Fred Zimmerman and Dave Beal.
Production Means Prosperity
This book advocates a simple premise: manufacturing provides a vital link to prosperity. But not everyone believes that. In fact, the manufacturing sector has become the invisible economy to many of us. Other parts of the economy have commanded more attentionfor example, finance and services, and subsectors such as software and Internet-related companies. Yet, manufacturing remains enormously important. The industrial sector is special because of its size, its ability to generate value, its role in meeting peoples wants and needs, and the dignity of the work it provides for millions of Americans.
Part One embarks on that journey by scrutinizing the data and by getting out to the front lines to talk with the people who make manufacturing work:
Mansour Mohamed had a bright idea. Couldnt machines be designed to knit and weave textile fibers into three-dimensional composite materials stronger than steel and lighter than aluminum? Couldnt the materials then be used to fashion a kaleidoscopic array of products, from I-beams to protective vests, from artificial limbs to bridge materials to parts for cars, buses, trains, and planes?
Mohamed pursued his dream, initially with uneven results. He and his school, North Carolina State University, landed $100,000 in federal money to build a prototype of his looms. They got the machine patented. However, Mohamed couldnt convince manufacturers to license the technology, so he started his own company to make the machines. Raising money was an uphill battle. Investors were riveting their attention on Internet, software, and telecommunications startups. Helping a weaving specialist for a textile industry startup seemed, well, old-fashioned. For two years, he was the only employee.
Then an unlikely alliance took shape. Mohamed needed a partner, someone with more managerial experience in manufacturing. He turned to an acquaintance, Brad Lienhart, who agreed to run the company. Both men had engineering degrees, but in other ways they could not have been more different. Mohamed was born in Egypt. He emigrated to the United States in 1980, then, as a textile engineering professor, watched American industry from the outside. Lienhart was raised on a farm in central Illinois, where he sold farm equipment parts when he was seven years old and drove a $10,000 combine three years later. He spent 28 years rising into the inner circle of top executives at Dow Chemical, then retired, at age 50 in 1994, with a mission of starting a company.
But did he really want to launch a manufacturer, in the heyday of the so-called dot-com age? Exactly.
Its far too early to say how much success the company, known as 3Tex, will achieve in the long run. However, by late 2000, 3Tex had grown to 45 employees. The company opened a plant in the shadows of shuttered textile factories in Rutherfordton, an economically depressed community in western North Carolina. It raised more than $10 million in three rounds of financing, and built up a customer list that included Ford and Johnson & Johnson. Dont be surprised, advises Lienhart. Over the last century, he explains, the United States has gone from an agrarian society to the industrial era to the information age. Now, he contends, that latter era probably has peaked. Lienhart argues that a better way to view the nations economic evolution is to recognize that we never fully left those earlier times; rather, we laid one era atop another, like the chapters of a book. Material technology is the future, he declares. By that, he means composites, ceramics, nanotechnology products, micro devices, biochemistry, and pharmaceuticals.
What about the new economy, a term that stamps this era as a time of immense productivity gains believed to be spurred on by emergence of digital technology? Heavy use of the term suggests that all prior time must be designated as an old economy era. That irritates the heck out of me, says Lienhart. Companies that make products and make a profitI dont buy the concept thats old.
The new economy mantra led to frequent stereotyping of businesses as old economy companies or new economy companies. Many manufacturers were arbitrarily tossed into the former category. That tended to stigmatize them as investors piled into Internet-related opportunities. Facile labelsnew economy, service economy, information economyplay well in the media. Often, users employ these terms as euphemisms for a transformation from a manufacturing-dependent system to a higher-performance economy where manufacturing is assumed to be fading into the history books.
Manufacturing firms do not equate to old economy firms, Bob McTeer, president of the Federal Reserve Bank of Dallas and a leading observer of the new economy concept, told the board of the National Association of Manufacturers (NAM) in October of 2000. Your productivity growth has led the nations. Youve been applying high tech to production for a long time. You know the game . . . whatever widgets look like years from now, well still want them.
