organization (WTO);

• Freedom of Expression—The implications of restrictions on speech and access to information in China for its relations with the U. S. in the areas of economic and security policy.

Since it would difficult to summarize the key points of the whole report, this article only highlights the areas posing a threat to the economy and national security of the U. S.

The report states that China is now the second-largest economy in the world and the world’s largest manufacturer, surpassing the U.S. in this ranking for the first time.  Its market exceeds that of the U. S. in industries such as automobiles, mobile handsets, and personal computers.  China’s gross domestic product (GDP) has grown from $1.32 trillion in 2001 to a projected $5.87 trillion in 2011, representing an increase of more than 400 percent.

China continues to maintain an export-driven economy with policies that subsidize Chinese companies and undervalue their currency (renminbi or RMB).  While the RMB rose by roughly 6 percent over the last year, it is still widely believed to be undervalued by as much as 30-40 percent.  “For the first eight months of 2011, the U.S. trade deficit with China increased 9 percent over the same period in 2010.  The U.S. trade deficit with China is now more than half of the total U.S. trade deficit with the world.  In the year to date ending August 2011, the United States exported about $13.4 billion in advanced technology products to China, but imported over $81.1 billion in advanced technology products from China, for a deficit of about $67.7 billion.  This is a 17 percent increase in the advanced technology products deficit for the same period over the previous year, ending in August 2010.”

The Chinese economy and its product exports are moving up the value chain.  On a monthly basis, the U. S. now imports roughly 560 percent more advanced technology products from China than it exports to China.  Exports of low-cost, labor-intensive manufactured goods as a share of China’s total exports decreased from 37 percent in 2000 to 14 percent in 2010.

“China’s foreign currency reserves are skyrocketing. A major contributor to this phenomenon is China’s continued policy of maintaining closed capital accounts.  China’s foreign currency reserves exceed $3 trillion, three times higher than the next largest holder of foreign currency reserves, Japan.”  Building currency reserves is one of the main goals of China’s predatory mercantilism trade policies.

China’s domestic money supply is becoming out of control. “Between 2000 and 2010, China’s money supply grew by 434 percent.  China’s money supply is now ten times greater than the U.S. money supply, despite the fact that China’s GDP is only one-third as large.”

The Commission reported that China assumed a more assertive role on the global stage in 2011 as shown by a more aggressive trade agenda, a push for a larger role in international institutions, and provocative moves in the South and East China Seas.  These actions are a result of China’s growing economic prominence and resource needs, as well as China’s view that the U. S. is in decline while China is ascendant.  “Chinese policies have had an impact on the       U. S., ranging from a negative effect on the economy to increased pressure from some parts of the international community for the U. S. to ensure the security of the global commons.”

Last year, the Commission highlighted China’s backsliding from market reforms in favor of an increased role of the state in the economy, which continued in 2011. “China subsidizes its state-owned enterprises to the detriment of both private Chinese firms and international competitors. The Chinese government’s special treatment of state-owned enterprises (SOEs) is of particular concern to U.S. businesses, as it can overcome comparative advantages of competitors, harming American economic interests.  China’s SOEs are also an issue of contention in government procurement, as China seeks to wall off a large portion of its economy from foreign competition.” The Commission estimates the SOE sector accounts for nearly 40 percent of China’s economy, but if the output of urban collective enterprises and government-run proportion of township and village enterprises are considered, the broadly defined state sector likely surpasses 50 percent.

China appears to be reversing the privatization reforms of the past two decades and renewing use of industrial policies aimed at creating SOEs that dominate important portions of the economy, especially in the industrial sectors reserved for the state’s control.  “The Chinese government promotes the state-owned sector with a variety of industrial policy tools, including a wide range of direct and indirect subsidies, preferential access to capital, forced technology transfer from foreign firms, and domestic procurement requirements, all intended to favor SOEs over foreign competitors.”

In 2010, the amount of foreign direct investment (FDI) flowing into China jumped to $105.7 billion, up from $90 billion in 2009.  Foreign-invested enterprises were responsible for 55 percent of China’s exports and 68 percent of its trade surplus in 2010.  The value and scope of U.S.-China bilateral investment flows have expanded significantly in the past ten years.  However, U.S. direct investment in China is more than 12 times greater than Chinese direct investment in the United States.  Official U.S. statistics show that U.S. cumulative FDI in China was $60.5 billion in 2010.  What this means is that American companies and companies from other foreign countries are investing money in China through expanding, building or buying plants in China, buying equipment, and hiring workers.

