A Plan to Save American Manufacturing

Although warnings about the crisis engulfing American manufacturing have been intensifying for months, the sector´s woes continue to be significantly underestimated – certainly by official Washington and even by many manufacturers themselves. In fact, despite the current boost in growth fueled by deficit spending, tax cuts, mortgage re-financings, and other one-time stimuli, the decline of American manufacturing is fast nearing the point of irreversibility – at least from the standpoint of restoring a critical mass of industries producing in the United States to world leadership.

The nation, in short, faces a manufacturing emergency. Unless drastic measures are taken quickly, this emergency will turn the United States into a second-class manufacturing power, greatly diminishing its own future economic prospects. Further, national security and flexibility in foreign affairs will be severely compromised. Finally, the international imbalances being created by the manufacturing crisis will likely push the world into a major dollar crisis and could cause a protracted depression.

In part, the manufacturing crisis reflects the economy´s latest cyclical downturn and the deflating of the bubble of the 1990s. Likewise, the manufacturing employment portion of the crisis stems in part from the increases in productivity in recent years. But neither of these factors sufficiently explains the root cause of manufacturing´s current troubles, which are the worst by many measures since the end of World War II, and that is the cumulative and continuing effects of two decades of misguided, ill-advised, and weak-willed U.S. trade and globalization policies.

During this period, Washington has consistently failed to open foreign consumption markets adequately to U.S. producers – despite years of promises and the fanfare that greeted each new trade agreement. In addition, the American government has failed miserably to combat predatory foreign trade practices aimed at undermining U.S. producers in their home market. Perversely, Washington has responded to these failures by encouraging U.S. manufacturers to supply their home market from low-cost third world production platforms like Mexico and China. And most U.S. multinational corporations, and indeed some of their smaller suppliers, have responded with enthusiasm.

The most serious global macroeconomic dangers stemming from the continued flight of American manufacturing overseas have to date been avoided and may be postponed still further by continued financial policy legerdemain – though the faster America´s international debts keep rising, the more difficult the challenge of correcting the imbalances. But regardless of when the crunch actually comes, the weakening of domestic manufacturing is already undermining the material foundations of American national success.

The prolonged wage slump triggered by the overseas migration of America´s best-paying jobs on average has been rippling through the U.S. economy and American society for at least two decades. The loss of these important jobs represents a shrinking of the employment base needed for a middle-class standard of living, stable families, and the local and state tax revenues necessary for a first-world level of responsibly financed public infrastructure and social services. Consequently, Americans find increasingly at risk their hard-won 20th century gains in access to quality education, health care, and retirement security (whether paid for by a solvent public sector or a sufficiently broad-based and profitable private sector).

In addition, the manufacturing crisis raises serious questions about the U.S. economy´s ability to maintain a high-tech, world-leading military without worrisome dependence on foreign products and technologies. Although it is true that defense-related imports come overwhelmingly from long-time allies or traditionally friendly countries, it is just as true that they are growing rapidly at a time when major disagreements increasingly mark the relationships between the United States and these countries.

Further, the massive loss of tax revenue – both corporate and personal – directly attributable to a disappearing industrial base will undoubtedly constrain America´s ability to sustain military operations in both peacetime and wartime at levels that U.S. policymakers have come to take for granted. Thus the country faces a future in which the ability to project power and thereby affect events and outcomes the world over will be much more limited than anytime in the last century and a quarter.

Most worrisome, the decline of American manufacturing is quickly feeding on itself and gaining unstoppable momentum. Washington´s continuing failure to secure equitable terms of trade forces more and more U.S. firms to compensate by outsourcing. These moves create powerful pressure for growing numbers of the remaining hold-out companies to follow suit.

The migration of prime contractors overseas inexorably pulls much of their supply chains with them. The export of blue-collar production work leads to the export of white-collar manufacturing-related work, as companies seek the advantages of locating researchers and designers near the factories they service. In fact, there is a continuous feed-back loop between R&D efforts and the factory floor, with the two functions, R&D and production, operating in tandem. And as is well documented, R&D and other technology work often produce a clustering effect, which draws labs and similar facilities from other industries in search of new synergies. The notion that the United States will retain high-end design functions while letting production migrate overseas is wishful thinking. Without major globalization policy changes, this vicious cycle of manufacturing flight cannot be turned into a virtuous cycle of manufacturing resurgence.