That, in a nutshell, is the basis for this book. Look around the room you are sitting in; the rooms nearby; the vehicle in the garage; the buildings down the road; your schools, airports, stadiums, and shopping centers. At every turn, you will see tangible products, more of them and more varieties, than ever before. If there is a new economy, certainly it must include them.
Manufacturing firms do not equate to old economy firms.
We think the enthusiasm espoused by many new economy advocates has too often given rise to a widespread sense that digital technology trumps hard work and makes the mastery of trades and skills less necessary. The term itself became so beguiling that it led many managers of new economy companies to a false sense of superiority. Good management is hard work, whether you are managing a garbage dump or a wireless provider. And, as venture capitalist Andy Kessler pointed out soon after the dot-com bubble burst, manufacturers are an essential part of the digital age. In fact, Kessler argues, some of the companies that make the picks and shovels used to build the Internet will have an edge over the long haul, because they offer something Internet service companies lackphysical products with intellectual property that can be defined and protected.
Ironically, at the very time the infatuation with the Internet became most intense, American manufacturing was setting the pace for the American economy. We think this performance is remarkable, given the stress this sector has been under and the degree to which it is misunderstood.
Some of the companies that make the picks and shovels used to build the Internet will have an edge over the long haul, because they offer something Internet service companies lackphysical products with intellectual property that can be defined and protected.
Measuring this misunderstanding is an elusive task, but one indication of the concern has come from the NAM. In 1995, the association embarked on a broad outreach program to boost Americans understanding of manufacturing. Five years later, the NAM concluded it needed to do more. Its chairman, W.R. Timken Jr., led the associations officials on a 30-city barnstorming tour designed to convince opinion leaders in the media, the investment community, and other influential fields, of the merits of manufacturing.
It should not be surprising that both the media and financial firms need a refresher course in manufacturing. The control centers for the nations media and investment communities are in New York City, where some of the deepest plunges in manufacturing activity have occurred. It was not much of a leap for publishers, editors, reporters, producers, television anchors, investment bankers, portfolio managers, traders, and securities analysts to conclude that manufacturing is heading into the history books. After all, their perceptions of manufacturing were shaped by what they saw every dayabandoned factories, vacant brownfields, few modern plants. There is far more manufacturing activity elsewhere, but they had little direct contact with it. Yet, in areas far from the nations epicenters of finance and publishing, manufacturing was growing, prospering, and adding life to communities.
The role of manufacturing in the 1990s was immense. Consider production. The manufacturing sector grew by 47 percent from 1992 to 2000, according to the U.S. Department of Commerces estimate of gross domestic product by industry. Durable goods productionfor example, autos, airplanes, and data processing equipmentrose 73 percent over this period. Fortune magazine cites figures from the United Nations Industrial Development Organization that show the value of American-made goods in 1998 was 50 percent higher than Japans total, and greater than the combined output of France, Germany, and the United Kingdom. No major industrial nation matched the U.S. rise in manufacturing output since the early 1990s, the magazine said.
Productivity gains drove the rising output, and hence the economy. From 1992 to 1999, productivityoutput per hour workedrose 31.6 percent in the manufacturing sector. That was more than twice the 13.4 percent gain for the entire nonfarm business economy. Productivity gains in the services sector, which accounts for the biggest share of the labor market, lagged far behind.
Then, when the economic slowdown became apparent in the fall of 2000, this sector made its importance known in a different way. As producers eliminated hundreds of thousands of jobs, unemployment rates and jobless insurance claims rose. Eventually, the ripple effect moved on to slash or even eliminate the surpluses of the federal government and many states. The Federal Reserves index of manufacturing production fell from 152.8 in September of 2000 to 147.9 in March of 2001. Six months later, the index had fallen to 141.1. Thus, the condition of the manufacturing sector served as an advance indicator of the new centurys first recession. Manufacturings importance is bidirectional.
