Fate Of A Nation

Dec. 21, 2004
Will the decisions executives make today weaken the country's future economy? Should they care?

As companies rush to globalize, more than a few executives and management gurus blithely note that business these days knows no boundaries. Markets are global. Companies are global. National boundaries -- if they are mentioned at all -- are presented as quaint relics from an earlier time. The job of business executives now is to find the best value-chain partners wherever they might be in the world, streamline development, production, and delivery, and ultimately maximize shareholder value. In the U.S. and many other Western nations, this value-chain management strategy has manufacturers transforming themselves into information- or knowledge-based companies -- as designers of manufactured goods and service providers. They outsource much of what they perceive to be non-value-added production to other companies that are, very often, in other countries. Shareholders reaping quick and lucrative gains from the strategy cheer on the companies, pushing them to further divest the expensive brick-and-mortar factories. At the same time, it is difficult to find any economist, business executive, or management guru who seriously questions the race toward a post-industrial economy. Enter Eamonn Fingleton, waving the caution flag in his recently published book In Praise of Hard Industries (1999, Houghton Mifflin). Fingleton is a business and economics writer whose commentaries have appeared in The Atlantic, The New York Times, Foreign Affairs, and other publications. He argues that banking so heavily on information industries could have serious consequences for future U.S. economic strength, and he exhorts U.S. government policy makers to create legislation that will protect and strengthen U.S. manufacturing. His message is worthy of manufacturing executives' attention. With their influence and often close personal relationships -- not to mention lobbying clout -- with legislators, manufacturing executives are in a position to push for the changes needed to strengthen the nation's manufacturing base. We present an excerpt from In Praise of Hard Industries that summarizes Fingleton's points, as well as an interview with the author that delves into what the manufacturing executive's role is in ensuring the economic strength of his or her company's home country. Q&A IW: Why don't other people see how important manufacturing is to a nation's economic strength, and what is it about your perspective that makes it so crystal clear in your mind? Fingleton: I think there are several things going on here: the tendency, due to various psychological, social, and political influences, to underestimate Japan; the tendency to regard the digital economy as the savior of the American economy in particular; and the spirit of globalism. These three factors tend to mitigate against any very close examination of trade patterns. People say these days that trade doesn't matter. I think it does. I think that in years to come people will look back on the 1990s and just be amazed at how policymakers could have allowed American industry to almost fade away and allowed these current trade deficits to continue to build -- they've been building for what, 25, 30 years unchecked. I look at this in a very broad, macro-economic way: If you run account surpluses with the rest of the world, each dollar that you rack up in current account surpluses represents another dollar invested abroad. And the reverse is also true. The U.S. running after these deficits represents an extra dollar owed to the world outside the American borders. Essentially, the American economy is increasingly being owned by foreigners. While there's no one point where you move from a level that's acceptable to a level that's intolerable, the trend in the long run is worrying. Although we live in this "global era," I think our psychology as human beings doesn't necessarily change that radically. I think that you'll find that wherever foreigners have owned a major slice of an economy, it has been -- to say the least -- unsatisfying for the local people, and more than once it has led to wars and all sorts of difficulties. The U.S. is always going to be a rich economy, but it's a matter of its ability to extend its power overseas. IW: Most of the call to action that you make in this book is directed toward the government. What should executives do? What is their role and responsibility in all of this? Fingleton: One thing they could be doing is making the case for manufacturing more clearly both with the media and with the government in Washington. I think that most people in manufacturing in the U.S. sympathize with much of my message. They understand that manufacturing is important. They understand that in an economy that is totally devoted to services -- that really doesn't have a strong export sector -- that economy long-term is going to see its position in the world diminished. Manufacturing people, perhaps through their industry associations, should be hammering at this message a bit more than they are. And there should be structures in American industry to support long-term thinking. They used to be there. IW: When did they go away? Fingleton: I suppose gradually over the last 40 years. American industry has changed very dramatically in many ways. One of the ways is that antitrust-regulation enforcement has become much more of a factor. I believe that American antitrust is too strong. Japan, Germany, and many other countries tolerate cartels. I agree that cartels can be highly abusive, but they don't necessarily result in great abuses, and they do have some positive side effects. IW: Can you summarize? Fingleton: Cartels allow the Japanese, for instance, to divvy up research and development so that [companies] don't duplicate approaches to a new problem. Each company can take a particular area and research it. Cartels allow much more stability in pricing, obviously. Unstable pricing is not a good thing -- there are a lot of transaction costs involved, you have to check the prices all the time, that sort of thing. A good example is the airline industry. IW: That's the direction people say we're going, a marketplace where if I want to buy 40 tons of a certain grade of steel, I'll go online, see who's got the best deal and who can deliver, and I'll make my order based on that. Fingleton: That favors economies that believe in protection, obviously, because the steel suppliers in the local market will have protected high prices and a sanctuary from which to operate, and then they can discount on a marginal-cost basis into the open market. They therefore destroy the pricing in the open market