If American companies cannot manufacture goods in America that Americans will prefer over foreign made goods for whatever reason, then manufacturing doesn’t belong in America. Those out of work from manufacturing jobs will just have to make themselves productive in another line of work.
You know back before you (metaphorically speaking) fired all those union guys in all those US manufacturing jobs, in your post #20.
They voted for Ronald Reagan.
Suppose they’ll do that again?...
They do-its called unemployment & welfare, but I bet that isn't what you meant.
“If American companies cannot manufacture goods in America that Americans will prefer over foreign made goods for whatever reason, then manufacturing doesn’t belong in America. Those out of work from manufacturing jobs will just have to make themselves productive in another line of work.”
I’ve sat in the executive suite when decisions were made to shut down US factories and outsource the production. The decision never related to the quality of the imported product being higher than the US product nor the actual cost of the imported product being lower at the time the decision was made. The decision always related to assumption regarding future economic scenarios and the expected impact on the price of the company’s stock. Let me explain.
In the 1990’s, many of the large US investment banks pushed outsourcing as a way for corporations to increase productivity, free up cash, and improve the earnings per share which in turn would increase the price of the company stock. Specifically, selling off domestic manufacturing operations and moving production to contract factories in Asia resulted in the liquidation of US fixed assets which in turn generated cash. That cash was often “reinvested” in stock buy backs. The investment banks generated huge commissions assisting with the disposal of assets (buildings and land) as well as executing the stock buy back transactions. The stock buybacks effectively reduced the number of shares of stock outstanding which if earnings were flat
The benefit for the corporation in terms of lowered product costs was often not significant. After all, the cost of imported products includes a profit margin for the foreign factory, higher transportation costs associated with bringing product to the domestic market, customs duties, and the infrastructure costs associated with sourcing goods and monitoring quality. For some manufactured products outsourced to China the real cost benefit was taxes, not real manufacturing costs. Some of the tax considerations included: lower Chinese corporate tax rate (20% for small manufacturers versus 35% US) on the Chinese factory, Chinese government “tax rebate” on exported goods, elimination of property taxes on US facilities, and the ability of the US corporation to shift profits offshore where they may be taxed at a lower rate than in the US. Plus in many instances the cost of capital for constructing new factories was close to zero in China during the 1990’s and early 2000’s due to Chinese government incentives while the cost of capital in the United States was much higher. By outsourcing the US company could replace aging bricks and mortar in the US with no investment of internal cash, thereby freeing up more cash for stock buy-backs.
In looking at the direct costs of imported manufactured goods versus domestic products (i.e. labor+materials+transportation+duties+direct overhead) there was virtually no cost differential between the US and China. Raw material costs were virtually identical while the labor differential was often a minimal factor. For most US manufactured products, direct labor was a small component of total cost. Plus US factories were almost always significantly more efficient than Chinese factories — i.e. many more units produced per employee. The direct labor cost differential between US and Chinese companies was usually offset by the higher productivity of the US worker and the incremental costs required to source the products and transport them to the United States.
The outsourcing decisions I witnessed during that time involved other factors, typically the analysis of investment bankers and executive compensation. During that period of rapidly escalating executive bonuses, incentive compensation of CEO’s and other senior officers typically was based on earnings per share and return on invested capital. Outsourcing had a major positive impact on both performance measures. A CEO of a slow growth mature business with significant capital investment in US factories could use outsourcing to dramatically reduce invested capital. The cash generated by liquidating assets could be used to buy back stock thereby reducing the number of shares outstanding and elevating earnings per share even if actual dollars earned by the business were flat or declining. These outsourcing programs often took 4-5 years to execute, and allowed CEO’s to earn maximum incentive compensation during a time when they were actually divesting the productive assets the corporation had accumulated over decades. Wall Street applauded this financial engineering, rewarding the companies with higher stock prices and ignoring the “one time” earnings charges for employee severance costs and asset write-downs. Government productivity statistics showed dramatic increases in business productivity as businesses shed US manufacturing employees and demonstrated an ability to generate the same or higher levels of sales with many fewer employees.
Now that much of America’s industrial capacity has been outsourced, we are beginning to see the cumulative impact of these decisions. First, many ideas associated with product innovation come out of factories where engineers tinker with equipment and discover new ways to use the assets. That source of innovation is now gone. Secondly, companies are finding that it is difficult to run product development functions in the US while having manufacturing operations offshore and are moving the high value knowledge worker jobs from the US to be near the sources of production. The lost manufacturing jobs (labor and management) are resulting in flat to declining per capita disposable income in the US and a shrinking middle class.
Those companies trying to sustain manufacturing in the US are finding the economics shifting against them. The number of domestic suppliers for component parts and raw materials has declined significantly resulting in higher domestic raw material costs and component costs due to reduced competition. In many instances there may only be one domestic source for certain components. At the same time, the Chinese have raised prices on certain component parts or machine parts used by US manufacturers in targeted industries in an effort to squeeze out the remaining US manufacturers.
In addition, US companies bear the cost of employee health care (most foreign competitors have health care costs covered by the government), high product liability costs due to a costly legal system, and high regulatory costs. All of these are government imposed penalties on domestic manufacturing, not direct production costs or quality issues.
The Chinese are in an economic war with the US and we have chosen not to fight. Government regulations, tax policy, Chinese government subsidies, and financial manipulation by Wall Street bankers all work against US manufacturing. These forces have nothing to do with the actual economics of manufacturing products.
My experience suggests that American manufactured goods can compete with foreign goods on cost and quality. The high productivity of the American worker combined with Yankee ingenuity will win on a level playing field. However, when government policies tilt the playing field allowing foreign governments to subsidize their exports through export tax rebates and low capital costs, while at the same time executive compensation systems discourage investment in productive assets, US manufacturing cannot win.
Instead of giving up on American manufacturing, how about leveling the playing field and allowing US workers and those of us who still want our country to have a powerful industrial infrastructure to compete on a level playing field. Eliminate the foreign economic subsidies through increased tariffs or equivalent tax policies. Pass meaningful tort reform ending shakedowns of corporations by trial lawyers by making them pay when they lose. Lift regulatory burdens. Shift management compensation to align with long term growth of the business instead of one time actions to boost EPS in a given year. Evaluate CEO on growth of dollar sales and profits over time instead of EPS which can be manipulated short term.
Many of the products we are now importing are shoddy. It seems as if everyday we read about imported drywall emitting toxic poisons, toys containing toxic lead paint, or foods tainted by chemicals. I don’t believe Americans prefer these dangerous products over domestic products. In many cases they aren’t given the choice by the marketplace because potential US producers are burdened by government dictated costs the foreign government subsidized foreign producers do not bear.
The recent tainted Chinese drywall scandal is a prime example of market forces not working. The consumer had no choice in the matter no does he/she have any recourse against the foreign producers of the tainted product. When the consumer purchased a new house, no one advised the purchaser the drywall was contaminated. Even if the consumer had been aware of the potential for contamination, there was no way to test for it. Now they are stuck with expensive repair costs and no legal recourse against the Chinese producers who cheated on the use of materials to produce the product. Given a choice up front between purchasing a home made from less expensive imported tainted drywall and a more expensive home made from more expensive untainted US drywall, I suspect most consumers would choose the American made product even at a higher cost.