savingusmanufacturing.com

In the increasingly competitive global marketplace, manufacturers need to continually strive to reduce costs to keep or increase market share.  This is one of the key factors in making the decision of whether to make parts in-house, outsource to domestic suppliers, or outsource offshore.

Even after a company makes the decision to outsource to a supplier, most don’t look beyond the quoted unit price in making the decision about which supplier to select.  This is especially true when comparing the quotes for domestic vs. offshore suppliers.   Some companies choose to outsource offshore because the price is cheaper than a domestic supplier.  They don’t add in the costs for transportation, much less all of the other “hidden costs” of dealing with an offshore supplier.

In order to make the correct decision for outsourcing, a company needs to understand the concept of “total cost of ownership” for outsourcing manufacturing.

What is “Total Cost of Ownership?”  It is an estimate of the direct and indirect costs and benefits related to the purchase of any part, subassembly, assembly, or product.  The Gartner Group originated the concept of  (TCO) analysis several years ago, and there are a number of different methodologies and software tools for calculating the TCO for various industries, products, and services.

Total Cost of Ownership includes much more than the purchase price of the goods paid to the supplier.  For the purchase the types of manufactured products we are considering, it should include all of the other costs associated with the purchase of the goods, such as:

• Geographical location
• Transportation alternatives
• Inventory costs and control
• Quality controls
• Reserve capacity
• Responsiveness
• Technological depth

The search for low cost areas for manufacturing isn’t something new. Fifty years ago, northern and New England companies started moving manufacturing to the southern states. Twenty-five years ago, many West Coast manufacturers started moving high– volume production offshore to Hong Kong, Singapore, and the Philippines. “Offshoring” refers to relocating one or more processes or functions to a foreign location.  The next lower cost area was Mexico with the advent of the maquiladoras.

For the past 15 years, many manufacturers have sought to reduce costs by offshoring all or part of their manufacturing processes in China.   In the last decade, outsourcing offshore has evolved from a little-used practice to a mature industry.  Even conservative companies are now willing to experiment with going offshore to gain a competitive edge.  The concept of globalization has become part of the fabric of today’s business.

Many times, the decision to outsource offshore is based on faulty assumptions that can have unpleasant consequences.  In some cases, the basis for the decision is well intentioned, such as to win new business by being close to a customer.

But, with every business decision comes an assumption, and more often than not, the related assumptions are erroneous.  Here’s a list of well intentioned but often-faulty assumptions:

• Longer lead times won’t affect our cost calculations very much.
• Overseas suppliers have the same morals and work ethics as we do.
• Overseas laws will protect our proprietary information.
• We can teach our suppliers to reach our quality needs and to build our product reliably and efficiently.
• Communication will not be an issue given daily conference calls, the Internet, and the fact that the supplier speaks English.
• Assessment and travel costs won’t change our cost calculations very much.
• The increase in delivery and quality costs won’t be significantly different than our cost calculations.
• Lean manufacturing and Six Sigma methodologies can be taught to suppliers before our company’s bottom line is affected.

In actuality, many case studies have shown that these assumptions were orders of magnitude off from reality.  The problems with making these assumptions are:

• It doesn’t capture a reasonable amount of variation.  Each lot takes weeks more time than anticipated to get to the U.S. or customer site for evaluation.
• The overlying methods for producing product or service have gotten more complex, not less.  In general, costs rise with complexity.
• The company doesn’t know the hidden costs that exist (i.e., process stability, process capability over time, potential for future deviations from the current process).
• The company loses complete control of quick changes to react to hidden costs.  It’s like trying to control production via remote control.

Accountants deal with hard costs such as material costs, material overhead costs, labor costs, labor overhead costs, quality costs, outside services, sales, general and accounting costs, profits, etc. What they don’t measure are the intangible costs associated with business such as the true costs of delay, defects, and deviations from standard or expected processes (the three D’s).

