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How we could Create Jobs while Reducing the Trade Deficit and National Debt

Tuesday, March 26th, 2013

There are numerous ideas and recommendations on how we could create jobs but most job creation programs proposed involve either increased government spending or reductions in income or employment taxes at a time of soaring budget deficits and decreased government revenue. Other recommendations would require legislation to change policies on taxation, regulation, or trade that may be difficult to accomplish. The recommendations in this article focus on what could be done the fastest and most economically to create the most jobs while reducing our trade deficit and national debt.

Manufacturing is the foundation of the U. S. economy and the engine of economic growth. It has a higher multiplier effect than service jobs. Each manufacturing job creates an average of three to four other supporting jobs. So, if we focus on creating manufacturing jobs, we would be able to reduce the trade deficit and national debt at the same time.

The combined effects of an increasing trade deficit with China and other countries, as well as American manufacturers choosing to “offshore” manufacturing, has resulted in the loss of 5.7 million manufacturing jobs since the year 2000. If we calculate the multiplier effect, we have actually lost upwards of 17 to 22 million jobs, meaning that we have fewer taxpayers and more consumers of tax revenue in the form of unemployment benefits, food stamps, and Medicaid.

In 2012, the U.S. trade deficit with China reached a new record of $315 billion. According to a recent study by the Economic Policy Institute (EPI), the trade deficit with China cost 2.7 million U.S. jobs from 2001-2011. The Department of Commerce estimates that each $1 billion in trade deficit translates to about 13,000 lost jobs, so the $738 billion trade deficit in goods for 2012 cost upwards of 9,599,200 jobs.

What Congress Could Do

First, Congress should enact legislation that addresses China’s currency manipulation. Most economists believe that China’s currency is undervalued by 30-40% so their products may be cheaper than American products on that basis alone. To address China’s currency manipulation and provide a means for American companies to petition for countervailing duties, the Senate passed S. 1619 in 2011, but GOP leadership prevented the corresponding bill in the House, H. R. 639, from being brought up for a vote, even though it had bi-partisan support with 231 co-sponsors. On March 20, 2013, Sander Levin (D-MI), Tim Murphy (R-PA), Tim Ryan (D-OH), and Mo Brooks (R-AL) introduced the Currency Reform for Fair Trade Act in the House and a corresponding bill will be introduced in the Senate.

Second, Congress should strengthen and tighten procurement regulations to enforce “buying American” for all government agencies and not just the Department of Defense. All federal spending should have “buy America” provisions giving American workers and businesses the first opportunity at procurement contracts. New federal loan guarantees for energy projects should require the utilization of domestic supply chains for construction. No federal, state, or local government dollars should be spent buying materials, equipment, supplies, and workers from China.

My other recommendations for creating jobs are based on improving the competitiveness of American companies by improving the business climate of the United States so that there is less incentive for American manufacturing companies to outsource manufacturing offshore or build plants in foreign countries. The following proposed legislation would also prevent corporations from avoiding paying corporate income taxes:

  • Reduce corporate taxes to 25 percent
  • Make capital gains tax of 15 percent permanent
  • Increase and make permanent the R&D tax credit
  • Eliminate the estate tax (also called the Death Tax)
  • Improve intellectual property rights protection and increase criminal prosecution
  • Prevent sale of strategic U.S.-owned companies to foreign-owned companies
  • Enact legislation to prevent corporations from avoiding the U.S. income tax by reincorporating in a foreign country

It is also critical that we not approve any new Free Trade Agreements, such as the Trans-Pacific Partnership and Trans-Atlantic Partnership that are currently proposed. The U.S. has a trade deficit with every one of its trading partners from NAFTA forward, so Free Trade Agreements have hurt more than helped the U.S. economy.

What States and Regions Could Do

State and local government can work in partnership with economic development agencies, universities, trade associations, and non-profit organizations to facilitate the growth and success of startup manufacturing companies in a variety of means:

Improve the Business Climate – Each state should take an honest look at the business climate they provide businesses, but especially manufacturers since they provide more jobs than any other economic sector. The goal should be to facilitate the startup and success of manufacturers to create more jobs. I recommend the following actions:

  • Reduce corporate and individual taxes to as low a rate as possible
  • Increase R&D tax credit generosity and make the R&D tax credit permanent
  • Institute an investment tax credit on purchases of new capital equipment and software
  • Eliminate burdensome or onerous statutory and environmental regulations

Establish or Support Existing Business Incubation Programs, such as those provided by the members of the National Business Incubation Alliance. Business incubators provide a positive sharing-type environment for creative entrepreneurship, often offering counseling and peer review services, as well as shared office or laboratory facilities, and a generally strong bias toward growth and innovation.

Facilitate Returning Manufacturing to America – The Reshoring Initiative,  founded by Harry Moser in 2010, has a  mission to bring good, well-paying manufacturing jobs back to the United States by assisting companies to more accurately assess their total cost of offshoring, and shift collective thinking from “offshoring is cheaper” to “local reduces the total cost of ownership.” The top reasons for U. S. to reshore are:

  • Brings jobs back to the U.S.
  • Helps balance U.S., state and local budgets
  • Motivates recruits to enter the skilled manufacturing workforce
  • Strengthens the defense industrial base

According to Mr. Moser, the Initiative has documented case studies of companies reshoring showing that “about 220 to 250 organizations have brought manufacturing back to the U.S….with the heaviest migration from China. This represents about 50,000 jobs, which is 10% of job growth in manufacturing since January 2010.”

State and/or local government could facilitate “reshoring” for manufacturers in their region by conducting Reshoring Initiative conferences to teach participants the concept of Total Cost of Ownership, how to use Mr. Moser’s free Total Cost of Ownership Estimator™, and help them connect with local suppliers.

Establish Enterprise Zones and/or Free Trade Zones: Enterprise Zones provide special advantages or benefits to companies in these zones, such as:

  • Hiring Credits – Firms can earn state tax credits for each qualified employee hired (California’s is $37,440)
  • Up to 100% Net Operating Loss (NOL) carry-forward for up to 15 years under most circumstances.
  • Sales tax credits on purchases of up to $20 million per year of qualified machinery and machinery parts;
  • Up-front expensing of certain depreciable property
  • Apply unused tax credits to future tax years
  • Companies can earn preference points on state contracts.

States located on international borders could also establish Foreign Trade Zones (FTZs), which are sites in or near a U.S. Customs port of entry where foreign and domestic goods are considered to be in international trade. Goods can be brought into the zones without formal Customs entry or without incurring Customs duties/excise taxes until they are imported into the U. S. FTZs are intended to promote U.S. participation in trade and commerce by eliminating or reducing the unintended costs associated with U.S. trade laws

What Individuals Could Do

There are many things we could do as individuals to create jobs and reduce our trade deficits and national debt. You may feel that there is nothing you can do as an individual, but it’s not true! American activist and author, Sonia Johnson said, “We must remember that one determined person can make a significant difference, and that a small group of determined people can change the course of history.”

If you are an inventor ready to get a patent or license agreement for your product, select American companies to make parts and assemblies for your product as much as possible. There are some electronic components that are no longer made in the U. S., so it may not be possible to source all of the component parts with American companies. There are many hidden costs to doing business offshore, so in the long run, you may not save as much money as you expect by sourcing your product offshore. The cost savings is not worth the danger of having your Intellectual Property stolen by a foreign company that will use it to make a copycat or counterfeit product sold at a lower price.

If you are an entrepreneur starting a company, find a niche product for which customers will be willing to pay more for a “Made in USA” product. Plan to sell your product on the basis of its “distinct competitive advantage” rather than on the basis of lowest price. Select your suppliers from American companies as this will create jobs for other Americans.

If you are the owner of an existing manufacturing company, then conduct a Total Cost of Ownership analysis for your bill of materials to see if you could “reshore” some or all of the items to be made in the United States. You can use the free TCO worksheet estimator to conduct your analysis available from the Reshoring Initiative at www.reshorenow.org. Also, you could choose to keep R&D in the United States or bring it back to the United States if you have sourced it offshore.

If enough manufacturing is “reshored” from China, we would drastically reduce our over $700 billion trade deficit in goods. We could create as many as three million manufacturing jobs, which would, in turn, create 9 – 12 million total jobs, bringing our unemployment down to 4 percent.

You may not realize it, but you have tremendous power as a consumer. Even large corporations pay attention to trends in consumer buying, and there is beginning to be a trend to buy ‘Made in USA” products. As a result, on January 15, 2013, Walmart and Sam’s Club announced they will buy an additional $50 billion in U.S. products over the next 10 years.

U.S. voters supported Buy America policies by a 12-to-1 margin according to a survey of 1,200 likely general election voters conducted between June 28 and July 2, 2012 by the Mellman Group and North Star Opinion Research. The overwhelming support has grown since prior iterations of the same poll – Buy America received an 11-to-1 margin of support in 2011 and a 5-to-1 margin in 2010. A survey by Perception Services International of 1400 consumers in July 2012, found that 76% were more likely to buy a U.S. product and 57% were less likely to buy a Chinese product.

As a consumer, you should pay attention to the country of origin labels when they shop and buy “Made in USA” products whenever possible. Be willing to step out of your comfort zone and ask the store owner or manager to carry more “Made in USA” products. If you buy products online, there are now a plethora of online sources dedicated to selling only “Made in USA” products. Each time you choose to buy an American-made product, you help save or create an American job.

In his book, Buying America Back:  A Real-Deal Blueprint for Restoring American Prosperity, Alan Uke, recommends Country of Origin labeling for all manufactured products that “puts control in the hands of American consumers to make powerful buying choices to boost our economy and create jobs,” as well as reduce our trade deficit. The labels would be similar to the labels on autos, listing the percent of content by country of all of the major components of the product. This Country of Origin labeling would enable American consumers to make the decision to buy products that have most of their content “made in USA.”

