Editor's Note: This is the first installment of a seven-part series that details the strategic and often gut-wrenching shifts taking place in manufacturing. It appears in the June 2003 issue of IndustryWeek. IW will introduce a new installment each month throughout the remainder of 2003. Most of us have had the dream. It's mixed up with the people, places and memories that dot our waking hours, but the basic theme is the same: We are free falling; it's terrifying, but exhilarating. We are not sure where or if we will land, and while in the depths of a gut-wrenching descent, we forget that we will eventually wake up and be safe. Manufacturing companies in the U.S. are on such a fall. But it's not a dream. And it's not certain that the landing will be safe. The increasing globalization of U.S. manufacturing companies has taken a huge evolutionary leap in recent years that on the surface appears as a mass exodus of U.S.-based production. Most notably, China's rising economic status has both cast a dark shadow on U.S. industry and opened a passage to sunny prospects. This maddening paradox has some manufacturers cowering in corners while others are confidently proclaiming their coming conquests. Companies from beyond its borders poured $52 billion into China last year. But what may come as a surprise in view of all the hype is that U.S. direct investment in China was a comparatively low $2 billion. Several significant questions remain unanswered. Nearly six months into 2003, no one really knows:
What kind of toll severe acute respiratory syndrome (SARS) will take on the Chinese economy and on China's future attractiveness as a manufacturing location.
How potentially disruptive politics in China and other cost-attractive overseas manufacturing locations will affect future foreign investment decisions.
How long cheap labor will last as a value proposition. Indeed, eventually, will the low-cost bubble burst?
Whether the U.S. government is doing enough to keep America attractive as a manufacturing location. What and how much are enough?
Whether U.S. intellectual property will ever be effectively protected outside the U.S.
And finally, there is the vital economic and human issue of what U.S. manufacturing will look like a decade from now. What portions, if any, of the processes of goods-producing industries will remain on U.S. soil? Jim Zawacki, president of GR Spring & Stamping Inc., a $35 million job shop supplier in Grand Rapids, Mich., counts himself among the manufacturing executives who are worried. "We are losing jobs to low-wage nations like China, and when Congress finally wakes up, our manufacturing base will be eroded," warns Zawacki, who also is chairman of the Precision Metal Association, a trade group of about 1,300 North American companies. Even as what he terms the "Big Guys" take off for China and other low-wage countries, "small and medium manufacturers, mostly suppliers, are trying to hang on without any support," he claims. "I am scared for my kids and future generations." As a result of outsourcing production both in the U.S. and overseas, IBM Corp. is "just a shadow of [its] former self in terms of manufacturing operations," asserts Edward W. Davis, a professor at the University of Virginia's Darden Graduate School of Business Administration in Charlottesville. And a rule-of-thumb calculation suggests that the movement of manufacturing operations to China in 2002 cost the U.S. about 234,000 jobs. Another worried manufacturing executive is Richard E. Dauch, co-founder, chairman and CEO of Detroit-based American Axle & Manufacturing Inc. (AA&M) Some 2 million U.S. manufacturing jobs have been lost during the past two years, he figures, including jobs outsourced to such places as China. "Some of that has to occur. But most of it doesn't," says Dauch, who since 1994 has steered the financial turnaround of $3.5 billion AA&M, a former General Motors Corp. division that makes driveline systems, chassis systems and forged products for the global automotive industry. "We've got to have a strong, efficient, flexible manufacturing base," insists Dauch. Focusing On China Much of the debate about the future of U.S. manufacturing centers on the perceived march of manufacturing to China. Type the words "manufacturing in China" into the subject line on Google, an Internet search engine, and you'll get an astounding 1.29 million matches. China is emerging as a legitimate economic player. It has a US$4.5 trillion economy, the world's sixth largest, and, figures the Economist magazine, manufacturing wages that average just 5% of the average manufacturing wage in the U.S. From his room on the 76th floor of the Grand Hyatt Hotel in Shanghai, Richard C. Cook, president and CEO of Mapics Inc., an Alpharetta, Ga.