On the other hand, there has been a more than 100 percent year-on-year growth of Chinese investment in the United States during the past two years.  Chinese investments have focused on manufacturing and technology, with an emphasis on brand acquisition. The report notes that some critics of China’s foreign direct investment in the U. S. contend that these investments are focused on acquiring and transferring technology to Chinese firms.  The Chinese Ministry of Commerce estimated that in 2010, cumulative Chinese FDI in the United States was $4.9 billion.

Due to the considerable government ownership of the Chinese economy, Chinese companies supplying products to the U.S. government or acquisition by Chinese companies of U.S. firms with sensitive technology or intellectual property could be harmful to U.S. national interests.  The Committee on Foreign Investment in the U. S. investigates the national security implications of mergers and acquisitions by foreign investors of U. S. assets.

In March 2011, China ratified its 12th Five-Year Plan (2011– 2015), a government-directed industrial policy that focuses on the development and expansion of seven strategic emerging industries:  new-generation information technology, high-end equipment manufacturing, advanced materials, alternative-fuel cars, energy conservation and environmental protection, alternative energy, and biotechnology.  The report predicts that China will likely continue to combine targeted investment with preferential tax and procurement policies to ensure that Chinese firms emerge as global leaders, or national champions, in these industries within the next five years.

China’s continuing lack of enforcement of intellectual property rights and indigenous innovation plans that limit government procurement to Chinese companies are problematic.  In addition, China maintains policies of forced technology transfer in violation of international trade agreements and requires the creation of joint venture companies as a condition of obtaining access to the Chinese market.

“Foreign-invested enterprises seeking to be considered for government procurement contracts or public works projects are expected to file for patents and copyrights within China in order to qualify for preferential treatment in government contracting.  Foreign affiliates risk the unintended transfer of their technology to Chinese firms if they do so, because of the nature of the Chinese intellectual property system and the lax enforcement of intellectual property laws and regulations in China.”  In 2001, China agreed to stop explicitly requiring foreign companies to surrender their technology in return for market access and investment opportunities, but the government still employs several tactics to coerce foreign firms to share trade secrets with Chinese competitors. China’s industrial policy seeks to circumvent accepted intellectual property protections and to extort technology from U.S. companies.

China continues to be one of the largest sources of counterfeit and pirated goods in the world (confirmed by the recent Senate hearings on counterfeit parts in the defense and aerospace supply chain.)  “The Chinese government itself estimates that counterfeits constitute between 15 and 20 percent of all products made in China and are equivalent to about 8 percent of China’s gross domestic product (GDP).  Chinese goods accounted for 53 percent of seizures of counterfeits at U.S. ports of entry in 2010, and the U.S. International Trade Commission estimates that employment in the U. S. would increase by up to 2.1 million jobs if China were to adopt an intellectual property system equivalent to that of the U. S.”

China progress in its military modernization efforts poses an increasing threat to U. S. national security.  “The People’s Liberation Army (PLA) is acquiring specific means to counter U.S. military capabilities and exploit U.S. weaknesses.  Since January 2011, China has conducted a flight test of its next-generation fighter aircraft, continued development of its antiship ballistic missile, and conducted a sea trial of its first aircraft carrier. These developments, when operational, will allow China to better project force throughout the region, including the far reaches of the South China Sea.”

The Commission reports that the PLA’s military strategy is designed to provide the army with the means to defeat a technologically superior opponent, such as the U.S. military. It focuses on controlling the regions surrounding China, especially the western Pacific Ocean, degrading an opponent’s technological advantages, and striking first in order to gain surprise over an enemy in the event of a conflict.  While U.S. bases in East Asia are vulnerable to PLA air and missile attacks, Japanese, Philippine, and Vietnamese bases are just as vulnerable, if not more so.

China has demonstrated progress in modernizing the PLA over the past year, and recent developments confirm that the PLA seeks to improve its capacity to project force throughout the region.  Continued improvements in China’s civil aviation capabilities, as first noted in the Commission’s 2010 Annual Report, enhance Chinese military aviation capabilities because of the close integration of China’s commercial and military aviation sectors.

