Free Republic
Browse · Search
News/Activism
Topics · Post Article

Skip to comments.

A House Divided: Manufacturing In Crisis
IndustryWeek ^ | Tuesday, November 01, 2005 | Doug Bartholomew

Posted on 10/13/2005 9:28:50 AM PDT by Willie Green

For education and discussion only. Not for commercial use.

Gone are the days when U.S. manufacturers united to compete against the likes of Germany and Japan, pumping out high-quality goods under the protective shelter of the world's most vibrant economy. Today, amid liberalized trade and widely available cheap labor, manufacturers have turned against one another, threatening to topple a house built upon the pillars of ingenuity, productivity and competitiveness.

It's no secret there's a civil war going on out there. The U.S. manufacturing landscape is being ripped apart by a series of attacks on its traditional strongholds that has left few industries intact.

Already tens of thousands of small and midsize manufacturers have gone under. Those that remain are struggling. Whole industries such as furniture, shoes, textiles and many computer components -- once hallmarks of American ingenuity, productivity and competitiveness -- have virtually disappeared, the victims of the rapid emergence of easily accessible low-cost labor overseas.

While all manufacturers face the same lopsided trade policies, surging prices for raw materials and relentless competition from China and other low-cost markets, small manufacturers get squeezed the hardest.

The statistics bear this out, reports Joel Yudken, sectoral economist at AFL-CIO. Using figures from the Bureau of Labor Statistics, Yudken found that out of a net loss of 27,000 U.S. manufacturers' establishments from 2001-2004, 90% were companies or individual plants employing fewer than 250 employees.

"Large manufacturers don't feel the market changes anywhere near as fast or as hard as the smaller companies," observes Martin Piszczalski, research director and automotive industry analyst at Gartner Group in Ann Arbor, Mich.

In fact, these days large manufacturers benefit from the very policies and practices that harm smaller companies. They tend to have the financial padding to withstand price increases while their market share and assets enable them to partner with contract manufacturers and overseas competitors to leverage the advantages that these companies have over U.S.-based companies.

This phenomenon has divided U.S.-based manufacturers in an unprecedented way.

While IndustryWeek has reported on many supply-chain partnerships that are healthy and mutually beneficial, it's evident that these are rare and that a growing faction sees large manufacturers as indifferent toward the struggles of their smaller and midsize counterparts.

"The larger manufacturers don't really perceive their fate as being tied to the smaller domestically focused companies," says Alan Tonelson, research fellow at the United States Business & Industry Council (USBIC). "In fact, the larger multinational companies view these small supplier companies as rather expendable commodities."

Some observers say the big companies have contributed to the smaller firms' woes through their relentless price-cutting mandates in recent years. In 2001, Daimler-Chrysler AG told its suppliers they would have to slash their costs by 15% over three years. Toyota Motor Corp. maintains a practice of requiring suppliers to cut prices annually. In a 2002 value-chain survey, IndustryWeek found that more than half of manufacturers reported they had required their suppliers to cut prices as a contractual obligation. Overall, the effect of these mandatory price reductions -- coupled with other geopolitical and economic forces -- has been to drive many suppliers out of business.

The schism has become so apparent that it has led to a rift within the membership of the Washington-based National Association of Manufacturers (NAM), which is perceived by some to represent primarily the interests of the large multinational manufacturers. As a result, a reform group within the membership is seeking to make the organization more responsive to small firms.

"We have established a working group of people within the membership who have a whole different point of view," says Jeff Noah, director of the small and medium-size manufacturers department at NAM. "This is part of an internal debate here at NAM. But we don't see it as big versus small."

But in fact -- when you talk with manufacturers -- it is big versus small, especially when it comes down to where manufacturers stand on the U.S. government's trade policy, which often favors the big multinationals at the expense of the little guys.


On The Web



United States Business and Industry Council


From the Web site: "The United States Business and Industry Council (USBIC) is a national organization of business owners and executives dedicated to making the U.S. domestic economy the world's leading engine of economic growth. The USBIC Educational Foundation is its research arm. . . . The USBIC was founded in 1933 to represent the concerns of America's small and medium-sized business community. Member companies are typically family-owned or privately held, mostly in the manufacturing sector."