If every American would make the decision to buy American products and avoid imports as much as possible, we could make a real difference in our nation’s economy. For example, if 200 million Americans bought $20 worth of American products instead of Chinese, it would reduce our trade imbalance with China by four billion dollars. During the ABC World News series called “Made in America,” Diane Sawyer has repeatedly said, “If every American spent an extra $3.33 on U. S.-made goods, it would create almost 10,000 new jobs in this country.”

In conclusion, if we want to create more jobs, reduce our trade deficit and national debt, we must support our manufacturing industry so that it could once again be the economic engine for economic growth. Following the suggestions in this article could make the “Great American Job Engine” roar once again.

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Import Penetration Still Outweighs Reshoring Trend

Monday, March 11th, 2013

In January, the U. S. Business and Industry Council released a report, “Import Penetration Rises again in 2011; Challenges Manufacturing Renaissance, Insourcing Claims,” by Alan Tonelson. According to the report,” the share of U.S. markets for advanced manufactured goods controlled by imports reached another all-time high in 2011… and domestic manufacturing’s highest value sectors keep falling behind foreign-based rivals.”

The USBIC report shows that “imports captured 37.57 percent of the collective $2.01 trillion American market in 2011 for a group of more than 100 advanced manufactured products,” up from 37.07 percent in 2010. When government data to calculate import penetration rate were first issued in 1997,”imports controlled 24.49 percent of substantially the same group of U.S. manufactured products.”

“Fully 29 of the 106 sectors for which reliable data were available featured import penetration rates of 50 percent or more in 2011. In 2010, 31 of these industries had lost half of their home U.S. market to imports, and in 1997, only 8 of the 114 sectors initially studied were in this situation.”

Between 1997 and 2011, 98 industries lost shares of their home market while only 8 gained shares. The industries that gained shares are:  “semiconductor machinery; saw mill products; paperboard mill products; motor vehicle stamping operations; transformer, inductor, and coil manufacturing; electron tubes; computer storage devices; and heavy duty trucks and chassis.”

The 98 industries include:  “semiconductors; electro-medical apparatus; pharmaceuticals; turbines and turbine generator sets; construction equipment; farm machinery and equipment; mining machinery and equipment; several machine tool-related categories; and ball and roller bearings.”

The report states that “from 1997-2011, output fell in 38 of the 106 total industries studied over this time span – nearly 36 percent of the total. These ‘declining’ industries include electricity measuring and test instruments; relays and industrial controls; motors and generators; motor vehicle engines and engine parts; several machine tool-related categories; and environmental controls.” In 11 more sectors, output growth was less than 10 percent, “including semiconductors; semiconductor production equipment; motor vehicle transmission and power train equipment; miscellaneous industrial machinery; and medicinals and botanicals.”

Mr. Tonelson writes, “High and rising import penetration rates for this many critical domestic industries over nearly a decade and a half represent powerful evidence of chronic, significant weakness in domestic manufacturing.”

In a section titled, “The Manufacturing Renaissance that Isn’t, he disputes the predictions of the Boston Consulting Group’s 2011 report, “Made in America, Again: Why Manufacturing Will Return to the U.S.” This report contends that American manufacturing would experience a renaissance because of rising costs in China and other parts of Asia so there would be a convergence in the total costs of manufacturing by some regions of the U. S. by 2015.

If U. S. manufacturers are still losing market share to foreign competitors through import penetration in their home market, this is a sign that “the United States has not even started to become “increasingly attractive for the production of many goods sold to consumers in North America” as predicted by the Boston Consulting Group, much less experiencing a Manufacturing Renaissance.

What is even more troubling to Mr. Tonelson is that the USBIC report focuses on the capital-and technology-intensive sectors that are “keys to maintaining national prosperity, technological leadership, and national security.”  The report shows that “dozens of America’s most advanced manufacturing industries are becoming just as vulnerable to import competition – and in some cases to import domination – as labor-intensive industries like clothing and toys.”

He concludes that the conventional stimulus strategies have had the disappointing results of “less growth and employment bang per investment-target stimulus buck with each passing year” because “U. S. imports of capital goods as such generates much less American output supported by much less American employment than purchases of domestically produced capital goods.”

In his opinion, President’s Obama’s goal of doubling exports during the 2009-2014 period isn’t going to improve the situation either when imports keep rising faster than exports. While there was a 15.45 percent improvement from 2010 to 2011, the January-October 2012 period only showed a 4.56 percent improvement.

Mr. Tonelson points out that negotiating new trade agreements isn’t producing the desired effect of increasing exports. The latest agreement negotiated with Korea has had the opposite effect  ? U. S. exports to Korea dropped by more than 18 percent while imports from Korea are up 4.74 from when it came into force in March 2012.

He concludes that the continued rise of import penetration in the U. S. indicates that American industry is losing ground relative to foreign-based competitors and “the nation is not making enough of the structural changes needed to create healthy growth and avoid reflating the last decade’s credit bubble.”

In an interview by Richard McCormack in the January 15, 2013 issue of Manufacturing & Technology News, Mr. Tonelson, stated, “I think the only way that these trends reverse meaningfully is if American trade policy changes. Unless we reduce the incentives of U.S. companies and companies all over the world to supply the U.S. market from overseas, this tide will not turn.”

While reducing the incentives of U. S. companies and foreign companies to supply the U. S. market from overseas is an important step in turning the tide, it would be the first of many steps we need to take. As I have written previously, we need to change our trade, tax, and regulations policies to help U. S. manufacturers be more competitive in both their home market and the global marketplace. We need to develop a national manufacturing strategy that would address all of the various factors that are resulting in the decline in the decline in the United States’ share of the global manufacturing output.

I did take exception to Mr. Tonelson’s dispute of the predictions of the Boston Consulting Group’s report and told him that the data is lagging reality ? “reshoring” is happening. As a manufacturers’ sales rep for American companies that perform fabrication services, I am in the “trenches” competing with offshore companies. Nearly every manufacturer I represent has experienced gaining new customers that are “reshoring” manufacturing from China. I have interviewed dozens of companies at trade shows over the past year and a half, and every company I interviewed had experienced “reshoring.” Nearly all of the San Diego region’s contract manufacturers of electronic manufacturing services have benefitted from “reshoring” in the past year.

The Reshoring Initiative, founded by Harry Moser in 2010, has documented case studies of companies reshoring. In the article, “Pumping Muscle into U.S. Manufacturing,” by Craig Barner in the March 6, 2013 issue of Forbes magazine, Mr. Moser said, “For example, about 220 to 250 organizations have brought manufacturing back to the U.S….with the heaviest migration from China. This represents about 50,000 jobs, which is 10% of job growth in manufacturing since January 2010, he said.”

“The top reshoring industries include electrical equipment, appliances and components; transportation equipment; and machinery, Moser said. Key reasons for returning to the U.S. include rising wages offshore, better quality of goods produced in the U.S., easier access to repairs and lower delivery costs, he said.”

On March 4, 2013, Prime Advantage, the leading buying consortium for midsized manufacturers, announced the findings of its eleventh semi-annual Group Outlook Survey. “A large majority — more than 70% of respondents — have increased their material and service purchases from American suppliers and service providers. Mexico is the second choice for sourcing, with nearly 28% of respondents moving sourcing to that region. The most frequently cited benefits that manufacturers hope to see in nearshoring are shorter lead times, as indicated by 67% of respondents, and lower inventories (49%). Among other benefits, companies cited better supply chain control (40%) and better overall communication (39%).”

If more American manufacturers would utilize the free Total Cost of Ownership Estimator™ developed by Harry Moser, more companies would understand the benefits of “reshoring” and foster a true renaissance in American manufacturing.

 

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Posted in Economy, Manufacturing, Outsourcing, Reshoring, Trade Policy | 2 Comments »

What Do American Manufacturers Owe Their Country?

Tuesday, February 5th, 2013

Last week The Economist conducted an on-line debate on the question:  Do multinational corporations have a duty to maintain a strong presence in their home countries? After a very intense written debate between Harry Moser, former president of GF AgieCharmilles  and founder of the Reshoring Initiative, and Jagdish Bhagwati, Professor of Economics and Law, Columbia University, the vote was 54% “yes,” and 46% “no.”

The moderator of the debate was Tamzin Booth, European business correspondent for The Economist, who introduced the topic by stating, “after the Great Recession, with high levels of unemployment persisting in rich countries, politicians are putting enormous pressure on firms to either keep operations at home or bring them back. The offshoring and outsourcing of work overseas have never been more unpopular. So strong is the backlash against firms which shift jobs abroad that many companies are choosing not to do it for fear of igniting a public outcry. And a “reshoring” trend, bringing factories home to America from China and elsewhere, is gathering pace and support from several American multinationals, including General Electric and Ford Motor Company.”

While Mr. Moser acknowledges that multinational corporations (MNCs) “have a responsibility to enhance shareholder return and obey relevant laws and regulations,” he believes that “MNCs also have a duty to maintain a strong presence in their country of origin,” which he defines “as investing, employing, manufacturing and sourcing at least in proportion to their sales in the origin country.”

He states, “This duty has two sources. The first is a quid pro quo for the special benefits that their charter provides. The second is based on understanding that a strong presence is almost always in the interest of their shareholders.”

In his pro argument for the first duty, Mr. Moser quotes Clyde Prestowitz: “Corporations are not created by the shareholders or the management. Rather they are created by the state. They are granted important privileges by the state (limited liability, eternal life, etc). They are granted these privileges because the state expects them to do something beneficial for the society that makes the grant. They may well provide benefits to other societies, but their main purpose is to provide benefits to the societies (not to the shareholders, not to management, but to the societies) that create them.”