The following action plan for saving and reviving U.S. industry incorporates recent policy lessons that Americans simply can no longer afford to ignore.

First, although America´s regulatory and tax systems have unnecessarily raised domestic business costs in many instances, the manufacturing crisis springs from far deeper roots. No regulatory, health care, or tax reform schemes that would produce acceptable economic, social, or political results can overcome the damage being done to American manufacturing by today´s globalization policy failures. Improved industrial competitiveness cannot and should not be based on gutting the basics of a just, humane, and inclusive society. Fundamentally new globalization policies are the sine qua non for saving and reviving American manufacturing.

Second, the United States will always have more control over its own actions than over the actions of other countries. Therefore, the keys to reversing American manufacturing´s decline lie neither in more market-opening trade agreements nor in efforts to micro-manage economic and social conditions overseas. Despite decades of so-called free trade agreements, too many foreign markets still remain too closed to U.S. exports. The main reason: Most of the world´s countries view trade as a zero sum game, with a piece of the American domestic market as the prize. The handful of economies wealthy enough to consume American-made goods can erect new trade barriers faster than U.S. negotiators can even identify them. The U.S. government, moreover, has too much trouble enforcing its own laws and regulations here at home to imagine that enforcing foreign laws and regulations, even those imposed by future trade agreements, will be successful.

Instead, to achieve the necessary results, the United States must focus on managing its own behavior and controlling access to its own market, unilaterally conditioning that access ona strategic analysis of its own national needs and on acceptable practices by its trade partners. In addition, the United States must rely mainly on its own power and leverage to achieve satisfactory terms of trade. As the record unmistakably shows, one-country-one-vote international organizations like the World Trade Organization too readily turn into mechanisms for undermining American sovereignty, diluting American power, and maintaining global economic free-riding.

Finally, Washington must recognize that simply promoting economic growth and higher incomes abroad will not alone cure U.S. manufacturing´s ills and rebalance America´s trade accounts. Most countries refuse to trust their economic fates to market forces or refuse to permit higher domestic growth to draw in proportionately higher volumes of imports. In short, too little commerce around the world is free enough to allow potential future growth to serve as a U.S. trade and manufacturing cure-all.

The following U.S. Business and Industry Council manufacturing blueprint emphasizes short-term emergency measures for reversing domestic manufacturing´s decline and laying the foundation for its revival. But it also includes longer-term proposals for ensuring that U.S. trade and globalization policies do not revert to the practices that have produced today´s crisis.

No one should assume that implementing this manufacturing revival plan will be pain-free. All economic adjustments and transitions exact costs as well as create benefits. Those necessary to improve the long-run fundamentals of American manufacturing and strengthen the foundations of the U.S. and world economies as a whole will be that much more difficult because of the national and global economic excesses that were fostered since the completion of the “Tokyo Round” of international trade talks, but especially during the 1990s.

Specifically, some temporary slowdown in U.S. and global growth rates seems unavoidable. And thanks to the power of recklessly expanded international trade and investment, pushed unceasingly by economic ideologues and short-sighted multinational companies, achieving this slowdown will require serious restrictions on trade and investment flows.

Yet the only alternatives proposed to date are policies that are already proven failures, or that are surrenders to wishful thinking. Moreover, these responses can only postpone the day of reckoning, not prevent it. And just as permitting a disease to fester usually ensures that the needed treatment will be that much stronger, more painful, and less certain to work, permitting the manufacturing crisis to fester and inflating the global economic bubble further will only increase, not decrease the economic dangers facing America and the world.

The implementation of restorative measurers cannot be left to the good sense of Washington policymakers and elected officials. As a group, they have demonstrated convincingly time and again that they do not grasp the magnitude of the problems they have created and that they are bereft of comprehensive solutions. Instead, they prefer cosmetic changes, designed to relieve political pressure and ensure reelection.

