Unintended Consequences of U. S. Environmental Protection Laws

March 22nd, 2011

One of the most difficult problems in bringing back manufacturing from offshore to “Reshoring” in the United States is the increasingly stringent environmental regulations being imposed at Federal and State level that adversely affect various sectors of the manufacturing industry.   The following describes some of the more stringent environmental regulations.

Clean Water:  As authorized by the Clean Water Act in 1972, the federal Environmental Protection Agency (EPA) oversees the National Pollutant Discharge Elimination System (NPDES) Regulations for Storm Water Discharges.  In most cases, the NPDES program is administered by authorized states.  Many states, such as California, have set up multiple water quality control regional boards that develop and administer specific regulations for their region.  The San Diego regional board issued 62 pages of new regulations in August 2002, for which compliance has been very onerous and expensive for manufacturers.  For example, rain water falling on a manufacturer’s parking lot must be monitored so that toxic pollutants, oil grease, waxes, chemicals, and visible floating materials are prevented from entering the storm drains on the property connecting to the municipal sewer system.

Hazardous Air Pollutants:  In 2005, the Federal Occupational Safety and Health Administration (OSHA) proposed standards to go in effect January 1st 2006, but Congress didn’t approve the new standards as stringently written.  The proposed standards would have reduced the allowed emissions for hexavalent chromium (a chemical compound used in the chrome plating process) to less than 1/50th of the allowable level (52 mg. of chromium per meter of air down to 1mg.)  The emission standard of 52 mg. that went into effect in 1998 was already a 97 percent reduction in hexavalent chromium emissions.  In May 2006, Congress finally approved slightly less stringent regulation of 5 mg. per cubic meter of air, which went in effect January 2007.

Metal plating, including chrome plating, is important to the electronics, machine equipment, defense, and automotive after-market sectors of manufacturing because every metal part that could corrode is nickel or chrome plated to keep it from corroding.  These new standards required existing chrome plating facilities to purchase new environmental control equipment in order to maintain compliance status.  Many large plating facilities converted to the more expensive, but less toxic trivalent chromium, which is suitable for some applications and certain thicknesses of plating.  The trivalent chromium process requires more careful control than the hexavalent chromium process and is more difficult to do in some applications such as barrel plating.

On June 12, 2008, the EPA issued final national air toxics standard for smaller-emitting sources in the plating and polishing industry applicable to cadmium, nickel, lead, manganese, and chromium.  The final rule affected an estimated 2,900 existing planting and polishing facilities.  These standards seriously affected the chrome plating industry nationwide and have accelerated the offshore outsourcing of products requiring chrome plating.

In San Diego County, six metal processors went out of business between 2007 and 2008, and one company closed down its chrome plating line prior to the stricter regulations going into effect.  Two companies moved their chrome plating across the border to Tijuana, Mexico so that there are now only two metal processors that do chrome plating, which has stretched lead times for locally fabricated metal parts that require chrome plating.  Of course, there is no border control for the flow of air so emissions in Tijuana affect the air quality in San Diego County.

Clean Air:  In September 2006, the federal EPA approved new national air quality standards that reduced the previous daily particulate matter standard by nearly 50 percent.  Particulate matter is fine particles such as soot, dust, and liquid droplets that are too small to see.  A new Maximum Achievable Control Technology (MACT) for hazardous waste combustors (boilers and incinerators) followed in 2008.  EPA will soon announce new draft rules aimed at slashing toxic air pollution emitted by power plants.

Electric utilities and manufacturers have objected to these new air quality regulations, saying that the new rules cost billions of dollars to implement.  William O’Keefe, CEO, George Marshall Institute, wrote “…the utility MACT will impose costs on utilities that far exceed air quality benefits…Forcing the utility industry to install the most expensive emissions reduction technologies will simply drive up the cost of electric power when it can least be afforded…That is not what we need as our economy struggles to recover from the worst recession in decades.”

A report released in 2007 by the National Association of Manufacturers  (NAM) stated “the domestic environment for manufacturers is dominated by concerns about rising external costs that make manufacturing from a U. S. base difficult.  These costs for corporate taxes, health care and pensions, regulation, natural gas, and tort litigation add more than 30 percent to manufacturers’ costs.”

In addition, the NAM report stated that the annual cost of complying with federal regulations is more than $10,000 per employee for manufacturers, while the cost is half that for non-manufacturers.  When companies are spending more money on regulatory compliance, materials, fuel and energy, they have less money for R & D, new product development, and purchase of capital equipment and systems.  This puts U. S. manufacturers at a substantial disadvantage compared to manufacturers in countries that aren’t subject to this degree of regulation.

On October 14, 2010, Joe Barton, Ranking Member of the Committee on Energy and Commerce and Michael Burgess, Ranking Member of the Subcommittee on Oversight and Investigations, wrote a letter to Lisa Jackson, Administrator of the U. S. Environment Protection Agency, expressing their concern over the cumulative impacts of new regulations being proposed by the EPA under the Clean Air Act (CAA).  The letter included a chart (51 pages), which identified approximately 40 proposed or final CAA regulations, including greenhouse gas regulations, revised air quality standards, and other regulator proposals under the CAA, as well as many regulations in the pre-proposal stages.   The letter stated, “At least eight of the proposed or final rules included have compliance costs estimated by EPA to exceed $1 billion each.  It appears that collectively the Administration’s new or proposed CAA regulations could impose billions of dollars of additional new costs annually on U. S. business as the new rules are implemented by your agency.”  A response was requested with regard to the accuracy of the compliance costs estimated included in the chart and if there were any other pending or proposed CAA regulations not included in the chart.

One of the unintended consequences of strict environmental protection laws and regulations in the United States that drives manufacturing offshore is the increased environmental pollution in other countries, such as China and India.  India and China have been getting more polluted in the last 30 years, as more and more U.S. manufacturing companies have outsourced to these countries.  Four cities in India and six cities in China are listed in the “Dirty 30” list of the worst polluted sites in the world, according to a 2007 report by the New York-based Blacksmith Institute.  The Institute’s “Top 10” list now includes four cities in China and two in India.  The Institute’s list is based on scoring criteria devised by an international panel that includes researchers from Johns Hopkins University, Harvard University, and Mt. Sinai Hospital in assessments of more than 400 polluted sites.  “Children are sick and dying in these polluted places, and it’s not rocket science to fix them,” said Richard Fuller, Blacksmith Institute’s founder and director.  The Institute highlights the health threats to children from industrial pollution, such as the stunting effect of lead poisoning on intellectual development.  Some 12 million people are affected in the top ten sites, according to the report.

One of the worst examples is Wanshan, China, termed the “Mercury Capital” of China, because more than the 60 percent of the country’s mercury deposits were discovered there.  Mercury contamination extends through the city’s air, surface water systems, and soils.  Concentrations in the soil range from 16 to 232 times the maximum national standard for mercury contamination. To put this into perspective, the mercury from one fluorescent bulb can pollute 6,000 gallons of water beyond safe levels for drinking, and it only takes one teaspoon of mercury to contaminate a 20-acre lake – forever.  The health hazards of mercury exposure include kidney and gastrointestinal damage, neurological damage, and birth defects.  Chronic exposure is fatal.