National Association of Manufacturers


From the Web site: "The NAM's mission is to enhance the competitiveness of manufacturers by shaping a legislative and regulatory environment conducive to U.S. economic growth and to increase understanding among policymakers, the media and the general public about the vital role of manufacturing to America's economic future and living standards. . . . The NAM is the nation's largest industrial trade association, representing small and large manufacturers in every industrial sector and in all 50 states."

USBIC, which is made up largely of small and midsize manufacturers, comes out and blames NAM "for hastening the demise of domestic manufacturing by following the dictates of its multinational members."

Noah concedes the small manufacturers have a different agenda, which he views as not realistic for NAM as an organization. "The small companies want tariffs that the majority of our members don't want," he insists.

Out of 14,000 members, about 10,000 are small and medium-size manufacturers, he adds.

Bad For Everyone?

Tonelson believes that eventually all U.S. manufacturers will suffer from this divide. And he is not alone.

"We are all in the same boat, whether a manufacturer is large or small," says Bob Johns, director of marketing for the sheet metal group at Nucor Corp., the big minimill steel producer based in Charlotte, N.C.

Johns isn't exaggerating. Take the case of Visteon, the multibillion-dollar Tier I auto supplier spun off from Ford Motor Co. that was struggling to stay in business until Ford stepped in again this year to give the giant parts manufacturer a financial hand. "Ford couldn't afford to let their most important parts supplier go bankrupt," Piszczalski points out.

Tonelson spells out these risks associated with not protecting the U.S. supply base:

Still, most large U.S. multinational manufacturers have shifted some or all production abroad and now export products back to the U.S. to take advantage of cheap labor elsewhere. According to a 2004 report by consultants McKinsey & Co., one-third of the U.S. trade deficit can be attributed to foreign operations of U.S. multinational companies.

"That's powerful evidence of the supply chains moving overseas," Tonelson says.

Another fear is that the demise of these smaller firms will hurt everyone through a diminution of talent, innovation and technology.

"These smaller manufacturers often are like a farm club, with their people often jumping to one of the bigger manufacturers," says analyst Piszczalski. "They serve as a breeding ground for talent and an important source of innovation. There are a lot of advantages to having these 'mom and pop' operations in your country."

Dave Frengel, director of government affairs at Penn United Technology, a Saxonburg, Pa.-based manufacturer of precision metal-forming dies, agrees. "If the big companies can't find the skills and the components they need in the U.S., then they have to buy them offshore."

And as Matt Meyers, director of the Global Business Institute at the University of Tennessee, Knoxville, Tenn., points out: "We are seeing a dramatic decrease in the number of supplier options worldwide."

That's one reason the Chrysler Group launched its Highly Integrated Partnership Organizations (HI-PO) program last January to work with a few dozen of its key suppliers. Although the auto manufacturer's primary goal of its initiative is to raise the quality of the parts delivered by suppliers, the company clearly is looking to improve ties with them and over the long haul, to help ensure their survival.

As part of Chrysler's HI-PO initiative, the automaker has loaned its manufacturing and quality-improvement talent to more than 40 suppliers. Earlier this year Chrysler assigned about 40 employees to its crack Quality Assessment and Audit Team (QAAT). They typically split up into squads of three or four to work with individual suppliers on helping them improve processes, reduce reject counts and boost overall quality.

"This effort is primarily focused on quality, but with some companies we've seen corresponding benefits in reduced costs," says Scott Garberding, vice president of supplier quality and product team program manager. "We see it as an investment in our suppliers' performance."

Garberding rejects the notion that Chrysler is merely trying to streamline suppliers' processes so that the OEM can reap the cost benefits. "It's not related to our cost-reduction plan, and we are not asking these suppliers for cost reductions," he says. "We do ask the supplier to agree to some performance improvement objectives, including certain quality-related milestones. We want to drive quality improvement across our supply base."

In the end, of course, Chrysler must determine which suppliers to keep and which to jettison. "We do make sourcing decisions based on supplier performance, including quality, supply capability, technological capabilities and cost performance," Garberding adds.

As far as sourcing parts overseas goes, Garberding says Chrysler takes a hard look at what each supplier brings to the table before making a decision. "Suppliers may have specific technologies or we may have longer-term relationships such that resourcing may not be practical, yet at the same time, we still need them to achieve performance improvement."