and eventually eliminate the competitors in the open market, or at least weaken them to the point where they're not a factor. [When] taken to an extreme and you lose your local suppliers, you will end up being dependent on nations where a lot of antitrust activity [and] a lot of pollution [are] considered acceptable. The Japanese record on antitrust is not only clear within the domestic economy, but also overseas. IW: So why are we in the U.S. so against cartels -- because of the abuses of the past, and we've gone overboard in eliminating them? Fingleton: I think, yes. Detroit in the 1960s and 1970s, obviously, is the exhibit A on the other side of the argument. There's no question that you need strong regulation if you're going to tolerate cartels, and I suppose the people on the other side of this argument take the worldwide view that regulation of that sort doesn't work in the U.S. In the American case, [antitrust is] done on a rather legalistic clockwork basis, and that makes it difficult to regulate in an intelligent way. I fully understand why people are very, very wary of cartels. But I look back to the '50s to a time when implicit cartel arrangements were tolerated here. For the most part they don't seem to me to have done much damage to the American economy -- rather the opposite. If you have solid pricing in an industry, that doesn't mean necessarily that the industry is profiteering. The industry [may be] reinvesting for the future and building its business, building its efficiency, building the productivity of jobs of its workers. IW: And that's where it becomes O.K. -- when companies are expected to reinvest in R&D and worker training, as in Japan presumably. Fingleton: It's part of a larger structure where there is an assumption of obligation to one's employees, and that, too, existed in the '50s [in the U.S.]. Long-term stable employment is not necessarily an inefficient system. But I would emphasize that it is part of a larger system. IBM cannot maintain lifetime employment because the system has changed. IW: Even the Japanese aren't maintaining lifetime employment, according to some reports. Fingleton: It's very difficult, actually, to know what's going on in Japan, and many of the statistics are subject to varying interpretations. What I do know is the lifetime employment system is not breaking down in Japan. Those who write about lifetime employment in [Japan] are ignorant of the essential nature of that system. [It] is a graduated system. It guarantees full lifetime employment to almost nobody, except the top executives. But for everybody else -- for women, for middle-level executives that don't quite make it to the top, or temporary workers, etc. -- there are many, many categories where the term lifetime employment does not apply. It is difficult to fire people in Japan -- that's the basic principle, by law it's difficult. But if you're a small company and you're in difficulties, the regulators generally will permit it. If you're a big company and you're doing well, the expectation is that you will employ your male employees right through until their early 50s; after that you can stop pushing them up. So when people come along and say lifetime employment is breaking down, they find some company pushing people out in their 50s. Well, that has always happened. IW: What's the new contract? In the U.S., companies lay off employees even when they are profitable, because they are restructuring -- that's a specific management practice. Fingleton: I can see why it's very difficult to resist that logic in the American economy today. The other side of the case, I think, is not fully understood. I think that Japanese companies cannot easily lay people off in that way, but that doesn't mean necessarily that they're inefficient. What happens is that they are put under pressure to find new work for the people whose jobs have been rendered obsolete, and if you are put under that sort of pressure, necessity is the mother of invention. Major companies in Japan will go to their R&D department, they'll go through patents filed in the U.S. Look at the history of Japanese industry in the last 20 years -- you see that. In the U.S. these days, the incentive is to rely on suppliers overseas. The invention may be American, but the investment in developing the technology and making it commercially successful is very large, and executives can make a case for saying, well, rely on Sony or Hitachi to do all the heavy lifting. IW: One of the arguments for outsourcing manufacturing is that there is no profit to be made in manufacturing anymore, that the value-added in these products isn't in the steel that makes up the product, it is in the smart people who can design, install, and show the companies how to use the product, and that is where the U.S. is going to make money. Fingleton: I can see that argument, and I think that, given the present structure of the world economy and the American economy, from the point of view of the individual companies the logic cannot be faulted. But from the point of view of the national interest, things are very different, because services do not export in general. You can find exceptions, but there's a general rule: When these companies go into services, they are serving the local American market from within the U.S. To the extent that [they serve an] overseas market, they will serve it with employees in the overseas market. IW: If the logic is rational for the individual company, but not for the nation, what is the responsibility of a company to its host country and what is the responsibility of the executive who runs that company to take into account the host country? Their company's making money -- why should they care where it's coming from? Fingleton: I'll give you an example. Boeing is under pressure from governments all over the world to outsource. Each national government wants its own industries to be suppliers to Boeing. As far as I can see, Boeing has put up very little resistance to that. It seems to me that Boeing should be going to Washington and asking for help in dealing with that trend, because Boeing is a company that not only is very important to the manufacturing base in the U.S., but also has other responsibilities as a defense supplier, defense manufacturer. IW: That would apply to the defense company, but what about the company that makes shoes? Who cares where they're made? Fingleton: I think the less high-tech the industry is, the less strategically important it is and the more difficult it is to make the case I've just made. But I think the top executives could be making the point more clearly, perhaps behind closed doors in Washington. They seem to have no interest in doing that. They've