On June 19, 2007, the Netherlands Environment Assessment Agency announced that China’s carbon dioxide (CO2) emissions were seven percent higher by volume than the United States in 2006.  Many experts were skeptical, but on June 13, 2008, the same agency announced that a new study found that China’s emissions were 14 percent higher than those of the United States in 2007.  “The Chinese increase accounted for two-thirds of the growth in the year’s global greenhouse gas emissions, the study found.”  In addition, China is now the largest source of SO2 emissions in the world (SO2 causes acid rain), and.  Japan and South Korea suffer from acid rain produced by China’s coal-fired power plants and yellow dust storms that originate in the Gobi desert.

An article titled “Scientists Track Asian Pollution” in the September 4, 2008 issue of The News Tribune of Tacoma, Washington reported that the Journal of Geophysical Research that stated “East Asia pollution aerosols could impose far-reaching environmental impacts at continental, hemispheric and global scales because of long-range transport,” and “a warm conveyer belt lifts the pollutants into the upper troposphere over Asia, where winds can wing it to the United States in a week or less.”

Dan Jaffe, a professor of environment science at the University of Washington and a member of the National Academies of Science panel studying the issue, said,  “This pollution is distributed on average equally from Northern California to British Columbia.”  He added that “up to 30 percent of the mercury deposited in the United States from airborne sources comes from Asia, with the highest concentrations in Alaska and the Western states.”

What good does it do to control the quality of our air and water in the United States so strictly that we drive our manufacturing industry south of the border to Mexico or offshore to Asia where environmental regulations are either lax or nonexistent?  If people want strong environmental protection while retaining American jobs, we are going to have to analyze the cost of the environmental impact on American manufacturers and accept a reasonable compromise that doesn’t go overboard on environmental regulations that drive more and more manufacturing offshore.  Another option would be to assess an environmental impact fee on products imported based on the level of pollution in the country of origin as compared to that of the U. S.  The natural disasters of the past year, such as the Icelandic volcano, and the recent earthquake/tsunami in Japan have shown us that what happens to the environment in one part of the world affects the environment of other parts of the world.  While government takes the time to come to grips with this problem, you can prevent yourself from contributing to the world’s pollution by buying products made in America.  Remember, every product you buy made in China or India contributes to the world’s pollution.

Posted in General, Outsourcing, Taxes/Regulations | 2 Comments »

Is First to File Patent Reform Bill Right for America?

March 15th, 2011

The America Invents Act (S. 23), originally titled the Patent Reform Act of 2011, passed the Senate by a vote of 95 to five.  The bill’s author was Judiciary Committee Chairman Patrick Leahy (D-Vt.), and Chuck Grassley (Iowa) the Ranking Republican on the Judiciary Committee, and Orrin Hatch (R-Utah) were original co-sponsors of the bill.  An amendment to strip S. 23 of its troubling grace-period provision by striking the section of the bill containing the conversion of America’s first to invent patent priority system to a first to file patent system introduced by Sen. Diane Feinstein (D-Calif.) was defeated 87-13.

The first to file (FTF) provision eliminates the current first to invent filing system that goes back to the earliest beginnings of our nation.  The FTF transition would eliminate the current one-year grace period that allows inventors to prove they were first to invent within one year from the date of their invention. Retaining the current grace period and filing system received little attention as small inventors were largely left out of the previous Congressional hearings on patent reform in 2009 and 2010, and no hearings were held by the Judiciary Committee of the new Congress prior to vote on the Senate floor.

According to Patent and Trademark Office Director, David Kappos, the U. S. is already operating as a “first to file” patent system because in 2007, the total number of interference cases for all applications was seven, and only one interference claim involving a small or medium sized entity was decided based on priority alone – out of 441,637 patent granting decisions.  Interference cases are where two inventors file their patents nearly simultaneously and rely on the first to invent criteria during interference proceedings.

“Reforming the nation’s antiquated patent system will promote American innovation, create American jobs.  It will grow our economy,” Leahy said on the Senate floor.  President Obama praised the Senate action, saying “This long-overdue reform is vital to our ongoing efforts to modernize America’s patent laws and reduce the backlog of 700,000 patent applications – which won’t just increase transparency and certainty for inventors, entrepreneurs and businesses, but help grow our economy and create good jobs.”

The bill allows the Patent and Trademark Office (PTO) to determine fees and stops the practice of Congress diverting patent fees to the general Treasury to ensure that the office has the resources to hire more qualified examiners and modernize its computer systems.  Like a thief in the night, Congress raided the PTO fund and diverted $53 million of fees to other Congressional programs.  The new Congress hasn’t made any attempt to refund that amount to the PTO.  PTO funding is completely dependent on user fees paid to the PTO for patent and trademark applications, examinations, and maintenance.  Zero taxpayer dollars are used to fund the PTO, which means Congress is using resources paid by inventors and innovators on programs not related to the patent or trademark applications those inventors and innovators filed.  In addition to the $53 million stolen last year, over $750 million was stolen by Congress over the last 15 years.  (CONNECT Policy eNews 1.31.11)

When Director Kappos was in San Diego in May 2010, he told the San Diego Inventors Forum that they were hiring 300 more patent examiners in 2010 and planned to hire 1,000 more in the next two years to help reduce the backlog of 750,000 patent applications.  He said they were also providing training to the current 7,000 patent examiners to accelerate the processing of patent applications.

The bill creates a new micro-entity category that would allow fees to be reduced by 75 percent for inventors with five or fewer employees and fewer than five prior patent applications.  The PTO currently offers a 50 percent discount for small entities (under 500 employees) in virtually every fee category, which is further reduced by another 50 percent for small entities and independent inventors who use the electronic filing system.

Under the bill, the PTO could set up an expedited review program under which, for a higher fee, it would guarantee a final decision on an application within a year.  It now takes about three years, on average, for a patent application to be approved, and the office has such a backlog that it takes two years for examiners to begin work on a new application.

The legislation garnered a broad spectrum of support from pharmaceutical companies, large corporations such as IBM and Motorola, academic groups such as the Association of American Universities, and labor groups, including the AFL-CIO.  The Coalition for 21st Century Patent Reform, a group whose 50 members includes Caterpillar, General Electric, Eli Lilly, and Procter & Gamble, said “this legislation will make our national more competitive in the global marketplace.”

Independent inventors (individuals who are not part of corporations) had been anxiously watching the outcome of the proposed Patent Reform Acts of 2009 and 2010, in which the new process would be a first to file system in contrast to the current first to invent system.  The concern of independent inventors was that this bill would favor large companies who can afford to file applications for patents before vetting the new technology because it would alter patent law to effectively kill the grace period by conditioning it on early disclosure.  In other words, an inventor would have to publicly disclose the invention in order to trigger a grace period.  Startups and small business inventors do not publicly disclose the details of their inventions right after they are conceived because it would tip off competitors to essential details of their new technology.   The ability to secure a patent is critical for an inventor or startup company to be able to obtain licensing agreements or early stage investment funding by angel investors or venture capitalists.

Several groups representing inventors and small business have long campaigned against any provision that would weaken the legal mechanisms available to their members to assert their patents.   In December 2009, a group of organizations announced that they banded together to form the Small Business Coalition on Patent Legislation.  The Coalition is a national consortium of non-profit organizations representing and assisting early-stage startup companies, small businesses, individual and academic inventors, researchers, and new innovative market entrants who depend on patent protection.  The Coalition included San Diego’s CONNECT organization, the National Small Business Association (NSBA), IP Advocate, the American Innovators for Patent Reform (APIR), the National Association of Patent Practitioners (NAPP), the Professional Inventors Alliance USA (PIAUSA), and the United Inventors Association (UIA)

Ed Black, president and CEO of the Computer and Communications Industry Association, a trade group whose members include Google, Microsoft and Oracle, warned that excluding the post-grant review provisions could make “the current situation even worse for the tech industry.”  Sen. Mark Udall (D-Col.) one of the co-sponsors of the amendment said he would seek to include it in the final version of the bill negotiated by the reconciliation committee with the House bill that passes.