These costs are often called hidden factories because they keep everyone busy generating absolutely nothing of any tangible or openly measured value.  Another way to understand these costs is that they produce results that no one, especially the customer would want to pay for.  In addition to obvious direct costs – such as additional meetings, travel, and engineering time – hidden factories also indirectly produce many forms of “soft” costs, such as loss of good will, loss of competitiveness, extended warranty costs, and legal costs.

When it comes to outsourcing, there’s more to consider than the quoted price.  Some outsourcing costs are less visible – or downright hidden.  Here are the top hidden costs of outsourcing offshore:

• Currency Fluctuations – last year’s invoice of $100,000 could be $140,000 today.
• Lack of Managing an Offshore Contract – underestimating the people, process, and technology required to manage an outsourcing contract.
• Design changes – language barriers make it difficult to get design changes understood and implemented
• Quality problems – substitution of lower grade or different materials than specified is a common problem
• Legal liabilities – offshore vendors refuse to participate in product warrantees or guarantees
• Travel Expenses – one or more visits to an offshore vendor can dissipate cost savings
• Cost of Transition – overlooking the time and effort required to do things in a new way.  It takes from three months to a year to complete the transition to an offshore vendor.
• Poor Communication – communication is extremely complex and burdensome.
• Intellectual Property – foreign companies, particularly Chinese, are notorious for infringing on IP rights without legal recourse for American companies

In the past, my experience was that once manufacturing moved out of the United States, it rarely came back.  However, in the past three years, we have seen more companies coming back from doing business in China. The main problems these companies encountered were:

• Substitution of materials
• Inconsistent quality
• Stretched out deliveries
• Inability to modify designs easily and rapidly

There’s also a growing realization that when it comes to quality and location, location may be the best guarantee of all.  It’s hard, very hard, to outsource quality, particularly to a distant land many miles and time zones away.  A growing number of manufacturers are realizing that “you get what you pay for” from their offshore suppliers. Applying good quality principles takes money, education, and experience, many of which are in short supply in the low-wage countries capturing the majority of offshoring dollars these days.

The “desirable” locations for cheaper outsourcing will change over time just as they have in the past fifty years.  The purely financial benefits of lower pricing will erode over time.  The challenge for America is to keep as many companies as possible growing and prospering within the United States.  As more manufacturers gain a correct understanding of the True Cost of Ownership for outsourcing manufacturing, it will help bring back and maintain more manufacturing in the United States.  You can help save American manufacturing by making sure everyone in your company gains this correct understanding.

Germany surpassed the United States to become the world’s leading exporter in 1992, around the time that Germany joined the European Union as a founding member.  The United States remained the second highest exporter until China surpassed it in 2008.  Germany remained number one until 2009 when China surpassed it to become the world’s top exporter.  Germany exported $1.17 trillion compared to the $1.057 trillion of the United States.  However, China’s exports were $1.2 trillion for 2009.  Germany’s exports fell by 18.4 % from 2008, the largest decline in 60 years, while China’s exports fell only 16 %.

“’This is just one more step by China in attaining economic size commensurate with its population,’ said Arthur Kroeber, managing director of Dragonomics, an economic research firm in Beijing.  Germany has a population of about 80 million, while China’s population is about 1.3 billion.”

If population were a key factor, then at over 300 million in population, the United States would have maintained the number one status until being surpassed by China.  The key question is how did Germany remain number one over the United States for so long and how did they lose this ranking to China?

Germany is the largest national economy in Europe, the fourth largest by nominal GDP in the world, and fifth by GDP in 2008.  The service sector contributes around 70 % of the total GDP, industry 29.1 %, and agriculture 0.9 %.  Germany is relatively poor in raw materials.  Most of the country’s products are in engineering, especially in automobiles, machinery, metals, and chemical goods.  Germany is the leading producer of wind turbines and solar power technology in the world.   Exports account for more than one-third of national output.  Germany is such an export-driven economy that German companies own 35% of the container ships in operation worldwide.