This view is corroborated by a recent essay, “The American Corporation,” by Ralph Gomory and Richard Sylla, in which they provide a brief history of corporation formation in America. From 1790 to 1860, over 22,000 corporations were chartered under special legislative acts by states, and

several thousand more were chartered under general incorporation laws introduced in the 1840s and 1850s. These state granted charters were not perpetual and had to be renewed periodically, “with its “powers, responsibilities?including to the community?and basic governance provisions carefully specified.”

The essayists comment that general incorporation laws were the answer to the problem of corruption in legislative chartering, but created their own problems in the late 19th Century with the rise of “Robber Barons, both the business leaders who amassed great power and wealth in the rise of mass-production and mass-distribution industries, and the great financiers of Wall Street who collaborated with them.” The concentration of wealth and power in the hands of so few led to the passage of antitrust laws and corporate regulations at both the federal and state levels regulations in the 20th Century to prevent or rein in monopolies.

The stock market crash of 1929 and the Great Depression resulted in a multitude of “New Deal” reforms and regulations on the corporate and financial sectors to protect and inform stockholders and the general public.

Gomory and Sylla write that for decades after WWII, “the problem of corporate goals seemed under control,” and “the interests of managers, stockholders workers, consumers and society seemed well aligned” while the U. S. and the Soviet Union were fighting a Cold War.

As late as 1981, the U. S. Business Roundtable issued a statement recognizing the stewardship obligations of corporations to society:  “Corporations have a responsibility, first of all, to make available to the public quality goods and services at fair prices, thereby earning a profit that attracts investment to continue and enhance the enterprise, provide jobs, and build the economy.” In addition, “The long-term viability of the corporation depends upon its responsibility to the society of which it is a part. And the well being of society depends upon profitable and responsible business enterprises.”

Establishing plants in another country in order to do business in that country and be closer to your customers is a reasonable business decision for many companies whose products are sold globally, such as Coca Cola and other food and beverage manufacturers. I concur with Mr. Moser’s statement. “We do not question multinational companies’ right to invest offshore.” However, it is another thing to transfer all or most of the manufacturing of your products to be sold mainly in the U. S. market to another country, at the cost of hundreds, if not thousands, of American jobs.

This brings us to Mr. Moser’s second pro argument to the question; namely, “a strong presence is almost always in the interest of their shareholders.” He states that his experience with the Reshoring Initiative’s free Total Cost of Ownership Estimator™ has shown that “in their excessive focus on offshoring of manufacturing, many MNCs make suboptimal decisions, actually reducing the long-term return to their shareholders. Thus many MNCs will more fully maximise returns for shareholders if they maintain a stronger presence.”

This is because most MNCs do not accurately measure the “Total Cost of Ownership” or “landed costs” in making decisions regarding where to manufacture their products. They ignore the “hidden costs” of doing business offshore about which I have written extensively in my book , such as:  quality problems, legal liabilities, currency fluctuations, travel expenses, difficulty in making design changes, time and effort to manage offshore contract, and cost of inventory.

In addition, Mr. Moser states that the behaviors of MNCs include:

  • “Ignoring a whole range of medium-term risks: IP loss; impact on innovation; and loss of competence and control due to increasing reliance on offshore outsourcing firms. The further a firm is removed from the manufacturing of its products, the harder it is to evolve and make future related products.
  • Ignoring longer-term catastrophic risks associated with shifting their presence offshore, including the decline in American economic, technological and military strength: risk of losing sales and assets in developing countries, especially when competing with local state-owned enterprises (SOEs); loss of the government-funded R&D that gives them a head start in many technologies; loss of strong origin-country defence and legal systems that protect the corporate charter; loss of “Pax Americana” that protects their trade around the world; and populist calls for anti-MNC political actions resulting from income inequality driven by a shriveling middle class.”

One important risk that Mr. Moser did not mention is the risk of theft of Intellectual Property by offshore manufacturers, especially in China. For many years, China has been doing this by reverse engineering, counterfeiting, and cyber espionage, but it has been made easier in the past two years by the mandatory technology transfer required by the Chinese government for corporations who set up plants in China.

In his con argument, Professor Bhagwati asserts that global sourcing and locating plants around the world has happened already, and “there is little point in tilting at reality.” He states, “Multinationals’ products, after all, can now hardly even be defined as American, French or any other nationality when their parts come from every corner of the world. All that matters, he argues, is that worldwide operations bring profits to the multinational, thereby benefiting the country in which it is headquartered. , “MNC investment abroad is good, not bad, for America unless it is a result of distorting tax policies that lead to overinvestment abroad. Asking MNCs to have a presence at home, and subsidising or forcing them under threat of penalties to do so, makes little sense unless you claim that this presence produces some externalities…the benefits to the MNC, and hence to America most likely, will accrue regardless of where the MNC does R&D, in Bangalore or Boston.”

In is rebuttal, Professor Bhagwati states, “Compelling an American MNC to retain a strong presence in America would be the wrong prescription no matter which of the two rationales you accept…Forcing them to produce at home when that makes them uncompetitive in world markets is surely the wrong prescription: it makes them uncompetitive in markets which today are fiercely competitive.

While I realize and have written about the fact that American manufacturers are under a disadvantage in dealing with countries like China that practice “predatory mercantilism,” it is my opinion that American multinational and national manufacturing corporations have more than a “duty to maintain a strong presence in their home countries.” As American citizens, we “pledge allegiance to the Flag of the United States of America, and to the Republic for which it stands, one Nation under God, indivisible, with liberty and justice for all.” Thus, we owe “allegiance” to our country, which is defined as “the loyalty of a citizen to his or her government.” Other synonyms are:  fidelity, faithfulness, adherence, and devotion.

Obviously, if you are a loyal, faithful, devoted citizen of the United States this means that you take actions in your personal and business life to support your country and do not purposely take actions that may cause harm to your country. Moving a majority of manufacturing to other countries, especially China is doing harm to your country since China has a written plan to replace the United States as the world’s super power. Therefore, American multinational corporations and other American manufacturers owe allegiance to the United States of America by maintaining a strong presence in our country.

 

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Indiana Manufacturers Have Weathered the Storm of the Great Recession

Tuesday, December 18th, 2012

According to results of the 2012 Indiana Manufacturing Survey: “Halftime” for Indiana Manufacturing, Indiana manufacturers have weathered the storm of the Great Recession and are well positioned to compete in the future., The report, commissioned by Katz, Sapper & Miller certified public accounting firm, was conducted by Scott A. Brown, Partner, Katz, Sapper & Miller, LLP in conjunction with Mark Frohlich, associate professor of operations management and Steven Jones, associate professor of finance  on the faculty of the Kelley School of Business Indianapolis, Indiana University.

This report has tracked Indiana manufacturing for six years, from the end of the economic boom through the Great Recession to the present. The authors “view the past year as a ‘halftime’ break for Indiana manufacturing after what proved to be an incredibly difficult first half.”

The vast majority of companies surveyed (82%) responded at the company level, while 10% are individual plants and 7% are divisions of larger organizations. Privately owned companies represent 87% of respondents and the other 13% are publicly traded companies. The average number of employees is 306, and the largest organization has 8,000 employees.

About 40% of companies rely on job shop-type production, and 41% use batch manufacturing. Very few companies operate assembly lines (8%) or continuous flow processes (11%), both of which are capital intensive and used to produce relatively standardized, high-volume items.

The three largest industry groups represented are industrial equipment (19%), automotive (19%), and aerospace and defense (10%). Another 18% of respondents are almost evenly distributed between high-tech (5%), healthcare (6%), and furniture/home goods (7%).

In the past four years since the financial crisis of late 2008, “manufacturers have faced challenges ranging from credit crunches and supplier bankruptcies to slumping consumer demand, soaring energy costs, and relentless foreign competition.” The report chronicles that “in 2008-09, Indiana manufacturers were mainly focused on cost-cutting and economic survival. By 2010-11, targeted investments aimed at growth began to reappear on the agendas of many manufacturers.” Now, four years later, “a significant majority now report that their business is either ‘healthy’ or ‘stable,’ with tougher times behind them” and “investment for growth is a priority for many companies around the state,” while “almost three out of every four manufacturers surveyed are investing for growth.”

“From a financial perspective, I think it small- to medium-sized manufacturers have made it through the Great Recession, and they’re starting to recover,” said Jones. “That is revealed in the survey responses indicating there’s less concern about working capital management and renewed focus on investment strategy, rather than cost cutting.”

“One in 10 companies surveyed plan to open new manufacturing facilities in Indiana over the next two years, and 44 percent rate their financial performance as “healthy,” a significant increase from last year’s response of 30 percent.”

The survey did find that net profit margins increased more for firms that introduced new products sometime in the two years prior. In the 2012 survey findings, the companies introducing new products increased to 44% (up from 38% in 2011), and they saw a 24% improvement in net profit margin (down from 26% in 2011.

According to survey 2012 survey results, business strategies have changed from 2011. In 2011, “the two most important underlying dimensions were superior product design and fast and reliable delivery along with superior customer service.” In 2012, “superior quality and lower selling prices have emerged as the two most important underlying dimensions on which manufacturers are differentiating their businesses.”

The authors “research reveals three key ways strategies are shifting as we move beyond the Great Recession toward a new era that is likely to be even more competitive:”

  1. Keep focused on the customer – strategies increasingly feature superior quality and lower prices, along with superior product design and customer service.
  2. Don’t underestimate the importance of technology – leading-edge technologies are playing a critical role in advancing these companies in conjunction with process improvement programs such as Lean and Six Sigma, advanced automation, and smart manufacturing technologies.
  3. Collaboration remains critical – partnerships and collaboration with up- and downstream customers and suppliers in the supply chain

Frohlich and Jones recommend, “Indiana manufacturing companies stay focused on the customer, avoid underestimating the importance of technology and know that collaboration remains critical.”