If the necessary policy reorientation is to be accomplished, the impetus must come from the remaining domestic manufacturers, their employees, their communities, and local and state governments, which are experiencing first-hand the budget crises caused in large part by globalization policies – whether the movement of plants overseas, company bankruptcies due to unfair foreign practices, high-tech and other services outsourcing, uncontrolled immigration with the resulting disproportionate consumption of social services, etc. In short, grass roots efforts must reach critical mass to force Washington to change two generations of misguided policies.

If any political leaders or economic experts know how to solve the manufacturing and trade crises without the significant trade restrictions featured in our action plan, the U.S. Business and Industry Council would welcome their ideas with open arms. But we would also be wondering what they´ve been waiting for. The time for comprehensive action to save American manufacturing has long since passed. Very soon there will be little left to save.

With Foreign Rivals Making The Cut, Toolmakers Dwindle

China, Others Put the Squeeze On Small, Costly Plants; Fears of Innovation Flight

By TIMOTHY AEPPEL
Staff Reporter of THE WALL STREET JOURNAL

When Microsoft Corp. wanted to build a better mouse, it turned to a toolmaker named Ernst Buchmayer.

The final parts of Microsoft's mouses weren't always fitting together correctly on the assembly line. An immigrant from Austria with a reputation for perfectionism, Mr. Buchmayer spent half a year making Microsoft new molds so uniform the differences were measured in increments 1/10th the width of a human hair. Microsoft's failure rates promptly plummeted. Year after year the company came to Mr. Buchmayer for new tools.

Then in 1998, Microsoft asked if he could match a lower price from an American competitor who was working with a Taiwanese mold maker. Mr. Buchmayer refused, and his company, Western Industrial Tooling Inc. of Redmond, Wash., lost the chance to build a new generation of molds. After that, his business from Microsoft ebbed away.

All over America, toolmakers -- a once-vital craft at the heart of the nation's industrial sector -- are seeing their work vanish. The National Tooling and Machining Association estimates that 30% of the toolmakers in the U.S. have shut down in the past three years, and it expects many more to close in the next few years. Orders for the machines used by the toolmakers have plunged nearly 70% since 1997.

The association estimates that annual sales for the U.S. toolmaking industry, after being carried along by the economic boom of the 1990s to a peak in the range of $25 billion to $27 billion in 2000, have declined to about $20 billion currently.

The toolmaker's craft is little known or understood. The toolmaker doesn't produce hammers or screwdrivers, but rather the dies, molds, jigs, fixtures, gauges and other devices used on factory floors to make other things. Many tools are custom-designed to churn out specific products, usually in vast quantities.

Abundant Fruits

Most American consumers never see toolmakers' creations -- only the abundant fruits of them. Everything from flat-screen televisions to sippy cups owes its existence to toolmakers. Toolmakers, generally small companies, fashion the devices that thump out car doors and the machines that put metal wrappers around corks on wine bottles. They're behind the surgical devices in operating rooms and the laser-guided bombs that hit Iraq. During World War II and through the early years of Vietnam, toolmakers were one of the categories of workers that could be exempted from the draft.

U.S. toolmakers withstood growing competition from lower-cost foreign producers for years. But China's sudden emergence as a manufacturing powerhouse and an unbeatable pricing opponent has them reeling.

Nearly every industry, from shoemaking in New England to tire production in Akron, Ohio, eventually matures and starts hopscotching the globe in search of lower costs. But without a strong tooling industry in the U.S., some people worry that an important engine of basic innovation could be at risk.

"We can lose our ability to make blenders and garden shovels, but there are other things that we have to be able to make in order to be masters of our destiny," says Bill Wood, president of Mountaintop Economics and Research, a Greenfield, Mass., market-analysis firm.

He points to unmanned drones and body armor for soldiers, both of which are made from composite materials that rely on special molds and other advanced tools. "I don't know whether it's in our long-term interest to rely on a foreign source for that kind of material or the tooling to make it," he says.

