Home Economics

Editor's Note: This is the sixth installment of a seven-part series that details the strategic and often gut-wrenching shifts taking place in manufacturing. It appears in the November 2003 issue of IndustryWeek. IW will introduce a new installment each month throughout the remainder of 2003. Globalization has come home. Literally. As they seek to attract new companies and hold onto those they already have, communities across the United States are wrestling with several of the same strategic issues that challenge the nation's 300,000 manufacturers. In simplest terms, that means communities must somehow confront the reality that globalization is producing significant economic disruption, simultaneously creating growth opportunities for some lines of business while threatening the continued existence of others. Jobs and revenues -- both corporate and community -- are at stake. "Globalization is requiring companies to rationalize their facility locations, and anything that is in any way a commodity or easily replicated in a lower-cost market is being moved," stresses Rick Weddle, president and CEO of the Greater Phoenix Economic Council and chairman of the Washington, D.C.-based International Economic Development Council. "It is growing exponentially, [and] we are rapidly seeing China either become, or be poised to soon become, the world's factory." This represents a sea change in manufacturing and economic development, and in the best of times, it would be tough for communities to deal with. But these are not the best of economic times -- as most U.S. manufacturing executives can attest -- and adjustment to change promises to be even tougher. The 2001 recession hit U.S. manufacturing hard, with production two years ago falling 7% even as the U.S. economy overall eked out a 0.3% gain. Since then, manufacturing's recovery from recession has been the slowest on record, relates the Washington, D.C.-based National Association of Manufacturers. And in the process of recession and recovery, more than 2.7 million U.S. manufacturing jobs have been lost. Couple dismal manufacturing economics with the impact of terrorist attacks, churn in international trade, and state and federal budget deficits, and a result is "a perfect storm of uncertainty," says David Ginn, CEO of the Charleston Regional Development Alliance in South Carolina. "Most of the [economic development] activity we're seeing today is consolidations, mergers and those kinds of things versus relocations and expansions," he says. "And [in] most of those, [companies] are slow to make the decisions." For example, between July 1 and September 1, the Charleston alliance did not have a single new-company announcement to make. Economic development budgets across the U.S. generally fell between late-2002 and mid-2003, but with a few exceptions those cuts don't appear to be continuing, suggests a second-quarter 2003 national survey of about 300 markets by the Greater Phoenix Economic Council. Indeed, the survey indicates that in some communities, increases in private-sector funds are compensating for the loss of public funds, and dedicated sales tax increases have boosted economic development funding. Shift To Higher Value Meanwhile, there's some evidence that communities are redirecting their economic development money toward capturing what Phoenix's Weddle calls "higher-end, higher-value operations." From Arizona and Indiana to Michigan and South Carolina, economic development teams increasingly are using such phrases as "technology intensive" and "advanced manufacturing" to describe the kinds of production facilities they're trying to attract and to keep. In fact, that reflects a more-established pattern in manufacturing itself. U.S.-based companies are keeping their technology-intensive production and highly-skilled jobs in the U.S. while moving labor-intensive, low-value-added stuff overseas, confirms Daniel J. Meckstroth, chief economist at Manufacturers Alliance/MAPI, an Arlington, Va.-based business and public policy group. In Gilbert, Ariz., just outside of Phoenix, for example, Spectrum Astro Inc. is constructing what it dubs "The Factory of the Future" to produce space satellites. Elsewhere in the Phoenix area, bets are being placed on biomedical devices, nanotechnology and nanomanufacturing. Nearly a continent to the east, the Charleston Regional Development Alliance in South Carolina is seeking more companies like Germany's Robert Bosch GmbH, currently the area's largest manufacturer. Bosch makes state-of-the-art fuel injectors, pays well, and makes use of Charleston's biggest infrastructure asset, its Atlantic Ocean port, notes the regional development alliance's Ginn. Meanwhile, the state of Indiana has made "a very conscious decision to target advanced manufacturing as one of the four sectors of the economy that we think are important for [the] future," then-Lt. Gov. Joseph E. Kernan (D) told IW in September before he succeeded Gov. Frank O'Bannon, who died unexpectedly. The state chose the sectors (the other three are life sciences, information technology and high-tech distribution) "in large part because they are strengths that we already have -- we believe they are our longest and strongest suit -- and they give us the greatest opportunity for growth in the future," said Kernan. To help stimulate that growth, the Indiana legislature in 2002 eliminated inventory and gross receipts taxes and raised the state's R&D tax credit to 10% from 5%. In Round Rock, Texas, best known as the headquarters of Dell Inc., economic developers are working on expanding the city's high-tech manufacturing sector. With such companies as Dupont Photomasks Inc. and Cypress Semiconductor Corp. already in the region, the city is seeking similar kinds of manufacturers that can employ the high-skilled workers in Round Rock and nearby Austin. "I think we realize in Round Rock that if we're going to