Non union manufacturing facilities in the American South have been decimated over the past 20 years thanks to lower tariffs and quotas. Entire industries have virtually disappeared (textiles, apparel assembly, furniture, home furnishings, and consumer product assembly). These nonunion workers did not have bloated benefits packages and many began their factory work at minimum wage or slightly above.
I spent over 30 years working in management for large corporations and was involved in many decisions to outsource. It is naive and simplistic to say the decisions were related to excessive union wages and benefits. The companies I worked for had nonunion labor forces and were located primarily in right to work states. Here are the facts:
1) During the 1970’s and 1980’s financial managers, most trained as MBA’s at the nation’s leading business schools, wrested control of many US companies from the product and customer focused managers who typically worked their way up from sales, marketing, design, or manufacturing assignments. The financial executives were not connected to customers, employees, or operations. They managed “numbers”, not factories or customer relationships much less the R&D/product development required to sustain innovation and new product activity. Under management of the financial executives US industry shifted from a focus on driving sales growth to managing quarterly improvements in bottom line performance. Organizations became internally focused on cost reduction, not externally focused on driving sales. To reduce costs and increase cash flow, US companies deferred or eliminated routine capital investment associated with increasing productivity. By the early 1990’s when the US market was opened to “free trade”, US factories were filled with obsolete equipment.
2) US labor was highly productive, but the equipment was not the most productive available. US companies were faced with a need to invest heavily in modern equipment and facilities if they wished to remain competitive. It is interesting that almost every financial analysis I was involved with showed US workers with modern equipment were competitive globally thanks to the higher productivity of the US worker and the creative management in US factories. The problem was getting the investment capital to give them the updated equipment.
3) At the same time Wall Street had shifted from its historical function of providing long term investment capital to US companies to a casino of speculators focused on quarterly performance, not long term value creation. In fact the Wall Street financial leaders of the 1990’s were obsessed with innovations in leveraged buyouts and private equity restructuring. Wall Street rewarded companies that stripped assets in order to free up cash and improve earnings in the short term. The speculators in charge of the US capital markets had no interest in funding the billions of dollars required to provide US workers with the current technology equipment needed to make them globally competitive.
4) Another nail in the coffin of US manufacturing came from China. While we opened our markets to the world, China maintained a mercantilist trade policy. Export industry were given zero interest loans by the state to construct modern factories with state of the art equipment. The Chinese government also gave its domestic companies rebates on the value of goods exported. The combination of free capital and export subsidies of up to 20% (15% was typical in the industries I worked with) distorted the economics to the point where the decision to offshore became simple. In addition, the China’s intentional manipulation of its currency to make its exports less costly in global markets has been well documented over the past two decades. Corporate tax rates in China are also lower than in the US giving Chinese companies another cost advantage.
5) The other nail in the coffin of US manufacturing came from the big Wall Street investment banks, and the big management consulting firms. I sat in a number of presentations where the bankers and consultants met with US public corporate management teams encouraging them to shut down US factories to free up capital to reinvest in acquisitions or stock buybacks. In other words trade hard productive assets for paper created by Wall Street. Many corporations took the bait, shedding people and plants giving modern state subsidized Chinese factories instant customers while decimating US workers and communities. I can assure you every presentation I viewed included a section on how the US company could unload the social costs of the layoffs on state, local and federal agencies.
Very few of the major offshoring initiatives with which I was associated ever realized the promised savings. Rising global petroleum costs dramatically increased freight costs. Many of the financial projections assumed the offshore workers would achieve the high productivity level of US workers. The productivity gains did not occur due to different management processes and higher labor turnover. Meeting quality standards was a major problem for Chinese factories in particular. Chinese culture does not frown on cheating and one way to reduce production costs is to produce product out of spec or use inferior raw materials. US companies incurred significant unanticipated costs to monitor production and ensure quality standards were being met in the factory. Finally, most US companies underestimated the reserve inventory they would have to carry in order to preserve service levels with longer lead times.
Today, for a variety of reasons, the economics of most manufacturing operations actually favors US labor, assuming it is supported with modern equipment and management processes. However, after 20 years of offshoring domestic raw material and component supply chains no longer exist for many industries. Even if a company is willing to invest in building an assembly operation in the US today, it faces the daunting challenging of supplying the factory with components when domestic suppliers of the components do not exist.