Tensions continued in 2011 between China and other claimants in the South China Sea territorial disputes as well as with Japan over territory in the East China Sea.  China’s policy in the region appears driven by a desire to intimidate rather than cooperate.  Despite intermittent statements of cooperation, Chinese assertiveness in the South China Sea indicates that China is unlikely to concede its sovereignty claims. Many of China’s activities in the region may constitute violations of the United Nations Convention on the Law of the Sea and the Declaration on the Conduct of Parties in the South China Sea.  An implication of China’s growing assertiveness, especially its harassment and intimidation of foreign vessels, is the growing risk of escalation due to miscommunication and miscalculation. As chances of confrontation grow, so could the consequences for the U. S., especially with regard to the Philippines, with which the United States holds a mutual defense treaty.

In 2011, as in previous years, the U.S. government, foreign governments, defense contractors, commercial entities and various nongovernmental organizations experienced a substantial volume of actual and attempted network intrusions that appear to originate in China.  “Of concern to U.S. military operations, China has identified the U.S. military’s reliance on information systems as a significant vulnerability and seeks to use Chinese cyber capabilities to achieve strategic objectives and significantly degrade U.S. forces’ ability to operate.”

The report identifies China as one of the top space powers in the world today, and the implications of China’s civil and military space activities are dangerous to the U. S.  China’s leadership views all space activities through the prism of comprehensive national power, using civil space activities to promote its legitimacy in the eyes of its people, to produce spin-off benefits for other industries, and for military-related activities.  The nation’s capabilities, which are state of the art in some areas, follow from decades of substantial investment and high prioritization by China’s top leaders.  The prestige of space exploration and the national security benefits of space systems serve as primary motivators for Chinese decision makers.

China’s civil space programs have made impressive achievements over the past several decades.  “If Chinese projections hold, these programs are poised for continued accomplishments over the next ten to 15 years, such as the development of a space laboratory and eventually a space station. As part of an active lunar exploration program, China may attempt to land a man on the moon by the mid-2020s.”

China seeks new opportunities to sell satellites as well as satellite and launch services in international commercial space markets. Chinese firms’ prospects for greater success remain uncertain over the near term.  However, China’s international space-related diplomatic initiatives and their firms’ ability to offer flexible terms on sales to developing countries may provide additional opportunities.

China views all space activities in the context of ‘‘comprehensive national power.’’ This concept includes many dimensions, but military aspects are fundamental.   “PLA’s primacy in all of China’s space programs, including nominally civil activities, illustrates this emphasis.”  For example, China appears to be making great strides toward fielding regional reconnaissance-strike capabilities.  China has also continued to develop its anti- satellite capabilities, following up on its January 2007 demonstration that used a ballistic missile to destroy an obsolete Chinese weather satellite, creating thousands of pieces of space debris.  “In addition, authoritative Chinese military writings advocate attacks on space-to-ground communications links and ground-based satellite control facilities in the event of a conflict.”

“In the military sphere, China appears to seek ‘space supremacy.’  The PLA aims to implement this policy through two tracks.  First, they increasingly utilize space for the purposes of force enhancement.  The best example is China’s integration of space-based sensors and guided weapons.  Second, they seek the capabilities to deny an adversary the use of space in the event of a conflict.  To this end, China has numerous, active, counterspace weapons programs with demonstrated capabilities.”

These threats to America’s economy and national security need to be taken seriously.  Perhaps if the executives of American manufacturing companies would read this report, or at least the executive summary, they would change their minds about sourcing their R&D and manufacturing in China and investing in expanding, building or buying manufacturing plants in China.  China is no friend to the U. S. and Americans better wake up to that fact before it’s too late.

 

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What Led to the Problem of Chinese Counterfeit Parts?

Tuesday, November 15th, 2011

Last week, the Senate Armed Services Committee reported that an investigation found and examined about 1800 cases of suspected counterfeit electronic parts dating from 2009 to last year, totaling about a million individual components.  Tracing the supply chain, 70% of the components came through China, where a variety of methods were used to misrepresent the parts as new and genuine.  Hearings now being conducted by Senator Carl Levin (D-Michigan) and Senator John McCain (R-Arizona).

At a news conference on Monday, November 7, 2011, Sen. Carl Levin told reporters, “There’s a flood of counterfeit parts entering the defense supply chain.  It is endangering our troops and it is costing us a fortune.”

Sen. John McCain said the investigation documents the alarming “threat counterfeit parts pose to the safety of our men and women in uniform, to national security and to our economy.”  He added, “We can’t tolerate the risk of a ballistic missile interceptor failing to hit its target, a helicopter pilot unable to fire his missiles, or any other mission failure because of a counterfeit part.”