The Coalition for Patent Fairness, which represents high-tech companies, such as Apple, Google, Intel, Cisco, and Oracle had been a leading voice of dissent on the legislation and announced they would continue to work with Congress to address the concerns of America’s top innovators.

When the bill was first introduced by the new Congress in January, Timothy Tardibono, CONNECT’S Washington D.C. Office Director said, “The bill makes it harder for inventors to perfect their invention before filing while ignoring a major Supreme Court case that will further exacerbate the patent application backlog and pendency time.  There is no need to rush this bill through until it fully protects innovation instead of hurting innovation and killing job creation.”  This legislation he mentioned is Microsoft v. i4i patent infringement case, in which Microsoft is petitioning the U. S. Supreme Court to lower the standard needed to prove a patent invalid from the current standard of clean and convincing to preponderance of the evidence.

In a February 2, 2011opinion article in The Hill’s Congress Blog, U. S. business & Industry Council President, Kevin Kearns, and Research Fellow, Alan Tonelson, wrote, “The principal advocates of the Leahy bill are the governments of Europe and Japan – along with boosters in China and India.  They want the United States to ‘harmonize down’ to their inferior systems.  They and the bill have it backwards.  Advocates also include a handful of Big Tech transnational corporations that want to make easier and less costly the infringement of other’s patent rights.  Their business model has a unique name, ‘efficient infringement.’”

They also pointed out that the reforms of the Clinton era “doubled from 18 to 36 months the time required to process a patent, required the Patent Office to publish full patent applications on the Internet 18 months after filing – encouraging theft of American IP worldwide, and created a new post-grant challenge process to patent validity that can consume three or more years in bureaucratic proceedings inside the Patent Office.  As a result, individual inventors who received 15 percent or more of all U. S. patents before the Clinton reforms got barely 5 percent last year.”

The action now moves to the House, where Judiciary Committee Chairman Lamar Smith (R-Texas) has indicated that he plans to introduce a companion bill in the near future..

As a member of the steering committee of the San Diego Inventors Forum, I stand on the side of the individual inventor and small business owner and oppose the conversion to the first to file system.  Each month, our meeting is packed with 60 to 80 inventors and entrepreneurs with innovative ideas for new products and technologies.   These inventors need the protection of the first to invent system to be able to fully vet their technology before publicly disclosing it after filing for a patent.

Now is the time to express your opinion.  Contact your Congressional representative and let them know how you stand on the America Invents Act, especially whether you support or oppose the conversion from a first to invent to a first to file system.

Posted in General | 2 Comments »

ABCs ‘Made in America’ Series

March 8th, 2011

On Monday, February 28th, ABC began a series on the World News with Diane Sawyer called “Made in America.” John and Ana Ursy of Dallas, Texas agreed to accept the challenge of working with the ABC team of David Muir and Sharyn Alfonsi to furnish three rooms of their home exclusively with products that are made in America.  When the team examined everything that existed in these three rooms and removed all foreign-made products, the result was a virtually empty house – no beds, no tables, no chairs, no couches, no lamps.  Only the kitchen sink, a vase, a candle, and some pottery remained.

The questions posed by the team were:  Is buying American-made more expensive?  What staples are no longer manufactured in the U.S.?  And what difference would it make if everyone promised to buy more American-made products?

The results were somewhat surprising.  The kitchen was the most difficult because there are only a couple of companies still making major appliances in America:  Viking Products provided the stove, and Sub-Zero and Wolf provided the refrigerator, microwave, and oven.  They couldn’t find any coffee makers made in the U.S.; Bun-a-Matic assembled a coffee maker out of parts made offshore.  There are no TVs made in America and no light bulbs.  General Electric closed the last plant making incandescent light bulbs in the U. S. in July 2010.  The team was able to furnish the bedroom with all American-made furniture, lamps, and bedding for less money:  $1,699 compared to $1,758.   All in all, the team found more than 100 manufacturers still making various consumer goods in America, and viewers submitted names of many more.  You can view the companies on an interactive map of the USA.

When one of the ABC reporters, Sharyn Alfonsi, examined the toy box of her own child, she didn’t find any American-made toys in it, so the interactive website provides the names of some U. S. toy makers, such as Green Toys in San Francisco that makes toys from recycled milk bottles. There are six other California companies shown on the interactive map:  Pure-Rest Organics, making organic bedding in San Diego, Harveys Handbags in Santa Ana, Maglite Flashlights in Ontario, Danmer Custom Shutters in Los Angeles, Glass Darma, making handmade drinking straws in Ft. Bragg, and Sergio Lub Jewelry in Martinez.

Why does it matter if we buy American-made products?   First, our addiction to imports has helped create our high trade deficit, especially with China, where most of the consumer goods we import are manufactured.  In 1960, imported foreign goods made up just 8 percent of Americans’ purchases.  Today, nearly 60 percent of everything we buy is made overseas.  In 2010, our overall trade deficit was $97.8 billion, up from $374.9 billion in 2009 but nearly 30 percent below our highest deficit in 2008 of $698.8 billion.  Our trade deficit with China has grown from $ $83.8 billion in 2000 when China was granted Most Favored Nation status to a record high of $273 billion in 2010.

Second, American-made products create American jobs.  Each time you choose to buy an American-made product, you help save or create an American job.  There is a ripple effect in that every manufacturing job creates three to four other jobs while service jobs create only one to two other jobs.  We’ve lost 5.5 million manufacturing jobs since the year 2000, and the number of manufacturing jobs dropped below 12 million in 2010, down from a high of nearly 20 million in 1979.

You may be thinking, would what I do make a difference? 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.”   Eleanor Roosevelt echoed this sentiment saying, “Never doubt that a small group of thoughtful, committed citizens can change world; indeed, it’s the only thing that ever has.”  Remember that our country was founded by a small group of people that did indeed change the world by forming the United States of America.

Here are suggestions of what each one of us can do:  First, look at the country of origin labels of goods when you go shopping.  Most imported goods are required to have these labels.  Many manufacturers have tried to get the Federal Trade Commission (FTC) to relax the rules determining what’s “Made in USA.”  After two years of public hearings, studies, and reports, in December 1997, the FTC reaffirmed:  A product will be considered Made in U.S.A. if “all or virtually all made in the Unites States” only where “all significant parts and processing that go into the product are of U. S. origin.”

Buy the “Made in U.S.A.” even if it costs more than the imported product.  It is a small sacrifice to make to insure the well being of your fellow Americans.  The price difference you pay for “Made in USA” products keeps other Americans working.  If the product you are looking for is no longer made in America, then avoid countries such as China that has the goal of becoming the world’s “super power” in the 21st Century by winning either an economic war or a military war with the U. S.  When you take our trade deficits with China into consideration, it would not be an exaggeration to say that American consumers have paid for the bulk of China’s military buildup.  American service men and women could one day face weapons mostly paid for by American consumers. Instead, patronize impoverished countries such as Bangladesh or Nicaragua, which have no military ambitions.

In addition, you would be reducing your “carbon footprint” by buying a product made in America instead of a product that is made offshore that will use a great deal of fossil fuel just to ship it to the United States.