Prosperity Is Not without Pain
The productivity increases of the 1990s did not come without controversy or pain. At Frigidaires sprawling St. Cloud, Minnesota, freezer plant, workers complained. They went on strike for three weeks late in 2000, charging that the management had boosted output by employing speed-up tacticstrimming break time and reducing designated times for plant cleanups. Elsewhere, companies had shut down many low-productivity plants. Often, the workers who lose their jobs encounter difficulties in matching the pay and benefits they were forced to give up. And technological advances, while they may create new jobs elsewhere, have often reduced jobs in manufacturing even when output is increasing.
Manufacturing employment has changed relatively little since 1970, ranging from between 17 million and 21 million workers. Improved management and better equipment have enabled roughly the same number of workers as there were 30 years ago to produce more than twice as much. While the labor force has grown immensely over the past generation, manufacturers share of the workforce has fallen to less than 15 percent from more than twice that share at midcentury. Most of the employment increases have come in the service industries, thereby helping to popularize terms such as the service economy. The manufacturing sector itself has contributed directly to the rise in service jobs by outsourcing to service providers countless nonproduction jobs in fields such as plant security, food services, and public relations.
Thus, manufacturing sent forth mixed signals to the rest of society during the 1990s. On the one hand, it was growing slowly in employment. On the other, it was one of the few segments of the U.S. economy, along with mining, wholesale trade, and agriculture, to dramatically improve its efficiency. In some ways, it appeared less glamorous than a few of the service industries it helped to create, but more basic in business fundamentals.
Foreign TradeFueled by Success
The strong performance of U.S. industry in the late 1980s and 1990s helped to encourage world confidence in the United States. Investments from abroad flowed into the United States in hopes of participating in the substantial gains being registered on Wall Street. As these capital flows continued, the value of the U.S. dollar increasedparticularly during the Asian financial crisis of 1997. This sudden upsurge in the value of the dollar worked to reduce the prices of goods imported by the United States from abroad, and some enterprising foreign producers took advantage of the situation by shipping more to this country.
The rise of manufacturers abroad has stiffened competition for American producers. The nations growing trade deficit, which reflects this stepped-up rivalry, is reason for concern. In some cases, entire industries have vanished after their suppliers moved abroad. Still, the United States continues to hold a bigger share of all the goods that move across borders than any other land. Moreover, U.S.-made goods account for four-fifths of all U.S. exports, far exceeding the agricultural products and various services that we send overseas. As for global investment, American manufacturers invest seven times as much at home as abroad. Conversely, foreign manufacturers continue to make massive investments in the United States. In some cases, foreign-backed plants in the United States have grown to become significant exportersand much more American in tone.
U.S.-made goods account for four-fifths of all U.S. exports.
Innovation is another often overlooked measure of manufacturings continuing importance. National Science Foundation figures show that roughly two-thirds of all private investment in research comes from manufacturers. Visits to Americas research parks provide the most visible evidence of this activity. The largest of these parksResearch Triangle in North Carolina, Stanford near Silicon Valley, Cummings in Huntsville, Alabamaare packed with manufacturers research and development (R&D) centers and pilot production operations.
Another sign of this sectors importance is the size of its payroll. Manufacturing workers took home 22.6 percent of the nations overall payroll in 1997, far more than their share of all the jobs. Their employers also support many more jobs in government, trade, services, and other parts of the economy. In our geographical study of manufacturing-intense counties, we found the overall payroll growing rapidly, from 38 percent to 60 percent between 1988 and 1997, in the counties where manufacturing performed well. Conversely, the payroll grew minimally in counties that did less well in manufacturing.
Manufacturing plays another role that goes beyond the value of the payroll. Historically, factories have provided younger people, workers with limited formal education, and new arrivals with career starting points. Today, the conventional wisdom is that factory jobs for new immigrants have virtually disappeared as technological change and the movement of low-wage jobs to developing countries have wiped out repetitive assembly work. Many of these jobs remain, though, particularly in coastal areas that have had a historic role as receiving points for immigrants. A study by the Massachusetts Institute for a New Commonwealth and the Citizens Bank concluded that were it not for the influx of immigrants, many fewer people would be working in New England factories in 2000.
