Ideas in Development

The handwriting is on the wall. American manufacturing is only viable if it goes off-shore. We can't compete with Third World wages. If a firm's management cannot turn around their business, why do you think some government program or nonprofit can pull this off?

When I speak to audiences about the challenges facing North Carolina's traditional economic base and the opportunities to avoid many mass layoffs and shutdowns, this is what I hear.

But such a strong sentiment of skepticism and fatalism will not help the situation here or elsewhere in the U.S.

To start, there are a number of ways that competitors such as China subsidize their exports through currency and other pricing manipulations that are hurting American industry. With strong political and policy leadership, these could be curbed and would contribute to an industrial rebound, regarding our balance of payments deficits.

However, the purpose of this essay is not to identify a federal action agenda, regarding international economic policy. Instead, I wish to make the case to policymaker, business, development professional, media, and citizen audiences, concerning the need for more aggressive and proactive state action.

In my view, the pessimism and reluctance to act noted earlier are based on:

• Market mythology, which tends to regard all shutdowns, relocations, and downsizing as pre-ordained and rational;
• An 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); and
• An inadequate appreciation of the spectrum of reasons for closures and mass layoffs, coupled with a lack of knowledge about how some of these causes can be reversed.

Keeping Hope Alive

First, markets are human creations. They are shaped by laws and public policies. They are imperfect, like all other institutions. Some of the turmoil and job loss, that markets appear to be causing, may be self-inflicted injuries. Always keep an open mind about the inevitability of both positive and negative trends and always investigate the facts of a given issue, before going along with textbook theory.

Second, there are a variety of policy tools and programs that can be used. We are not talking about only the eleventh hour turnaround nightmare, when in most cases, it's too late. We are not proposing bail-outs.

Instead, the starting point is that everything is easier if we are truly proactive and preventative in our policies, programs, and responses. 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. (This is also an approach that could be used to expand business ownership options for experienced minority entrepreneurs.)

With better planning and more fiscal and professional resources, we can have a genuine game plan for building on current strengths and addressing competitive challenges. Indeed, signs of trouble within a company are visible years before desperation settles in.

When it comes to troubled firms, we have a broad portfolio of options from which to choose. Expanded incumbent worker training can enhance firm and employee flexibility, productivity, and creativity. Well-staffed and managed state-level manufacturing extension programs can teach total quality management, lean manufacturing, Six Sigma, and other such techniques. Industrial renewal can be part of cluster and supply chain strategies. States can encourage, legislatively, work incentive programs, such as profit-sharing, gain-sharing, and employee ownership. Local business visitation programs can be upgraded through training, using specialized software, and developing protocols with business assistance organizations for delivering discrete, timely, and professional assistance to troubled and promising enterprises. Universities can collaborate with business in establishing a capacity-building and research center for High Skill/High Performance Workplaces. An improved early warning system, tapping the insights and relationships of local business retention staff, combined with good data mining, can give those in the private, public, and nonprofit sectors the time to help firms change their fortunes.

Moreover, we do not claim that the vast majority of firms, especially in furniture, textiles and apparel in my state will survive, much less prosper. In many cases, firms will not have the R&D, flexibility in manufacturing capacity, marketing savvy, and financing to go into a new product line – one with a better future. Due to the higher productivity required to meet the global marketplace test and the strong trend to out-source many formerly in-house services, successful firms will likely eliminate some jobs, while output expands and profit margins increase.

Triage will be required. Mature firms that compete almost exclusively on price will be poor candidates for either proactive or rescue services. Thus, we must keep our wits. There will be times to help a firm survive and times to write it off and get on with helping its workforce transition to new employment.

Fortunately, state policymakers and development professionals are already doing this sort of work across the country. But our efforts should be on a larger scale, promoting the changes in firms, management, employees, trade associations, and business support programs that give us the best we can hope for – a globally competitive, adaptable, and entrepreneurial manufacturing economy.

Now, we come to the third issue: To retain or not to retain, that is the question.

A thoughtful, but simple classification system to sort through the factors behind at threatened closing or contraction would help a lot.

In the eighties, development consultant Ross Boyle, made a good start. He believed that the quality and appropriateness of the right treatment of the symptom (plant closures and mass layoffs) would be enhanced by greater understanding of the reason and motivation for the decision. Boyle starts by noting that there are cases where local factors shape the company choice and cases where they don't. He begins with those that are local/regional in nature.