If you have a “Made in USA” appliance that needs repair and all the new ones are imported, try to get it repaired.  If it can’t be fixed, and it is a small appliance that you can live without, then don’t buy a new one.  We Americans buy many things that we really don’t need just because they are so cheap.  If a product that you are considering purchasing is an import, ask yourself, “Do I really need this?”  If you don’t need it, then don’t buy it.

If you are willing to step out of your comfort zone, ask to speak to the department or store manager of your favorite store.  Tell the person that you have been a regular customer for x amount of time, but if they want to keep you as a customer, they need to start carrying some (or more) “Made in USA.” products.  If you buy products on line or from catalogs, you could contact these companies via email with a similar message.   Your contacting a company does have an effect because there is a rule of thumb in sales and marketing that one reported customer complaint equals 100 unreported complaints.

Buying American has been made even easier by a new guide to buying American – “How Americans Can Buy American:  The Power of Consumer Patriotism” first released in March 2008 and updated in 2010.  Author Roger Simmermaker says, “Supporting American companies leads to a more independent America.  Ownership equals control, and control equals independence.  We cannot claim to be an independent country or control our own destiny if our manufacturing base is under foreign ownership or foreign control.  A nation that cannot supply its own needs is not an independent nation.  If we are to claim independence from the rest of the world and truly be a sovereign nation, we must begin supplying our own needs once again.”

According to Simmermaker, “buying American” is not just about buying “Made in USA.”  “Buying American, in the purest sense of the term, means we would buy an American-made product, made by an American-owned company, with as high a domestic parts content within that product as possible…’American-made’ is good. ‘Buying American’ is much better!”

One of our greatest statesmen, Thomas Jefferson, stated, “I have come to a resolution myself, as I hope every good citizen will, never again to purchase any article of foreign manufacture which can be had of American make, be the difference of price what it may” (pg. 9 of Simmermaker’s book).

Simmermaker has made it easy by listing companies and their nation of ownership and view his list of American owned companies at his website: www.howtobuyamerican.com.    In addition here are some other websites.

www.buyamericanmart.com

www.madeinusa.org

www.americansworking.com

www.shopunionmade.org

www.MadeInUSAForever.com

As American consumers, you now have more American choices so you can live safely and have more peace of mind.  It’s high time to stop sending China our American dollars while they send us all of their tainted, hazardous, and disposable products.  If 200 million Americans refused to buy just $20 each of Chinese goods, that’s would be a four billion dollar trade imbalance resolved in our favor – fast!  In the ABC World News program, Diane Sawyer 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.”   The ABC World News series “Made in America” continues with a look at the garment industry the week of March 7th.

Manufacturing jobs are the foundation of our middle class, and we are losing our middle class in state after state.  From December 2000 to December 2010, 22 states have lost a third or more of their manufacturing jobs.  Massachusetts, New York, and Ohio have lost 38 percent of their manufacturing jobs, New Jersey 39 percent, North Carolina 42 percent, Rhode Island 44 percent, and Michigan 48 percent.

We cannot afford to export our wealth by buying imports from China and finance our more than 10 years of deficits by borrowing an average of $1.553 billion every day.  We cannot lose our manufacturing base and be able to remain the world’s “superpower.”  In fact, we may not be able to maintain our freedom as a country because it takes considerable wealth to protect our freedom.

Remember, the company you save or the job you save by your actions may be your own.  More importantly, you can play a role as an individual in saving our country’s sovereignty by following the suggestions in this article.

Posted in Outsourcing, Reshoring, Trade Policy | 3 Comments »

Bringing Back Jobs from Offshore to Revive American Manufacturing

March 1st, 2011

There have been many recommendations of how to revive American manufacturing and create the jobs Americans need, but most job creation programs proposed by commentators, politicians and economists involve either increased government spending or reductions in employment or income 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 would be difficult to accomplish.  Many of these solutions involve borrowing money now, largely from China, or taking money from one group of citizens or a future generation to give to another.  Other programs call for Chinese currency revaluation or tariffs, which would help the manufacturing industry, but would increase consumer prices.

In contrast, the move to bring back manufacturing production to the United States, called Reshoring, has grown increasingly popular over the last few years.  Reshoring brings jobs directly back from offshore, often from the LLCCs (Low Labor Cost Countries) that have grown so rapidly over the last decades at the expense of American workers, American manufacturing companies, and the overall U.S. economy.  Higher transportation and fuel costs, escalating wage rates in developing countries like China, and serious, sometimes life threatening, quality problems with products made in China are providing added impetus to this trend.

Reshoring breaks out of the waiting-for-policy-decisions problem, the economic zero-sum-game and the increases in consumer prices and assures that the pie grows to the advantage of all Americans.  Reshoring also focuses on the manufacturing sector that has suffered so many job losses for decades and the Small-to-Medium Enterprises (SMEs) that offer the best potential for job growth.

To help accelerate this trend, there is a new initiative with a plan to efficiently reduce our imports, increase our “net exports” and regain manufacturing jobs in a non-protectionist manner.  The Reshoring Initiative was founded by Harry Moser, retired president of Agie Chamille LLC, a leading machine tool supplier in Lincolnshire, Illinois.  The Initiative shows how outsourcing within the United States can reduce a company’s Total Cost of Ownership (TCO) of purchased parts and tooling and offer a host of other benefits while bringing U.S. manufacturing jobs home.

The Initiative documents the benefits of sourcing in the United States for large manufacturers and helps suppliers convince their U.S. customers to source local.  Archstone Consulting’s 2009 survey showed that 60% of manufacturers use “rudimentary total cost models” and ignore 20% of the cost of offshoring.   If a manufacturer is not accounting for 20% of their costs to offshore, offshoring may not be the most economical decision.  In tough economic times and stiff global competition, no company can afford this.  To help companies make better sourcing decisions the Reshoring Initiative provides:

  • A free Total Cost of Ownership (TCO) software that helps manufacturers calculate the real offshoring impact on their P&L
  • Publicity to drive the reshoring trend
  • An online Library of 98 articles about successful Reshorings
  • Access to NTMA/PMA Contract Manufacturing Purchasing Fairs to help manufacturers find competitive U.S. sources.

Manufacturing companies can reshore to:

  • Reduce pipeline and surge inventory impacts on Just-in-time operations
  • Improve the quality and consistency of products
  • Cluster manufacturing near R&D facilities, enhancing innovation
  • Reduce Intellectual Property and regulatory compliance risk
  • Reduce total Cost of Ownership (TCO)

The Initiative has received increasing visibility and influence: recognition by Industry Week magazine via its 2010 Manufacturing Hall of Fame, inclusion of the TCO concept in Cong. Wolf’s (R VA) “Bring Jobs Back to America Act” (H.R.516); numerous webinars; dozens of industry articles; presentations in major industry and government policy conferences in Chicago and Washington, DC; and coverage by CBS, CNBC, WSJ, USATODAY and the Lean Nation radio show.

The Initiative is succeeding in changing OEMs’ behavior. Companies have committed to reshore after reading Initiative articles.  Fifty-seven representatives from large manufacturers and 113 custom U.S. manufacturers attended the May 12, 2010 NTMA/PMA Contract Manufacturing Purchasing Fair, where OEMs found competitive domestic suppliers to manufacture parts and tooling.  Sixty-four percent of the OEMs brought back to the U. S. at least some work that was currently offshored.