This dangerous state of affairs has taken over 20 years to develop and is a complex web of unintended consequences of seemingly innocuous changes in policies.  There are four main reasons for the problem of Chinese counterfeit components:

1.      Mil. Spec. qualified components replaced by off the shelf components

2.      “Buy American” requirements relaxed

3.      Manufacturing outsourced offshore, mainly in China

4.      Rapid obsolescence of components, especially micro chips

It all started with the scandals of the 1980s over the $600 toilet seats and $400 wrenches that President Reagan’s Defense Department, under Caspar Weinberger, was accused of wasting its money on by the Democrat-controlled Congress.

At the time, the news media ignored reasonable voices pointing out that tooling often has to be made to produce metal, plastic, rubber, and fiber glass parts in certain manufacturing processes.  This tooling cost then has to be amortized into the piece price of the part; i.e., tooling cost divided by the number of parts ordered plus piece price equals selling price. Since defense and military parts are produced in much lower volume than commercial products, the amortized tooling costs add much more to the part cost than it does for commercial parts.

The $600 toilet seat was actually a uniquely shaped, molded fiberglass shroud that fits over the toilet and had to satisfy specifications for vibration resistance, weight, and durability for the P-3C Orion antisubmarine aircraft, which went into service in 1962.  Since the airplane had been out of production for years, new tooling was required to produce the part.  The price reflected the design work and the cost of the equipment to manufacture them, and Lockheed Corp. charged $34,560 for 54 toilet covers, or $640 each.  The president of Lockheed at the time, Lawrence Kitchen, adjusted to the price to $100 each and returned $29,165.

Because of the public outcry over these scandals, the procurement regulations were changed.  The Defense Department, branches of the military, and their supply chain of vendors were allowed to purchase commercial off the shelf parts (COTS) if they met the same fit and function of parts made to strict military specifications.  In the early 1990s, most commercial parts were still being made in the United States, with some outsourcing to the Philippines, Hong Kong, and Singapore, so this change was pretty safe.  Permitting commercial parts to replace Mil. Spec. parts probably drove out of business the small companies that catered exclusively to the military and that provided traceability, per Mil. Spec., for parts supplied to government agencies, military contractors, and subcontractors.  This was all done in the name of cost savings.  Now, however, most commercial electronic components and micro chips are fabricated in China.

Second, after the end of the Cold War and the successful conclusion of the first Gulf War, the provisions of the “Buy American Act” were eased to allow purchasing off the shelf commercial parts from foreign countries by the Defense Department and other government agencies.  Previously, parts, assemblies, and systems were required to be substantially made in the United States or in a NATO country, such as Great Britain, France, and Germany.

This led to parts being made in China as more and more American companies started to outsource manufacturing in China either by selecting Chinese companies as vendors or setting up their own manufacturing plants in China.   This trend accelerated after China received “most favored nation” status with the approval of the World Trade Organization treaty in the year 2000, and American companies started to build semiconductor wafer fab plants in China to produce micro chips.

The problem with counterfeit parts is not something new to industry – there were always a small number of rejected parts that went out the “back door” of companies to be sold on the black or “gray” markets by individual employees.  What is new is the purposeful production of counterfeit parts by a foreign government, namely, China, as a form of economic warfare and counter espionage.

Brian Toohey, president of the Semiconductor Industry Association (SIA), testified Tuesday before the Senate Armed Services Committee calling counterfeit parts “a ticking time bomb.”   He added, “The catastrophic failure risk inherently found in counterfeit semiconductors places our citizens and military personnel in unreasonable peril,” said Toohey. The SIA estimates that counterfeits cost US-based semiconductor companies more than $7.5 billion a year.

EBN Editor, Barbara Jorgensen wrote in her blog, “Counterfeits have been appearing in the consumer and industrial sectors for as long as anyone can remember, but their presence in mission-critical defense equipment and military and passenger aircraft threatens lives  The efforts have a ways to go, but the dialogue between industry associations such as the SIA and the Defense Department and Justice Department are a major step in the right direction.”

Bruce Rayner, Contributing Editor, EE Times, wrote “counterfeiting is on the rise and it is getting harder to detect.  Counterfeit computer hardware, including chips, was one of the top commodities seized in 2010 by the US Immigration and Customs Enforcement agency (ICE) … up five-fold over 2009…The reason for the increase is that there’s a lot of money to be made.  Many obsolete components are in demand by the military because they need to repair very old equipment, such as 1980s-vintage fighter jets.  But the parts are no longer manufactured, and only a few authorized distributors stock the vintage components.  In some cases, the only place to buy these chips is from independent distributors or brokers who don’t have formal sourcing relationships with the original component manufacturer. They buy them over the Internet from sources they don’t know and who can’t validate their authenticity.”

