Our Shrinking Manufacturing Sector
Posted on 31. May, 2011 by Administrator in Economy
Part I
It’s almost impossible to walk through a major ‘big box’ store these days and not feel like Ichabod Crane riding through the dense trees of Sleepy Hollow. Surrounded by thousands of products now stamped with the ‘Made in China’ label, the feeling is one of profound loss. America has awakened to a brutal new reality. A one-time enemy turned trading partner has now become our largest creditor and one that is pulling the levers of our financial system through its investments in – and stranglehold on – the U.S. economy.
Back in the 80s, the Japanese were the bogeymen, threatening to take over New York City with offers to purchase Rockefeller Center (and other prime real estate). I was frequently asked then if I thought this was a dangerous development. My answer was, “I’d rather have foreign ownership of real estate than world domination of the currency or bond markets. What would the Japanese do if they ran into cash problems? Pack up their real estate and take it with them?” That was then when we still made things at home and sold them abroad.
The 90s changed all that with the rapid growth of the high-tech sector that sucked investment money from old-line manufacturing companies and put it into the stock market. Many U.S. manufacturers struggled to stay profitable (and protect their share values) by moving huge production volume off-shore where labor rates were lower and where foreign governments rolled out the red carpet for them in industrial parks across southern China and southeast Asia.
Back then everybody was making money (not unlike the late 1920s), and it seemed that by cleverly off-shoring production, manufacturers would be able to compete with the whiz kids of Silicon Valley and their growing dot com companies. The trouble was that American companies were not taking their new gains made from lower production costs and re-investing them in newer technology (though their foreign partners, the contract manufacturers, did) while all that off-shore manufacturing was going on. To make matters worse, their stock prices were not rising as fast as those of the new-tech service sector, so many invested there instead. Any new products developed were developed with a view towards overseas manufacture, thereby perpetuating the vicious circle of dependency.
At the same time, Federal tax loopholes made it more attractive for companies to move profits to tax safe-havens in a whole new set of foreign countries rather than bring them home! Neither the Feds nor the private sector thought that there would be a day of reckoning when “America’s chickens (failed investment and manufacturing strategies) would come home to roost.” All operated on the assumption that our GDP and disposable income growth rates would continue unabated. We thought we were on a journey towards prosperity without suspecting for a moment that what we were really doing was insuring the demise of our generations-old manufacturing supremacy. By the time that realization set in, our options to reverse the trend disappeared. We were involved in expensive foreign wars that drained our treasury; bad law-making that grew our deficits and indebtedness; and our companies began down-sizing American workers instead of reducing their foreign workforces or cancelling production contracts, overseas.
To be fair, these corporate decisions were really ‘no-brainers,’ because American consumers were used to paying low prices for their goods (and were reluctant to accept higher prices no matter where the goods were produced) AND Federal tax laws gave companies little room or incentive to repatriate their profits. In Part II, we’ll talk about Free and Fair Traders and how seemingly competing interests moved America into a dependency on major foreign contract manufacturers. In Part III we’ll discuss how a product goes from being domestic to foreign and the consequences of those decisions.
Part II
In part I of this series, we discussed the events that led up to America’s fall from manufacturing grace, but the root cause of that fall is not only our tunnel vision regarding the dangers of too much off-shoring, but also our devotion to the notion of FREE TRADE.
For many free marketers and inveterate capitalists, free trade is more than a mantra; it is an economic way of corporate life that unshackles (some would say encourages) American companies to escape the laws of regulatory gravity and move about the world seeking the highest possible profit and the best deals. At this point it’s important to draw a distinction between Free Traders and Fair Traders. Free Traders believe in a commercial world with few or no boundaries or encumbrances like tariffs and quotas. They believe in the free and unfettered movement of goods, services, capital and workers across international boundaries with minimal or no intervention from local, regional, national or international institutions. If all Free Traders wore t-shirts they would probably say, “Free Traders do it anywhere, anytime, with anybody.”
Free Traders are also aware of the historical baggage they carry from the days when oil and mineral cartels reigned supreme. They are used to hearing themselves called monopolists and capitalist pigs, but they cling steadfastly to their contention that world commerce could simply not function in a tightly regulated trading regimen. Despite that fact, they’ve allowed themselves to be controlled by international trade agreements and institutions like the GATT and the WTO. Fair Traders, on the other hand, subscribe to a different theory of world commerce, one that is constantly looking for a ‘level playing field’ where no one country gains economic advantage or hegemony over the other. The problem with this philosophy is that ‘fair’ is a subjective term that is more often defined by politics than economics. That’s why Fair Traders are always frustrated and spend an inordinate amount of time trying to rearrange and re-position the regulatory framework to equalize the opportunities.