On the February 4, 2011, the Illinois Reshoring Initiative announced its program to apply the principles of the national Reshoring Initiative to revitalize Illinois manufacturing by reshoring to bring back many of the most desirable jobs that have been lost to decades of offshoring.  This industry-led initiative will utilize an integrated, measurable, five-step program to help large manufacturers and their local suppliers recognize the total P & L impact of offshoring and the benefits that both will obtain from reshoring.   The program features keynote speakers, Peter M. Perez, Deputy Assistant Secretary for Manufacturing, U. S. Department of Commerce’s International Trade Administration, and Harry Moser, founder of the national Reshoring Initiative.

Mr. Moser commented, “In the past manufacturing conferences have presented good ideas but offered few tools and no follow-up.  The Illinois Reshoring Initiative’s year-long program provides the TCO Estimator free to attendees and has 5 integrated steps that will assure that the good ideas are implemented and the results measured.”  The Illinois Reshoring Initiative Conference will be held 7:45 AM to 11 AM, March 16, 2011 at Wojcik Center, Harper College, Palatine, IL 60067.  To register for the conference go to http://illinoisreshore.eventbrite.com/.

The Reshoring Initiative www.reshorenow.org is supported by: the Association for Manufacturing Technology (AMT) www.amtonline.org; Sescoi, , www.sescoi.com/ ; GF AgieCharmilles, www.gfac.com/us; the Association for Manufacturing Excellence (AME)  www.AME.org,; the National Tooling and Machining Association (NTMA) www.ntma.org and by the Swiss Machine Tool Society (SMTS) www.smts.org . Additional information on the NTMA/PMA Purchasing Fairs can be found at www.purchasingfair.com.

 

Posted in Reshoring | 1 Comment »

How Accurate is the Federal Unemployment Rate?

February 22nd, 2011

Each month, the Bureau of Labor Statistics (BLS) of the U. S. Department of Labor sends out a press release announcing the total number of employed and unemployed persons in the United States for the previous month, along with many characteristics of such persons.  Many people think that the federal unemployment rate is derived by adding the total of claims filed for unemployment insurance benefits under State or Federal Government programs.  This isn’t the case.  Let’s examine how the unemployment rate is generated to see how accurate it is.

The January 2011 official unemployment rate was 9.0%, down from 9.4% in December, and a high of 10.2% in November 2009 during the Great Recession.  Some people claim that if the unemployment rate were calculated as it was during the Great Depression, the current rate would be close to double what it is and nearly as high as the rates back in the 1930s.  The problem with this claim is that there was no official unemployment rate until the 1940s.  The rates we use today for this era were reconstructed after the fact based on the work of three economists:  Stanley Lebergott, Michael Darby, and G. H. Moore.  Libergott included those on work-relief as unemployed while Darby did not.  Libergott and Darby agreed on an unemployment rate of 3.2% in 1929 rising to a high of 23.6% and 22.9% respectively in 1932.  After the work-relief programs began in 1934, their rates diverged to a peak in 1936 of 16.9% compared to 9.9%.  If you compare the two series, it appears that between 1934 and 1941, WPA projects took two to 3.5 million workers off the unemployment roles, and shaved the rate by 4 to 7 percentage points.

During the Great Depression, a number of ad hoc attempts were made to calculate the rate using various sampling methods, which led to widely divergent results.  In 1940, the Work Projects Administration (WPA) began publishing statistics on those working, those looking for work, and those doing something else based on a survey of a sample population.

In 1962, high unemployment and two recessions in three years led to the formation of The President’s Committee to Appraise Employment and Unemployment Statistics to reassess the concepts used in gathering labor-market data by the BLS.  The Committee suggested some improvements, and the BLS tested new survey techniques for several years, before making a number of changes in 1967.  The Committee also recognized the need for more detailed data on persons outside the labor force, and the BLS began collecting information on those who wanted a job although they were not looking for work.

Among the most important changes was the requirement that workers must have actively sought employment in the last four weeks in order to be classified as unemployment.

In 1976, the BLS first published the original U1 to U7 tables to provide more information on the hidden unemployed, who would be part of the labor force in a full-employment scenario.   These tables were revised in the 1994 redesign (becoming U1 to U6) and added the requirement that discouraged workers must have sought work in the prior year.

U1:  Percentage of labor force unemployed 15 weeks or longer.

U2:  Percentage of labor force that lost jobs or completed temporary work.

U3:  Official unemployment rate that is the proportion of the civilian labor force that is unemployed but actively seeking employment.

U4:  U3 rate + “discouraged workers who have stopped looking for work.

U5:  U4 rate + other “marginally attached workers” who would like and are able to work, but have not looked for work recently.

U6:  U5 rate + part-time workers who want to work full time, but cannot due to economic reasons.

These unemployment rates are derived from a monthly survey of 60,000 households known as the Current Population Survey (CPS).  The CPS sample is selected to be representative of the entire population of the U. S.  All of the counties and county-equivalent cities in the country are grouped into 2,025 geographic areas (sampling units), and the Census Bureau then designs and selects a sample consisting of 824 of these geographic areas to represent each state and the District of Columbia.  The sample is a State-based design and reflects urban and rural areas, different types of industrial and farming areas, and the major geographic divisions of each state.  This mix of geographic areas to represent each state is important because there is a wide range of unemployment rates from state to state.  For example, North Dakota had the lowest rate for December 2010 at 3.8%, while Nevada had the highest rate at 14.5%, with California not far behind at 12.5%.

Every month, 25% of the households in the sample are changed, so that no household is interviewed more than four consecutive months.  After a household is interviewed for four consecutive months, it leaves the sample for eight months, and then is interviewed for the same four calendar months a year later, before leaving the sample for good.  This procedure results in approximately 75 percent of the sample remaining the same from month to month and 50 percent from year to year.

Each month, 2,200 Census Bureau employees pose questions regarding whether individuals in the home have a job or if they are laid off.  Other questions query whether the persons are available for work, and the techniques they have used to look for work in the preceding month.  At the time of the first household interview, the interviewer prepares a roster of the household members, including their personal characteristics, date of birth, sex, race, marital status, education, and so on, and their relationships to the head of household.  The interviewers don’t decide on the respondents’ labor force classification.  They simply ask the questions in the prescribed way and record the answers.  Based on information collected in the survey and definitions programmed into the computer, individuals are then classified as employed, unemployed, or not in the labor force.

This information is then compared as a percentage to the number of people in the labor force, which consists of all persons employed or unemployed over the age of 15 and not on active duty in the Armed Forces or in an institution (correctional facility, residential nursing, or mental health care facility.)

The information collected is adjusted to account for independent population estimates across the entire nation.  These adjustments take into account factors such as state of residence, sex, age, and race.  The rate is calculated by dividing the total of the civilian labor force by the number of unemployed to get the percentage of unemployed.  The BLS releases the data collected on the first Friday of each month as the national unemployment rate.

Is it possible to skew the numbers to make the unemployment rate look better than it really is?  Yes, and there are two main ways to do it:  (1) select the geographic areas that have the lowest rate of unemployment as your sample to come up with a lower number of unemployed persons or (2) lower the number representing the total of the civilian labor force so that you get a lower percentage when dividing that number by the number of unemployed.   In addition, methods one and two could be combined.