“These results indicate a reason to be optimistic about the manufacturing sector and jobs investment in the State of Indiana,” said Jones.

A slightly higher percentage of companies are “on-shoring” (aka “reshoring”) manufacturing back into the United States. When asked if they expect to relocate or onshore any manufacturing back to the United States during 2012-13, or alternatively, do they plan on relocating, or offshoring, any production outside the United States during 2012-2013, 9% indicated they intend to onshore and 8% intend to offshore. The top four reasons why companies are “reshoring” were:  better control over production (60%), proximity to customers and main markets (50%), closer to key suppliers (40%), and reduce total “landed” costs; i.e., customs/duties, transportation, warehousing, etch (40%). The main reasons for offshoring manufacturing out of the United States are:  lower offshore labor costs and proximity to customers in new markets.

“What now are recognized as systematic errors in offshoring over the past 10-15 years were a lot of mistakes based on myopic financial decision making,” said Jones. “Firms made offshoring decisions assuming exchange rates wouldn’t change, which is wholly unrealistic in currency markets. Many made these financial decisions using only the data in front of them. Additionally, the real cost of labor has gone up in China. All of this represents what, in retrospect, may be an excessive amount of offshoring in the previous decade.”

The survey revealed that the main reasons for Indiana’s competitive edge include:

  • Better access to new technologies
  • Better control over production
  • Locations closer to customers, markets and suppliers
  • Great accounting and auditing oversight

The report states, “The major remaining concern for the state is having a trained workforce that is qualified to pursue advanced manufacturing strategies.”

“These results clearly indicate a growing concern about access to an adequately trained Hoosier workforce, more so than in past years,” the report reads. “Consistent with the previous results indicating growing concerns about worker training, only 30 percent of respondents view Indiana’s workforce as a competitive advantage for the state.”

The authors conclude that “While Indiana’s manufacturers still face strong global competition, their practices and products are beginning to permeate all elements of operations; opening up new markets and sources of demand; driving innovation; and even changing industry cost structures.”

This report shows where Indiana’s manufacturers are right now, but the question is what to do next? The report indicates “a strong sense among Indiana’s manufacturers that execution is now the challenge to bringing about the new era of manufacturing. Confidence among business leaders about their progress toward this new era is strong, and their companies are taking concrete steps towards improving manufacturing…While today’s business environment provides a multitude of new challenges to manage, it also offers significant opportunities for those who can master its dynamics.”

The survey found that a new manufacturing era is on the horizon, and “there is widespread agreement about what the next era of manufacturing will look like. It is one where manufacturing is not only a separate strategic initiative, but also something fully integrated into the strategy and operations of a company. For example, manufacturers will need to develop a broader sense of what value creation means to customers as a whole.”

The underlying tone in this year’s report is that “the next five years could well determine not only the fate of some firms, but also, in significant ways, the success of Indiana and that of our country in the global economy for years to come…Manufacturing can and should continue to thrive if the right policies and strategies are pursued. Real and fundamental changes are continuing to take place across manufacturing in all kinds of capabilities.”

The authors conclude that “the message is clear: Indiana (and American) manufacturing has survived a tough first half. Now it must move forward to remain competitive in the future.”

This report is another example of how American manufacturers can survive and even grow and prosper in the face of global competition. The companies doing the best have implemented many of the recommendations contained in the chapter ? “What can manufacturers do to save themselves? ? in my book, Can American Manufacturing be Saved? Why we should and how we can. Innovative new products, fast, reliable delivery, superior customer service in conjunction with applying the principles and tools of Lean and Six Sigma are a few of the suggestions from this chapter. I encourage everyone to read the new 2012 edition of my book to find out what you can do as a manufacturer to grow and succeed, what national policies need to be changed and implemented to foster success of this critical sector of our economy, and what you can do as an individual to save American manufacturing.

 

 

Posted in Innovation, Manufacturing, Reshoring, Training | No Comments »

New Products and Education Highlighted at Las Vegas FABTECH Expo

Tuesday, November 27th, 2012

The annual FABTECH expo was held November 12-14 at the Las Vegas convention center. It is the largest metal forming, fabricating, welding and finishing event in North America and only comes to the west once every three to four years. The other rotating locations are Chicago, IL and Atlanta, GA.

FABTECH is co-sponsored by five industry-leading associations: the American Welding Society (AWS), the Fabricators & Manufacturers Association, International (FMA), the Society of Manufacturing Engineers (SME), the Precision Metalforming Association (PMA), and the Chemical Coaters Association International (CCAI).

The first day’s attendance was a record high of over 15,000, and show organizers reported that 25,903 attendees walked the more than 450,000 net square feet of floor space during the three-day show to see live equipment demonstrations, compare products side-by-side and find cost-saving solutions. Because of the Las Vegas location, many attendees probably came to have fun over the weekend and attended the show the first day. I visited the show on the second and third day so I missed the huge crowd of the first day. It was my first FABTECH show, and it was overwhelming in size and scope. I haven’t seen exhibitor displays as large since the heyday of the Los Angeles WESTEC show in the early 1990s.

I was curious to see if attendees were going to the show to browse or actually place orders. Judging by the number of “sold” signs on equipment and my interviews with exhibitors, attendees were placing orders and not just browsing. Exhibitors speculated that many were buying to take advantage of the “accelerated depreciation for the purchase of capital equipment” that will expire on December 31st, unless Congress extends the current tax rates (referred to as the Bush tax cuts).

The October issue of West Manufacturing News reported, “FABTECH’s annual expo comes as manufacturing continues to lead the American economy out of the recession…Offshored work is returning home and profits at manufacturing companies increased 25% in 2011.”

Out of the more than 1,100 manufacturers participating in the expo, 274 companies were displaying new products. There were 113 new products in the welding section alone, and the rest were displayed in the forming and fabricating, finishing, metal forming, and tube bending, pipe and wire forming sections.

I met the COO of Lincoln Electric, Christopher Mapes, while standing in line at Starbucks, and he arranged for me to have a demonstration of their new VRTEX® virtual reality arc welding training simulator. These computer based training systems are educational tools designed to supplement and enhance traditional welding training. They allow students to practice their welding technique in a simulated and immersive environment. The VRTEX® systems promote the efficient transfer of quality welding skills and body positioning to the welding booth while reducing material waste associated with traditional welding training. I actually got to put on the helmet and perform a virtual weld. I have watched welding in the shops I have represented over the years, but it was my first time to actually perform a virtual weld. I immediately saw how great the training system would be for training the next generation of workers in programs such as the Workshops for Warriors I wrote about in October.

The FABTECH educational conference held simultaneously with the three-day expo included an unprecedented number of sessions on such manufacturing topics as laser and water jet cutting, product finishing and coatings, forming and fabrication, lean, online and social marketing, metal stamping, tube and pipe ending, and welding. The educational sessions were available for half-day, all-day and a three-day program. The education programs and special events were packed with attendees.

There was at least one special event each day:  On day one, there was a workshop on “Lean Manufacturing for Managers” and a “State of the Industry:  Manufacturers’ Executive Outlook.” On day two, there were three special events:  “Post-Election Analysis:  How the Results Impact U. S. Manufacturing; the “American Jobs for American Heroes,” in which Steve Nowlan, President, Center for America (CFA), briefed attendees on the opportunity for manufacturers to hire military veterans for skilled manufacturing jobs. The American Jobs for America’s Heroes is an alliance of the National Guard, CFA, Corporate America Supports You (CASY) and the Military Spouse Corporate Career Network (MSCCN) to help 60,000 unemployed National Guard members, veterans and spouses find skilled jobs in the private sector. The final event was a presentation by Harry Moser, President of the Reshoring Initiative on “To Offshore or Reshore? How to Objectively Decide!” I attended the “Post Election Analysis” and “To Offshore or Reshore? special events.

According to the after-show press release, at the State of the Industry roundtable with manufacturing CEOs, the CEOs concurred that growth in manufacturing should continue for the next year; however, all said a stumbling block to growth is the lack of skilled workers in manufacturing. The CEOs emphasized that manufacturers need to be more aggressive in influencing parents of students, having students influence each other and have school be a more active voice in recruiting potential workers.

The Post-Election Analysis panel featured Washington insiders Paul Nathanson, Founding Partner, Policy Resolution Group, Omar Nashashibi, The Franklin Partnership LLP, and David Goch, Webster, Chamberlain & Bean, all of whom have long track records in representing manufacturing interests.

They discussed the so-called looming fiscal cliff, tax reform, and other issues that will impact manufacturers. Paul Nathanson said, “Manufacturers need certainty to plan and there are major challenges ahead because of tax increases with the expiration of current tax rates and new taxes under Obamacare.” He feels something will get done before end of year and doesn’t think that sequestration will go in effect.

Omar Nashashibi said, “The new Congress will look at tax reform. The expiration of current taxes and Obamacare taxes represents $5.4 trillion of tax increases. The President proposed 28% taxes for corporations, but that doesn’t affect 70% of businesses that are LLCs, LLPs, partnerships, or sole proprietorships.

David Goch said, “Congress will do what they have done in the past – a 6-9 month ‘punt.’ The continuing resolution for funding ends March 31st if the debt limit isn’t reached sooner.” He warned the audience not to be surprised if the “carbon tax” reappears. “A recent Brookings Institute report proposed a “carbon tax” that would result in $1.2 trillion revenue over 10 years. It would make economists happy as it encourages investment vs. consumption. It would make Republicans happy because there would be no new taxes, and it would make environmentalists happy.”

