Dangerous Disconnect

Millions of displaced manufacturing workers remain unemployed. Simultaneously, an increasing shortage of highly skilled production workers is threatening U.S. manufacturing. If executives don't address this complex conundrum head-on, rhetoric could overco

Editor's Note: This is the first installment of a six-part series "Who Will Work For You?" that examines the future of the U.S. manufacturing labor force. It appears in the July 2004 issue of IndustryWeek. IW will introduce a new installment each month throughout the remainder of 2004.

John Fern knows what it means to lose a job.

Last November, the 45-year-old Crystal, Minn., machine operator was laid-off along with about 40 co-workers as Minneapolis-based Ault Inc., a producer of power supplies, moved manufacturing operations to China. Ault, which reported sales of $41.48 million in fiscal 2003, says the factory shutdown was necessary "to reduce expenses, improve cash flow and return the company to profitability."

For Fern, who first went to work for Ault in 1979, it was a matter of "our orders, machines and livelihood" being packed up and shipped half a world away. He recalls feeling that he and other workers were "just another statistic on a chart, another percentage of the workforce that have joined the ranks of men and women who found themselves unemployed through no fault of their own." He remembers hating being reduced to a number -- and losing a sense of purpose.

John Fern is a human face on the imperfect storm of change that has swept through U.S. manufacturing in recent years, a powerful structural shift that not only has displaced millions of American workers, but also has opened seemingly endless opportunities in new markets and new products for scores of American manufacturers. This story of sweeping change is still being written, and its chapters include offshoring, productivity, technology, skills, costs, Wall Street's expectations of corporate financial performance and the election-year politics of global economics. And like virtually every person in manufacturing, this story is complex, confusing and even contradictory. The only easy answer to the question "Who will work for you?" is that there are no easy answers.

Yet, it is a question that manufacturing executives cannot ignore. With global competition challenging the U.S. labor market, technological change continuing to sweep through American business, and dramatic shifts in the demographics of the U.S. labor force in the works, "the future strength of our economy rests in large measure on the skills and adaptability of the American workforce," bluntly states this past April's report from the Task Force on Workforce Development, a joint project of the Albert Shanker Institute and the New Economy Information Service.

In short, U.S. manufacturing needs John Fern as much as John Fern needs U.S. manufacturing. Just ask Sanjay Chandra, CEO of privately held American Leather Co. "We're in a major metropolitan area -- Dallas/Fort Worth -- and we struggle to find people who want to work in manufacturing," says Chandra. "Wherever these people are being laid off, [most of them are] not showing up ready to work here. And when they do come into work, they are not staying with the job."

So where is the disconnect?

U.S. manufacturing executives face two overarching challenges during the next five to 10 years related to labor. First, they must help introduce the American worker to a new concept of what it means to be employed in manufacturing: the promise of a job for life replaced by a firm commitment to ongoing training and education, which gives both employer and employee more flexibility. Second, manufacturing executives must educate themselves about the new world of work and become active and responsible participants in the ambitious job of defining the future of U.S. manufacturing. These vital issues deserve to be lifted to a new level of dialogue, for already at the local and national levels -- in the form of proposed legislation, political speeches and association statements to name a few -- discussions about unemployed workers are becoming increasingly divisive, and the great danger is that in this election year and beyond, rhetoric rather than reason will dominate.

Not Ready For New Jobs

Although U.S. Labor Department data show 91,000 manufacturing jobs were created across America from February through May of this year, about 3.1 million manufacturing jobs were lost between the summer of 2000 and the end of 2003, "almost an 18% drop," figures Yorgos Papatheodorou, market development manager at Lockwood Greene, a Spartanburg, S.C., industrial engineering and construction firm. However, with U.S. manufacturers running lean even in recovery from the 2001 recession, and technology continuing to be applied to production, perhaps as few as half of the 3.1 million jobs will return and many of those that do will require workers with advanced skills or entirely new skills. Almost 80% of all recent U.S. job losses -- not just those in manufacturing -- have been structural, estimates the Task Force on Workforce Development. That means they're gone for good. "What happens to the workers whose jobs have been permanently eliminated? They have to look for entirely new work because companies are creating entirely new jobs, not merely refilling old jobs," the task force states.

U.S. manufacturing is part of a global dynamic of production in which jobs flow in and out of countries around the world as the economics of value chains are altered.

Pamela Lopker, president and founder of QAD, a California software producer, insists that globalization and the outsourcing of jobs are the natural order of things. "I don't think there's any turning back from that," she says. In the 1980s, all of the company's workers were in the U.S. Now, only about 40% of its 1,300 employees are. "Who's going to buy our software, or a toaster, or a car for five times more because it was made in America?" she asks.

Simultaneously, in an increasingly IT-intensive world, companies are putting a premium on intellectual capital -- including at the production level. Consider Robert S. Weiner, president and CEO of 10-year-old, 300-employee Constantine Carpet LLC in Calhoun, Ga., who seemingly against the odds is growing a business and jobs in what's supposed to be a mature industry. "The specifics of our manufacturing are complicated enough and detailed enough that even what you would consider the lowest-level employees have to have enough skill that I definitely want to have them trained here," he says. "I could never outsource a lot of these functions overseas."

But will U.S. workers be ready when potential employers in manufacturing post "Help Wanted" signs? Not enough of them, research shows.