It’s widely understood that it takes about 200,000 new jobs each month to stay even with the workers entering the labor force.  Economists say that it takes the creation of about 3,000,000 jobs to lower the unemployment by a full percentage point.  They also say that you need 5% GDP growth to lower the rate by a full percentage point.  Neither of these occurred in 2010.  The national GDP growth was only 2.8% for 2010 and is predicted to grow by only 3.5% in 2011.  Less than a million new jobs were created last year.  Separate government data shows that only 36,000 net jobs were created in January, barely a quarter of the number needed to keep pace with population growth.  Taking this into consideration, does it seem real that the official U3 unemployment rate dropped by .4 percent this January from 9.4% to 9.0%?  Remember, this is the same administration that directed the BLS to stop producing the jobs in manufacturing chart last March when the number of manufacturing jobs dropped below twelve million.

What did happen was that 2.2 million left the labor force in the past year, meaning that there was a lower number to use as the numerator for dividing the number of unemployed to get the unemployment percentage.   These are people who have given up looking for a job.  The real unemployment rate is the U6 rate that includes the “discouraged workers” and workers with a part-time job that want a full-time job.  The U6 rate on the BLS website for January is 16.1%.

According to a Gallup poll released on February 12th, the U. S. unemployment rate is 10.2%, and the underemployed rate (equivalent to the U6 rate) is 19.7%, rounded off to 20% on the Gallup website.  Another recent Gallup poll shows that 35% of Americans feel unemployment is the biggest challenge facing the nation right now.

Involuntary unemployment has devastating effects on American workers and their families.  Long-term unemployment leads to depression and despair to illness.  Loss of American employment decreases household wealth, reducing consumption of locally manufactured goods, which further stifles job creation.  Joblessness, homelessness, and hopelessness are the end result.

We need a plan to rebuild America to create the jobs Americans need.  The Reshoring Initiative is a good start to bring manufacturing work back to the United States from offshore to create more higher paying jobs for Americans.  Only then will the unemployment rate truly drop, and local, state, and budget deficits will begin to diminish.

Posted in General | 2 Comments »

Why Isn’t Economic Upturn Leading to Job Gain?

February 15th, 2011

According to the National Bureau of Economic Research, and independent group of economists, the Great Recession ended in June 2009.  It was the longest and deepest downturn for the U. S. economy since the Great Depression.  Some 20 months later, the average American would be inclined to dispute this opinion based on the lack of job opportunities.  What is the reality?

The January 2011 “Report on Business,” by the Institute for Supply Management stated that the manufacturing sector expanded for the 18th consecutive month.  Norbert J. Orwe, CPSM, chair of the Manufacturing Business Survey Committee said, “The manufacturing sector grew at a faster rate in January as the PMI registered 60.8 percent, which is its highest level since May 2004 when the index registered 61.4 percent…New orders and production continue to be strong, and employment rose above 60 percent for the first time since May 2004.”  This wasn’t just an upturn in a few industries – 14 of the 18 manufacturing industries reported growth in the PMI in January.

The PMI is the Purchasing Management Index, based on data compiled from purchasing and supply executives nationwide.  A PMI reading above 50% indicates that the manufacturing economy is expanding and below 50% indicates that it is declining.  At the very worst of the Great Recession, it was 32.5% in December of 2008.  Lakshman Achuthan, managing director of Economic Cycle Research Institute said, “Gross domestic product has recovered about 70% of its pre-recession level.”

While the national unemployment rate finally dropped to 9.0% in January from 9.4% in December, many experts realize that this is because thousands of men and women dropped off the unemployment rolls when the last of the extensions of up to 99 months ended in December. The U6 unemployment rate that takes into account the people that have lost their unemployment benefits or taken part-time jobs while seeking full-time employment is 16.1%.  This reflects the growing difficulty of increasing jobs of any type in today’s competitive global economy.

Gregory Tassey, Sr. Economist at the National Institute of Standards and Technology commented in a paper titled Rationales and Mechanisms for Revitalizing U. S. Manufacturing R&D Strategies, “For the first seven recessions after World War II, the relatively closed status of the U. S. economy meant that average employment recovery was swift and substantial (about four months to positive employment levels relative to the recession trough).  In the late 1980s, however, the growing global competition began to promote greater investment in addition to accelerated outsourcing.  The result was the 19 months elapsed before a positive employment level was attained.  This significant slowing of the cyclical rebound in employment was dwarfed by the extremely slow recovery in employment from the 2000-2001 recession, which required 30 months to reach a positive employment level relative to the recession trough.”

Why have the last two recessions resulted in “jobless recoveries?”  What is keeping unemployment so high now?  One of the main reasons is the loss of manufacturing jobs.  Too many manufacturers are sourcing all or most of their manufacturing offshore.  An upturn in their business doesn’t mean more manufacturing jobs for Americans if they aren’t producing or buying everything for their products in the United States.  Since 2001, we have lost 63% of the U. S. textile industry and 74% of the U. S. printed circuit board industry.  We have lost 47% of communication equipment jobs and 43% of motor vehicle and parts industry jobs.

Since manufacturing jobs create three to four other jobs, the loss of each manufacturing job causes the loss of three to four other jobs.  Our nationwide loss of jobs in all sectors won’t reverse until we stop the hemorrhaging of manufacturing jobs out of the United States.

In addition, manufacturers are doing more with less for three main reasons.  First, the United States ranks highest in productivity as measured by Gross Domestic Product per employed person at 97.1 compared to China’s rate of 10.2 and India’s rate of 7.5.  James Vitak, a spokesman for specialty chemical maker Ashland Inc. said,  “You can add more capability, but it doesn’t mean you necessarily have to hire hundreds of people.”

Second, an increasing number of manufacturers are adopting “lean manufacturing” based on the principle of continual improvement (Kaizen) of the Toyota Production System.  The “lean manufacturing process was developed to produce smaller batch sizes and just-in-time delivery; that is, producing only necessary units in necessary quantities at precisely the right time.  This results in reducing inventory, increasing productivity, and significantly reducing costs.  It has evolved into a system-wide management process that continually seeks to increase profits by stripping out wasted time, material, and manpower from the manufacturing process.  Thus, fewer people are needed to produce products.  Manufacturers aren’t building up inventory to fill orders – they are ordering materials, components, parts, and assemblies as needed to fill orders as they receive them from their customers.

Third, existing salaried employees have been required to work harder and longer because manufacturers are fearful of hiring new people until they have more confidence that the upturn in business will continue, and we won’t have a double dip recession.  Manufacturers can get away with doing this because for every person employed, there are a hundred people willing to fill the job.

The fear of increased taxes with the expiration of the Bush tax cuts, the cost of changes due to the Health Care Act of 2010, and the possibility of a “cap and trade” bill added to the uncertainty about the economy for all businesses last year.  Passage of the bill that maintained the current tax rates without an increase just before the end of the year reduced fears somewhat, but the other two issues are still causing uncertainty about the future.

The number of manufacturing jobs is a better indicator of what’s really happening in the economy than the stock market.  Many of the companies on the Dow and Standard & Poor indexes of the stock exchange are no longer American-owned companies.  They are multinational globalist companies that don’t care about providing jobs for Americans.  They care about their bottom line of making as big a profit as possible.  These companies may be doing well based on their worldwide business and could post profits and have their stock prices go up without creating jobs for American workers and benefiting the U. S. economy as a whole.

I keep hearing that we won’t create enough jobs to lower the unemployment rate until consumer confidence is restored and consumer spending increases.  I disagree.  Consumer spending doesn’t create American jobs when most of the goods consumers buy are now made in offshore.  We won’t be able to create the jobs we need to lower the unemployment rate until business owners and consumers start “connecting the dots.”  We don’t create American jobs when companies outsource their manufacturing to other countries and consumers buy products made offshore.  To create jobs in America, we need to manufacture in America and then buy products made in America.