They all believe that Congress will reach a deal to at least move the deadline for a debt deal before the end of the year. All agreed that the manufacturing sector has gained influence in Washington over the past two years and encouraged manufacturers to get involved in advocacy efforts for the industry via their trade associations.

While I am an authorized speaker for the Reshoring Initiative, I attended Harry Moser’s presentation on Tuesday afternoon to see if he had any new data that I could add to my own presentation. I appreciated being reminded that W. Edwards Deming’s “4th Key Principle for Management,” in Out of the Crisis, was:  “End the practice of awarding business on the basis of price tag. Instead, minimize total cost.” If companies had been practicing this principle for the past 20 years, we would have had far less manufacturing sourced offshore.

Moser’s Total Cost of Ownership (TCO) calculator enables companies to calculate the cost of all of the variables, including the hidden costs and risk factors, of doing business offshore.  Moser stated, “Manufacturers have to look at the total costs of offshoring to reliance that the savings gained might not e as significant as they think…Once you factor in tariffs, shipping costs, increase inventor because of delivery delays, quality control and communication issues, it’s a financial win to bring certain types of manufacturing back to North America.”

Some of the new data included in his presentation was:

  • 61% of larger companies surveyed “are considering bringing manufacturing back to the U.S.” (MIT forum for Supply Chain Innovation 1st Qtr. 2012)
  • 40% of contract manufacturers have done reshoring work  this year (MFG.com 4/12)
  • Percentage of U.S. consumers who view products Made in America very favorably: 78%  (2012) up from 58% (2010) (AAM June 28-July 2, 2012)
  • 76% are more likely to buy U.S. product
  • 57%  are less likely to buy Chinese product  (Perception Research Services Intl. survey 7/12, 1400 consumers)

According to the Reshoring library of case studies, the top four industries that have reshored are:

  • Electronic equipment, appliances & components
  • Transportation equipment
  • Machinery
  • Furniture

The main reasons why companies are reshoring are:

  • Wage and currency change
  • Quality, Warranty, Rework
  • Delivery
  • Travel Cost/Time
  • Inventory

Moser believes that just by using the TCO calculator, 25% of manufacturing offshored could return to America, representing about 300,000 jobs. In conclusion, Moser recommends:

  1. Keep existing domestic sources
  2. Shift outsourcing back to U. S.
  3. Repurpose own offshore to serve the offshore market and incrementally invest domestically to serve domestic market.
  4. Shut own offshore facility and build new domestic facility.

In the after show press release, John Catalano, FABTECH show co-manager, said, “We’ve received great feedback from attendees and exhibitors. Attendees were impressed with the size and scope of the show and the vast array of new products and technologies on display. Exhibitors were enthusiastic and report that sales activity was brisk and leads were plentiful.”

Mark Hoper, FABTECH show co-manager, said, “If you can take the pulse of the economy by what’s happening in manufacturing, then you have to be optimistic that we are headed for economic growth, said. A constant theme I heard both on the show floor and at the seminars was that, while challenges and uncertainties remain, most manufacturers believe that their businesses are headed for continued growth in 2013.”

Mark your calendar to attend FABTECH 2013, which will be held on November 18-21 at McCormick Place in Chicago, IL.

 

Posted in Education, Manufacturing, Reshoring | No Comments »

“Lame Duck” Congress Must Act to Prevent Sequestration

Tuesday, November 6th, 2012

The clock is ticking ? only 55 more days until sequestration takes effect on January 2, 2013. For the uninformed, sequestration is the across the board 10 percent cut in discretionary spending in the budget, including the Department of Defense budget, that is mandated by the Budget Control Act of 2011. The mandatory entitlement spending of the federal budget, Social Security, Medicare, Medicaid, will continue to grow, along with the interest on the national debt.

If Congress is unable to reach a compromise on how to reduce our 16 trillion dollar national debt, over $500 billion dollars in cuts to the defense budget over the next decade would be mandated to start January 2nd, translating into a cut of about $55-60 billion for 2013.

Our government took drastic action to prevent the bankruptcy of General Motors, but the effect of sequestration would be like both General Motors and Ford going bankrupt. It would not only affect all of the major defense prime contractors, but would affect their subcontractors, and in turn, their vendors, all the way down to the bottom of the defense and military supply chain. The lower tiers of the supply chain are nearly all small businesses, many of them disadvantaged businesses in the minority, veteran, or women-owned categories.

After three and a half years of a weak recovery, the last thing we need is a drastic cut in defense and military spending. In many regions of the country, defense and military spending has been the major factor in helping a region to recover. My hometown of San Diego is one of these regions that would be impacted severely.

According to the San Diego Military Advisory Council (SDMAC) 2012 Economic Impact Study, “a total of $20.6 billion of direct spending related to defense was estimated to flow into San Diego County during fiscal year 2012,” and “the military sector is responsible for 311,000 of the region’s total jobs in 2012 after accounting for all of the ripple effects of defense spending. This represents one out of every four jobs in San Diego.”

“Defense?related activities and spending were predicted to generate $32 billion of gross regional product (GRP) for San Diego County in fiscal year 2012,” more than the total economic output estimated for Colorado Springs, Colorado, or El Paso, Texas.

The report states that “dollars linked to national security enter San Diego through three primary channels: wages and benefits for active duty and civilian workers; benefits for retirees and veterans; and direct spending on contracts, grants, and small purchases” by the military and other Department of Defense (DoD) agencies. San Diego will not be immune to planned cutbacks in troop levels and spending by the DoD. The Marine Corps is expected to see its size gradually reduced over the next five years primarily through attrition and a reduction in recruiting, but the number of Navy personnel based in San Diego is projected to increase in fiscal year 2013 with the return of a second aircraft carrier, the USS Ronald Reagan, and the potential addition of a third aircraft carrier.

In the San Diego region, the manufacturing industry is the largest business sector that provides goods and services to the military. One-third of all companies reported some dependency on the defense industry. Over 1,700 companies of the San Diego companies profiled on the Connectory.com database of primary industries reported that military and government contracts make up a portion of their market share, so “an orchestrated approach to future defense downsizing and its impact on the manufacturing sector is needed.”

Larry Blumberg, SDMAC Executive Director, states, sequestration is “a mindless way of doing business.” The 2013 Defense budget “submitted to Congress on February of this year was designed to provide the resources to support the National Defense Strategy which was released in January 2013. Across the Board cuts to the Defense Budget make the Strategy “Un-Executable”, which is not in our National best interests.”

Nearly all of the major defense prime contractors ? BAE Systems, Boeing, General Dynamics, General Atomics, Lockheed-Martin, Northrop Grumman, and United Technologies ? have a presence in the San Diego region.

According to an editorial by the president of the National Defense Industry Association, Lawrence Farrell Jr., about “$22 billion of the sequester cut of $54 billion for fiscal year 2013 will come from operations and maintenance accounts. About $21 billion of the reductions will be from investments in new weapons systems and technology.” He also wrote, “With or without sequester, the near term reality for defense is military forces will be smaller, and weapons a bit older unless planned acquisition catches up with aging systems. Every branch of the military needs to modernize their aging fleets.”

On Aug. 6, 2012, Defense Secretary Leon E. Panetta said, “I’ve made clear, and I’ll continue to do so, that if sequestration is allowed to go into effect, it’ll be a disaster for national defense and it would be a disaster, frankly, for defense communities as well…Panetta called sequestration “an indiscriminate formula” that was never meant to take effect. “ It was never designed to be implemented,” he said. “It was designed to trigger such untold damage that it would force people to do the right thing. He urged the defense community leaders to do what they can to ensure Congress reaches a solution that avoids sequestration.”

On September 21, 2012, Sen. John McCain, ranking Republican on the Armed Services Committee and committee Chairman Carl Levin and four other Republican and Democratic senators sent a letter to Senate Majority Leader Harry Reid (D., Nev.) and Senate Republican Leader Mitch McConnell (R., Ky.) urging their party leaders to find a way to avert the spending cuts slated to begin Jan. 2, 2013 to “send a strong signal of our bipartisan determination to avoid or delay sequestration and the resulting major damage to our national security, vital domestic priorities and our economy.’’

In an August 2012 article titled “A Smarter Way to Trim the Pentagon Budget” Charles Knight, co-director of the Project on Defense Alternatives, stated, “There are numerous ways to save defense dollars that avoid both institutional disruption and most of the economic pain associated with deep cuts to government spending. An illustrative option is the “Reasonable Defense” plan, which will soon be released in its entirety by the Project on Defense Alternatives.” The Project on Defense Alternatives is a think tank which promotes consideration of a broad range of defense options and advocates resetting America’s defense posture along more sustainable, cost-effective lines.

The plan would decrease the 2013 defense budget by only $30 billion vs. $55 billion, comparable to the 2006 defense budget adjusted for inflation, and the reduction over a 10 year period would be more gradual than the Budget Control Act cap on defense spending. Key points of the plan are:

  • The Reasonable Defense budget for ten years would cost $560 billion less than the 2013 plan submitted by the White House.
  • Over the course of ten years the White House plan is to provide the Pentagon with $5.76 trillion.
  • The Reasonable Defense budget would provide the Pentagon with $5.2 trillion over tenyears.
  • The Budget Control Act would cap defense at about $5.18 trillion.

While this plan mitigates the pain of cutting the defense budget over the next ten years, even sequestration will not solve the overall budget deficit problem. “Defense {spending} today is around 3 percent of GDP, the lowest since 2001, and comprises about 18.5 percent of federal spending, which is on par with the 20-year average.” Our deficit has been more than $1 trillion per year for the past four years, and sequestration would only cut $1.2 trillion over ten years. Yet, defense spending cuts would comprise more than 50 percent of the cuts.