Bronwyn Lance, a senior fellow at the Alexis de Tocqueville Institution, says that by the late 1990s, immigrants had come to hold dominant shares of the jobs in many blue-collar niches of the New England workforce, particularly those critical to production and output in manufacturing. They were nearly twice as likely to be employed in skilled production crafts as native-born workers, and three to five times as likely to be employed as fabricators, assemblers, and machine operators, the very occupations that keep factories running, writes Lance, who has studied the economic impact of immigration.
Long-established manufacturers have also held prominent roles in charitable giving. While Bill and Melinda Gates and other donors with immense new wealth steal the headlines, most of the nations largest foundationsLilly, Kellogg, McKnight, and othersgrew from fortunes created by manufacturers.
Manufacturing is still a huge part of the economy, concludes Stephen Hardis, the retired CEO of Eaton Corp. in Cleveland. I think that, in many ways, is the untold story of the 1980s and 1990s. People arent telling that story.
Getting Out Manufacturings Story
Its a complicated story to tell. To get at it, we looked at how production-intense counties were performing, then used the data to identify significant trends, similarities, and contrasts in certain counties, regions, and states. We gathered information from job and payroll changes over time and location, plant visits, and company data. One shortcoming of job and payroll statistics is that they do not directly address productivity gains. A county could suffer a 10 percent loss of manufacturing jobs over time, yet show a 20 percent gain in manufacturing productivity during that same period. In such a case, the county could have contributed substantially more than its share to the nations increase in production. Paradoxically, industrial success can be the driving force behind job losses, because a restructured manufacturer can gain efficiencies that enable the company to do more with fewer workers. As writer William Nothdurft put it in an essay for the Northwest Area Foundation, . . . the community may be declining even if the industrial sector it depends on isnt.
Also limiting our data are jolts that can alter the economic landscape of a county almost overnight. Our classifications of counties are based on a study of the past quarter century, rather than an attempt to foresee the future. Conditions change rapidly in todays tumultuous economy, particularly in smaller counties heavily dependent on a single employer or industry. What seemed to be good fortune can suddenly turn into misfortune. For example, some counties that prospered from booming defense manufacturing in the 1980s suffered in the 1990s, when postCold War military cutbacks forced such employers to cut their payrolls sharply. From 1990 to 1995, the United States lost nearly a million defense manufacturing jobs. The 2001 terrorist attacks could again affect the fortunes of defense contractors and the communities in which they operate.
Nonetheless, we feel our county-by-county analysis of manufacturing job and payroll data is helpful. It provides a useful springboard from which to draw a road map of trends in this sector, and to sketch out the portrait of manufacturings striking diversity of people, products, and plants.
Many surprises awaited us. In North Dakota, we found that Cass County (Fargo) gained more manufacturing jobs, on net, than all of California between 1988 and 1997. In the Midwest, we saw impressive rebounds but also learned that much of this region continues to be heavily dependent on the auto industry. In Philadelphia, we found steep manufacturing declines that symbolize the devastation inflicted on the inner cities of the Northeast and Midwest by factory shutdowns. In Tennessee, we saw firsthand evidence of the close relationships that make manufacturing work well in so many different situations.
Across the country, we found abundant evidence of the changes wrought by globalization. Examining such shifts half a century ago would have been mostly a one-way exercise. Never was a country more fabulous than America in 1949, the British historian Robert Payne wrote after visiting the United States. Half the wealth of the world, more than half the productivity, nearly two-thirds of the worlds machines are concentrated in American hands; the rest of the world lives in the shadow of American industry, and with each day the shadow looms larger, more portentous. . . . Indeed, the United States had been fortunate. U.S. manufacturers had emerged unscathed from World War II after war damage had disrupted countless factories in the rest of the industrialized world.