More than 40% of the companies that Boston Consulting Group (BCG) recently talked to for a project in the U.S. expressed serious concerns about an erosion of skills. Part of the problem is that available manufacturing jobs and available workers are not good matches.

"Most manufacturers would say they have an insufficient supply of the right skills for the issues that face them today," relates Chicago-based Doug Engel, National Manufacturing Industry Practice leader, Deloitte Consulting LLP. U.S. manufacturers, he says, want workers with skills that include, among others, computer training, teaming, problem analysis and technical proficiency. Instead what they find among many of the unemployed are "traditional shop-floor" employees with few advanced skills. And the desire for workers with advanced skills is only expected to grow, says Leo Reddy, CEO of the Washington, D.C.-based National Coalition for Advanced Manufacturing (NACFAM). He expects "the skill levels of the [production] worker in manufacturing is going to have to go up at an accelerating rate and require stronger academic preparation than in the past."

Lack Of Investment

Despite evidence that skills shortages in manufacturing are a long-standing problem -- a 1997 study from the National Association of Manufacturers (NAM), for example, showed 88% of manufacturers experiencing a shortage of qualified workers in at least one category -- there is little evidence that manufacturers have addressed the need for training or retraining -- at least on the scale that's needed.

"We have enough history to know that training within firms is highly cyclical," says Thomas A. Kochan, professor of work and employment relations at Massachusetts Institute of Technology's Sloan School of Management in Cambridge, Mass. "Firms invest when there's a shortage, and the first time that the business cycle starts to go downward, training is the first thing to be cut."

Realizing the importance of ongoing training is Magnus R. Nicolin, president and CEO of Esselte Corp., a privately held, Stamford, Conn.-based, $1.2 billion global manufacturer of such decidedly low-tech office products as note cards and file folders. The company has three plants in the U.S. -- Illinois, Massachusetts and Missouri -- and Nicolin believes U.S. manufacturing workers can "out-compete pretty much anybody." Says Nicolin: "That's why we are investing a lot in training and teaching through kaizen philosophies to get the right continuous improvement thinking into our teams."

Yet, NACFAM's Reddy calculates that manufacturers are investing about 2% of payroll in training, a figure which, he says, "is not sufficient, particularly when it comes to continuously upgrading skills." This lack of commitment to training exists despite data in the 2003 IndustryWeek/MPI Census of Manufacturers showing that firms describing themselves as world-class -- and having the performance metrics to corroborate their claims -- devote larger portions of their budget to employee training than do poorer performing companies. "I don't think manufacturers have made enough of an investment yet in retraining," says Deloitte's Engel. "It's probably easier to spend money on new product development than new people development."

Government -- especially the federal government -- must become involved in solving America's manufacturing job skills problem, say a surprisingly large number of industry insiders. Although management consultant Anand Sharma, CEO of Durham, N.C.-based TBM Consulting Group, champions a doctrine of business survival that is accurately labeled Lean Darwinism, he sees a role for government in encouraging worker education and training. "They can provide incentives. They can provide the right environment and encourage companies to invest more in their people," says Sharma. "The only appreciating asset a corporation has is its people. They learn. Everything else depreciates -- your buildings, your products, your equipment and your technology."

Richard E. Dauch, co-founder, chairman and CEO of American Axle & Manufacturing, Detroit, repeated the thought at the Detroit Economic Club on May 10, urging his audience to "realize that people are our most important asset." Nevertheless, basic accounting principles require that Sharma and Dauch treat their employees not as assets but as liabilities.

Terry D. Growcock, chairman and CEO of the Manitowoc Co. Inc., a Manitowoc, Wis., maker of cranes, ice machines and beverage dispensers that's deliberately pursuing a global production strategy, believes both American workers and U.S. manufacturers would benefit if federal and state governments lightened the burden of tax, health-care, regulatory, litigation and other non-production overhead costs. A December 2003 study from the Manufacturers Alliance and NAM estimated such costs add "at least" 22%, nearly $5 an hour, to the unit labor costs of U.S. manufacturers when compared with what their major foreign competitors face. "Probably the biggest myth is that the U.S. worker's productivity, which is unparalleled in the rest of the world, can offset all of the other costs that U.S. manufacturers are burdened with [and] the rest of the world is not," insists Growcock.

The broad public policy themes emerging from a November 2003 conference organized by NACFAM all envision a high degree of federal government involvement. For example, one calls for increased support by the federal government for incumbent worker training "especially when that training is aligned with industry-based skill certifications such as those developed by the Manufacturing Skill Standards Council (MSSC) and with lifelong learning commitments by employers."

Started in the late 1990s and managed by NACFAM, the MSSC has been working to close the manufacturing skills gap by creating national skill standards and a certification program for workers, a program that would help "professionalize" the manufacturing industry.

Harley-Davidson Motor Co. president and COO James McCaslin, the chair of the MSSC's steering committee, says the goal of the council is to "create a passport for production workers," analogous to a journeymen's card. He sees it as an opportunity to improve skills and further improve the productivity and competitiveness of the American worker.

MIT's Kochan insists there is a real danger in not addressing the U.S. worker skills issue. There is a risk that companies could use the lack of qualified workers in the U.S. as a reason to move elsewhere, he says, "and it could become a self-fulfilling prophecy that we ship more elsewhere because we are not investing in training the next generation of manufacturing workers. We're not there yet, but we could be in the next five to seven years."

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