The best way to solve the deficit problem is to bring manufacturing back from offshore to create higher-paying jobs for more Americans. It’s simple:  Americans with good-paying manufacturing jobs pay taxes and generate tax revenue for the government, while Americans without jobs cost the government money in the form of unemployment benefits, Medicaid, and food stamps. If we could bring back half of the 5.5 million jobs we have lost, we could reduce the federal budget deficit significantly, as well as reduce state and local budget deficits. Harry Moser of the Reshoring Initiative states that the top reasons to reshore are:

  • Brings jobs back to the U.S.
  • Helps balance U.S., state and local budgets
  • Motivates recruits to enter the skilled manufacturing workforce
  • Strengthens the defense industrial base

Regardless of the outcome of the election, the members of the “lame duck” Congress must act like statesmen instead of the intensely partisan politicians of the past several years to prevent sequestration. Call your U. S. Senator and Congressional representative to urge them to approve a budget that will prevent sequestration. Otherwise, one of  the companies that close or the jobs lost may be your own.

 

 

 

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Posted in Economy, Manufacturing, National security, Reshoring | No Comments »

ITIF Report Details 50 Policies to Improve U.S. Manufacturing Competitiveness

Tuesday, September 25th, 2012

Last week, the Information Technology and Innovation Foundation (ITIF) released a report titled, “Fifty Ways to Leave Your Competitiveness Woes Behind: A National Traded Sector Competitiveness Strategy,” by Stephen Ezell and Robert Atkinson in which they stated, “A comprehensive strategy aimed at strengthening U.S. establishments competing in global markets is needed for the United States to boost short-term recovery and long-term prosperity…”

“The United States is increasingly isolated in its belief that countries don’t compete with one another and that only firms compete” said ITIF Senior Analyst Stephen Ezell, co-author of the report. “Our traded sector establishments are up against competitors that are aided in countless ways by their governments. It’s time to level the playing field.”

The report, presents 50 federal-level policy recommendations to help restore U.S. traded sector competitiveness, along with 13 state-level recommendations. The recommendations are organized around federal policies regarding the “4Ts” of technology, tax, trade, and talent, as well as policies to increase access to capital, reform regulations, and better assess U.S. traded sector competitiveness.

A nation’s traded sector includes industries such as manufacturing, software, engineering and design services, music, movies, video games, farming, and mining, which compete in international marketplaces and whose output is sold at least in part to nonresidents of the nation. They are the core engine of U.S. economic growth and face unique challenges.

Because these industries face competition in the global market that non-traded, local-serving industries (retail trade or personal services) do not, their success is riskier. “The health of U.S. traded sector enterprises in industries such as semiconductors, software, machine tools, or automobiles—all far more exposed to global competition than local-serving firms and industries—cannot be taken for granted.”

If a company like Boeing loses market share to Airbus, thousands of domestic jobs at Boeing, its suppliers, and the companies at which their employees spend money will be lost. In contrast, a local grocery store may compete for business with other supermarkets, but it is not threatened by international competition. If Safeway loses market share to Wal-Mart, the jobs remain in the United States.

Ezell and Atkinson state, “The fact that the U.S. traded sector has not created a single net new job in 20 years is a core reason for the current U.S. economic malaise.” They cite the research of Nobel Prize-winning economist Michael Spence, who has demonstrated that “from 1990 until the Great Recession started in 2007, the U.S. achieved virtually no growth in traded sector jobs. The malaise has been a downright decline in manufacturing, as the United States lost nearly one-third of its manufacturing workforce in the previous decade, saw on net over 66,000 manufacturing establishments close, accrued a trade deficit in manufactured products of over $4 trillion, and experienced a decline in manufacturing output of 11 percent at a time when U.S. GDP increased by 11 percent (when measured properly).”

Ezell and Atkinson corroborate what I have written previously ? “every lost manufacturing job has meant the loss of an additional two to three jobs throughout the rest of the economy. The 32 percent loss of manufacturing jobs was a central cause of the country’s anemic overall job performance during the previous decade, when the U.S. economy produced, on net, no new jobs….at the rate of growth in manufacturing jobs that occurred 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.”

The reasons why the authors emphasize the importance of manufacturing as a “traded sector” are:

  • It will be difficult for the U. S. to balance its foreign trade without a robust manufacturing sector because manufacturing accounts for 86 percent of U.S. goods exports and 60 percent of total U.S. exports.
  • Manufacturing remains a key source of jobs that both pay well.
  • Each manufacturing job supports as an average of 2.9 other jobs in the economy.
  • The average wages in U.S. high technology are 86 percent higher than the average of other private sector wages.
  • Manufacturing, R&D, and innovation go hand-in-hand.
  • The manufacturing sector accounts for 72 percent of all private sector R&D spending.
  • Manufacturing employs 63 percent of domestic scientists and engineers.
  • U.S. manufacturing firms demonstrate almost three times the rate of innovation as U.S. services firms.
  • Manufacturing is vital to U.S. national security and defense.

They contend that “the engines of a nation’s competitiveness are in fact not mom and pop small businesses, but rather firms in traded sectors, high-growth entrepreneurial companies, and U.S.-headquartered multinational corporations. Although such firms comprise far less than 1 percent of U.S. companies, they account for about 19 percent of private-sector jobs, 25 percent of private-sector wages, 48 percent of goods exports, and 74 percent of nonpublic R&D investment. And, since 1990, they have been responsible for 41 percent of the nation’s increase in private labor productivity.”

The report notes that “traded sector businesses improve the local economy in three ways:

  1. Traded sector businesses bring money into a region by selling to people and businesses outside the region.
  2. They help keep local money at home through import substitution, which occurs when local residents and businesses purchase locally produced products instead of importing goods and services.
  3. They improve economic equity since “their productivity and market size tends to lead them to offer higher wage levels” and “jobs at traded sector companies help anchor a region’s middle class employment base by providing stable, living wage jobs for residents.”

While the authors believe all 50 recommendations are needed, they believe the 10 most critical recommendations are:

  1. Create a network of 25 “Engineering and Manufacturing Institutes” performing applied R&D across a range of advanced technologies.
  2. Support the designation of at least 20 U.S. “manufacturing universities.”
  3. Increase funding for the Manufacturing Extension Partnership (MEP).
  4. Increase R&D tax credit generosity and make the R&D tax credit permanent.
  5. Institute an investment tax credit on purchases of new capital equipment and software.
  6. Develop a national trade strategy and increase funding for U.S. trade policymaking and enforcement agencies.
  7. Fully fund a nationwide manufacturing skills standards initiative.
  8. Expand high-skill immigration, particularly which focuses on the traded sector.
  9. Transform Fannie Mae into an industrial bank.
  10. Require the Office of Information and Regulatory Affairs (OIRA) to incorporate a “competitiveness screen” in its review of federal regulations.

Only two of their top 10 recommendations made the list of the most critical recommendations in the second edition of my book:  # 4 and # 10. However, I support all of their other top 10 recommendations, as well as many of their other 40 recommendations, especially the following:

  • Lower the effective U. S. corporate tax rate – As of April 1, 2012 (when Japan lowered its corporate tax rate), the United States took the mantle of having the highest statutory corporate tax rate at almost 39 percent (when state and federal rates are combined) of any OECD nation.
  • Combat foreign currency manipulation
  • Better support and align trade promotion programs to boost U. S. exports.
  • Better promote reshoring.

I also support their recommendation that Congress should broaden the R&D tax credit’s scope to make it clear that process R&D (R&D to develop better ways of making things) qualifies for the tax incentive and that Congress should expand the R&D credit to allow expenditures on employee training to count as qualified expenditures.

With regard to trade enforcement, they recommend that the U. S. “exclude mercantilist countries from the Generalized System of Preferences (GSP)” because “the top 20 GSP-beneficiary countries — Argentina, Brazil, Bolivia, Colombia, India, Indonesia, Pakistan, the Philippines, Russia, Thailand, Turkey, and Venezuela—are on the U.S. Trade Representative’s Special 301 Watch List (which documents countries that fail to adequately protect U.S. companies’ or individuals’ intellectual property rights).”

I believe that enacting legislation to address foreign currency manipulation by China in particular should be in their top 10 recommendations. I also recommend that we enact legislation to establish either a Natural Strategic Tariff as recommended by economist Ian Fletcher in his book Free Trade Doesn’t Work:  What Should Replace It and Why, or a Balanced Trade Restoration Act to authorize sale of Import Certificates using either the Warren Buffet plan or the Richmans plan (as explained in their book Trading Away our Future).

I completely disagree with their recommendation to “Forge new trade agreements, including a high-standard Trans-Pacific Partnership and Trans-Atlantic Partnership.” As documented by Alan Uke in his book, Buying Back America, the U. S. has a trade deficit with nearly every single one of the countries with which it has a trade agreement. In fact, the U. S. has a trade deficit with 66 countries, the most egregious being the $278 billion deficit with China. Remember the touted benefits of NAFTA with Canada and Mexico? Well, in 2010, we had a trade deficit with Canada of $28 billion and $66 billion with Mexico. Do we want to increase our current trade deficit by adding more trading partners?

Additionally, the report articulates four key themes that the authors believe should be viewed as essential components of a U.S. traded sector competitiveness strategy. They recommend that the following key themes must be embraced by U.S. policymakers if the United States is to restore its traded sector competitiveness (summarized):

  1. The federal government must place strategic focus on its traded sectors, because it simply can’t rely entirely on its non-traded sectors to sustainably power the U.S. economy.
  2. The United States needs become much more of an engineering economy because gains from engineering-based innovation are capturable and appropriable within nations.
  3. The United States must move toward an economic system more focused on production than consumption, giving short-term consumption less priority in our politics.
  4. The structure of the global trading system must be seriously restructured to ensure that it is a trading system based on market-oriented principles and not the “innovation mercantilism” that has risen in the last decade, which fundamentally hurts the U.S. competitive position while violating the spirit and often the letter of the World Trade Organization.