Posted in General, Outsourcing | No Comments »

Why it’s Important to Understand Total Cost of Ownership For Outsourcing Manufacturing

February 8th, 2011

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.

Posted in General | 4 Comments »

Could the U. S. Become Top Exporter Again?

February 1st, 2011

Many would say this is an impossible goal since the U. S. lost its top ranking to Germany in 1992, and China replaced Germany as the top exporter in 2009.  I say it’s possible if American companies get back to what made them great in the first place – unique, innovative products made to high quality standards by a well-trained workforce.

For nearly 60 years, American manufacturing dominated the globe.  The United States led the world in innovation.  American companies like Ford, Boeing, Maytag, IBM, and Levi became household names.  American manufacturing became synonymous with quality and ingenuity.

Of these companies, Maytag was bought by Whirlpool, IBM sold off its PC business to Chinese company Lenovo, and Levis are now made in China just like every other brand of jeans manufactured.

When I drive around with my granddaughter, we play a game to see who can see the most “slug bugs” (VW Beatles).  They are easy to spot, even in oncoming traffic, because they have such a distinctive look compared to other cars.  Nearly every other car looks like peas in a pod – you can’t tell what automaker they are until you see the logo.

The unique appearance and features of a VW Beatle are examples of what those of us in marketing and sales call Differential Competitive Advantage (DCA).   Other examples of DCA thrusts are:  wide selection, customization, convenience, speed of service or product delivery, innovative cutting edge technology, fills a wide range of needs or a special need, specialized know-how, and lowest price.

There are no marketing rules that apply to every type of company, and there are no quick fixes or “magic pills” that will work for every company.  There is no such thing as a sustainable competitive advantage – it will change over time.  However, the universal law of marketing is “What’s in it For Me (WIFM) so that the DCA of your product has to answer that question.

To be successful at exporting, American companies need to have an innovative product that fills a market need in other countries.  They need to know their potential markets, know each possible way to reach that market with a persuasive message and use marketing methods that produce the maximum leverage with minimum effort.

For years now, I’ve been hearing that American companies had to outsource manufacturing offshore to remain competitive.  To me, this means that these companies gave up on marketing their products using their differential competitive advantage (DCA) and were down to competing on the price level.

German companies don’t compete on price; they compete on the perceived benefits of their reputation for high quality, precision-engineered products.  Germany’s average manufacturing wage is higher than the United States, the highest of all the European Union countries.  They have strong unions that offer more benefits and vacation time than any American companies or unions.  Germany was able to keep its position as the top exporting country for 17 years belying the argument of American companies that high union wages drove them to offshore manufacturing to be competitive.   It’s even less of an argument in my territory because only a handful of companies are unionized.

I believe that there is also an intangible factor in Germany’s success in exporting – the pride company owners have in their country and their products.  German company owners want to be successful as German companies, not global companies.  My research revealed that the majority of German companies are privately owned, not publicly traded.  This gives them the leeway of following their own measure of success instead of being responsible to their stockholders for the next quarter’s earnings.

Too many American based companies refer to themselves as global companies instead of American companies.  These companies are “globalist international companies” because they no longer have loyalty to the United States.  Their loyalty is to their bottom line, their stockholders, and their future bonuses, and they will do whatever it takes to make their bottom line look good even if it causes harm to themselves and their country in the long run.

American companies need to get back to producing their products in America.  If the majority of the components, parts, and assemblies in a product are being made offshore, is it really an American product?   Will companies who source offshore be able to produce their products if their overseas supply chain was disrupted to the point that they couldn’t get parts?

Do companies who outsource really understand the Total Cost of Ownership (TCO) of comparing the cost of sourcing parts and assemblies domestically rather than offshore?  Do they recognize the hidden costs of doing business offshore?  If not, the Reshoring Initiative of the National Tooling and Machining Association (NTMA) can provide a useful worksheet to calculate TCO.

There is no question that outsourcing offshore will continue for the foreseeable future, especially for the multinational companies that have products to sell within the countries in which they set up manufacturing operations.  Manufacturing products locally for consumption within a foreign country will be crucial to profitability as transportation costs continue to increase.

American manufacturers must be willing to continuously invest in their products to improve performance quality, and cost, but they must also be willing to improve the skills of their workers to be more competitive in the global market. Germany and Switzerland lead the world in their apprenticeship and workforce training.  Apprenticeship programs have virtually disappeared from American industry, and we must rebuild them to follow the example of Germany and Switzerland to train the skilled workforce needed for the 21st Century in the United States.

There is no lack of American ingenuity and creativeness.  The monthly meetings of the San Diego Innovators Forum are filled to standing room only with men and women who want to learn how to successfully convert their innovative ideas into products for the global marketplace.  Those of us on the steering committee are trying to help them to produce an American product, sourced in the United States instead of sourced offshore.

In his second annual message to Congress, December 1, 1862, President Abraham Lincoln said, “The dogmas of the quiet past are inadequate to the stormy present.  The occasion is piled high with difficulty, and we must rise – with the occasion.  As our case is new, so we much think anew, and act anew.  We must disenthrall ourselves, and then we shall save our country.”

We must arise to the occasion of our economy in crisis by thinking and acting anew to restore our manufacturing industry as the world leader.  American companies need to rejoin Team USA by making innovative, high quality products in the United States that can be exported to fit an unfilled niche in other companies.  Of course, no American company could succeed through exporting only; they need to have sufficient domestic customers also.  American consumers need to “connect the dots” to wake up and realize that buying cheap goods in China doesn’t create American jobs.  Buying cheap imports rather than buying “Made in USA” products is a big factor in our high unemployment rate.  We Americans need to be more like the Germans and be willing to pay a little more to buy products made in our own country.  By doing this, we can regain our position as the world’s top exporter and “Win the Future” as President Obama encouraged us to do in his State of the Union Address last week.

Posted in Reshoring | No Comments »

How Did Germany Keep Position as the World’s Top Exporter for so Long?

January 25th, 2011

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 19th-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.

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National Export Initiative – Part Three – Success Stories

January 18th, 2011

Before the National Export Initiative is fully implemented, it is worthwhile to examine the stories of companies that have already been successful at exporting their products, even to China.

SnowPure is a leader in high-technology Electrodeionization (EDI) with it ElectropureTM brand.   The original company was founded in 1979 by Harry O’Hare as HOH Water Technology, went “public” in 1987 and was renamed Electropure in Inc. in 1996, also public.)  After a management buyout in 2005, it became SnowPure LLC, a privately held company, with Michael Snow, Ph.D. as President.  The company broadened its water technologies to include ZapwaterTM, EDI, ExcelllionTM ion-exchange membranes, DC power supplies, flow switches, and instrumentation for high purity systems, and innovative ultraviolet (UV) products.  SnowPure does not sell systems and does not sell to end-users.  SnowPure’s mission is to provide water purification technology components to system integrators.

SnowPure opened its first sales office in China in 2006, and formed SnowPure International in Hong Kong in 2008.  SnowPure released its new Electropure EXC EDI at the Aquatech China show in January 2009.  SnowPure’s percentage of sales that are exported is close to 85 percent.  Their percentage of exports increased in 2010 compared to 2008 and 2009 because their total revenue increased even though their USA sales decreased.