By the Fortune Global 500 ranking of the world’s 500 largest stock market listed companies, 37 are headquartered in Germany.  Well-known global brands are:  Mercedes Benz, BMW, Volkswagen, Audi, Porsche (automobile), Adidas and Puma (clothing and footwear), Bayer and Merck (pharmaceuticals), DHL (logistics), T-Mobile (telecom), Lufthansa (airline), SAP (computer software), Siemens (computer services), and Nivea (personal care).  You may have been as surprised as I was to learn that DHL, T-Mobile, and Nivea are German companies.

With the manufacture of 5.2 million vehicles in 2009 (compared to the U. S. total of 7.9 million), Germany was the world’s fourth largest producer and largest exporter of automobiles.  German automotive companies enjoy an extremely strong position in the so-called premium segment, with a combined world market share of about 90 %.  Germany places five luxury automotive brands among the world’s top global brands for all sectors, more than any other country.  Germany’s reputation for quality precision engineering gives them a competitive advantage in selling high dollar vehicles in foreign countries.  Thus, German automotive products spearhead the high value and growth of Germany’s exports.

Germany is also the world’s leader in mechanical engineering systems analysis and design, holding about 20% of this global market.  This precision engineering expertise gives Germany a competitive advantage in producing machine tools (the tools that make tools and equipment).  For example, Germany has a 58 % market share for producing reciprocating pumps used for drilling and water purification and produces 34 % of packaging and bottling equipment used around the world.

It isn’t just large firms that are market leaders.  Small-to-medium sized manufacturing firms that specialize in technologically advanced niche products are vitally important.  It is estimated that about 1,500 German companies occupy a top three position in their respective market segment worldwide.  In about two thirds of all industry sectors, German companies belong to the top three competitors.

Germany’s tax structure contributes to their success as an exporter and puts a barrier on imports. Germany’s corporate tax rate is 15 %, but they also have a solidarity surcharge (5.5 % of corporate tax) and a trade tax charged by local authorities.  As of 2008, the rate averaged 14 % of profits subject to trade tax.   In addition, all services and products generated in Germany by a business entity are subject to value-added tax (VAT) of 19%. Certain goods and services are exempted from value-added tax by law.  Value-added taxes are added in paid for all along the supply chain, and then are rebated for exports.  A VAT is added at the border to imports as a balancing trade strategy to discourage imports.

I had heard a rumor that one of the factors in Germany’s success is that they don’t tax revenue on exports, but was unable to confirm this by diligent research.  I did learn that Germany practices a “national jurisdiction” on taxes wherein they tax national consumption in contrast to the “unitary jurisdiction” of the United States wherein companies are taxed on revenues from worldwide sales (with a deduction for taxes paid to foreign countries).  This taxing practice may be the source of the rumor or the source may be confusing it with the value-added taxes that are rebated for exports.

In a June 28, 2010, economist Ian Fletcher, commented, “Germany, like the U. S., is nominally a free-trading country.  The difference is that while the U. S. genuinely believes n free trade, Germany quietly follows a contrary tradition that goes back to the 19^th-century Germany economist Friedrich List… So despite Germany’s nominal policy of free trade, in reality a huge key to its trading success is a vast and half-hidden thicket of de facto non-tariff trade barriers.”

Fletcher, in turn quotes from a report by the Heritage Foundation:  “Non-tariff barriers reflected in EU and German policy include agricultural and manufacturing subsidies, quotas, import restrictions and bans for some good and services, market access restrictions in some services sectors, non-transparent and restrictive regulations and standards, and inconsistent regulatory and customs administration among EU members.”

Another opinion of Germany’s export success as reported in The New York Times, is “the roots of Germany’s export-driven success reach back to the painful restructuring under the previous government of Chancellor Gerhard Schröder.  By paring unemployment benefits, easing rules for hiring and firing, and management and labor’s working together to keep a lid on wages, ensured that it could again export its way to growth with competitive, nimble companies producing the cars and machine tools the world’s economies – emerging and developed alike – demanded.”

The same article reported that Germany’s Chancellor Angela Merkel resisted the use of government stimulus spending that the United States and some European partners used to handle the recession.  Instead of extending unemployment benefits like the United States has done several times since the recession began, Germany “extended the “Kurzarbeit” or “short work” program to encourage companies to furlough workers or give them fewer hours instead of firing them, making up lost wages out of a fund filled in good times through payroll deductions and company contributions.  At its peak in May 2009, roughly 1.5 million workers were enrolled in the program,” and the Organization for Economic Cooperation and Development estimated that   “more than 200,000 jobs may have been saved as a result.”

