Harold L. Sirkin
Despite the recession the U.S. remains the world’s leading manufacturer—and much of what is made here can’t be done elsewhere
A few weeks ago, my wife asked me why the U.S. doesn’t make anything of value anymore. Everything, she said, is made in China or Mexico or other faraway points on the compass.
Welcome to one of the destructive side effects of the “woe is me” times we live in: Along with the legitimate and serious problems that face our economy, we seem to have convinced ourselves that we’re powerless to do much about the downturn because we’ve already become a second-rate economic power.
In fact, as I told my wife, the U.S. is still the world’s leading manufacturer and in most of the world, “Made in the USA” is still synonymous with quality and high value.
This isn’t what many people want to hear. Daily headlines about big companies in big trouble and monthly job-loss figures coming from the Bureau of Labor Statistics provide plenty of ammunition for those who see U.S. industry in decline. And yes, there are big companies in trouble. But recessions eventually end. If the conversation I had with my wife is any indicator, the real difficulty U.S. business and political leaders may face in the months ahead is restoring America’s confidence. And that’s where some healthy honesty would help.
Many of those who talk economic Armageddon intentionally paint an overly pessimistic picture. They claim U.S. factories are outdated. They complain U.S. products are overpriced. They claim that U.S. workers are lackadaisical and overpaid. They warn U.S. companies are unsuited for 21st-century competition in a global marketplace where everyone from everywhere is competing for everything. They claim a lot of things. And much of what they claim isn’t true.
As Stephen Manning of the Associated Press acknowledged in a rare “just the facts” story in mid-February, the U.S. “by far remains the world’s leading manufacturer,” producing goods valued at a record $1.6 trillion in 2007—nearly double the $811 billion produced a decade earlier. Indeed, the AP writer noted, “For every $1 of value produced in China’s factories [in 2007], America generated $2.50.” Not bad for a country that doesn’t produce anything anymore.
Not only is the U.S. still the world’s leading manufacturer, but there are many good reasons that companies will continue to manufacture here and invest in new plants and equipment. According to the Census Bureau’s 2007 Annual Capital Expenditures Survey, released on Jan. 22 of this year, U.S. nonfarm businesses invested $1.36 trillion in new and used structures and equipment in 2007, a 3.9% increase over 2006. More than $484 billion was spent on new structures alone.
Yes, the recession and credit crunch have derailed this engine of economic growth, just as the recession has put the brakes on consumer spending. The NAM/IndustryWeek Manufacturing Index for the fourth quarter of 2008, for example, reported that large manufacturers were anticipating a 4.2% decline in capital expenditures during the next 12 months; small respondents were anticipating a 2% decrease.
But these are hardly the kinds of numbers that should make us want to jump off a cliff.
The High-Value Goods Leader
So why is our country, admired worldwide for its optimism, now enveloped in self-doubt and defeatism? One explanation is politics: Politicians and interest groups find it much easier to move their agendas forward during times of angst. Many of them therefore deliberately fuel the public’s anxiety.
Another reason is the fact that there is a kernel of truth in some of the naysayers’ claims. Some of our factories are outdated; but many are among the most modern in the world. Wage and legacy costs—retiree health benefits, for example—have made some companies less competitive. By the same token, U.S. multinationals are generally among the most productive and innovative in the world. And, yes, U.S. companies have ceded production of men’s dress shirts that retail for $12, microwave ovens that retail for $69, and boom boxes that retail for less than half that price to low-cost developing countries. But the U.S. leads the world in many high-value fields, producing more than half of the $175 billion in health-care technology products purchased worldwide each year, for example. The U.S. also ranks as the world’s largest producer of chemicals, selling 11% of the global total. And, as the AP reported, we “sold more than $200 billion worth of aircraft, missiles, and space-related equipment in 2007.”
In fact, even in the midst of a global recession, the U.S. exported an estimated $1.377 trillion worth of goods last year, according to the authoritative CIA World Factbook. Nearly half of the exports were capital goods: aircraft, computers, electric power machinery, office machines, telecommunications equipment, and the like. Industrial supplies, such as organic chemicals, accounted for another nearly 27%. And consumer goods, including pharmaceuticals, and agricultural products accounted for 15% and 9%, respectively.