-based manufacturing software firm, this past March looked out on the 40-, 50- and 60-story buildings all around him. Just five years ago, there was only one tall building in the vicinity: the soaring 1,245 foot-high Orient Pearl TV Tower. Some 400 of the 500 largest U.S. companies are doing business in China these days, estimates Yang Jiechi, China's ambassador to the United States. And they're being joined by a variety of midsize and small firms. China's startling changes of the past five years frighten the Mapics executive, whose company has customers in 70 countries and presses its ERP, CRM and other manufacturing software CDs near Atlanta. "They are going to take jobs like it's going out of style," warns Cook, who's also chairman of AeA, an electronics industry trade association. Fear Factors U.S. manufacturing executives, in addition to their understandable concerns about a U.S. economic recovery from recession that has been agonizingly slow, are worried, among other things, about innovation, outsourcing, protecting proprietary technologies, and perceived imbalances between the U.S. dollar and other currencies. And especially frustrating for many of them is a sense that neither politicians nor the general public as yet shares the depth and breadth of their concern about the present and future of U.S. manufacturing. "Please, Lord, help our political leaders see the light before it is too late, and all our good jobs are gone," pleads GR Spring & Stamping's Zawacki. Jerry J. Jasinowski, president of the 14,000-member National Association of Manufacturers (NAM), has been the point person in Washington, D.C., for many manufacturers during the past few months. "Manufacturing is at a crossroads," Jasinowski bluntly told NAM members this spring. "We face fundamental changes, which if left unaddressed, could result in huge economic losses and the erosion of our industrial leadership." For the public-policy-driven NAM, the focus has been on such issues as taxes, trade, the relative strength of the U.S. dollar, U.S. health-care costs, tort reform -- all parts of a "Strategy for Growth and Manufacturing" that the NAM has been pressing on Congress since February. "This new initiative will elevate the visibility of manufacturing -- and our pro-growth, pro-manufacturing agenda -- to policymakers and the media," Jasinowski said. At the request of U.S. Commerce Secretary Donald L. Evans, the Commerce Department's undersecretary for international trade, Grant Aldonas, is looking at issues affecting the long-term competitiveness of U.S. manufacturing. "Our goal is to identify the challenges facing American manufacturing and outline a strategy for ensuring that the government is doing all it can to create the conditions that will allow [manufacturers] to maximize [their] competitiveness and spur economic growth," Evans told executives attending National Manufacturing Week in Chicago back in March. Aldonas' findings are due on Evans' desk by mid-summer. Sensible Strategies Meanwhile, for manufacturing executives such as Paul A. Gustafson, who agrees that U.S. manufacturing is at a crossroads, the focus is on making the right strategic decisions for his company. "We are very selective as to what we put into the various countries," explains Gustafson, president and CEO of Emhart Teknologies, a New Haven, Conn.-based maker of fasteners and other products used in the assembly of goods and a unit of Black & Decker Corp. Manufacturing decisions are based on capabilities and value added. "We look very hard at developing increasingly higher value-added products, and the higher value-added products we keep in the areas where we want to protect the technology. The lower value added we would put into a purely low-cost environment," says Gustafson. For example, for stud-welding systems used in the automotive industry, products are designed primary in Germany, Japan and the U.S. The electronics and sophisticated hardware and software that go into the systems also come from company facilities in those countries. But such things as cabinets, frames and wiring harnesses are done in places like the Czech Republic and Mexico. "Then we bring them all together in the U.S., Germany or Japan," explains Gustafson. Sealed Air Corp., the $3.2 billion, Saddle Brook, N.J.-based maker of Bubble Wrap and other packaging products, is following a two-part strategy for its three manufacturing plants in China. "One is to be a supplier of protective and specialty packaging materials to global customers that are manufacturing in China for export," explains William V. Hickey, Sealed Air's president and CEO. "But we are also equally active in manufacturing in China for both global and local companies that are serving the continually growing Chinese population. Our business is packaging products for our customers wherever they may be." His company operates in 50 countries. "If a company moves from Country A to Country B to Country C, we don't necessarily see that as a threat to our business," says Hickey. Customers also figure prominently in the business strategy of $4.9 billion ITT Industries Inc. "We are moving some production to China in basically three out of four of our business sectors for one simple reason: That is where our customers are," says Louis J. Giuliano, chairman, president and CEO of the White Plains, N.Y.