just embraced globalization and have waved goodbye to any sense of their obligation to society as a whole. I'm not suggesting they should forgo profit opportunities, but they should in the capacity as private individuals, many of them with great personal influence in Washington, be making these points in the appropriate forums. IW: What about their actions? Mr. Executive is making decisions to spend this much on this contract or this supplier in the U.S. or getting it at a lower cost in some other country. Presumably with the latter more money falls to the bottom line and the shareholders are happy. Fingleton: I think it'd be the level of the individual company, the level of individual manager. It's difficult to say you should forgo profits for the national interest. I don't think that argument's sustainable. Except for the caveat that [you should] watch your point of suppliers because they may be doing a loss-leading exercise, discounting the price to get the business. When your local supplier has gone out of business, you're a captive. You may become dependent on suppliers that may be almost a monopoly. IW: If you were, say, General Electric's Jack Welch, what would you do? Fingleton: I think that if I were Jack Welch, I would, of course, maximize long-term shareholder assets, and if that meant sourcing abroad and there were no real sourcing alternatives [that's what I'd do.] There's no question he has been very aggressive in generally reducing the company's manufacturing operations in the U.S., but Welch is aware that there is a national concern, and he has voiced that concern. One could argue that he might have tried harder to find U.S. sourcing. I can't judge that. He should see this at two levels: He has to run the company in the shareholders' interest, but on a personal level he should be a voice for some balance of priority in the national interest. IW: What about the people in the U.S. who say, well, yes, we have some suppliers we're using overseas, but there are a lot of Japanese companies that have manufacturing plants here, so it's going both ways? Why do you see the tilt against the U.S. versus Japanese companies? Fingleton: I think that in the case of the Japanese and the case of some of the other advanced economies outside the U.S., there is an industrial policy. It's very difficult to prove in any particular case that the policy affected business decision-making, because a lot of it is understood. But one has a sense that when a Japanese company invests in the U.S. it will favor Japanese suppliers, unless there's a really strong reason not to do so. That's almost automatic given the keiretsu system. IW: In the U.S. this new management strategy we're calling value-chain management . . . is very similar to the keiretsu system in that you identify your partners. The difference is that you don't care where your suppliers are based, just as long as they're in your tight circle. Fingleton: And as long as they can deliver on time. I think, viewed from the point of view of an individual executive or even an individual company, it's hard to question [U.S. executives' sourcing] logic. The system as it currently stands strongly favors that logic, so my argument, really, is the level of the system. The system is letting the American national interest down. IW: Even though presumably the system, the government, is doing the will of the people, which includes a very strong business lobby. Fingleton: I would suggest that the press has been remiss in not really explaining things clearly. I think that there are negatives to globalization, but they're not being looked at. There's an issue here for the major national publications, the major news broadcasters, the major magazines. They should be looking more closely at how the world functions outside American borders, because the assumption is that America's main competitors are becoming globalized in the same way, and they're not. IW: What about those who would say that "What's good for GM is good for the U.S."? Or the executive who says, "I can't be worried about the U.S. Somebody else has to worry about the U.S. My job is to run this company, and if I do this right, then it's going to do some good for the country that I happen to be living in, that my company happens to be based in"? Fingleton: I would question the logic of that statement. Put it like this: If high profits, high profit margins were a recipe for success, if the coddling, if the promotion of very large profits for industry were a recipe for success, Mexico and the Philippines would be powerhouses. Equally, if low profits were a recipe for economic failure, Switzerland and Japan would be paupers. Profits certainly are important, but high profits are not necessarily better than reasonable profits. If you want to have a successful economy, you have to have a high-wage economy. So there's a question of balance between the interests of labor and the interests of corporations. The interest of labor is served by the nation husbanding its technological resources and setting up structures that tend to ensure that local workers -- one's own workers in one's own nation -- will get the benefit of the most productive new technologies.

About the Author

Patricia Panchak | Patricia Panchak, Former Editor-in-Chief

Focus: Competitiveness & Public Policy

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In her commentary and reporting for IndustryWeek, Editor-in-Chief Patricia Panchak covers world-class manufacturing industry strategies, best practices and public policy issues that affect manufacturers’ competitiveness. She delivers news and analysis—and reports the trends--in tax, trade and labor policy; federal, state and local government agencies and programs; and judicial, executive and legislative actions. As well, she shares case studies about how manufacturing executives can capitalize on the latest best practices to cut costs, boost productivity and increase profits.

As editor, she directs the strategic development of all IW editorial products, including the magazine, IndustryWeek.com, research and information products, and executive conferences.

An award-winning editor, Panchak received the 2004 Jesse H. Neal Business Journalism Award for Signed Commentary and helped her staff earn the 2004 Neal Award for Subject-Related Series. She also has earned the American Business Media’s Midwest Award for Editorial Courage and Integrity.

Patricia holds bachelor’s degrees in Journalism and English from Bowling Green State University and a master’s degree in Journalism from Ohio University’s E.W. Scripps School of Journalism. She lives in Cleveland Hts., Ohio, with her family.  

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