One of only two companies in the U.S. that made tools capable of laying carbon fiber and tape in the precise patterns needed to build components of stealth aircraft went bankrupt recently. That company, Ingersoll Machine Tools Inc. in Rockford, Ill., eventually was bought by an Italian company, which plans to keep producing the machines. But the bankruptcy caused a public outcry about the loss of U.S. toolmaking muscle.

Mr. Buchmayer, 72 years old, says he sees some younger toolmakers rushing to forge alliances with counterparts in China because they can't stay home and beat the Chinese. When William Bachman, president of Bachman Machine Co. in St. Louis, was asked to submit a bid to make tools to stamp metal parts for car jacks, and to also produce the parts themselves, he priced the tools at $595,000. His Chinese competitor offered to make the tools free.

"It really doesn't matter how much I automate," Mr. Bachman says, "I can't compete with zero." As for making the car-jack parts from the tools, the Chinese company is doing so for $1.06 each, less than half Mr. Bachman's price of $2.18.

Eli Whitney is often considered the father of U.S. toolmaking -- not because of his famous cotton gin, but because of guns. In 1798, the U.S. government enlisted him to produce 10,000 muskets. And for the first time, they were to be made with interchangeable parts. Mr. Whitney built jigs and gauges so that the parts would come out as nearly identical as possible. The concept opened the way for Henry Ford's assembly lines.

A Future in Plastics

Mr. Buchmayer's first job in the U.S. was in a Ford plant in Buffalo, N.Y., after an apprenticeship in Austria and a stint in Canada in the early 1950s. One day he went into his drycleaners and noticed a wall calendar with a picture from the Pacific Northwest that reminded him of Austria. He moved his family to Seattle and launched his company in 1969. It specialized in making molds because those were the tools most closely associated with the fast-growing plastics business.

Leading the way onto his factory's floor, Mr. Buchmayer points to a mold on a workbench. It's a cube, about the size of a microwave oven, that is made from layers of steel and contains several cavities. When the cube is inserted into a molding machine, molten plastic is shot into the cavities. The mold is then opened and finished parts pop out.

In the 1970s, Mr. Buchmayer made molds to churn out airplane parts for Boeing Co. A decade later, it was calculators for Texas Instruments Inc., and later still, ink cartridges for Hewlett-Packard Co. When one industry slumped or moved production offshore, a bigger and more lucrative market emerged to replace it. "I used to just go down to Oregon or California to find work when it got bad around here," he says. "There was always something, somewhere."

The economics of toolmaking are complex and closely intertwined with questions of quality and precision. It's a given that molds made in a shop such as Mr. Buchmayer's produce parts with as few flaws as possible. But there are other important measures of tool quality, such as the number of parts a tool can produce before it has to be scrapped or repaired, and how fast a machine can run with the tool.

The best toolmakers are adept at solving problems. Two years ago, Mr. Buchmayer was approached by a molder who makes plastic disks for a new type of blood centrifuge. The disks have a spot in the middle where a drop of blood is placed and tiny channels that guide the blood out to spaces along the periphery for testing. The existing molds were producing too many rejects. Mr. Buchmayer has spent two years studying the design, to try to figure out how to come up with a mold that will produce even more exact dimensions on the final part.

"You can't see the changes I'm making with the naked eye," Mr. Buchmayer says. "You have to look at it under a microscope."

Signs of Trouble

At the peak of Mr. Buchmayer's tiny slice of the tech boom, Western Industrial churned out 39 molds for Microsoft in a year. With prices ranging from $35,000 to $250,000, depending on the complexity of each mold, it was a sweet time for the toolmaker.

But there were signs of trouble. Other customers, including Hewlett-Packard, started pressing for lower prices. Mr. Buchmayer still does some work for the high-tech company, but he lost much of that business at the same time Microsoft fell away. Western Industrial's sales plunged 70% from its boom-years peak to just over $3 million last year, when it posted a loss of $500,000. The company has shed 30 of its 55 workers.