Beyond federal policies to support traded sector competitiveness as a nation, the report also includes a section on recommended policies that states should implement to bolster their competitiveness, and in turn, the competitiveness of the broader U.S. economy. The state policy recommendations utilize the same “4Ts” framework as the federal recommendations.

Ezell and Atkinson state, “Implementing the policies recommended in this report will make the United States a more attractive investment environment for traded sector enterprises and their establishments. The technology policies will help spur innovation in advanced manufacturing, upgrade the technology capacity of manufacturing and other traded sector firms, help restore America’s industrial commons, and support the productivity, innovation, and competitiveness of traded sector SMEs. The tax policies will stimulate a favorable climate for private sector investment by making the overall U.S. corporate tax code more competitive with that of other nations and also by leveraging tax policy to incent private sector R&D and investment.”

In conclusion, they urge that U.S. policymakers understand that “manufacturing is not some low-value-added industry to be cavalierly abandoned.” Manufacturing is vital to U.S. competitiveness. I highly recommend reading all of this comprehensive, well-researched, well-documented report to be able to evaluate all of their recommendations and benefit from the details that are the basis for each recommendation.

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Posted in Economy, Manufacturing, National security, Outsourcing, Reshoring, Taxes/Regulations, Trade | No Comments »

The Future of American Manufacturing — Is there Reason for Hope?

Tuesday, August 14th, 2012

While the state of American manufacturing has been grim for the past decade, the “reshoring” trend and new technologies are making the outlook for the future of American manufacturing look brighter than it now appears.

In the past few years, the key factors for returning manufacturing to America have been quality problems, rising labor costs, intellectual property theft, rising shipping costs, long lead times for product delivery from Asia, and the cost of inventory for the larger lots you have to buy from Asia to get the cheaper prices.

Now, Harry Moser’s Total Cost of Ownership worksheet calculator is helping companies quantify the hidden costs of doing business offshore enabling more companies to make the decision to reshore manufacturing. According to Harry Moser, founder of the “Reshoring Initiative,” about 10% of companies nationwide are bringing manufacturing back to America from Asia. It is a pleasure to read frequent stories about even large companies such as Dow Chemicals, Caterpillar, GE, and Ford starting to move some manufacturing back to the U.S. from China.

“But rising costs and political pressure aren’t what’s going to rapidly change the equation.” according to Vivek Wadhwa, Vice President of Academics and Innovation at Singularity University. “The disruption will come from a set of technologies that are advancing at exponential rates and converging. These technologies include robotics, artificial intelligence (AI), 3D printing, and nanotechnology. These have been moving slowly so far, but are now beginning to advance exponentially just as computing does.”

In the past, large American food product companies like General Mills and Kraft Foods, as well as the automotive industry, have been the biggest user of complex robotic systems. But, today’s robots are smaller and cheaper ? they are really specialized electromechanical devices run by software and remote control designed to perform specific tasks in the manufacturing of products for a variety of industries. These robots are cost effective for lower production volume than those used in the food and automotive industry enabling more companies to utilize this technology.

Artificial Intelligence (AI) is really the software that makes computers, robots, and even unmanned aircraft and space vehicles run in an “intelligent” manner. Unmanned vehicles have dominated the sky in the “war on terror” in Iraq and Afghanistan and are now being used to provide surveillance along our international border with Mexico. The unmanned rover, “Curiosity,” traversing the surface of Mars is an example of the latest AI technology.

“Additive manufacturing is the process of producing parts by successive melting of layers of material rather than removing material, as is the case with conventional machining.

Each layer is melted to the exact geometry defined by a 3D CAD model. Additive Manufacturing allows for building parts with very complex geometries without any sort of tools or fixtures, and without producing any waste material.”

This process, also known as 3D printing, is turning product designs into reality for a fraction of the cost of past manufacturing technologies. The application of this technology started as a way to make prototypes faster and cheaper. What is great about parts made by this process is that they are not just the fragile prototype parts previously made by stereo lithography technology; parts made by 3D printing can function as production parts.

A simple tabletop 3D printing device, such MakerBot’s Replicator, is now down to about $1,700 for use in home workshops, making the technology more accessible to students, researchers, do-it-yourself enthusiasts, hobbyists, inventors and entrepreneurs.

Millions of dollars of government-funded research in additive manufacturing has led to breakthroughs and cost reduction in the utilization of this technology. Large, complex geometry parts that had to be made by casting and forging with expensive tooling are now being made by laser sintering of metals such as tool steel, stainless steel, cobalt chrome-moly, and other steel alloys. While Selective Laser Sintering (SLS) and Direct Metal Laser Sintering (DMLS) began as a way to build parts early in the design cycle, it is now being used to manufacture end-use parts. Depending on the material, up to 100% density can be achieved with material properties comparable to those found with traditional manufacturing methods.

There are many applications for the laser sintering method of additive manufacturing in the aerospace and defense industry because of the low volume requirements. The cost of amortizing expensive casting and forging tooling into low volume production was the main reason for the $600 hammers and $900 toilet seats of the defense spending scandals 20 years ago.

Even the tooling to make simple injection molded plastic parts can now be made by this technology, helping keep some plastic injection molding work in the U. S. that used to go to China.

We are just beginning to see advances in nanotechnology that will affect manufacturing in the next decade. Nanotechnology (sometimes shortened to “nanotech”) is the manipulation of matter on an atomic and molecular scale. Generally, nanotechnology works with materials, devices, and other structures with at least one dimension sized from 1 to 100 nanometers.

Since the creation of the National Nanotechnology Initiative in 2000, the U. S. has invested 3.7 billion dollars. “The NNI involves the nanotechnology-related activities of 25 Federal agencies, 15 of which have specific budgets for nanotechnology R&D. The agencies involved allocate expenditures from their core budgets, demonstrating nanotechnology’s importance to their mission.”

Today, engineers and scientists are developing new types of materials, such as carbon nanotubes, ceramic-matrix nanocomposites, and new carbon fibers. These new materials are stronger, lighter, more energy-efficient, and more durable than current materials in use.

These advances in technology will be a real boon to the U. S. manufacturing industry in the next 5 – 10 years, but they will have a dramatic impact on China as well. Large Chinese manufacturing companies such as Foxconn are starting to utilize robotics, which will cause a reduction in the Chinese labor force just as it did in the U. S. a generation ago.

It is unlikely that the 10% of products being returned to the United States from China is affecting China’s unemployment rate, but the serious financial problems of several countries in the European Union is taking its toll on China’s exports to these countries. While China reported a low unemployment rate of 4.1% in July 2012, this needs to be understood in the context of the size of China’s workforce. The Chinese workforce is so large that there are actually more people unemployed in any one month in China than the total workforce of the United States.

In February 2011, Marketplace Business China correspondent, Rob Schmitz, explained the unemployment situation in China, stating, “Now that’s what’s called the ‘urban registered unemployment rate.’ I emphasize ‘registered,’ because it only counts people who officially live in urban areas. Many people are off the books. These are the hundreds of millions of migrant workers who move to the cities and they make up a huge labor pool. So when you factor in that population, China’s actual unemployment rate comes out to be 22 percent. That’s around 200 million people who don’t have work.”

If China wants to avoid headlines of massive unemployment as the U. S. has experienced, the Chinese government needs to change its focus from an export-driven economy to a domestic-driven economy. This will require a far greater increase in wages than has occurred in the past few years so that the average Chinese worker will be able to buy the products they are now producing for export.

It may be worth thinking about emulating the strategy that Henry Ford utilized in 1914 when he wanted to stabilize his workforce ? he decided to pay double the average daily wage. This had a twofold result:  he kept his employees from quitting his company to take a job at another company for a slightly higher wage, and the higher wages his company paid enabled his workers to be able to buy the Model T car they were making.

If China’s industry switched to manufacturing more products for their domestic marketplace, it would also help reduce the unemployment for their college graduates. As Rob Schmitz explained in the same article, “Nearly a quarter of last year’s graduates haven’t found jobs. Part of the problem is that there is a big disconnect between how China’s colleges are preparing its young people and the reality of China’s economy. China’s economy is still mostly dependent on manufacturing and building things. At the same time, you have six million college students a year graduating with degrees from everything from the sciences to liberal arts. And China’s economy simply hasn’t evolved to the point where enough employers are looking for workers with those skills.”

It is becoming apparent that more and more Americans now realize that manufacturing jobs are the foundation of the prosperity of our country and that we need to be producing a major portion of goods domestically in order to have a strong manufacturing industry and thus a strong economy. It may be China’s turn to learn this lesson.

Posted in Innovation, Manufacturing, Reshoring | 1 Comment »

San Diego Region Prepares for Increased “Reshoring” Opportunities

Tuesday, July 31st, 2012

On June 25, 2012, the South County Economic Development Council released the “San Diego Regional Manufacturing Sector Report,” funded by a grant from the San Diego Workforce Partnership.  The purpose of the report was to identify challenges and opportunities for local manufacturers in order to provide the necessary resources as a region and recommend actions “to capture previously lost manufacturing opportunities that had gone overseas.”

Manufacturing is returning to the United States because “overseas production has become increasingly more costly due to high transportation costs, expensive reverse logistics to correct product defects, and increasing labor costs.”   The report states “San Diego County is poised to reap the benefits of the return of manufacturing to America.  Just-in-time, product oversight, and cost efficiencies are bringing manufacturers back to the U.S.  There is a unique advantage for manufacturers with San Diego’s prime location along the international border and on the Pacific Rim. This allows for easy shipping of products and co-producing products with Mexico.”