As a result, Germany’s unemployment rate at the height of the global recession was 9.0% in contrast to the 10.2% of the United States.  The German jobless rate in October 2010 was down to 7.0% in contrast to the 9.6% of the United States.  Germany is one of the few economies experiencing a solid recovery and one of the even fewer economies without a substantial deficit crisis on its hands.  Germany’s exports surged month by month in 2010, but year-end data hasn’t been released yet.

Numerous manufacturers in Germany see China as a key driver in their recovery from the global financial and economic crisis.  In July 2010 , Chancellor Merkel took the heads of major German corporations with her on a four-day visit to China.  As a result Siemens signed a contract worth $3.5 billion (2.7u billion euro) with Shanghai Electric Power General Equipment to develop steam and gas turbines.  Daimler signed a contract worth 6.35 billion yuan (720 million euro) with Beiqi Foton Motor to build trucks.

Even small-to-medium manufacturers are benefiting from increased exports to China.  Nobilia, a mid-size manufacturer of prefab kitchens “made in Germany,” is selling its kitchens to construction companies building huge housing projects in China.  Company spokeswoman Sonja Diemann said, “These are big projects with 1,000-plus apartment units.  There is a growing group of consumers who have money, seek quality products and know that Germany has a good reputation in manufacturing.”

German trade with China has grown from $41 billion in 2001 to $91 billion dollars in 2009, and now represents 5% of German trade.  Germany’s exports to China in 2009 accounted for $36 billion, a 7% increase over 2008.  However, Chinese exports to Germany accounted for $55 billion, and Germany has been running a trade deficit with China since 2005.  It shows that even with the addition of a VAT on imports and other non-tariff trade barriers, Germans are increasingly buying the cheaper consumer goods that China is flooding onto the world market.

If even Germany has a trade deficit with China and can’t fend off the Chinese juggernaut on trade of consumer products, who can?  This is a question that the economists of Germany and the United States must carefully consider.  One answer is ending the so-called “free trade” coalition as advocated by Ian Fletcher in his book, Free Trade Doesn’t Work, What Should Replace it and Why.  One thing I do know, the negotiation of more “free trade” agreements that provide an unfair playing field for developed countries is not the answer.

On March 11, 2010, President Obama established the Export Promotion Cabinet by Executive Order 13534 and tasked them with a plan to achieve the goal of doubling U. S. exports in five years that he had stated in his 2010 State of the Union address.

Sixteen representatives from the Secretary of State down to the Director of the United States Trade and Development Agency were appointed to this Cabinet, but the final report, released on September 15, 2010, was the product of an intensive six-month collaboration between this Cabinet and the 20 federal agencies that make up the Trade Promotion Coordinating Committee (TPCC).  In addition, the TPCC Secretariat reviewed over 175 responses to a Federal Register notice requesting input to the National Export Initiative (NEI) from small, medium, and large businesses; trade associations; academia; labor unions; and state and local governments.

In 2008, U. S. exports represented records levels of GDP (12.7 percent) and supported over 10 million jobs (6.9 percent of fully employed workers).  This was the highest percentage level of GDP since the beginning of World War I in 1914 and marked the high point of a 70-year trend that began in the early 1930s.  However, exports fell from $1.8 trillion in 2008 to $1.57 trillion in 2009 during the recession.

The report states:  “The National Export Initiative (NEI) is a key component of the President’s plan to help the United States transition form the legacy of the most severe financial and economic crisis in generations to a sustained recovery …The NEI’s goal of doubling exports over five years is ambitious.  Exports need to grow from $1.57 trillion in 2009 to $3.14 trillion by 2015.”

The NEI has five components:  improve advocacy and trade promotion, increase access to export financing, remove barriers to trade, enforce current trade rules, and promote strong, sustainable, and balanced growth.

