American Manufacturing

My last client was for a spin out of a small manufacturing business of an oil equipment giant. This subsidiary’s business isn’t really related to the parent’s, so they’re trying to create value through an IPO. I was there for the diligence part of “due diligence”, so really got to know the operations inside out. (The cynic in me says the partners are there for the “due” part, which is to collect the bills due, but that’s another story in itself.)

One thing that really stuck out in my mind through this assignment was that this was one of the last great American manufacturing jobs left. By which I mean a relatively uneducated employee could start on the company’s manufacturing line with a salary of around $22,000 a year, and work their way up. With hard work and patience, they could eventually work their way into a skilled job up the line with a respectable annual salary of $50,000 – $70,000 a year. Granted it would take many years, but it’s an accessible on-ramp into middle class for literally someone with a high school education. If the person were really dynamic and had the brains, they could even swing themselves into a management position at some point. The company had good benefits, including retirement and all the usual goodies. In a nutshell, a worker’s paradise for lack of a better term.

Looking over what they do and what they make, there isn’t really anything – save social responsibility on the company’s part – to stop them if they wanted to transplant their entire operations to China or India. They would save a bundle on labor costs, and given the highly automated nature of their machines, you really don’t need that much skill on the part of the workers. At the very least, none of the skills involved are above the aptitude of an eager Chinese or Indian. The double edge sword of modernization is also that since you want to make everything automated and dumb it down to the n-th degree to maintain high quality, you get to a point where you can literally take the brain out of the equation. So pay a Chinese or Indian $100 a month, and you decrease your biggest operating expense by more than 90%.

7 thoughts on “American Manufacturing”

  1. Hey, all I got is a high school education…Which turns out to be an issue when you apply for a green card. Never mind what you do, the Department of Labor worries you might be taking one of those jobs.

    And the savings are probably not exactly 90%. Shipping costs have been going through the roof in the past couple of years. And wage inflation down there is higher, and poised to raise as the Chinese and Indian economic boom get under way. Increase in offshoring also drives wages up over there. Remember when Japanese workers were cheap ? It will happen all over again. Except faster. Unless everybody shoots themselves in the foot with the usual knee-jerk protectionism.

    In the meantime, to the extent these cost savings are passed to the consumer at home, everybody wins, including, in the longer run, those guys who are being axed today.

    I live in an old textile mill. There is a ton of them converted in cool condos all over the country. Textile workers used to be a huge constituency. Hard to find one these days, yet we don’t see entire towns of unemployed, destitute mill workers.

    Outsourcing seems a recurrent political red herring though, the last great protectionist incentive. But the strongest, most consistent employment reduction factor in manufacturing – and many other sectors – has to be productivity. See the latest semiconductor fabs. Most of the employees are security guards and a few people for monitoring and maintenance. The darn places pretty much run themselves. That’s a lot of high-paying manufacturing jobs removed out of the equation. But you don’t hear about them because these people are rarely unionized.

    On the plus side, opportunities similar to the ones you talk about still exist. Some brains and hard work are required, but you can make your way up in software, from tech support for instance. Or even in banks and finance. (Remember tradergrrl ?). And that is what of the defining characteristics of America.

    But yeah, the destruction bit of ‘creative destruction’ can be as painstaking as the diligence part of your work.

    What’s truly amazing though, is that my job didn’t exist when my parents were born, just like 90% of today’s jobs. And many kids born today and in the past decade will get jobs that didn’t even exist when *they* were born…

  2. Or, your late FIL w/only a HS degree decided he could do the same thing he’s been doing for himself. And his son worked part time after school after barely passing HS.

    The downsides? No experience in corporate America before he started working for his dad full time. No seasoning. Making sure always have cash aside for the big downside (hasn’t happened yet so we can still pay the employees)And being a more conservative because one never knows when the business will go back in the basement. He is our retirement for now and for doing what we’re supposed to be doing, not loading up on debt and saving what’s our award? Very greedy people who want to take what we’ve saved because we “have more than our ‘fair share.'”

    Here’s a tidbit via trend macro (and a reason NOT to elect another lawyer):

    “Wednesday, December 10, 2003
    A new report from the National Association of Manufacturers and the Manufacturing Alliance (MAPI) found that much of the manufacturing sector’s problems are not due to unfair actions by our trading partners, but are self-imposed. It notes that we have higher corporate taxes, higher pollution abatement costs, and higher tort liability costs than our key competitors. Overall manufacturing costs are 22.4 percent higher in the U.S. as a result of such self-imposed costs, reducing our competitiveness and contributing to the trade deficit.

    In terms of tort liability, a new report from Tillinghast-Towers Perrin estimates this cost at $233 billion last year, up $27 billion from 2001. The report estimates tort costs at 2.33 percent of GDP, or $809 per person in the U.S. Of this amount, only 22 cents on the dollar goes to compensate victims for actual economic loss. The rest is for lawyers and additional payments for punitive damages and “pain and suffering.”

    We may be reaching the point where something will be done. On December 8, the Wall Street Journal noted that vaccines–including for this year’s flu epidemic–are increasingly unavailable in part due to lawsuits. The cover story in Newsweek this week (Dec. 15 issue) details case after case of absurd lawsuits with multi-billion dollar awards and the ways in which society has been made worse off. A new study from the Congressional Budget Office also examines the growing cost of the tort liability system.”

  3. How does this apparently high-cost company sustain market share (and profits) against low-cost competitors that do outsource to India and/or China?

    If there are no competitiors, then the question if moot. But if there are, then it seems to me that there’s something important missing here–like the relatively higher productivity of American labor compared to foreign labor when mixed with identical non-labor factors.

  4. “How does this apparently high-cost company sustain market share (and profits) against low-cost competitors that do outsource to India and/or China?”

    Their margins certainly aren’t anything to write home about, both gross and net margins are super super thin.

    You’re right about productivity. They’ve been in the business for a while, so they’ve got it down pretty well. They’ve also managed to shave non-labor operating expenses down pretty low. Technology I’m sure has a hand in this.

    But here is the crux of my concern: I’m all for creative destruction, but how long can innovation and productivity continue to outpace the destruction? Most of us here probably has no problem with adaptation and relying on our wits. But what is true for some, is not true for the other 50% of the population who aren’t on the cutting edge.

  5. As a sidenote, I always thought it funny when they announced huge productivity gains over the last two years… Everyone is working harder because they don’t want to get laid off.

  6. Nito, people have been the same question for the last hundred years, expecting, or predicting capitalism would crash or hit some kind of brickwall, eventually.

    And every time, there was a failure, indeed. Of our imaginations, that is.

  7. “But here is the crux of my concern: I’m all for creative destruction, but how long can innovation and productivity continue to outpace the destruction?”

    Until all the new advances that can conceivably be made given then-current technology are in heavily regulated industries, product categories, etc.

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