To prepare for the influx of manufacturing opportunities, South County Economic Development Council (SCEDC) and its partners surveyed 283 manufacturers between October 2011 and June 2012 about conducting business in the San Diego region. The survey included questions on business history, growth projections, employment level, business challenges, labor climate, business location, markets, products, and capabilities. The report summarizes and analyzes data gathered from those interviews.

The U. S. as a whole lost 5.7 million manufacturing jobs from 2000 – 2010, and the San Diego region went from 128,738 down to 90,205 in the same period for a loss of 33,533 jobs…  California lost over a half a million in the same period.  Job creation and new hires during this period slowed considerably resulting in a seriously slowing manufacturing industry in San Diego County.   The results of the survey for level of employment were mixed ? 36% had fewer employees than in 2002 and 32% had more employees.  However, 50% indicted that a reduction in employees had occurred within the last 12 months showing that the recovery from the recession is fragile.  On the plus side, 54% have hired in the past year, 26% are currently hiring, and 36% plan to hire in the next 12 months.

The survey reveals that a large percentage of San Diego’s manufacturers specialize in prototype development, low-volume production, and just-in-time delivery. “Moreover, many of the products that are made in the San Diego region offer the customer better oversight and more opportunities for collaborative approaches to product development. This makes “near shoring” a viable option (as opposed to ‘off shoring.’)” More than one-third of the manufacturers surveyed stated that customers have brought product manufacturing back from Asia.

The vast majority of manufacturers indicated they were pleased with their current location. Of the 283 companies surveyed, 238 business owners indicated they are pleased with their location. They cited a historical presence, family ties, customers and suppliers located nearby and quality of life as the reasons they liked their location. When asked about their location challenges, the top four were:

  • Government regulations ? Manufacturers felt they were overburdened by regulations: overlapping and complex regulations, employment laws, including cost of workers’ compensation insurance, burdensome hiring laws,  numerous regulations governing employees, stringent compliance requirements, and the multiplicity of agencies was cited as putting them at a disadvantage.
  • Taxes ? compared unfavorably with taxes in other states, with adjacent states having a more business “friendly” tax structure.
  • Environmental issues ? “environmental regulations “getting stricter.” They also noted “the State of California had more stringent guidelines than the federal government and most other states. This puts companies at a competitive disadvantage.”
  • Utility cost and availability ? “especially concerned about electricity costs, noting that manufacturers use a large amount of energy to produce a product.”

In an effort to determine the commitment manufacturers have made to their existing locations, companies were asked if they owned or leased the facility.  When a company owns a building, they have made a long-term commitment to that location, and it is not easy for them to relocate. When a company leases a site, it is easier for them to relocate.  Companies that have month to month leases or rent are at the greatest risk of relocation. Ninety-eight companies (35%) indicated they owned their existing site, and 120 companies or 42% had long-term leases.

However, there is cause for concern because “many manufacturers indicated they were located in the San Diego region because their suppliers or customers were located here…Fifty-five percent of the manufacturers indicated their customers and/or suppliers have relocated within the past three years.”

Manufacturing companies are being courted by other states to relocate with attractive incentives to do so.  The survey revealed that “Almost 75% of the manufacturers surveyed were unaware of various assistance programs available to them…Seventy-six percent of the respondents indicated they had not worked with college or job training programs…Only sixteen percent of those surveyed said they had forged a business relationship with local educational institutions…Nine percent of the businesses indicated they had participated in a State job training program.”

Several manufacturers said there was a shortage of qualified CNC machinists and they had to recruit from all over the region.  The need for classes at both the high school and college level was cited as a necessity to grow these types of workers.  More efforts toward preparing the future manufacturing workforce are required. Manufacturers expressed difficulty in finding qualified employees noting many of the training programs have been downsized or no longer exist due to budget cuts.  There is a need to retrain current employees and offer additional training classes related to computerized manufacturing equipment.

Additionally, manufacturers were not aware of finance, tax credit and permit assistance programs being offered.  Only 20% were aware of small business finance and business assistance programs, and less than 20% were aware of various tax credit programs, permit assistance and employment assistance programs.

To ensure San Diego can maximize the opportunities provided by manufacturing returning to the U. S., the report found that “there is a need to link the innovation companies with local manufacturing…to capture the “lab to shelf” full chain of product within our region. To accomplish this, there needs to be a better connection between the innovation companies and the manufacturers. There also needs to be a better way to link local manufacturers with each other as well as link companies to local suppliers.”

An efficient way of connecting companies is through the Connectory.com database, which is an online resource containing detailed capabilities and profiles of manufacturers and supply chain companies.  San Diego County currently has over 5,000 company profiles on Connectory.com.  Profiles make it easier to understand the capabilities of the manufacturing supply chain and find core capabilities and capacities that are needed for the large amount of contracts and subcontracts available in San Diego County.

According to the report, the San Diego Military Advisory Council states that the manufacturing industry is the largest business sector that provides goods and services to the military in San Diego County.  The total economic impact of output for manufacturing is $7.2 billion. Manufacturing related expenditures totaled $4.8 billion or forty-five percent of all procurement for the military industry in FY2009.

Therefore, the looming potential threat to San Diego’s manufacturing industry is “sequestration, the legislatively mandated, across the board 10 percent cut in Department of Defense budgets on January 2, 2013 (if Congress does not act to make other deficit reduction decisions).” Over 1,700 companies reported military and government contracts so “an orchestrated approach to future defense downsizing and its impact on the manufacturing sector is needed.”

The report provides numerous recommendations ? a few of the most important are:

Change State Tax ? Amend the State Tax and Revenue Code to allow cities to rebate their portion of the property and sales tax for business transactions that occur locally. The authority to rebate the local jurisdictions portions of the taxes could be held at the local level. Local cities and counties could be empowered to choose to rebate their portion of a specific tax and use this as an incentive to encourage companies to create new jobs through company expansion and location within their respective areas.

Holiday on New Regulations ? take a one-year moratorium on regulations impacting the manufacturing industry while information and education is provided to manufacturing business owners about forth-coming regulations.

Streamline and Reduce Existing Regulations ? Combine regulation requirements from the various local, state and federal agencies to avoid confusion by the business owner.  It is recommended that the state and local agencies work together to consolidate the number of required inspections and approvals, especially fire department, air pollution control district, and environmental health compliance inspections.

Cohesive Proactive Communication with Manufacturers ? Governing bodies should prepare industrial businesses to comply more efficiently and cost-effectively with forthcoming regulations, well in advance of the enforcement period. Local government should provide more communication and work with local business owners through a series of educational awareness campaigns prior to enacting new laws or regulations. An active and open discussion prior to making changes will allow industrial businesses to plan and ensure that they are part of the implemented solutions.

Made in the San Diego Region Campaign ? Spread the word and provide the information to consumers on the diverse manufacturing base to assist them in making choices that support the local economy.  Initiate a “Made in the San Diego Region” campaign that includes some type of identification on the product that will increase the awareness around the world of what is made in the San Diego Region.

Connectory.com ? All government and non-profit entities should encourage the manufacturers to use the Connectory.com. The government entities should provide resources to link and publicize the Connectory.com linking businesses to each other and to provide information about the industrial and technology base of the economy.

Prepare for Sequestration ? In the San Diego region, one-third of all companies reported some dependency on the defense industry.  San Diego’s residents are unaware of this impending crisis, believing that we are protected from sequestration by the nation’s increased focus on Asian-Pacific Defense posture. We recommend the region engage in a pointed, targeted, and unvarnished reporting of the potential negative impacts of sequestration.

The report concludes that the “San Diego region has one of the largest economies in the world, resilient in its diversity and blessed with multiple sources of incoming investment…the San Diego region has a very good opportunity to flourish, but it lacks the acknowledgement from local government and the appreciation of the overall population, of the risks it faces, and the rewards its success can offer.”

Four of the above recommendations have been made as a result of previous manufacturing industry reports, conferences, summits, and task forces of which I was a part, but there has been no action on the part of California’s legislature or regional and local governing bodies.  Until we change the complexion of the State legislature to one friendlier to employers, it is unlikely that we will see any action on these statewide issues.

We need to foster a business environment that is conducive to the manufacturing sector in both San Diego as a region and California as a whole. This would necessitate bringing manufacturers into discussions about regulations, taxes, and government purchasing.  Manufacturing today requires highly skilled workers proficient in a wide range of advanced technologies.  More preparation of the workforce is necessary to meet the anticipated increase in demand for manufacturing through training and retraining.  Providing training opportunities to address the skill gap of existing workers would go a long way to enabling growth of the manufacturing sector.

The report states that regional leadership is the key to help the manufacturing industry thrive in the San Diego region. I agree, but leadership is also the key to restoring California as the “golden state of opportunity” for manufacturers and all other businesses.

The SCEDC study concludes that the manufacturing sector lacks the necessary resources to conduct business successfully on a large scale.  The wealth of tax credits and business assistance programs are not as widely used as expected, further emphasizing the need for leadership and an expansive educational campaign.  This report is meant to spark discussion and action to enable San Diego to grow its existing manufacturing industry. As a follow up to the report, the South County EDC is planning an Economic Summit on Friday, September 21, 2012.

We also need to spark discussion and action on a state level.  To this end, the Coalition for a Prosperous America (CPA) is facilitating an economic summit on October 11, 2012, entitled, “Manufacturing in the Golden State ? Making California Thrive,” co-hosted by California State Senator Mark Wyland and Assembly member Toni Atkins.  As the newly appointed State Chair for CPA, you may contact me to become involved at Michele@savingusmanufacturing.com or Sara Haimowitz at sara@prosperousamerica.org

 

Posted in Economy, Manufacturing, Reshoring | 1 Comment »

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 »

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