America's Dirty War Against Manufacturing - Part 2

So who really lost Detroit? Why did the U.S. auto industry’s domestic market share decline from 71.1 percent in 1998 to 44.8 percent in 2009? Why does the U.S. now produce fewer cars than China? And what does this story tell us about the overall causes of decline in American manufacturing?
The conventional wisdom is that wages and union contracts simply made American cars too expensive. During the auto-industry collapse of 2008, the news media bombarded the public with data about how much higher labor costs are in Detroit factories compared with those in non-unionized Southern states. The New York Times reported, for example, that at GM “the average worker was paid about $70 an hour.”

Trouble is, that figure was wrong. In 2007, the average hourly wage in a unionized Detroitauto plant was $29. The average hourly wage in a non-unionized Toyota plant in Kentucky? $30. In Japan, Toyota paid assembly-line workers about $22 an hour. True, that’s less expensive. But when you consider that wages make up about 10 percent of a car’s cost, it becomes clear that wages are not the reason for Detroit’s struggles. As for that $70-an-hour figure, it’s the sum of the hourly wage plus the cost of retiree health-care benefits and pensions. U.S. auto companies have carried these costs like a ball and chain.

Society’s Burdens

Detroit for years complained that, unlike German and Japanese competitors, it couldn’t make money on small cars. But U.S. automakers never explained why. As automation and competition shrank Detroit’s workforce, its labor costs didn’t shrink with it. Not because of wages, but because of retiree health care and pensions -- burdens that are borne by society, not manufacturing plants, in every other advanced country. That disparity, the result of policy decisions made in Washington rather than wages negotiated by the United Auto Workers, was the source of most of the labor-cost advantage enjoyed by foreign companies.

That wasn’t all that went wrong in Detroit, of course. A decade ago I met with then-UAW President Steve Yokich to urge him to partner with environmentalists and automakers to develop fuel-efficient vehicles that could compete with those from Japan and Germany. Yokich took me to the window of his office in Solidarity House. Pointing outside, he said, “What do you notice about the parking lot?”
“They’re all American vehicles?” I answered. “Look again. Almost no SUVs. My guys know crap when they make it.” Yokich understood Detroit’s ruthlessly short-term business model -- put lots of cheap sheet metal on an outmoded truck chassis and layer on a gargantuan markup. He conceded that Nissan and Daimler would soon start making fuel-efficient, technologically sophisticated SUVs that would steal that market segment, too. Japanese companies were more innovative in part because they enjoyed much cheaper capital; the real interest rate in Japan, suffering through its lost decade, was 0 percent. But for the Big Three, the SUVs being designed in Tokyo and Stuttgart would be “next year’s problem.”

Bob Lutz, the former head of GM, says it was neither uncompetitive wages nor unions that drove the Big Three into decline. It was a management with its eye focused on the bottom line and the short term. That, he says, is the “creeping malignancy that transformed the once powerful, world-dominating, American economy from one that produced and exported to one that trades and imports.”

Trade Deal Effects

When federal fuel-economy rules required Detroit automakers to produce some fuel-efficient cars, they decided to make them in places like Mexico because two decades of trade deals, under Republicans and Democrats, protected American banks, agriculture, drug companies and Hollywood -- but not manufacturing. (Gas-guzzling trucks, intriguingly, continued to enjoy tariff protection -- one reason Detroit made so many.)

The final nail in Detroit’s coffin was also hammered byWashington. It was gasoline priced at almost $4 a gallon. For decades, the U.S. government let the Saudis manipulate the market -- periodically flooding it with cheap oil to discourage the U.S. from making serious efforts to reduce our demand for oil, which, ironically, is the only way to ensure cheap oil. The auto industry treated oil spikes as a routine market perturbation, ignoring the possibility that gasoline might permanently become more expensive. When global demand pushed gas beyond $2.50 a gallon, bankruptcy soon came barreling toward Detroit.

The forces that devastated U.S. auto manufacturing undermined industry after industry: steel, tires, televisions, computers, home appliances. All suffered from dubious tax policy, legacy health-care costs, trade negotiators who put overseas investors ahead of Midwestern factories, inadequate workforce training, decaying infrastructure. Manufacturing employment, which had climbed steadily since World War II, suddenly began declining in 1980.

The financial crisis that began in 2008 transformed decline into collapse. In the first 18 months of the crisis, more than 2 million jobs -- 15 percent of remaining manufacturing employment-- were lost. Very few have come back. Meanwhile, U.S. wages had been falling relative to those in Germany and Japan.

Former Intel CEO Andy Grove warns that the whole “scaling”process by which innovation led to mass production has broken down in the U.S. As he put it in a 2010 essay in Bloomberg Businessweek, “How America Can Create Jobs,” both politicians and business leaders bought into a “general undervaluing of manufacturing -- the idea that as long as ‘knowledge work’ stays in the U.S., it doesn’t matter what happens to factory jobs.”

Lack of Commitment

Even when the federal government made attempts at a smart manufacturing jobs policy, it lacked commitment. The research and development tax credit, first passed 30 years ago, has never enjoyed permanent status. It has expired once and been extended for short periods 15 times. Taxpayers pay for the credit, and lose the revenue, but companies don’t build factories to take advantage of it because they can’t be sure it will be around by the time a factory is complete.

Likewise, some U.S. CEOs told themselves they were leading global corporations; it didn’t matter if they made their stuff in Detroit or Shanghai. They bet on one version of globalism. It turned out the Chinese had a very different idea. Cars are indeed being made in Shanghai, but increasingly by companies led by executives named Wu or Chen.