When asked how SnowPure achieved this success in exporting, Michael Snow said, “It was by being in the right place at the right time with a product that was needed by industry.  Companies trust U. S. technology, service, and support.  It was done with zero advocacy and zero export financing (not without trying though).  The U. S. Department of Commerce has been very

forthcoming with introductions, though little business has come from these.  One thing that USDOC and the Secretary of Commerce promote is the Export Import Bank.  The ExIm receivables insurance is good so far and is administered privately, but we haven’t had any claims, so I don’t know if it works.  They also promote ExIm as export financing but this is a not true for small businesses.  It must go through the banks and is so onerous in the administration and reporting that Wells Fargo and California Bank & Trust, for example, have very high minimums for participation; I need $200-300k for working capital for exports, so there is no program for us.”

Michael added that he hasn’t experienced any trade barriers for his products, and they have found exporting easy.   He said, “Having export receivables insurance has helped us with allowing credit without the cost and hassle and risk of letters of credit.  We do this through ExIm Bank, and it costs about 0.36%.

Paulson Manufacturing has been providing protective equipment for various industries worldwide since 1947.  Specializing in face protection, the family owned and operated business delivers quality products and innovation for industrial, fire and rescue, and tactical and ballistic verification testing applications.  All of their products are manufactured in America at a five-acre facility in Temecula, California.

Roy Paulson, President, said, “Paulson Manufacturing has seen sales increase up to 25% due to international exports. Not only are we able to capitalize on the export market, we are able to facilitate stronger sales for our OEM customers because of our exclusively designed products, which allow them a stronger international market share as well. With increasing sales, we are able to hire more employees, both temporary and permanent.”

Mr. Paulson added, “As the recession hit worldwide, our sales fell roughly 10% in 2008.   We had worked diligently with our international distributors in successfully obtaining orders from military and police agencies; however, these assets were frozen and the orders lay dormant. In these instances, it has been a waiting game; since then, we have seen our export sales increase at about 4% a year.

Paulson added, “In some instances, our experience has proven in order to stay competitive and creative in the overseas market, custom products must be engineered to suit the customers need.  Each country has its own standards and specifications.  In order to pull our market share, we needed to provide a product that would meet these requirements.  One example would be our body shields, used by police and military and our ArcShields, used in electrical safety.

Greece is a great example of a body shield modification. We redesigned our body shield to meet the Greece police specifications, sent the shield for testing, and received our European Certifications that were required. We won the tender with the help of our distributor who worked diligently with the authorities. This hard work from both sides has led to a great success of reoccurring orders.

The Paulson Arc Shield is a safety product used by electricians as required by the NFPA-70E Standard. This unique item did not have an export market because there were no standards in the foreign countries that required the use of our item.  With this product, we approached the market from two directions:

1. We initiated and helped to fund a study in Europe that defined the use and application of the ArcShield. This study was the combined effort of a respected University and other agencies vested in worker safety. We continued our efforts by working with the proper committees to define the need and awareness of the electrical safety standards in the United States and to develop new rules in Europe regarding safety rules and Personal Protective Equipment (PPE). This has now resulted in language, standards and test methods that will open the European market to many products from the United States, including our own.

2. The second method was to sell the electrical safety equipment where the individual companies could understand that these products would reduce risk and save money over the long term. One example that can be used is China where there are no rules or safety standards that require the use of our product; however, with sales and education efforts we have developed good repeat business in the Chinese market.”

When asked what changes in trade policies or export regulations would help increase their exports, Paulson said, “The rules and regulations and export control rules were a very big challenge for us. We ran into all of the difficulties with the export control rules that primarily affect products that have dual use application for military or for police.  I made a relatively early determination that I wanted to work on changing those rules because the rules are too difficult for American business.”

SPX Global LLC is a leading company in providing solar powered water systems throughout the globe.  SPX mobile systems provide a rapidly deployed, fully independent solution to support the basic needs of rural villages, developing communities, and disaster relief operations throughout the globe.

SPX solar powered water filtration systems operate independent of electrical infrastructure and provide an easy to operate and cost effective solution to deliver potable water to those people who do not have clean water or a reliable water infrastructure.  SPX ultrafiltration UF) reverse osmosis (RO) and Agriculture water delivery AG) systems are enabling delivery of clean water throughout the globe.  In 2009, SPX successfully delivered 325 Solar Powered Ultra Filtration Water systems to Iraq.

Cory Cunningham, President, Sustainable Industries, ran all the operations for the SPX Global LLC in 2010.  Sustainable Industries (SI) was formed to sell directly to DoD/federal/state entities under the Service Disabled Veteran rating and export contracts for SPX are a joint effort of SPX/SI.   Cunningham said, “Direct procured exports to Iraq were about $250,000 in 2010, and he managed the production and export of approximately $19.8 million in 2010.”    This was a significant increase over 2009, when they produced and exported about $15 million.  He said that they were able to achieve this success in exporting through his personal relationships developed with Iraqi companies and government officials.  The key was that Iraq values first-world (U. S.) manufacturing.

In answer to the question about what changes in trade policies or export regulations would help increase exports, Cunningham listed:  “Small business loans that are easier to obtain; Subsidized manufacturing for small business, i.e. helping with rent and payroll to reduce risks for small businesses; Stronger government support of all sized businesses; Focus on clean technology that actually provides sustainable solutions and real job growth; Tighter regulations on ARRA/Buy USA products requiring USA certificate of origin, which would create jobs for U. S. workers vs. in other countries with lower/subsidized labor costs.”

Since 1961, Gamma Scientific Inc. has offered the world’s most comprehensive selection of precision light measurement instruments, such as high-accuracy photometers and spectroradiometers to integrating spheres and NIST-traceable light source.  Gamma Scientific also uses its extensive light measurement expertise to manufacture custom light-measurement for unique customer applications such as production control, government testing, and avionics.

Gamma utilizes international sales agencies in Canada, China, Europe, and Japan.  Their sales to Asia increased by nine percent, and sales in Europe increased seven percent from 2008 through 2010, which helped to mitigate the decrease in sales in North America during the same period.  Their overall sales have increased 500 percent in the last ten years since starting an aggressive plan to expand exports.

Richard Austin, President, said, “We focused on Korea as a country starting in 1998, and it has paid off.   We started marketing to China ten years ago, and I have made many personal trips to China to support our Chinese sales agency’s efforts.  Our major competitors are in Germany, and they have greater market share.  We had to go through a qualification process with customers in China, and we had to give up margins to compete against German products.  The strength of the Euro compared to the dollar has helped us be more competitive and increase market share in the last two years.”

Austin was the only one of the presidents interviewed that thought the Korea Free Trade Agreement would be beneficial.  Austin said, “Korea has high tariffs on our type of products, and the tariffs would drop with the Korea FTA and help increase our exporting to Korea.”

There are some common factors that played a key roll in these four examples of companies that are successfully exporting their products, even to Asia.  They are:

  • A specific marketing plan to export their products
  • Technology of products that meet needs in other countries
  • Personal commitment and involvement by president of company
  • Use of sales agencies and distributors
  • Taking advantage of connections

These examples show that the most important ways the National Export Initiative plan could help is through enhancing connections through the trade promotion component of trade missions and reverse trade missions and increasing export credit and financing.  If the NEI plan fulfills all of the priorities that are identified in it, exports should increase.  Only time will tell whether or not the goal of doubling exports in five years can be achieved.  We can only hope this goal will be achieved to help American manufacturers succeed and grow.

Posted in Trade Policy | No Comments »

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