U.S. Manufacturing: Still GoodBut Not Alone
Gradually, these nations rebuilt their industrial bases. Today, as so many of us know from the products we buy, their industries have often wrested competitive advantages from their American rivals. Some critical U.S. industries have slipped precipitously. One is the machine tool industry, which came out of the war as the world leader after producing the machines so necessary to the Allies military effort. Today, the U.S. machine tool industry has fallen to third place in production, far behind No. 1 Japan and No. 2 Germany, and not far ahead of No. 4 Italy. Americas world-leading trade deficit in machine tools tops the deficits of the next four countries combined. One-time world-beating machine tool builders from the United StatesCincinnati Milicron, Kearney & Trecker, Warner & Swasey, Giddings and Lewis, and othershave ceased operation or been acquired, often by producers from abroad. America has only 2 of the worlds 25 largest machine tool builders, Unova and Ingersoll Milling; Japan has 12, Germany 8.
The trade deficit has become the topic of endless wrangling, with most economists and corporations backing free trade and arguing that the deficits arent much to worry about. Labor unions and manufacturers in steel, textiles, and other industries heavily affected by imports counter that they need protection from unfair trade practices. The merits of either side are not an issue for this book, but we do think there should be more recognition of the dynamic that unfolds when a domestic industrys suppliers leave the United States to operate abroad. All too often, the record shows that the industries themselves soon follow suit.
Americans should recognize that their country has no curb on engineering and management talent so important to manufacturing operations. Engineering schools in the United States are packed with students from abroad. Most return to their native lands after they have earned their often-subsidized degrees. In Singapore, Mexico, India, China, and many other lands, curriculums in math, science, and other disciplines have been improving rapidly.
The growing strength of many overseas manufacturers has given them the resources to invest more in the United States, a trend that has led to construction of numerous plants. The pacesetters for this investment have been Japanese and German auto and truck manufacturers. Since 1982, they have built, expanded, or announced plans for assembly plants in nine statesIllinois, Indiana, Ohio, Kentucky, Tennessee, Alabama, South Carolina, Mississippi, and California. This activity has been most visible in Ohio, where Honda now employs more than 13,000 workers at two assembly plants, an engine factory, and various support facilities. The company has, at times, exported close to a sixth of its Ohio production.
American manufacturers have been facing immense challenges in coping with the foreign competition. One of their most common responses has been mergers and acquisitions, the largest thus far being the 1998 sale of Chrysler to Germanys Daimler-Benz. They have also turned more to cost-cutting, often through downsizing and outsourcing to contract manufacturers. The increased competition has often led to overcapacity and price-cutting. U.S. producers have expanded abroad, seeking more direct access to foreign markets and lower labor costs through significant investments of their own. However, the net flow of investment has been into, rather than out of, the United States. From 1994 to 1998, American manufacturers invested $147 billion abroad while foreign producers invested $209 billion in U.S. manufacturing.
From 1994 to 1998, American manufacturers invested $147 billion abroad while foreign producers invested $209 billion in U.S. manufacturing.
Other pressures have also been pounding away at U.S. manufacturers.
One is the stock market, which has become more unforgiving by punishing companies that miss quarterly earnings expectations for whatever reasons. The market has become so fascinated with quarter-to-quarter achievements that many publicly held manufacturers engaged in the thoughtful development of workable long-term strategies are often not seen as attractive.
Add to this the preoccupation with acquisitions, divestitures, and mergers. The markets often favorable reaction to acquisitive strategies has boosted the rationale for more mergers, many of which fail to live up to their promise. This trend is the biggest single impediment to U.S. survival in the global marketplace, contends Frank Riley, a longtime top executive at Bodine Co. and a former president of the Society of Manufacturing Engineers, who has seen many reputable producers fall prey to poorly executed acquisitions. Riley, still active as the head of a Connecticut-based builder of automation equipment, remains optimistic about the future of U.S. manufacturing but he laments the damage done by poorly implemented acquisitions.
Another obstacle for manufacturers is the not in my backyard opposition to the location of factories and their suppliers. As community groups have become more pervasive in blocking such projects, their opposition has effectively shut down efforts to build factories, refineries, and power generating stations at many sites across the country.
