All Americans recognize that China is a rising economic power. According to the Institute for International Economics, China became the third largest trading nation in the world in 2004. This rapid ascent is not only a function of its sheer size and high growth rates, but also its openness to trade and foreign investment. Its ratio of trade to Growth Domestic Product and its ratio of inward investment is already double Japan’s. Couple these facts with its currency manipulations and its low pay and overall production costs, China constitutes a serious threat to America’s remaining manufacturing base.
The average man or woman on the street might describe the economic position of my home state’s manufacturing economy in this way.
All Americans recognize that China is a rising economic power. According to the Institute for International Economics, China became the third largest trading nation in the world in 2004. This rapid ascent is not only a function of its sheer size and high growth rates, but also its openness to trade and foreign investment. Its ratio of trade to Growth Domestic Product and its ratio of inward investment is already double Japan’s. Couple these facts with its currency manipulations and its low pay and overall production costs, China constitutes a serious threat to America’s remaining manufacturing base.
The average man or woman on the street might describe the economic position of my home state’s manufacturing economy in this way.
“The handwriting is on the wall. North Carolina manufacturing is only viable if it goes off-shore. We can’t compete with China’s wages. The federal government appears unwilling or unable to exercise the diplomacy and provide the carrots and sticks needed to improve this situation. And what can a state the size of North Carolina do? We don’t make trade policy. It’s a job for the federal government and the World Trade Organization. Furthermore, if a firm’s management cannot turn around their business, why do you think some government program or nonprofit can pull this off?”
Although understandable, such a strong sentiment of skepticism and fatalism will not help the situation here or elsewhere in the U.S. But it’s also true that we will not succeed in saving and modernizing a larger proportion of this sector if we keep on doing what we are currently doing. Furthermore, when the dust settles, no matter if we pursue new approaches or not, the state will still end up with fewer manufacturing jobs than today.
There is, in fact, a case for more aggressive and proactive state action. But it is discouraged by a market mythology which tends to regard all shutdowns, relocations, and downsizing as pre-ordained and rational. For instance, running statewide workshops on owner succession issues is one way to prepare owners of viable firms, which are not publicly traded and have no heir to take the helm, to prepare for this inevitability and meet those experts in the private sector that can be most helpful.
We are also hindered with a fairly widespread policymaker unfamiliarity with the range of effective strategies that are available that can be used to retain, expand, and modernize businesses of all types (but manufacturing in particular).
Hope for a renewed manufacturing base is not unrealistic. Existing businesses account for most job creation, not business attraction. Because manufacturing is a major source of export earnings and good jobs, and boasts a hefty employment and income multiplier, this economic base should not be written off. There are flourishing manufacturing firms here and across the nation. But raising average practice to best will be a challenge. The starting point for making modernization a bit easier requires having a plan.
But expect no new action from the federal government. So, states are where the action is.
Dr. Daniel Luria of the Michigan Manufacturing Technology Center, along with colleagues at the Center on Wisconsin Strategies, have some great ideas for a Great Lakes manufacturing fix, which could be adapted for North Carolina. Here is the gist.
Every industry has good and bad companies and the range of performance even for firms serving the same product niche is very wide. Good firms pay better, provide benefits, use new performance-based compensation tools, add-value, produce their products right the first time, have low employee turnover, use the latest lean technology techniques and management strategies, invest in skill development and provide most employees with computers for getting their job done.
Luria argues that we need to support such high skill, high performance workplaces and grow more of them. This requires attacking waste in the plant and office. (This can save hundreds of thousands of dollars in small firms.)
The next trick is to “get busy” by expanding their markets. (When technology and capital resources are used more, firms make more money.) “Lean” enterprises are ideally structured to deal with sudden spikes in sales volume and with earning additional income with more, but smaller orders. Thus, “use lower costs to quote for growth, look for more customers in more markets, and invest savings in reduced exposure to price-based competition by developing new higher margin, quality-based product and service lines.”
Luria’s extensive data base of thousands of US companies and his analysis of unit costs for off-shoring to China documents that many American firms are already in striking distance.
Next year, state government with a significant manufacturing employment and output should consider focusing on existing and potential good firms. Measure and score 500 smaller manufactures, using the criteria discussed earlier and identifying 150 likely bets.
Then policymakers should condition tax and other subsidies and training packages on high in-state and in-region purchasing by these small- and mid-size firms (foreign or domestic) and sustaining job quality. He counsels also to use state purchasing where possible as an example and make reductions in energy use and imports by manufacturers a major goal.
So, there is a better manufacturing future for manufacturing states, if we get creative and try.
We will still end up with fewer jobs in this sector than today. But they will be good middle-class jobs with a future.
William Schweke is a Vice President at CFED in Durham and has been involved in researching and designing business retention, expansion, and modernization strategies.
Resources
For more detailed background on Luria and COWS ideas: find working paper on “Full-Utilization Learning Lean” at http://www.cows.org/about_publications_detail.asp?id=319
Contact: Mary Gable at the Economic Policy Institute mary@epi.org for a copy of Luria’s slide show on saving and modernizing manufacturing at the 2006 Earn Conference.
Sloan Foundation website on Industry Studies – www.industry.sloan.org/industrystudies/
Nicholas Lardy, “China: The Great New Economic Challenge?” in Bergsten, Fred (editor). The United States and the World Economy: Foreign Economic Policy for the Next Decade. Washington, DC: Institute for International Economics, 2005.