The NEI Executive Order identified eight priorities for the plan, and the Export Promotion Cabinet developed recommendations to address each of these priorities, which cover all five components, cut across many Federal Government agencies, and focus on areas where concerted Federal Government efforts can help lift exports.  The following are recommendations for each priority:

Priority 1:  Exports by Small and Medium-Sized Enterprises (SMEs) – advocacy, promotion and export financing component

1. Help identify SMEs that can begin or expand exporting through a national campaign to increase SME awareness of export opportunities and U. S. Government resources.
2. Prepare SMEs to export successfully by increasing training opportunities for both SMEs and SME counselors.
3. Connect SMEs to export opportunities by expanding access to programs and events that can unite U. S. sellers and foreign buyers.
4. Once SMEs have export opportunities, support them with a number of initiatives, including improving awareness of export finance programs.

Priority 2:  Federal Export Assistance – trade promotion component

1. Create more opportunities for U. S. sellers to meet directly wit foreign buyers by bringing more foreign buyer delegations to U. S. trade shows and encourage more U. S. companies to participate in major international trade shows.
2. Improve cooperation between TPCC agencies to encourage U. S. green technology companies to export by matching foreign buyers with U. S. producers.

Priority 3:  Trade Missions – trade promotion component

1. Increase the number of trade and reverse trade missions, including missions led by senior U. S. government officials.
2. Improve coordination with state government trade offices and national trade associations.

Priority 4:  Commercial Advocacy – trade promotion component

Leverage multiple agencies assistance in the advocacy process and extend outreach efforts to make more U. S. companies aware of the Federal Government’s advocacy program.

Priority 5:  Increasing Export Credit – export financing

1. Make more credit available through existing credit platforms and new products.
2. Increase outreach to exporters, foreign buyers bankers, and other entities in order to build awareness of Government assistance.
3. Make it easier for exporters and other customers to use Government credit programs by streamlining applications and internal processes.

Priority 6:  Macroeconomic Rebalancing – strong, sustainable, and more balanced global growth

In the short term, the U. S. and its G-20 partners must work to ensure that the global economy shifts smoothly to more diversified sources of economic growth.  Over the long term, shifts in the composition of economic growth in our trading partners will also be crucial to U. S. export growth.  Actions to reduce surpluses and stimulate domestic demand for imports will be required by a broad range of countries.

Priority 7:  Reducing Barriers to Trade – removing trade barriers and enforcing trade obligations components

1. Conclude an ambitious, balanced, and successful WTO Doha Round that achieves meaningful new market access in agriculture, goods, and services.
2. Conclude the Trans-Pacific Partnership (TPP) Agreement to expand access to key markets in the Asia-Pacific region,
3. Resolve remaining issues with pending FTAs, such as the United States – Korea FTA.
4. Address foreign trade barriers – especially significant non-tariff barriers – through use of a wide range of U. S. trade policy tools.
5. Use robust monitoring and enforcement of WTO trade rules and other U. S. trade agreements.

Priority 8:  Export Promotion of Services – advocacy and trade promotion components

1. Build on the activities and initiatives outlined in Priorities 1 – 7 with enhanced focus on the services sector since it accounts for nearly70 percent of U. S. GDP.
2. Ensure better data and measurement of the services economy to inform commercial decision-making and policy planning.
3. Continue to assess and focus on key growth sectors and emerging markets such as China, India, and Brazil; increasing the number of foreign visitors to the U. S.
4. Better coordinate services export promotion efforts.

There are four general themes that apply to all of the priorities and recommendations in order to achieve the goal of doubling the U. S. exports in five years:

1. Strengthen interagency information sharing and coordination.
2. Leverage and enhance technology to reach potential exporters and provide U. S. businesses with the tools necessary to export successfully.
3. Leverage combined efforts of State and local governments and public-private partnerships.
4. Have united goals for TPCC member agencies to support the NEI’s implementation

The plan admits that the Federal Government alone cannot succeed in this initiative; its ultimate success will be determined by the success of U. S. companies selling their goods and services internationally.  A continued dialogue with the business community will be required to help ensure that the NEI is addressing their export challenges.