A third reason for our collective funk (and there are certainly other reasons) may be the nostalgia factor, particularly prevalent among the baby boomers: the fact that much of what was “Made in America” in the past—think clothing, radios, televisions, telephones, sewing machines, toys, tools, housewares, small appliances, baby furniture, bicycles, even the legendary Oldsmobile “Rocket 88” that was so much a part of the America in which many baby boomers came of age—isn’t made here anymore. (The Rocket 88, in fact, isn’t made at all.) Seeing so many iconic Made in America brands disappear seemingly overnight has caused pain and anxiety for many Americans.
A Normal Course of Events
But none of this is especially new. Production jobs started to abandon America’s industrial heartland years before Japan edged into the picture and decades before China and other rapidly developing economies (RDEs) took their place on the global economic stage. Vibrant economies are constantly undergoing change. Joseph Schumpeter, in the 1942 book Capitalism, Socialism, and Democracy, described the process as “creative destruction.” But other factors being equal, it makes sense in a competitive marketplace to make products where they can be made at the lowest cost. Economist David Ricardo described this phenomenon, known as “comparative advantage,” nearly 200 years ago.
So what’s different today?
In fact, little is different. Manufacturing companies should still seek low cost. But as we also know, costs aren’t everything. In deciding where to manufacture, companies also need to consider other factors, including R&D and engineering capabilities, the availability of raw materials, the accessibility of markets, quality control, intellectual resources and intellectual property-rights protections, management talent, and infrastructure capacity, among others. These are all areas where U.S. companies often have an advantage. And these are all reasons Made in the USA will continue.
So what should be done?
1. Policymakers need to address the right problem.
For many years now, Washington has been attempting legislatively to discourage U.S. plant closings. But the closing of certain production facilities is often a sign of renewal: a naturally occurring phenomenon in which the old and outdated is replaced by something new. As Manufacturers Alliance/MAPI Chief Economist Daniel Meckstroth has noted, the “death rate in manufacturing” really isn’t significantly higher than in the past. What has changed, Meckstroth says, “is that the creation of new factories has dropped so dramatically.”
If Meckstroth is right and the problem is that too few new factories are opening, Washington should encourage companies to invest in new plants and equipment. It also needs to identify and change existing policies that discourage the building of new factories.
A recurring theme in my conversations with U.S. CEOs is that the effort it takes to build a new plant is barely worth it anymore. There’s just too much red tape, too many hoops to jump through, too much bureaucracy, too many special interests fighting you tooth and nail, too many unnecessary, if not nonsensical rules to contend with, too many permits and legal roadblocks.
2. Executives need to speak up with candor.
We all know that Washington is as much to blame for our economic woes as any company or industry. But most executives are reluctant to speak up, except through the trade groups they support and the lobbyists they hire. This may be the price companies pay when they seek favors from government. So let’s declare a moratorium, wherever possible, on government handouts—and speak forthrightly about policies that are hurting your company and how they might be changed to accomplish the same goals without the destructive side effects.
3. Managers need to prepare for the rebound.
It’s easy enough to sit around feeling sorry for yourself when all you hear is doom and gloom. The doom and gloom may be justified. These are not happy times. But this is when top managers should be making the plans that will enable them to spring back into action when the economy picks up.
Very little happens by accident. Somebody has to be first out of the gate: you or a competitor? Let it be you. When the Labor Dept. releases its next monthly job-loss report, let’s not forget that the U.S. labor force has grown threefold since World War II. Before the recession started taking its toll, a record 135 million Americans were gainfully employed, the American Institute for Economic Research reminds us. These are not signs of a dying economy.
I’m not trying to minimize our current problems: These are very tough times. But tough times often produce the winners we celebrate in better times. That’s what managing is all about.
Harold L. Sirkin is a Chicago-based senior partner of The Boston Consulting Group and author, with James W. Hemerling and Arindam K. Bhattacharya, of GLOBALITY: Competing with Everyone from Everywhere for Everything (Business Plus, June, 2008).