The August 2011 issue of Industry Week reported, “In 2010, government agents seized fake goods totaling $188.1 million, which if genuine would have been worth $1.4 billion.  Goods from China accounted for 66% of the value of seizures by U. S. Customs and Border Protection.”  In the same article, Wes Shepherd, CEO of Channel IQ, said that the outsourcing of manufacturing in China combined with online selling “introduced the specter of counterfeiting as a much more serious problem.”

Joe O’Neill, owner of O’Neill Technologies and formerly with Intel, Samsung and Toshiba, told me in an interview, “the counterfeit problem is a product life cycle mismatch between consumer and more traditional applications, such as industrial, medical, and defense.  The life cycle of micro chips, also referred to as micro processors and controllers, are very short in the networking, computer, and telecommunications industries.  The life cycle of a cell phone model may range from six to 12 months, while industrial and military products may have a life cycle of decades.  Products for the military are a small piece of the market so there is a real problem with part obsolescence.  Availability of these parts that have been made ‘end of life’ force manufacturers to go into the Gray Market or other non-traditional sources to keep their factories supplied with parts.  There are a few companies that specialize in making obsolescent microprocessors for industrial, medical or military manufacturers by “cloning” the parts.” One such company is Innovasic, which makes the X86 series of Intel and AMD micro processors.

During the Senate hearings, part of which I watched after work, photos of bins of electronic parts were shown as Thomas Sharpe, V. P. of SMT Corporation, described visiting electronic component marketplaces in July 2008, where scrapped electronic parts were washed in rivers or left for the daily monsoon rains, dried on river banks, and collected in bins to be ready for counterfeit processing.  Counterfeiters buy used parts for pennies in the street markets of Shenzhen and other Chinese cities, re-mark them, fix broken leads and buff them up, then ship them to brokers in the West who unknowingly or knowingly sell them to other brokers or to OEMs for multiples of what they paid.

Last year, the Department of Justice’s Task Force on Intellectual Property was created specifically to prosecute counterfeiters, and last week Stephanie McCloskey was sentenced to 38 months in federal prison for her role in a scheme by VisionTech Components to import fake chips from China into the U. S. that were sold to a variety of customers including defense contractors and the military.

Until we implement more stringent procurement regulations, strengthen “Buy American” procurement regulations for defense and military components, and return more manufacturing to the United States from offshore, it will be up to manufacturers to have a system to detect and deter counterfeits.  Many defense contractors have put in place strict regimen for inspecting, testing, and reporting counterfeits, but all companies need to be vigilant by inspecting, testing, and reporting.

 

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Why John Stossel is All Wet ? “Buy American” is Smart, not Stupid

Tuesday, November 8th, 2011

John Stossel’s blog article on WorldNetDaily® on November 1, 2011, “The stupidity of ‘Buy American,’ is based on a premise so fallacious that one wonders how a usually intelligent commentator like Stossel could have been taken in by it.

The premise is that “we should buy things where they’re cheapest.  That frees up more of our resources to buy other things, and other Americans get jobs producing these things,” according to the explanation of why “Buy American” is “nonsense” by economist David Henderson of the Hoover Institution.

First of all, “buying things where they’re cheapest” isn’t always the best decision on where to spend your money ? the old adage “you get what you pay for” is more often true.  Most of the everyday items that people buy today at “big box” and other retail outlets are being manufactured in China and other countries in Asia.

What do you get for your money when you buy products that are made in China and other Asian countries?  Clothes and shoes that don’t fit or fall apart, toys that choke or strangle children, baby buggies, strollers, and cribs that maim or even kill, household items that either don’t work properly, cause fires, and explode, and tainted food.  The U. S. Consumer Protection Safety Commission’s website provides a monthly list of products that have been recalled, and month after month, more than 90% are made in China.   For example, there have been eight recalls thus far in November, and seven of the eight products were made in China.  In October, there were 21 product recalls: 12 were made in China, two were made in Taiwan, two were made in Vietnam, two were made in Mexico, and three were made in the U. S.  The products ranged from glass bowls and toys to tents, battery packs, and baby strollers.