continue to grow our manufacturing sector, we need to be on the cutting edge of manufacturing," says Nyle Maxwell, the city's mayor. And a 128,000 square-foot expansion of Imation Corp.'s disk-storage devices plant in Wahpeton, North Dakota, is adding to that mostly-agricultural state's relatively small but growing advanced-manufacturing base, a sector that includes the Bobcat Co., an Ingersoll Rand Corp. subsidiary that makes compact loaders and excavators, and Marvin Windows and Doors. "We're not so much looking at SIC [Standard Industrial Classification] codes as we are looking at manufacturers that employ high technology," explains Lee Peterson, commissioner of North Dakota's Department of Commerce in Bismark. "When you take our workforce, which we believe is the most productive in the nation, and match that with technology, we can compete with China, we can compete with India, we can compete with anybody." A study done this year for the Research Triangle Regional Partnership in North Carolina by the Research Triangle Institute identifies eight industries that promise to be competitive during the next 10 to 20 years. They are: pharmaceuticals, biological agents and infectious diseases, agricultural biotechnology, pervasive computing, advanced medical-care, analytical instrumentation, nanoskilled technologies, and informatics. For instance, "in pervasive computing, we're not talking about PCs anymore," stresses Ted Abernathy, executive vice president of the Research Triangle Regional Partnership. "We're talking about medical devices, monitoring devices, wearable electronics [and] sensor networks -- all of those things that appear to be on the cutting edge of innovation around computers." Also in North Carolina, the city of Charlotte continues to capitalize on a partnership with the University of North Carolina at Charlotte and develop as a center of digital electronics. Indeed, Charlotte already can claim to be a major part of an emerging East Coast optoelectronics belt. And there's more to come during the next 10 years, predicts Terry Orell, vice president for economic development at the Charlotte Chamber of Commerce. "We're going to see more direct production of digital optical devices, but we're also going to see other companies come in here that use digital optics as a portion of the product that they produce." The emphasis being placed on advanced manufacturing can make for some striking contrasts, however. For example, in North Carolina this past summer, as Charlotte was adding to its distinction as an optoelectronics center, Pillowtex Corp. was filing for Chapter 11 bankruptcy protection and laying off an estimated 5,500 textile workers in the state. And as Indiana began to focus on advanced manufacturing for its future, it was losing manufacturing jobs, notably in steel. Between 1997 and 2002, the state lost 9% of its manufacturing jobs. Wrong Bridge? Despite their best intentions and all their studies and strategies, communities could be making a fundamental mistake by focusing first on attracting and retaining specific industries, however. "I am skeptical of attempts to carve out an industry specialty as opposed to a skills specialty," states Robert B. Reich, U.S. Secretary of Labor during President Bill Clinton's first term and now a professor of social and economic policy at Brandeis University's Heller School for Social Policy and Management in Waltham, Mass. "Does it make sense to go industry-by-industry and ask whether a particular community will generate a lot of jobs in [one] industry versus another? It makes less and less sense," contends Reich, who insists factory jobs are a dying breed. The big challenge for most communities and urban areas "is to bring really the bottom 60% to 80% of their working populations up to a high minimum level of competence so that [the people] can get the skill sets that are needed and don't have to rely only on personal services [for their employment]," says Reich. His is a far more ambitious agenda than communities -- or companies -- generally have pursued. Reich is skeptical even of the kind of impressive community-university partnership in Charlotte, which has created companies and manufacturing jobs. "I think university-community partnerships are terrific. But I think it's best for a community not to think about them in terms of one particular industry niche. That particular niche may become obsolete or when it becomes standardized, it may move offshore," he says. "When I was at the Labor Department, we tried to identify not industries, but cross-industry skill sets and began to develop skill standards so that community colleges and vocational and technical schools could see ascending ladders of skill sets in particular clusters of industries. That to me makes much more sense." Still, intense competition continues among states and regions and communities to attract and retain manufacturers. "No governor wants to lose a manufacturing facility to another governor," Reich notes. But "the sad reality is that there are fewer and fewer jobs in those factories; [instead there are] more robots, more n-c machine tools," he observes. What's more, "the competition between states or between cities for the same jobs doesn't create a single new job, and it uses up scarce public resources that could otherwise be spent on education and infrastructure. It's just plain stupid." Yet even if states and regions and communities were to follow Reich's advice and train and re-train workers so they could better climb skills ladders, they'd confront another formidable challenge: How to involve experienced workers like Phoenix's Weddle. "I have a son who is involved in a master's program in computational biosciences. He can do that," says Weddle. "But that would be a real stretch for me. . . . I would be in a remediation program for a long time to get to that -- as I would expect a lot of American workers would be."