Microsoft spokeswoman Stacy Drake says her company "explored different avenues that would allow us to gain needed cost efficiencies while continuing our relationship with Western Industrial Tool, but unfortunately we were unable to do so."

Howard Holt, 60, a Western Industrial employee, says he has only to glance at his pay stubs to realize this is no longer the priesthood of manufacturing it once was. His income, including bonuses, shrank to $62,000 last year from $98,000 in 1995, and he expects it to drop a further $8,000 this year.

Sitting in a restaurant overlooking a lake near the Western Industrial plant, Helen Buchmayer pats her husband's hand as she recalls the sudden hardship of recent years. She has worked alongside her husband for three decades and still serves as the company's secretary and treasurer.

It helps that they're frugal. Despite their success, the couple still lives in the modest suburban house they built in 1969. He drives a 1998 minivan, while his wife drives a 1993 Camry. For now, the couple is dipping into their savings to keep the factory going and say they aren't sure how much longer they can go on doing that.

Mr. Buchmayer admits that the lush times of the 1990s blinded him to the growing focus on price that was playing havoc with the rest of his industry. He cut back on mining customers for new business, he says, calling that a huge mistake. One of his best hopes now is tiny plastic parts used in fiber-optic systems that would replace more-expensive glass components. The plastic parts require some of the most precise work he has ever done.

"A part like this is a nightmare to produce," he says, picking up what looks like a plastic elbow smaller than a fingernail. The manufacturer is looking for someone who can make molds capable of producing these. Right now, they want only a few molds, because demand hasn't taken off for the switching equipment these parts would ultimately be used in.

"The tools will be built here and proofed," says Mr. Buchmayer, meaning they'll be checked to make sure the parts are coming out right. For manufacturing, he adds, "they'll go to Singapore."

Write to Timothy Aeppel at timothy.aeppel@wsj.com

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Samsung Commence Expansion Project At Austin Site Including Nano-Scale Capabilities

Samsung Electronics Co., Ltd., the world leader in advanced semiconductor memory technology, today broke ground on the second stage of the expansion of its Austin memory chip fabrication plant.

The 34,000 square foot expansion of its manufacturing area is part of a succession of investments that will equip its Austin plant for next-generation advanced semiconductor fabrication technology.

Samsung’s three-year investment plan of $500 million announced May 2003, will upgrade, expand, and increase capacity to produce nano-scale semiconductor memory technology at the Austin plant. The nano-tech upgrade investments will enable Samsung Austin Semiconductor to deliver 0.1-micron geometry designs down to 0.08-microns at a capacity of 50,000 wafers per month for manufacturing giga-density DRAM devices.

Currently, the Austin plant manufactures several types of memory chips including 16, 64 and 256-megabit chips in the .123 micron feature size. The northeastern Austin plant has about 970 employees.

Phase-two involves the construction of a linked fabrication line, a means to increase the total capacity. The outer shell and the clean room of the new extension, initiated this year, will be followed by equipment set-ups by July 2005.

Samsung plans to increase employment of approximately 300 to join Samsung over the three-year term.

The additional 300 jobs, with an average wage of almost $53,000 per year will put more than $15 million per year into the Austin economy, according to a recent economic impact study conducted by the Greater Austin Chamber of Commerce. That spending, plus the associated spending on equipment and materials, will mean as much as $753.3 million to the Austin economy in direct and spin-off effects when the fab is totally operational, according to the study. The Chamber report also concluded that during the construction phase, the expansion could generate about $135.2 million and create over 1,100 jobs on the project, most of them temporary.

Samsung Austin Semiconductor, established in 1996 is Samsung’s single semiconductor fabrication plant outside of Korea. The Austin plant has been a successful link between the Korea-based electronics company and its long-term business relations with customers in the US.

The relationship Samsung has established with the Austin community is a benchmark investment to Samsung. The past eight years has enabled Samsung to experience true globalization through successful localization of management and integration of its advanced memory technology.

Samsung Initiates $75 Million Second-Stage Expansion of Austin [Texas] Plant

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