Recently, a Senate Armed Services Committee investigation led by Sens. Carl Levin (D-MI) and John McCain (R-AZ) reviewed more than 100,000 pages of DOD documents and found that U.S. Department of Defense had purchased counterfeit electronic parts (defective and with “back doors”) from China in 1,800 cases, running to more than 1 million parts.

Second, buying cheap goods that are made offshore only creates American jobs if you use the money to buy American products.  If you just buy more products made “offshore,” you don’t create any new American jobs.   About the best it does is keep people who work in wholesale and retail employed.  That’s why tax rebates and refunds haven’t created the jobs that were expected.  Consumers used the extra money to pay down debt, add to savings, or bought the everyday products that are now made mostly in China.

Why does it matter where products are made and why is it smart to “Buy American?”  A  report released in April 2011 titled, “The Importance and Promise of American Manufacturing, Why It Matters if We Make It in America and Where We Stand Today,” co-authored by Michael Ettlinger and Kate Gordon of the Center for American Progress provides the answer to these questions.  The Center for American Progress is a nonpartisan research and educational institute dedicated to promoting a strong, just and free America that ensures opportunity for all.

The authors opine that “Manufacturing is critically important to the American economy.  For generations, the strength of our country rested on the power of our factory floors—both the machines and the men and women who worked them.  We need manufacturing to continue to be bedrock of strength for generations to come … The strength or weakness of American

In addition to maintaining our standard of living as Americans, there are several other important reasons why it’s smart to “Buy American.”  They are:

Manufacturing is critical to our national defense ? American manufacturers supply the military with the essentials needed to defend our country, including tanks, fighter jets, submarines, and other high-tech equipment. The same advances in technology that consumers take for granted support the military, particularly soldiers fighting overseas.

The U.S. cannot rely on other countries to supply its military because their interests may run counter to its own.   America cannot risk being held hostage to foreign manufacturers when it comes to products that are essential for its national security and the U.S. military. It is crucial that key components and technologies that are critical to the production of U.S. weapons and the related industrial capacity to produce such items be located within the United States.

Manufacturing supplies millions of jobs ? Manufacturing jobs are the foundation of the U.S. economy and the basis for its middle class. Manufacturing provides high-paying jobs for nearly 12 million Americans.

Manufacturing Jobs Pay Higher Wages than Service Jobs ? Manufacturing wages and benefits are approximately 25 – 50 percent higher than in non-manufacturing jobs.

In an opinion article in Industry Week magazine, John Madigan, a consultant with Madigan Associate, wrote “Jobs paying $20 per hour that historically enabled wage earners to support a middle-class standard of living are leaving the U.S… only 16% of today’s workers earn the $20-per-hour baseline wage, down 60% since 1979.   Service and transportation jobs, per se, cease to exist in the absence of wealth. Rather, they exist and thrive as by-products of middle-class incomes buying products and services.”

Manufacturing Creates Secondary Jobs ? There is a multiplier effect of manufacturing jobs that reflects linkages that run deep into the economy. For example, every 100 steel or automotive jobs create between 400 and 500 new jobs in the rest of the economy. This contrasts with the retail sector, where every 100 jobs generate 94 new jobs elsewhere, and the personal and service sectors, where 100 jobs create 147 new jobs.  It is manufacturers who hire services such as banking, finance, legal, and information technology.

Manufacturing is the Engine of American Technology Development and Innovation ? American manufacturers are responsible for more than two-thirds of all private sector R&D, which ultimately benefits other manufacturing and non-manufacturing activities. More than 90 percent of new patents derive from the manufacturing sector and the closely integrated engineering and technology-intensive services.

Manufacturing R&D is conducted in a wide array of industries and businesses of all sizes. The heaviest R&D expenditures take place in computers and electronics, transportation equipment, and chemicals (primarily pharmaceuticals.)

Manufacturing is an incubator for technology and science, which require proximity to facilities where innovative ideas can be tested and worker feedback can fuel product innovation. Without this proximity, the science and technology jobs, like customer service jobs, follow the manufacturing jobs overseas.

Manufacturing Generates Exports — The United States was the world’s first-largest exporter until 1992 when Germany took over this position.   Germany remained number one until 2009 when China surpassed it to become the world’s top exporter, and the United States fell to being the third-largest exporter.  The difference between the top three was small:  Germany exported $1.17 trillion compared to the $1.057 trillion of the U. S., but China’s exports were $1.2 trillion in 2009.