On December 7, 2010, U. S. Energy Secretary Steven Chu announced the establishment of the Renewable Energy and Energy Efficiency Export Initiative as part of its National Export Initiative and Trade Promotion Coordinating Committee.  “Expanding U. S. clean technology exports is a crucial step to ensuring America’s economic competitiveness in the years ahead,” said Secretary Chu.  “The initiatives we are announcing today will provide us with a better understanding of the global clean energy marketplace and help boost U. S. exports.”

The Initiative is divided into two parts:  (a) an assessment of the current competitiveness of U. S. renewable energy and energy efficient goods and services and (b) an action plan of new commitments that facilitate private sector efforts to significantly increase U. S. renewable energy and energy efficient exports within five years.  As part of the Initiative, the Administration created www.export.gov/reee, a web portal that consolidates information on government-sponsored export promotion programs.

The next article will examine whether or not the plan will work to achieve the stated goal.

In June 2010, the National Association of Manufacturers (NAM) released a report titled, “Manufacturing Strategy for Jobs and a Competitive America.”  In considering the recommendations made by NAM, it is important to understand where they are coming from as an organization and what kind of companies comprise their membership.

NAM is the largest, most well known trade association in the United States, headed up by former Governor of Michigan, John Engler.   Many Fortune 500 companies that are manufacturers are members of NAM, and the member companies that comprise NAM’s policy committees and subcommittees are mainly large, multinational companies because small-to-medium-sized companies don’t have full-time representatives in Washington where policy matters are discussed and voted on.  Also, many of these multinational companies have manufacturing operations in China and other foreign countries, and this influences their position on trade issues.

NAM’s Executive Summary begins with what I consider absolute truths:  “America’s prosperity and strength are build on a foundation of manufacturing.  Manufacturers create, innovate and employ millions of Americans in some of the best jobs our country has to offer.”

We agree on the fact that the United States needs a comprehensive manufacturing strategy to be able to compete against foreign governments that provide all the tools of government to support their manufacturing industries.

NAM’s proposed strategy “highlights the need for:

• Tax policies to bring American more closely into alignment with major manufacturing competitors
• Government investments in infrastructure and innovation
• Trade initiatives to reduce barriers and open markets to U. S. exports”

The need to create a national tax climate that allows U. S. manufacturers to be competitive in the global marketplace is unquestionably the highest priority.  We must reduce the corporate tax rate and promote fair rules for taxation of active foreign income, both of which I wrote about in my recent article, “Congress – It’s Jobs, Stupid,” as well as in previous articles and my book.  We must institute permanent lower tax rates for individuals and small businesses because most small businesses are not incorporated and create the majority of new jobs in the United States.

There is no question that the continuing expansion of federal mandates and labor regulations undermines employer flexibility and increases costs that discourages hiring new employees.  New regulations and federal mandates must be rejected and opposed.

Implementing a common sense, fair approach to legal reform is vital to bringing legal costs under control and eliminating the disadvantage American companies face in competing globally.

We definitely need to create a regulatory environment that promotes economic growth.  U. S. manufacturers are forced to comply with scores of regulations that manufacturers don’t have to face in other countries.    As NAM’s plan points out, “the Small Business Administrations office of Advocacy has estimated that regulatory compliance costs amount to $1.1 trillion annually.”

I share NAM’s goal for the United States to be the best country in the world to innovate and perform the bulk of a company’s goal R&D, but this goes against the trend of its own membership of large, multinational companies.  More and more R&D is being conducted offshore in China and India each year.  The danger is that innovation and production are intertwined.  Stephen Cohen, co-director of the Berkeley Roundtable on the International Economy at the University of California Berkeley, said, “Most innovation does not come from disembodied laboratory.  In order to innovate in what you make, you have to be pretty good at making it – and we are losing that ability.”

A 2008 report by Duke University’s Fuqua School of Business Offshoring Research Network and Booz Allen Hamilton, predicted that offshoring of R&D would increase 65 percent and offshoring of engineering services would increase 80 percent in the next 18 to 36 months.