1. Facility-motivated, where shutdowns result from problems in the facility itself. This occurs when the plant layout is obsolete, management is backward and poor, the workforce is unmotivated and needs training, technologies are behind the times, and so forth. Another cause of closing occurs when the owner has not planned for ownership succession if he dies or retires and has no heir to take over. Any of these problems, theoretically, can be fixed, given time, needed expertise, cooperation from the firm, and may be an actual management and ownership change. An easier problem to potentially solve within this category involves helping a firm intending to expand to find space locally and work through the permitting process smoothly and swiftly.
2. Community-motivated, where the closing is the result of problems associated with the community in which the facility is located. The challenges can be small or large. Economic dislocations can happen when the community's local characteristics change substantially in a negative direction or when the location requirements for the facility change. Obvious problems include: deterioration in the physical infrastructure and schools, rising crime, higher taxes but poorer public services, growing pollution. These trends may be hard to shift, but, if action is not taken too late, and elected and civic leadership is strong, a change can come.

Next, there are those involving non-local drivers:

3. Organization-motivated, that result in closings caused by decisions within the parent corporation. Such dislocations occur when a local operation no longer fits the plans of the parent organization, regardless of its performance. (It's a branch plant.) Corporate acquisitions can result in excess capacity, with which the parent deals by deciding to divest. Changes in product lines, marketing priorities, a refocus on its core business, et cetera, can lead to shutdowns as well, even if the facility is a viable free-standing business. Sometimes the parent corporation needs additional capital to pay off creditors for its acquisitions and it generates these funds by milking profitable subsidiaries, thereby ruining their long term future. Large corporations sometimes set return on investment hurdles that smaller facilities, although profitable, cannot meet. Here again, closing and liquidations can happen. But these facilities could become a new profitable enterprise, under new private or employee ownership.
4. Market-motivated, where the shutdown or relocation are the result of changes in national and/or international markets. Growing imports, substitute products and services, cuts in domestic tariffs, and other trends and events can undo a once-profitable firm's market position.

The initial three offer real possibilities for effective intervention, depending on the facts of the case. The fourth situation will rarely be a good alternative for saving jobs, since it requires essentially doing a startup with a new product line. However, there will be times that such rescues should be tried and can succeed.

More details about the business conditions of the firm and a tough-minded triage perspective will be needed if such a retention endeavor is attempted. Such turnarounds and worker buyouts are reasonable (although challenging) and they will not succeed without a good management team in place to run the new enterprise.

Thus, knowing the facts and motivations behind the decision to divest, relocate, or close can help state and local policymakers and practitioners to decide on whether helping the soon-to-be terminated employees is their only responsibility.

Ideally, much of a state's business retention, expansion, and modernization efforts will focus on the initial three motivations.

Improving the Odds

According to the National Academy of Public Administration, small manufacturers employ seven million people and produce $711 billion of the Gross National Product. This amounts to about 350,000 firms which face large obstacles if they are to introduce new products and technologies, lower costs, and enhance quality. Currently, too many small and mid-sized manufactures are operating visibly below their potential for a variety of reasons. But there are ways and resources presently available that could help reduce these barriers.

As stated earlier, the odds, involved with mounting a larger and more aggressive business retention, expansion, and modernization strategy across a state, improve with more proactive efforts. A professional, statewide, and uniform business visitation and survey endeavor can troubleshoot problems before they get too big to solve, become a rich data base for analyzing industry trends, and constitute the beginnings of an early warning network, which give more time than mandatory WARN notices. Outreach and educational workshops on succession issues, targeting older owners, could help avoid the eventuality of messy transitions and even unnecessary closings. More foresighted and well-financed initiatives to improve supplier chain productivity, to help small and mid-sized firms crack foreign markets, to strengthen cluster strategies, to adopt higher value-added product lines and high performance workplace organization are all worth pursuing. Opportunities also exist for governments to increase the brokering of business and technical services through contracts with private sector consultants and training organizations. Modernization assistance vouchers with a sliding scale for payments, depending on size of firm, are one such option.

Our manufacturing future is only pre-ordained, if we throw in the towel and stick with what worked in the past.

There is a better manufacturing future for manufacturing states, if we try.

William Schweke is a Vice President at CFED in Durham and has been involved in researching and designing business retention, expansion, and modernization strategies.