It's no secret there's a civil war going on out there. The U.S. manufacturing landscape is being ripped apart by a series of attacks on its traditional strongholds that has left few industries intact.
Already tens of thousands of small and midsize manufacturers have gone under. Those that remain are struggling. Whole industries such as furniture, shoes, textiles and many computer components -- once hallmarks of American ingenuity, productivity and competitiveness -- have virtually disappeared, the victims of the rapid emergence of easily accessible low-cost labor overseas.
While all manufacturers face the same lopsided trade policies, surging prices for raw materials and relentless competition from China and other low-cost markets, small manufacturers get squeezed the hardest.
The statistics bear this out, reports Joel Yudken, sectoral economist at AFL-CIO. Using figures from the Bureau of Labor Statistics, Yudken found that out of a net loss of 27,000 U.S. manufacturers' establishments from 2001-2004, 90% were companies or individual plants employing fewer than 250 employees.
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In fact, these days large manufacturers benefit from the very policies and practices that harm smaller companies. They tend to have the financial padding to withstand price increases while their market share and assets enable them to partner with contract manufacturers and overseas competitors to leverage the advantages that these companies have over U.S.-based companies.
This phenomenon has divided U.S.-based manufacturers in an unprecedented way.
While IndustryWeek has reported on many supply-chain partnerships that are healthy and mutually beneficial, it's evident that these are rare and that a growing faction sees large manufacturers as indifferent toward the struggles of their smaller and midsize counterparts.
Help For Small Manufacturers
Some observers say the big companies have contributed to the smaller firms' woes through their relentless price-cutting mandates in recent years. In 2001, Daimler-Chrysler AG told its suppliers they would have to slash their costs by 15% over three years. Toyota Motor Corp. maintains a practice of requiring suppliers to cut prices annually. In a 2002 value-chain survey, IndustryWeek found that more than half of manufacturers reported they had required their suppliers to cut prices as a contractual obligation. Overall, the effect of these mandatory price reductions -- coupled with other geopolitical and economic forces -- has been to drive many suppliers out of business.
The schism has become so apparent that it has led to a rift within the membership of the Washington-based National Association of Manufacturers (NAM), which is perceived by some to represent primarily the interests of the large multinational manufacturers. As a result, a reform group within the membership is seeking to make the organization more responsive to small firms.
"We have established a working group of people within the membership who have a whole different point of view," says Jeff Noah, director of the small and medium-size manufacturers department at NAM. "This is part of an internal debate here at NAM. But we don't see it as big versus small."
But in fact -- when you talk with manufacturers -- it is big versus small, especially when it comes down to where manufacturers stand on the U.S. government's trade policy, which often favors the big multinationals at the expense of the little guys.
From the Web site: "The United States Business and Industry Council (USBIC) is a national organization of business owners and executives dedicated to making the U.S. domestic economy the world's leading engine of economic growth. The USBIC Educational Foundation is its research arm. . . . The USBIC was founded in 1933 to represent the concerns of America's small and medium-sized business community. Member companies are typically family-owned or privately held, mostly in the manufacturing sector."
From the Web site: "The NAM's mission is to enhance the competitiveness of manufacturers by shaping a legislative and regulatory environment conducive to U.S. economic growth and to increase understanding among policymakers, the media and the general public about the vital role of manufacturing to America's economic future and living standards. . . . The NAM is the nation's largest industrial trade association, representing small and large manufacturers in every industrial sector and in all 50 states."
Noah concedes the small manufacturers have a different agenda, which he views as not realistic for NAM as an organization. "The small companies want tariffs that the majority of our members don't want," he insists.
Out of 14,000 members, about 10,000 are small and medium-size manufacturers, he adds.
Bad For Everyone?
Tonelson believes that eventually all U.S. manufacturers will suffer from this divide. And he is not alone.
"We are all in the same boat, whether a manufacturer is large or small," says Bob Johns, director of marketing for the sheet metal group at Nucor Corp., the big minimill steel producer based in Charlotte, N.C.
Johns isn't exaggerating. Take the case of Visteon, the multibillion-dollar Tier I auto supplier spun off from Ford Motor Co. that was struggling to stay in business until Ford stepped in again this year to give the giant parts manufacturer a financial hand. "Ford couldn't afford to let their most important parts supplier go bankrupt," Piszczalski points out.
Tonelson spells out these risks associated with not protecting the U.S. supply base:
- A heavy dependence on foreign suppliers leaves the bigger manufacturers more vulnerable to supply disruptions due to political upheavals or natural disasters.
- As sentiment against overseas production grows and more U.S. citizens lose jobs because of closing plants, large companies could face an erosion of their domestic market.
- It can be difficult to protect intellectual property overseas.
Still, most large U.S. multinational manufacturers have shifted some or all production abroad and now export products back to the U.S. to take advantage of cheap labor elsewhere. According to a 2004 report by consultants McKinsey & Co., one-third of the U.S. trade deficit can be attributed to foreign operations of U.S. multinational companies.
"That's powerful evidence of the supply chains moving overseas," Tonelson says.
Another fear is that the demise of these smaller firms will hurt everyone through a diminution of talent, innovation and technology.
"These smaller manufacturers often are like a farm club, with their people often jumping to one of the bigger manufacturers," says analyst Piszczalski. "They serve as a breeding ground for talent and an important source of innovation. There are a lot of advantages to having these 'mom and pop' operations in your country."
Dave Frengel, director of government affairs at Penn United Technology, a Saxonburg, Pa.-based manufacturer of precision metal-forming dies, agrees. "If the big companies can't find the skills and the components they need in the U.S., then they have to buy them offshore."
And as Matt Meyers, director of the Global Business Institute at the University of Tennessee, Knoxville, Tenn., points out: "We are seeing a dramatic decrease in the number of supplier options worldwide."