Manufactured goods make up more than 60 percent of the value of U.S. exports, double the level of ten years ago. While agricultural exports amount to about $50 billion a year, manufacturers export about that much each month.  High tech products are America’s largest export sector, and the European Union was the top importer of these goods, followed by Canada, and Mexico.

Manufacturing Supports State Economies ? Manufacturing is a vital part of the economies of most states – even in those areas where manufacturing has declined as a portion of the Gross State Product (GSP). As a share of GSP, manufacturing was among the three largest private-industry sectors in all but ten states and the District of Columbia. Manufacturing is the largest sector in ten states and in the Midwest region as a whole. It is the second largest in nine states, and the third largest in 21 others.

For the past decade, manufacturing corporations paid 30 to 34 percent of all corporate tax payments for state and local taxes, social security and payroll taxes, excise taxes, import and tariff duties, environmental taxes and license taxes.  Since many small manufacturers are not incorporated and pay individual taxes as sole proprietors, the tax revenue generated by all manufacturers is impossible to calculate.

In summary, it’s smart, not stupid to “Buy American” because manufacturing is the foundation of the U.S. national economy and the foundation of the country’s large middle class. Losing the critical mass of the manufacturing base will result in larger state and federal budget deficits and a decline in U.S. living standards. This, in turn, would result in the loss of a large portion of our middle class, which depends on manufacturing jobs. America’s national defense will be in danger, and it will be difficult, if not impossible to maintain the country’s position as the world’s super power.  “Buying American” will help ensure that American manufacturing survives and grows in the global economy.

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Why is there a lack of skilled workers with such high unemployment?

Tuesday, October 4th, 2011

The national unemployment rate has ranged between 9 to 10 percent for nearly three years, representing 14-15 million workers and another 8-9 million workers that are considered underemployed.   The unemployment rate for the manufacturing industry jumped from 8.3 percent in December 2008 to a high of 13.0 percent in January 2010, but has ranged from a high of 9.9 percent in January 2011 to a low of 8.9 percent in August.

We have lost more than 5.5 million manufacturing jobs in the past decade, and over 57,000 manufacturing companies have gone out of business.  Aren’t there enough workers who lost jobs to fill the needs of companies that have survived and are now experiencing the recovery of the manufacturing industry?   With over 20 million many unemployed or underemployed workers, why is there a lack of skilled workers?

The main reasons for the lack of workers with the specific skills needed by today’s higher technology manufacturers are:

  • Unemployed workers mainly come from industries that have been decimated by offshoring
  • Fewer people choosing manufacturing as a career choice because of poor image
  • Attrition from retirement that is getting worse as baby boomers start to retire

First of all, a large percentage of the people who lost their jobs came out of industries that have been decimated by the offshoring of manufacturing – textiles, furniture, tires, sporting goods, and the garment industry just to name a few.  For example, the garment district in New York City has virtually disappeared, and now there is only one company left that makes gloves ? LaCrasia Gloves.

An added blow was the decimation of the automobile and auto parts industry during the Great Recession when North American auto production dropped from an average of 14-15 million vehicles per year down to below 10 million vehicles in 2008.

Most of these industries were dominated by large manufacturers employing hundreds to thousands of workers in plants located in the northeast, Midwest, and south.  They either worked on assembly lines or utilized specific skills suited to their industries.  In some cases, a textile plant, furniture plant, or automotive plant was the only large employer in the town.  When the plant closed, workers either had to take whatever other job they could find or relocate to another area.  If they were over the age of 55, they were fortunate to find a job at all.  In most cases, these workers didn’t have the specific skills needed in high-tech manufacturing industries.

When the manufacturing industry seems to be in a nationwide downward spiral, workers don’t even know where to relocate to find other types of manufacturing jobs.  And, if their spouse still has a good job, there is no incentive to move to where there might be an opportunity for another manufacturing job.  For example, I’m sure that only residents in the region are aware that German industrial corporation AG Siemens has a new plant in Charlotte, North Carolina and is hiring nearly 900 workers.

Another reality is that American workers in the regions of highest unemployment don’t have backgrounds in the manufacturing industry.  In fact, of the top ten cities of highest unemployment, eight are located in the mostly agricultural regions of California:  El Centro, Merced, Yuba City, Stockton, Modesto, Fresno, Visalia-Porterville, and Hanford-Corcoran.  It would be an education and logistics challenge of tremendous proportions to retrain these workers for jobs in the manufacturing industry.