Conservatives in Congress like to say that government shouldn’t pick winners and losers. Yet for three decades the U.S. government picked manufacturing to be a loser -- time and time again putting the interests of favored industries ahead of factories and the people who work in them.

It’s not too late. The U.S. is still one of the two largest manufacturing countries in the world, and manufacturing is the bright spot in our export picture. But we must recognize that if public policy consistently shortchanges manufacturing, a broad-based recovery of the American middle class will remain beyond our reach.

Story Courtesy of http://www.bloomberg.com/news/2012-01-19/america-s-dirty-war-against-manufacturing-part-2-carl-pope.html

America's Dirty War Against Manufacturing - Part 1

“I’d love to make this product in America. But I’m afraid I won’t be able to.” My host, a NASA engineer turned Silicon Valley entrepreneur, has just conducted a fascinating tour of his new clean-energy bench-scale test facility. It’s one of the Valley’s hottest clean-technology startups. And he’s already thinking of going abroad. “Wages?” I ask.

His dark eyebrows arch as if I were clueless, then he explains the reality of running a fab -- an electronics fabrication factory. “Wages have nothing to do with it. The total wage burden in a fab is 10 percent. When I move a fab toAsia, I might lose 10 percent of my product just in theft.”
I’m startled. “So what is it?”

“Everything else. Taxes, infrastructure, workforce training, permits, health care. The last company that proposed a fab on Long Island went to Taiwan because they were told that in a drought their water supply would be in the queue after the golf courses.”
So begins my education on the hollowing-out of the American economy, which might be titled: “It’s not the wages, stupid.”

Manufacturing’s share of U.S. employment peaked in 1979 and has since fallen by almost half. Although manufacturing has been a relative bright spot in the dismal economy of the past couple of years, in the last decade, the U.S. lost a third of its manufacturing jobs, with the damage rippling far beyond that base to erode millions of jobs that are dependent on it.

Tomorrow’s Losses

The loss of textile, shoe and toy production to low-wage competitors such as China, and now Cambodia, has devastated a few regions, particularly South Carolina. But the loss of yesterday’s manufacturing isn’t the really painful part: It’s losing tomorrow’s manufacturing: automobiles, electronics, metal fabrication, specialty chemicals, appliances and consumer electronics.
Those industries left the U.S. in search not of cheaper workers, but of more supportive governments. If the U.S. lost manufacturing due to high wages (or unions, labor laws, regulation -- the other commonly cited villains), how do you explain the manufacturing success of Germany and Japan? Germany, the world’s pre-eminent high-end manufacturing economy, has higher wages, stronger unions and stricter labor laws than the U.S. Japan, too, is a high-wage competitor, yet Toyota Motor Corp. still makes 60 percent of its vehicles there. General Motors Co. makes only about 30 percent in North America.

So if wages aren’t to blame, what is? Policy. But is U.S. government policy really hostile to manufacturing? Sadly, yes. Take tax policy. Historically, manufacturing was the high-wage sector of the economy -- manufacturing jobs still pay about 30 percent more than service jobs in education and health care -- so tax policy milked it. Manufacturing companies, in the old days, actually paid the corporate income taxes that many others avoided. Commodity producers (oil, timber, agribusiness) lobbied for, and received, federal subsidies, with investors in oil and gas wells simply voiding corporate income taxes on the profits they earned. Banking, retail and services found their own ways around taxes, often by offshoring intellectual property or shifting profit to tax havens. Eventually, manufacturers figured out how to duck taxes as well -- by going overseas.

Varying Regulations

Yet it isn’t just taxes. Wind turbines, for example, are enormous, heavy and expensive to transport -- so there is a big advantage to fabricating them close to the installation point. But consider the predicament of the Spanish wind manufacturer Gamesa Corporacion Tecnologica SA after it began operations inPennsylvania. Because the George W. Bush administration’s Department of Transportation wouldn’t establish uniform standards for transporting the enormous turbine blades, each state followed its own rules. Whenever a blade crossed a state line it had to be unloaded by a construction crane and then reloaded to conform to the next state’s specifications.
Similar policy failures explain why Minnesota’s Port of Duluth exports iron ore to China and imports wind turbines fromEurope. On the way to China, the ore freighters pass Chicago; Gary, Indiana; Cleveland; and Buffalo, New York -- cities where steel could be made and turned into turbine towers. But the U.S. wind market is too small, and the government too focused elsewhere, to make it profitable.

And that Long Island golf-course story? Not unique to New York. During the 1991 California drought, Silicon Valley’s electronics manufacturers were warned by Governor Pete Wilson that the state might have to shut off their water supply. Agriculture, Wilson said, came first. When I asked a Silicon Valley lobbyist in Sacramento if he had quietly received assurances that California would prioritize 21st-century computer chips over 19th-century alfalfa, he said he hadn’t. In fact, he said, some plant expansions initially planned for Silicon Valley were being diverted to Oregon to secure access to water.

In 1991, it was Oregon. Today, it’s Asia. Conventional wisdom blames globalization for the exodus of factories and jobs. Because other countries pay lower wages, the thinking goes, there is nothing we can, or even should, do about it. But the evidence of Germany and Japan -- and the experience of manufacturers in the U.S. -- tells a very different story.

We are not victims of an impersonal Leviathan called“globalization.” We’re the suckers who allowed our government to sacrifice the manufacturing sector while protecting the real winners: commodities, intellectual property, finance and agribusiness. The U.S. didn’t lose its manufacturing leadership; it threw it away.

Story Courtesy of http://www.bloomberg.com/news/2012-01-18/america-s-dirty-war-against-manufacturing-part-1-carl-pope.html