Some large manufacturers are committed to fighting the decline of U.S. manufacturing out of plain and simple self-interest. One reason is that many of these small and midsize companies are their customers. "We are going to fight the decline of U.S. manufacturing tooth and nail," says Johns of Nucor. If small and midsize firms go down the tubes, he adds, "The direct impact will be that volume will go down for large companies, and we'll all eventually disappear down the sewer."

Jim Fritsch, executive vice president for strategic planning at Commercial Metals Co. Steel Group in Dallas, thinks there are a number of ways bigger manufacturers can take heed and learn from the smaller companies.

"First, smaller companies are usually quicker at decision making and at moving in new directions," Fritsch says. "Second, small companies tend to focus more effectively on cost management. They don't get complacent, and they keep a close eye on the cost of doing business."

He also thinks smaller manufacturers often tend to know their markets more intimately and are quicker to sense and react to market changes or shifts in customer preferences. "Although new product innovations are extremely important for larger companies as well, it's the smaller companies that tend to do this more rapidly."

That nimbleness and creativity -- while in itself not always enough to sustain a small manufacturer -- can extend into other areas of the business as well.

"One challenge for all companies today is transportation, and small companies tend to be more creative in finding ways to get their products to their customers when there is a transportation crisis, such as a shortage of rail cars," Fritsch says. "They know they have to get their products to their customers, because they depend on that cash flow to stay alive."

Trade To Blame?

Another point that manufacturers once agreed upon that is now driving them apart is government action versus free-market forces. At the heart of this debate is trade. Again, larger companies can better absorb the pain associated with freer trade and more quickly reach the benefits: fewer tariffs and access to more consumers. The prevailing Bush administration theory is that trade eventually will bring more jobs and profits to U.S. shores. But small and midsize manufacturers -- and on occasion large ones, such as large steel producers -- say the administration has been lax on enforcing trade laws, which these days are a complicated stew of mandates of governments and quasi-government bodies such as the World Trade Organization.

In general, Frengel says, trade laws and the U.S. government's position on enforcement, or lack thereof, have encouraged the exodus of U.S. manufacturing.

"The message from the federal government is that you are an idiot if you are a manufacturer and you stay in the U.S.," Frengel says, echoing the bitterness and frustration of many U.S. manufacturers that feel betrayed by their government.

A lack of government support for manufacturers can have a dramatic negative effect on the survivability of these companies, industry observers say.

"Once you drop the trade barriers, then the various governments' policies become much more significant and can be the differentiators that determine where manufacturing goes," says Gartner's Piszczalski.

He offers as an example Canada's policy of assuming the health-care costs of workers as one reason that Ontario Province now produces more vehicles than Michigan. "That's one reason Toyota decided to put its latest plant into Canada," Piszczalski adds.

In another example, Frengel cites the Bush administration's negative stance toward the Hunter-Ryan Bill. House Resolution 1498 would treat currency manipulation as a means for a government to subsidize exports, and would prohibit military-critical parts or those key to national security from being imported if a country was found in violation of export subsidies. "This bill would allow injured parties to seek remedies," Frengel says. "The administration hates it, and they are not embracing this bill."

Frengel says his company supports what he calls "intelligent trade policies and a system to administer them, which are not there. We did not create a robust trade management system. Our company supports trade policies and reforms that will help our nation."

The loss to the nation, he says, is the same loss to large manufacturers, every time another small or midsize manufacturer goes bust. For example, only a single major machine-tool manufacturer -- Haas Automation of Oxnard, Calif. --  is left in the U.S. out of a once vibrant, thriving and innovative industry.

"The people and the technologies to make some of these products are being lost," Frengel explains. "To get an industry like this back can take 10 to 15 years. Precision tooling, for example, is difficult to make, and the innovation and creative manufacturing culture is all being lost. It's a huge cost, a loss that is very hard to recover from."

Johns offers a similar view: U.S. manufacturing, large and small, is in a deep decline, and something needs to be done about it before it's too late.

Says Johns: "We are industry, and we are quite upset."


TOPICS: Business/Economy; Culture/Society; Foreign Affairs
KEYWORDS: competeordie; corporatism; globalism; inefficientunions; manufacturing; protectionism; thebusheconomy; transnationals; unionsarescared; unionsripusoff; unionssuck
Navigation: use the links below to view more comments.
first previous 1-2021-4041-55 last
To: Eagles Talon IV
Nutso, trade wars will bring about a worldwide depression. Ever hear of Smoot Hawley?