Sometimes, manufacturers damage themselves with their own actions. For example, according to Riley, manufacturers purchasing and financing practices often make them less competitive. In one such practice, he says, directors of some U.S. manufacturing companies require approvals for capital equipment spending of as little as $1,000, yet they allow massive advertising campaigns and other noncapital spending projects to move ahead without board approval. The process of requesting approval to buy capital equipment has become such a nightmare as to make even planning in the largest companies impossible, Riley declares. In another such practice, he says the average payback period expected for buying factory automation equipment is one year. Quips Riley: If you know any banks paying 100 percent interest, please let us know and I would like to invest my money there.
In some cases, poor decisions and mismanagement have hurt. Its hard to say whether these factors have been more or less prevalent in manufacturing than in other parts of the economy. Clearly, though, manufacturers are not immune to such afflictions. The integrated steel companies were widely criticized for failing to invest in new equipment until minimills and foreign competitors forced them into action. Everyone knows the sad story of how Chainsaw Al Dunlap, who slashed jobs wherever he went, dismembered Sunbeam Corp. (see Chapter 15), but the manner in which so much of the investment community encouraged and even endorsed Dunlaps illusory leadership for so long is less widely known.
Consider a Harris Poll survey, taken in 1998 for the American Association of Engineering Societies and the Institute of Electrical and Electronics Engineers (IEEE). The survey found that a broad slice of the U.S. public thinks of engineering as the stealth profession. Forty-five percent of Americans believe they are not very well informed and another 16 percent not at all well informed about engineering and engineers. Concluded IEEE-USA President John R. Reinert: The poll manifests both a subjective and objective American ignorance about the work of engineers. The Harris survey places much of the blame for this condition on the media.
In the industrial Midwest, the poor image of manufacturing has hurt recruiters. Most people believe manufacturing is on a steep decline across the United States, Susan Maine, managing director of the Pittsburgh-based Advanced Manufacturing Network, said in a 1998 press release. This is a real problem in industrial cities like Pittsburgh, Detroit, Cleveland, and Chicago. People in our region believe all the steel mills and factories are closed, when in fact manufacturing still contributes more to our regions economy than any other employment sector. Local manufacturers are having a very difficult time finding interested and qualified workers. Part of the problem is that parents and educators are clinging to old views of manufacturing, and are not themselves aware of the career opportunities available in todays modern factory.
Maines group showed high school students a list of 18 popular career choices. When asked what field they would like to work in, only 1 percent of the students picked manufacturing, which tied with religion for last place in the survey. They ranked sports and entertainment first.
Another source of confusion is the tendency to exclude vast portions of manufacturing from the high-tech category. A Federal Reserve Bank of Chicago study published in late 2000 points out that Michigan and the Midwest place much differently in rankings of technology intensive states and regions depending on how the rankings are done. The American Electronics Association ranked the Midwest eighth among the countrys nine regions and Michigan seventeenth among the 50 states in high-tech workers per 1,000 jobs in 1998. However, the Michigan Economic Development Corporation ranked the Midwest third and Michigan fourth in that same year. What accounted for these differences? The Michigan agencys study counts the auto and aerospace industries, including their R&D operations, as high-tech, while the Associations study does not. At first blush, we might not think of motor vehicles as high-tech goods, write bank economists Richard Kaglie and William Testa. But modern vehicles are equipped with a range of high-tech devices, such as on-board computers that monitor the function of the engine, sensors that detect when one wheel is slipping and transferring power to another, and global positioning systems that provide driving directions.
More confusion arises from the trend to contract out manufacturing, which makes it appear that many producers want to get out of production. The more they opt to farm out various functions, the harder it becomes to figure out whos doing what.
Then there was that International Monetary Fund report in 1997. The study concluded that contrary to popular perceptions, deindustrialization is not a negative phenomenon but is the natural consequence of the industrial dynamism in an already developed economy. Dont fight it, fund officials advised. Celebrate it.
Maybe we should not celebrate so quickly. If deindustrialization means shedding high-value industries, the effects may not be so beneficial. People and nations around the world want those industries, for good reason, and they are working hard to get them.
Copyright © 2002 by Frederick M. Zimmerman and David Beal
University of St. Thomas
St. Paul, MN 55105 USA
Revised June 29, 2002