That's one reason the Chrysler Group launched its Highly Integrated Partnership Organizations (HI-PO) program last January to work with a few dozen of its key suppliers. Although the auto manufacturer's primary goal of its initiative is to raise the quality of the parts delivered by suppliers, the company clearly is looking to improve ties with them and over the long haul, to help ensure their survival.
As part of Chrysler's HI-PO initiative, the automaker has loaned its manufacturing and quality-improvement talent to more than 40 suppliers. Earlier this year Chrysler assigned about 40 employees to its crack Quality Assessment and Audit Team (QAAT). They typically split up into squads of three or four to work with individual suppliers on helping them improve processes, reduce reject counts and boost overall quality.
"This effort is primarily focused on quality, but with some companies we've seen corresponding benefits in reduced costs," says Scott Garberding, vice president of supplier quality and product team program manager. "We see it as an investment in our suppliers' performance."
Garberding rejects the notion that Chrysler is merely trying to streamline suppliers' processes so that the OEM can reap the cost benefits. "It's not related to our cost-reduction plan, and we are not asking these suppliers for cost reductions," he says. "We do ask the supplier to agree to some performance improvement objectives, including certain quality-related milestones. We want to drive quality improvement across our supply base."
In the end, of course, Chrysler must determine which suppliers to keep and which to jettison. "We do make sourcing decisions based on supplier performance, including quality, supply capability, technological capabilities and cost performance," Garberding adds.
As far as sourcing parts overseas goes, Garberding says Chrysler takes a hard look at what each supplier brings to the table before making a decision. "Suppliers may have specific technologies or we may have longer-term relationships such that resourcing may not be practical, yet at the same time, we still need them to achieve performance improvement."
Some large manufacturers are committed to fighting the decline of U.S. manufacturing out of plain and simple self-interest. One reason is that many of these small and midsize companies are their customers. "We are going to fight the decline of U.S. manufacturing tooth and nail," says Johns of Nucor. If small and midsize firms go down the tubes, he adds, "The direct impact will be that volume will go down for large companies, and we'll all eventually disappear down the sewer."
Jim Fritsch, executive vice president for strategic planning at Commercial Metals Co. Steel Group in Dallas, thinks there are a number of ways bigger manufacturers can take heed and learn from the smaller companies.
"First, smaller companies are usually quicker at decision making and at moving in new directions," Fritsch says. "Second, small companies tend to focus more effectively on cost management. They don't get complacent, and they keep a close eye on the cost of doing business."
He also thinks smaller manufacturers often tend to know their markets more intimately and are quicker to sense and react to market changes or shifts in customer preferences. "Although new product innovations are extremely important for larger companies as well, it's the smaller companies that tend to do this more rapidly."
That nimbleness and creativity -- while in itself not always enough to sustain a small manufacturer -- can extend into other areas of the business as well.
"One challenge for all companies today is transportation, and small companies tend to be more creative in finding ways to get their products to their customers when there is a transportation crisis, such as a shortage of rail cars," Fritsch says. "They know they have to get their products to their customers, because they depend on that cash flow to stay alive."
Trade To Blame?
Another point that manufacturers once agreed upon that is now driving them apart is government action versus free-market forces. At the heart of this debate is trade. Again, larger companies can better absorb the pain associated with freer trade and more quickly reach the benefits: fewer tariffs and access to more consumers. The prevailing Bush administration theory is that trade eventually will bring more jobs and profits to U.S. shores. But small and midsize manufacturers -- and on occasion large ones, such as large steel producers -- say the administration has been lax on enforcing trade laws, which these days are a complicated stew of mandates of governments and quasi-government bodies such as the World Trade Organization.
In general, Frengel says, trade laws and the U.S. government's position on enforcement, or lack thereof, have encouraged the exodus of U.S. manufacturing.
"The message from the federal government is that you are an idiot if you are a manufacturer and you stay in the U.S.," Frengel says, echoing the bitterness and frustration of many U.S. manufacturers that feel betrayed by their government.
A lack of government support for manufacturers can have a dramatic negative effect on the survivability of these companies, industry observers say.
"Once you drop the trade barriers, then the various governments' policies become much more significant and can be the differentiators that determine where manufacturing goes," says Gartner's Piszczalski.
He offers as an example Canada's policy of assuming the health-care costs of workers as one reason that Ontario Province now produces more vehicles than Michigan. "That's one reason Toyota decided to put its latest plant into Canada," Piszczalski adds.
In another example, Frengel cites the Bush administration's negative stance toward the Hunter-Ryan Bill. HR1498 would treat currency manipulation as a means for a government to subsidize exports, and would prohibit military-critical parts or those key to national security from being imported if a country was found in violation of export subsidies. "This bill would allow injured parties to seek remedies," Frengel says. "The administration hates it, and they are not embracing this bill."
Frengel says his company supports what he calls "intelligent trade policies and a system to administer them, which are not there. We did not create a robust trade management system. Our company supports trade policies and reforms that will help our nation."
The loss to the nation, he says, is the same loss to large manufacturers, every time another small or midsize manufacturer goes bust. For example, only a single major machine-tool manufacturer -- Haas Automation of Oxnard, Calif. -- is left in the U.S. out of a once vibrant, thriving and innovative industry.
"The people and the technologies to make some of these products are being lost," Frengel explains. "To get an industry like this back can take 10 to 15 years. Precision tooling, for example, is difficult to make, and the innovation and creative manufacturing culture is all being lost. It's a huge cost, a loss that is very hard to recover from."
Johns offers a similar view: U.S. manufacturing, large and small, is in a deep decline, and something needs to be done about it before it's too late.
Says Johns: "We are industry, and we are quite upset."