Both Free and Fair Traders have their share of proponents and detractors, and their ideological purity is constantly under attack by market forces, well-heeled companies, lobbyists and legislators not to mention special interest groups. Trade Pragmatists make up the third group. These are the realists, companies who understand the rules of global commercial engagement and who live within them while they work to change them to their advantage. Trade Pragmatists are not patriotic. Their loyalties are to their shareholders, not their country of origin, and that’s why most of their time is spent in trying to shave a few dollars off the cost of their manufacturing and sheltering their profits. Their raison d’être is survival, preferably survival at a higher level. It is precisely these companies that comprised the vanguard of the off-shorers, joined later by the Free and Fair Traders to form the perfect storm that has led to vast unemployment and decimated opportunities for millions of American workers today.
Are they the only ones to blame?
The cartoon character Pogo said, “We have met the enemy and he is us.” Pogo was right; Americans are also to blame. That goes for organized labor, white collar workers and consumers. Had we voted with our feet and insisted on purchasing more goods made in the USA, we might not be in the situation we’re in. I believe that most Americans are reasonable people and when confronted with a purchasing decision that would save an American worker’s job or let it migrate overseas, they would choose to save one here. The problem is that the choice has not been ours to make. Corporations don’t survey their customers on where they would like their products manufactured, nor do they offer us a choice of the same products made in two different locations (one in the U.S. and one made overseas). It is basically a take it or leave it situation, and without an alternative we must take it. Part III will discuss how a product goes from the drawing board to the store shelves and what decisions can be made along the way to add value in the USA.
Part III
In parts I and II of this series we explored the root causes for America’s ‘off-shoring’ situation and the unemployment problems it created for our economy. Now we’ll look at the entire product development chain to get a better idea of where we can still add value. I have a friend (we’ll call him Leonard) who is an experienced industrial designer and manufacturer of a line of outdoor barbecue items. Leonard has been manufacturing his assortment of products (Leonard’s Line) in China for about eight years. Like other companies he didn’t start out that way. For many years, Leonard’s Line was designed, manufactured and marketed by U.S. workers working for U.S. companies until one day, he got a call from a major manufacturer that was private-labeling his line and selling it to a nationally-recognized discount retailer. The manufacturer started to pressure Leonard on price and on delivery times. After calling his usual contract manufacturers and asking if they could make some product modifications that would cut some product costs thereby bringing the products into the price range of the manufacturer AND meet the stringent delivery times, he was told, ‘no,’ they couldn’t.
Leonard got nervous. If he botched this order it could be his last with the nationally-recognized manufacturer and even harm his reputation with the major retailer (whom he was courting with other products under his own label). He could lose immediate sales and long-term ones as well. Leonard did what hundreds of other American manufacturers would have done in a similar situation… he started looking abroad for a contract manufacturer. China was at the top of his list, and he made some inquiries and soon found himself on a plane headed for an industrial park there. A deal was worked out and Leonard’s Line became Leonard’s International Line. After solving some thorny quality control and other manufacturing problems over a period of several years, Leonard’s Line has now become a 100% out-sourced assortment of products with average yearly gross sales in the millions to major manufacturers and major retailers.
Where’s the value added?
Aside from the product design (which Leonard still does, himself), all other value is added in China. This includes: product prototyping, manufacturing, packaging design and fabrication, point of sales displays, brochure design and printing, inventorying and shipping. All but a tiny percentage of the total costs associated with producing Leonard’s Line are added overseas, leaving no value for American workers to add until the products land in U.S. container ports where they are off-loaded to American trucks and begin their journey to the retailers’ shelves.
When discussing the situation, Leonard feels no guilt about off-shoring his Line. He explained that, “If I hadn’t done so (gone offshore), I would have found myself out in the cold – just another rejected company by one of America’s largest retailers. Believe me, I love my country, but last time I checked there was nothing patriotic about going bankrupt. Maybe someday I’ll design a line of exclusively American-made items, but I have my doubts. Most of the quality machine shops and efficient low-to-medium volume factories have closed their doors, and even if I opened my own facility I don’t know if I could find the skilled personnel to run it!”
Leonard’s story is typical of many American entrepreneurs who’ve found themselves dependent on the price points of major retailers and a market too used to those prices, and while there appears to be a new wave of companies that are selling direct, via the internet, potential customers still want to ‘kick the tires’ and handle the products before opening their wallets. One thing is for certain, the manufacturing paradigm has shifted, and if America’s companies want to compete they’re going to have to do it without much help from their government – or from America’s retailers. We will never be able to completely go back to the way things were. Our only hope is to make American companies, consumers and the government aware of the consequences of doing nothing.
Stephan Helgesen is a former diplomat who served in 24 countries over a 25 year period and former Director of the State of NM Office of Science and Technology. Today, he owns his own high-tech consulting company and is also the Honorary Consul for Germany in New Mexico. He can be reached at: helgesen@2ndopinionmarketing.com.