There were no "retaliatory" tariffs or "trade wars" as a result of Smoot Hawley.

The truth is, two-thirds of U.S. imports under Smoot-Hawley came in duty-free, and when the tariff was enacted, more items were added to the free list than were taken from the free list and made dutiable.

Furthermore, there's little evidence that American exports were affected by Smoot-Hawley. Exports fell to countries that were not impacted by the tariff as well as to countries that were impacted by it.

The decline in international trade was a RESULT of the global depression, NOT a CAUSE of the depression. And there is absolutely no evidence of countries imposing "retaliatory" tariffs in response to Smoot-Hawley. Most governments were more concerned with stimulating their own domestic economic recoveries rather than whatever minute proportions that could be spared for trade.

How then do you propose to make it mandatory they pass these savings on to customers?

I don't. That must be one of YOUR marxist wetdreams. As far as I'm concerned, they'd be free to competitively lower prices if they wish, distribute the savings to shareholders as dividends, or use the money to reinvest in plant and equipment.

So what you are saying here is that the politicians are not corrupt it is the MONEY that is FORCING them to pass these trade deals?

Nope. I'm saying BOTH parties to the transaction are corrupt.

41 posted on 10/13/2005 1:24:34 PM PDT by Willie Green (Go Pat Go!!!)
[ Post Reply | Private Reply | To 38 | View Replies]

To: Willie Green
"There were no "retaliatory" tariffs or "trade wars" as a result of Smoot Hawley."

Really? Maybe you ought to peddle your beliefs to this guy: *********************************************************** "The business reality of Smoot-Hawley was far worse. 1,028 economists had earlier petitioned President Hoover to veto the bill, but with enactment, tariffs hit all-time levels on some 70 agricultural products and 900 manufactured items. The economists had warned that S-H would raise prices to consumers, damage export trade, hurt farmers, promote inefficiency and promote foreign reprisals. As to the issue of increased prices, you saw in a piece I did two weeks ago that consumer prices actually collapsed in the years 1930-32, a point that we will come back to. As for foreign reprisals, nations were outraged. Historian Richard Hofstadter called the tariff act, "a virtual declaration of economic war on the rest of the world." Within two years, 25 countries had retaliated and U.S. foreign trade took a huge hit. America had exported $5.24 billion in goods in 1929 and by 1932, the total was just $1.6 billion. http://www.buyandhold.com/bh/en/education/history/2002/smoot_hawley.html *********************************************************** BTW, I am not against lowering taxes on corporations. In fact I believe they ought to be removed entirely. You are right in saying the market place will take care of the pricing. Corporations effectively pay no tax anyway since it is all figured into the cost of bringing their product to market. I also do not believe corporations are corrupt in trying to get their elected officials to enact legislation favorable to their company. It is the duty of a company to make money for it's stock holders. It is incumbent upon the politicians to exercise restraint while accepting donations by letting the donor know that the acceptance of the donation in no way indicates a promise to perform on the part of the politician..

42 posted on 10/13/2005 1:48:50 PM PDT by Eagles Talon IV
[ Post Reply | Private Reply | To 41 | View Replies]

To: Eagles Talon IV
Really?

Really.

Many nations of that time embraced the idea that retaliation would be counterproductive. They feared antagonizing Congress or a grass roots brushfire of nationalistic patriotism among U.S. citizens that might lead to discrimination of their imported goods. Historical records show that the Smoot-Hawley tariff did little to encourage foreign countries to retaliate with high tariffs of their own. In May 1931, the State Department report found that "by far the largest number of countries do not discriminate against the commerce of the United States in any way." Data from the U.S. Commerce Department show that the reason for the severe drop in exports in almost every American export industry was because of economic problems related to the depression, not foreign retaliation for higher U.S. tariffs. Some U.S. exports, however, did see significant gains in foreign market share. Exports of apples, pears and grapefruits increased. Exports of prunes went up 31 percent, and exports of dried apricots soared higher by 72 percent. Exports of raw materials such as cotton and rayon held steady. Exports of American films increased 49 percent, and exports of false teeth rose 24 percent.
Myths of the Smoot-Hawley Tariff
43 posted on 10/13/2005 2:01:41 PM PDT by Willie Green (Go Pat Go!!!)
[ Post Reply | Private Reply | To 42 | View Replies]

To: Willie Green

When we start paying our workers a dollar an hour, we'll get our industries back - having cut out the transportation costs from China.