Second, manufacturing’s tarnished image has led young people entering the workforce to choose other career paths.  In an article titled, “What the shortage in skilled manufacturing workers means to a hungry industry” of the e-newsletter Smart Business, Kika Young, human resources director at Forest City Gear Co. Inc. of Rockford, IL, said “Most people in Gen Y out of high school don’t think of manufacturing as a career or as a good option.  They don’t think of it as glamorous; they think of it as dark and dingy and dirty and aren’t interested in going into that.”

“ Emily Stover DeRocco, president of The Manufacturing Institute of Washington, D.C., an organization dedicated to improving and expanding manufacturing in America, said, “It’s absolutely true that the image and the definition of manufacturing in this country has not kept up with the industry.”  She added, “Companies need to invest more in employee training and make workforce skills a top strategic priority.  Our education system must also do a better job aligning education and training to the needs of employers and job-seekers. In the face of a global recession and intense international competition, American manufacturers must differentiate themselves through innovation and a highly skilled workforce.”

Third, the attrition of skilled workers through retirement, death, and disability year after year is compounding the problem.  Harry Moser, retired president of GF AgieCharmilles and founder of the Reshoring Initiative, estimates that “about 8 percent of the manufacturing workforce is lost each year due to retirement, promotion, career changes, disability, and mortality.”  In the machining industry, this means a loss of “about 20,000 to 25,000 skilled machinists per year…In contrast, only about 8,000 per year receive sufficient machining training in high school, community college and apprentice programs to be considered good recruits.”

The U.S. Bureau of Labor statistics estimate that 2.8 million, nearly a quarter of all U.S. manufacturing workers, are 55 or older.  While manufacturing has led the United States out of the recession, the improvement has been a mixed blessing because as more skilled workers are needed, the supply is limited because baby boomers are retiring or getting close to retirement.  What makes the situation worse is that there aren’t enough new ones to replace them because the subsequent generations were smaller and fewer chose manufacturing as a career.

The convergence of all of these factors has resulted in an insufficient number of workers trained for advanced manufacturing jobs.   It’s more of a skills gap in the specific skills needed by today’s manufacturers than a shortage of skilled workers.  In the past 15 years, the manufacturing industry has evolved from needing low-skilled production-type assembly workers to being highly technology-infused as it follows lean principles.

According to the 2010 Manpower Talent Shortage Survey, 14% of employers In the U.S. reported having difficulty filling key positions within their organization, down from 19% in 2009.  Among the most difficult jobs to fill in North America are those of the skilled manual trades, with electricians, carpenters, plumbers and welders among the most in-demand employees.  Jonas Prising, Manpower president of the Americas said, “The issue is not a lack of candidates, but rather a talent mismatch.  There are not enough sufficiently skilled people in the right places at the right times.  Compounding the issue is the fact that employers are seeking ever more specific skill sets, or a rare combination of skill sets, and are less willing to engage in anticipatory hiring.  This paradox adds up to a very challenging and frustrating situation at a time when people need work and employers need talent.”

In September 2011, a survey sponsored by Advanced Technology Services, Inc. (ATS) and conducted by The Nielsen Company, was released that corroborates this skilled worker shortage.  ATS is a recognized leader in outsourced production equipment maintenance, helping companies like Caterpillar, Eaton, BorgWarner and Honeywell run their factories better through equipment maintenance and related services.  The top findings of the online survey of 100 VP-level and C-level executives completed in August were:

  • 55% of largest U.S. manufacturers polled—those with $1 billion or more revenue—will be hardest hit by skill shortage costing each $100 million or more over the next 5 years.
  • 45% of the companies surveyed are encouraging their older workers to stay on the job.
  • 50% of respondents said they currently have 11 or more open positions for skilled workers, with 31% having over 20 open slots.

“This is an essential time to be in manufacturing considering other sectors are seeing hiring slow down.  Many young people overlook the opportunity and high wages that careers in manufacturing afford,” said Jeff Owens, President of Advanced Technology Services. “As you can see form the rebound and the shortage of skills that manufacturing is experiencing, opportunities for profession growth and excellent wages are plentiful for people with the technical skills required.”

The need for skilled labor in the manufacturing industry was among the leading topics of discussion at the imX event in Las Vegas on September 12-14, 2011.  Jeanine Kunz, director of professional development for the Society of Manufacturing Engineers (SME), said “If companies don’t address this shortage of qualified labor now, hundreds of thousands of jobs will go unfilled by 2021, jeopardizing our workers, our companies and our nation’s future.”

The question of what is being done to address the lack of skilled workers will be considered in next week’s article.

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