I take great exception to you accusing me of lying and preferring government interference in the market. I’ve spent over 30 years managing these offshoring issues and fully understand both the macro economic issues impacting the decisions as well as the nitty gritty details associated with establishing supply chains around the globe. Are you speaking from similar experience or merely spouting platitudes? There are legitimate reasons for tariffs particularly when other countries are subsidizing their competitive industries or engaging in currency manipulation to make their industries more competitive. Tariffs also allow the government recapture some of the costs the taxpayers bear to support trade (Customs Service, Coast Guard, harbor dredging by the Army Corps of Engineers for example). If tariffs and duties are not imposed to cover these costs, essentially taxes paid by domestic manufacturers are subsidizing the importers.
Union labor, as you infer, has another set of issues but politicians can easily correct the distortions unions impose on the marketplace by passing a national right to work law. Remember, union wages are the result of a voluntary agreement between management and labor. It is management’s fault if it agrees to uncompetitive labor contracts. No doubt the executives who acquiesce to the unions also give themselves compensation packages several times the compensation for equivalent management jobs at overseas competitors. If your preference is to lower the compensation of US working people to the level of workers in third world countries, I suggest you should also support the lowering of the compensation of senior executives in the 1% to equivalent competitive levels. After all, isn’t that what should happen in a perfectly free market?
Wow, you typed a lot here at the risk of it being lost in the FR troubles that have been plaguing us! Kudos to you. I will try to address some of them, but need to re-establish a couple of foundational facts.
A. This article is about a factory closure in Belgium.
B. The EU is very protective of the labor and many of the countries are especially hard on employers. Belgium is one such country.
C. You used this article as an opportunity to attack capitalism and free markets.
D. You called for more government involvement in the market, specifically you stated a desire for more quotas and higher tarriffs.
E. Belgium has very high hiring quotas and it is extremely difficult have any flexible manufacturing facility in that country.
F. The closure of the plant being discussed in the article, is a result of more government involvement. Yet you called for more.
Now, let me briefly address each of your points by their number:
1. Yes, our corporations have given way to much power to the Finance function. Why did that start to occur? My guess is that it is due to financial reporting regulation growth. I have seen it most recently with SOX and am expecting even more need for “financial controlling” with Frank-Dodd. This additional government control is forcing corporations to spend to much time trying to comply with regulations, therefore the functional area with the most influence is Finance or Controllers.
2. US labor was and is still very productive. As a result, we want it used most efficiently and productively. You complain about the textile industry leaving the US and moving overseas, yet you brag about the productivity of the US labor market. That productivity is best used for higher level manufacturing and not sewing socks or weaving rugs. In my business it is much better for the cheap overseas labor to make fasteners in bulk, and then we can use the US highly productive labor and capital to assemble a car seat.
3. Wall Street still has the long term investment function that you describe. Yes, there is also speculation, but your view of Wall Street fails to recognize that it is still the single best investment vehicle for long term growth.
4. China has not been a nail in the coffin of US manufacturing. As you pointed out earlier, the labor productivity is much lower (much less skilled) than the US labor market. Then you complain that their government subsidizes their manufacturing and your solution to make us more competitive is for our government to increase the burdens on our US manufacturers.
5. You describe crony capitalism. Yet, you claim to want more government interference, which would create more shortsighted managers asking for more government assistance, which would create a “need” for more government control, and on and on and on and on.
OK, you took offense at me calling out your lies. Maybe you weren’t purposefully lying, but you were not wise in chosing a plant closure in Belgium as an opportunity to attack capitalism and the free market. So, in essence you were blaming blaming the result of high quotas and protected labor on the free market! Either you were being purposefully obtuse or you were lying. I’ll let you clarify further or any lurking reader decide.
Then you stated, “I’ve spent over 30 years managing these offshoring issues and fully understand both the macro economic issues impacting the decisions as well as the nitty gritty details associated with establishing supply chains around the globe.”
I anticipated as much after I checked your profile page and to be honest I was rather shocked. Your comments seemed to be completely disconnected from global manufacturing and specifically from Supply Chain Management. Your approach to solving the challenges we face in manufacturing is to compound those problems.
Then you ask, “Are you speaking from similar experience or merely spouting platitudes?”
I am speaking from the background of being a Global Lead Buyer for a Fortune 5 company. I am currently negotiating a $500M buy that touches manufacturing in the US, MX, Brz, Germany, Russia, India, China and Thailand. I am speaking from completing an insourcing project from 2009-11 that brought $400M back to the US in manufacturing. I am speaking from 15 years of similarly diverse experiences that are focused on Supply Chain Management.
The solution to our problems is not more government restrictions on markets, it is not protectionism, it is to get the government out of the way of our manufacturers. They will decide where the most efficient uses of all resources lie on the globe.
All of that said, I’d wager we could both agree that the single best solution to make the US a Global Leader in Manufacturing is to abolish all corporate and income taxes and institue the FairTax.