44 posted on 10/13/2005 5:04:20 PM PDT by Malesherbes
[ Post Reply | Private Reply | To 1 | View Replies]

To: Mase
"Our economic success is driven by the search for profits. Any businessman not loyal to making a profit does no one any favors and will not be in business long. To suggest that these millions of business owners would sell out their country for that profit is reprehensible. "

The fact of the matter is that in areas such as technology, the natural goal of profit maximation is at odds with "security". That's why we have export laws.

To suggest that some business owners wouldn't maximize a profit if an explicit legal barrier didn't exist is completely naive.
45 posted on 10/14/2005 7:16:26 AM PDT by indthkr
[ Post Reply | Private Reply | To 28 | View Replies]

To: indthkr
To suggest that some business owners wouldn't maximize a profit if an explicit legal barrier didn't exist is completely naive.

If what they do isn't against the law, who are you to pass judgment on what constitutes a breach of security? Isn't that why we have export laws and punishment for those who violate them?

There are around 23 million small businesses in this country which make up 97% of all identified exporters. How many of these folks do you think are intentionally violating existing export laws and are willfully compromising national security?

The poster I was responding to said There are not many American companies left, most are multinationals who only have loyalties to money. Is this a statement you want to defend? Are you ignorant enough to believe that there are not many American companies left here and that any American based company, with facilities in another country (the definition of multinational), has loyalties only to money - not country? If so, maybe you also need to meet some vets I know who operate these businesses.

46 posted on 10/14/2005 8:17:31 AM PDT by Mase
[ Post Reply | Private Reply | To 45 | View Replies]

To: Mase
"Isn't that why we have export laws and punishment for those who violate them?"

You're just repeating what I already posted. I don't think you understood the point of my post.

"How many of these folks do you think are intentionally violating existing export laws and are willfully compromising national security?"

I don't think there are virtually any businesses that are violating the letter of the law as far as exports go, at least to the extent that it is actionable. Do I think there are businesses that will push the letter of the law to the extreme envelope, including beyond the Spirit and Intent? Absolutely. Do they do it out of malice? No, they do it for money.

"If so, maybe you also need to meet some vets I know who operate these businesses."

I know plenty of Vets, and as far as I can tell they are all patriots. But by extention, I don't necessarily believe that all Vets are patriots. John Kerry and John Walker come to mind.
47 posted on 10/14/2005 9:54:52 AM PDT by indthkr
[ Post Reply | Private Reply | To 46 | View Replies]

To: indthkr
You're just repeating what I already posted. I don't think you understood the point of my post

You said the natural goal of profit maximation is at odds with "security". If this is a natural goal, then you believe that without export laws, American businesses would sell out their country in the pursuit of profits. Is this what you're saying? Sure sounds like it. If so, this is not only grossly untrue, it is also the height of cynicism.

If there were no export laws, some people would certainly take advantage of it and do things that would compromise our national security. We have export laws in place to protect against these types of people/companies.

The vast amount of American businesses are made up of patriotic, moral and ethical people who would never knowingly do something that would compromise the security of their family or their country.

You want to get into the gray area of what the intent and spirit of the law involves. Just because one person says that we shouldn't sell product X to a foreign country doesn't mean it presents a real risk to national security. FR is filled with folks who believe that any trade with specific countries is a risk to national security. Who should determine what is beyond the spirit and intent? You? That's why we have the laws and courts.

My using vets as an example is to counter the feelings of some here that all businesses, regardless of who runs them, would sell out their country for the additional income. Yes, some would, but the vast majority would not and that's really the point.

48 posted on 10/14/2005 10:42:31 AM PDT by Mase
[ Post Reply | Private Reply | To 47 | View Replies]

To: Mase
"If this is a natural goal, then you believe that without export laws, American businesses would sell out their country in the pursuit of profits. Is this what you're saying?"