I agree with NAM’s recommendations regarding enacting tax provisions that stimulate investment and recovery, encouraging the federal government’s critical role in basic R&D, and enhancing efforts by the federal government to protect American Intellectual Property (IP) and impede the continuing trade in counterfeit products that results in hundreds of thousands of jobs annually.

However, I question NAM’s recommendation to support substantial increases in the number of employer-sponsored visas as the solution to attract the best talent within the United States and from the entire world.  With the U. S. unemployment ranging between a low of 9.6 to a high of 10.0 in the past year, the last thing we need is more immigrant workers, legal or otherwise taking jobs away from qualified Americans.  There are plenty of highly skilled American workers to fill the needs of American manufacturers.  We are still attracting a large number of foreign undergraduate and graduate students, but a high number of Indians and Chinese are returning to their native countries to work in the industries their governments support instead of remaining in the United States.

I share NAM’s goal to have the U. S. be a great place to manufacture to meet the needs of the American market and export our products to the world.  The United States outdated export control system needs to be modernized to encourage exports and strengthen national security.  Small-to-medium-sized manufacturers need more assistance in export promotion and export credit.   The biggest problem is that the United States is no longer the source for products consumers buy around the world (electronics, small appliances, clothing, etc).  These products are now being made in China and other Asian countries and imported into the United States and other developed countries.  The end result is the export of more and more high tech products by United States manufacturers, some of which involve technology useful for military weapon systems.

It is imperative that the United States develop a comprehensive energy strategy that embraces an “all of the above” approach to energy independence.  A large portion of our worldwide trade deficit is for the importation of oil.  We must end our dependence on imported oil and utilized all of our domestic resources for energy generation.

The United States already leads the world in innovation and investment related to protecting the environment to the point that American manufacturers are at a competitive disadvantage compared to China and other Asian countries.  Until these countries start enacting similar laws and regulations or enforcing existing ones, the United States must avoid signing treaties that make it even harder for American companies to compete in the global marketplace.

At a time when the federal government’s budget deficit exceeds $1.5 trillion for 2010 and many cities and states are near bankruptcy, it is unlikely that it will be possible to invest in the infrastructure that will help American manufacturers move products and people more efficiently.

I strongly disagree with NAM’s recommendation to “enact pending trade agreements and negotiate additional agreements in the Pacific area and elsewhere.”  In my June blog article, “Do Free Trade Agreements Create Jobs?” I pointed out that NAFTA, effective in 1994, and the subsequent free trade agreements haven’t created American jobs, they have cost American jobs.  Between 1994 and 1999, we lost about a half million manufacturing jobs, but we’ve lost another 5.5 million jobs since the year 2000 when China was granted Most Favored National status and gained access to the World Trade Organization thereafter.  Our trade deficit with China rose from $84 billion in 2001 to $226.9 billion in 2009, down from $268 billion in 2008 due to the worldwide recession.  As Ian Fletcher stated in his book, Free Trade Doesn’t Work, What Should Replace It and Why, Chinese imports now constitute 83 percent of our non-oil deficit.  Elsewhere in his book, Fletcher noted, “It has been estimated that every billion dollars of trade deficit costs American about 9,000 jobs.  In his book, Mr. Fletcher makes a compelling argument that a “natural strategic tariff” should replace free trade agreements.  I strongly suggest that NAM and other national economists consider Mr. Fletcher’s proposed solution.

In conclusion, NAM’s proposed manufacturing strategy has many admirable recommendations; however, it is really a codification of positions and recommendations promoted by NAM for the past 20 years during which we have lost over six million manufacturing jobs.  NAM’s strong emphasis on a progressive international trade policy based on “free trade” will not save American manufacturing in the future.  The continuation and expansion of “free trade” policies will lead to the destruction of more American industries and the loss of more American jobs. We must change course if we want the United States to remain a great nation.  There is still time, but the clock is ticking!

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

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

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

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

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

The Statement of Principles included:

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

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

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

The five specific legislative initiatives recommended are:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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