I don't think all of them would sell-out, but some certainly would (and you basically go on to agree with this statement). Would they do it with malicious intent, or because they want to seen their friends and neighbors obliterated by some weapon? No, they would do it for the money.

"the height of cynicism"

No, there is nothing cynical about it. Any more than predicting that I might be eaten if I jump into a chum-filled, shark-infested lagoon.

"Who should determine what is beyond the spirit and intent? ....That's why we have the laws and courts."

It would be nice if the process worked that way, but the reality seems to be Industry Lobbyists and Politicians. Bill Clinton and Loral immediately come to mind.
49 posted on 10/14/2005 11:21:01 AM PDT by indthkr
[ Post Reply | Private Reply | To 48 | View Replies]

To: indthkr
I don't think all of them would sell-out

Really? How else should someone interpret the natural goal of profit maximation is at odds with "security?"

If it's natural for a businessman to choose profit over security you are, in effect, indicting all of those who are motivated by profit.

Now you are rephrasing this statement to say that only some would do such things if given the opportunity.

If a business pushes the envelope beyond the spirit and intent of the law, don't you think they are in fact breaking the law? To essentially accuse people of breaking the law by couching it as "pushing the envelope" and violating the "spirit and intent" of the law just for the money, when they are not really breaking the law, seems very cynical to me.

50 posted on 10/14/2005 12:17:51 PM PDT by Mase
[ Post Reply | Private Reply | To 49 | View Replies]

To: Mase
"To essentially accuse people of breaking the law by couching it as "pushing the envelope" and violating the "spirit and intent" of the law just for the money, when they are not really breaking the law, seems very cynical to me."

There's nothing cynical about the observation that firms do in fact operate right up to, and on the margins of the letter of the law. It's not a prediction, its an observation of reality.

In some cases, they may also go beyond the spirit and intent, however as is the case in a number of areas in U.S. law, it may not be actionable.

Some people can, and do, cheat.
51 posted on 10/14/2005 4:35:05 PM PDT by indthkr
[ Post Reply | Private Reply | To 50 | View Replies]

To: Mase

52 posted on 10/14/2005 9:18:42 PM PDT by Tulsa Ramjet (If not now, when?)
[ Post Reply | Private Reply | To 48 | View Replies]

To: Mase

53 posted on 10/14/2005 9:18:51 PM PDT by Tulsa Ramjet (If not now, when?)
[ Post Reply | Private Reply | To 48 | View Replies]

To: Tulsa Ramjet
Nice chart. What's your point?

Are you trying to judge the health or sickness of an industry based solely on employment? By that standard, agriculture has been the sickest industry of all for decades because employment has declined - although farm productivity rose dramatically in the past century. Industrial health is better measured by output, productivity, profitability and wages. We manufacture more now than at any other time in our history, wages are rising and Americans are the most productive workers in the world.

The best measure of comparative productivity levels is real GDP per employed person. According to the Bureau of Labor Statistics, in 2002 the United States continued to lead the world in this category.

You should also realize that much of the change in industrial employment is an effect of changes in the classification of various jobs. Big companies used to do everything in house, so that people like janitors and accountants were classified as "manufacturing" workers simply because they worked for manufacturing companies. These companies discovered that it was more economical to outsource such work. That is why "business services" is one of the fastest rising categories of employment in the United States. Since 1995, 25% of all the new jobs created here have been in professional business services.

From 1995 - 2002, China lost 15 million manufacturing jobs while the U.S. lost 2 million. Most of these losses were due to productivity gains.

Since 1992, industrial production in the U.S. is up 50%.

But thank you for the chart.

54 posted on 10/14/2005 9:43:23 PM PDT by Mase
[ Post Reply | Private Reply | To 52 | View Replies]

To: Willie Green

Must be why we have the best congress money can buy...


55 posted on 10/14/2005 10:38:48 PM PDT by hosepipe (This Propaganda has been edited to include not a small amount of Hyperbole..)
[ Post Reply | Private Reply | To 1 | View Replies]


Navigation: use the links below to view more comments.
first previous 1-2021-4041-55 last

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.

Free Republic
Browse · Search
News/Activism
Topics · Post Article

FreeRepublic, LLC, PO BOX 9771, FRESNO, CA 93794
FreeRepublic.com is powered by software copyright 2000-2008 John Robinson