-based company. For example, Goulds pumps from ITT Industries' fluid technology business sector are being used in the Three Gorges Dam project on the Yangtze River. "We need to be there with local competence, local engineering support [and] local manufacturing capability in order to serve that market," says Giuliano. For U.S. national security reasons, ITT Industries' defense electronics and services sector does not do business in China. In addition to customer location, such factors as product development, labor content, production volume, freight costs and price competitiveness are critical elements that American manufacturers are making -- or should be making -- part of their manufacturing strategies, indicates Edward P. Campbell, president and CEO of Nordson Corp., a $648 million, Westlake, Ohio-based maker of systems that apply adhesives, paints and powders to products during manufacture. Nordson, for example, builds powder painting booths in China for Chinese and other Asian customers. They are a bulky product. "From the point of view of time, transportation costs as well as fabrication costs, it makes no sense for us to build them in our U.S. locations and try to transship," he says. Back To The Future The movement of manufacturing from the u.s. to China and other low-wage countries is "a new manifestation of an old trend," Campbell says. In the 1980s, there was a shift in U.S. manufacturing from northern to southern states. In the 1990s, facilities in Mexico began to proliferate. During the last few years, southeast Asia became a key region for manufacturing. And now China is joining this list of manufacturing hot spots, he says. The "insistent need to reduce total operating costs and pass gains along to end-users is rippling through the whole industrial economy, affecting not only how business is done, but where it is done." That is certainly true for once U.S. stock-and-trade products such as athletic shoes, consumer electronics, household appliances, furniture, light bulbs, toys and textiles. And cost pressures may soon result in some relocating of manufacturing within China. Shanghai has become an expensive location, and manufacturers concerned about cost need to move to rural China, local executives told Campbell during a recent visit to China. "But that doesn't necessarily mean that more sophisticated products, more engineered products cannot continue to be manufactured in the United States as long as we continue to be creative and innovative," insists Sealed Air's Hickey. Yet by virtually every CEO's account, U.S. manufacturers must be careful even as they continue to be creative and innovative. For example, although China has been a member of the World Trade Organization since January 2002, manufacturing executives say China still does not offer the kinds of protection for know-how, patents and other sorts of intellectual property that are common in the U.S., Canada or Europe. "We have so far been very careful at guarding our core technologies," states Terry Growcock, CEO of Manitowoc Co., a Wisconsin-based manufacturer that produces ice-making machines in China. Such core technologies as the evaporator plate on which ice is formed continue to be made in the U.S. Other CEOs complain of China unfairly devaluing its currency and pegging it unrealistically low to the U.S. dollar. A result is tough-to-beat prices for its exports. And there is the possibility that manufacturing in China is a business bubble that could burst. "If there is turmoil politically in China, I think all bets are off about what's happening economically," says Bo Carlsson, professor of industrial economics at Case Western Reserve University's Weatherhead School of Management in Cleveland. Once the U.S. gets a real recovery from recession going, contends Walter Liptak, a Chicago-based senior vice president and securities analyst at KeyCorp, a Midwest financial firm, some of the worries about the present and future of U.S. manufacturing will dissipate. And, he says, growth also will silence some of the critics of U.S. industrial competitiveness. The reason: Companies are putting the principles of lean production and Six Sigma quality into practice. They're reducing labor costs, reducing factory floor space, and are doing more with fewer people. "It's a good manufacturing strategy," he says. "I think they'll be able to compete with any manufacturing base in the world." But Darden's Davis, discouraged by what he describes as "the mad flight" of large, publicly held companies to jettison production assets in their attempts to boost their quarterly financials, believes more than GDP growth and operating strategies will determine U.S. manufacturing's future. "This focus on quarterly profits among the large, publicly held companies is deathly. If there is any hope on the horizon for this country it is in the privately held, medium-size companies," he says. "I see them with a willingness to take greater risks in investments that benefit the competitiveness of the company and don't just make the ROI look better in the short run. I see them with a better balance of outsourcing. "If I could change one thing about this country that I think would help improve manufacturing in the long run, it would be to pass a law to forbid the reporting of company profits on a quarterly basis. I think that the short-term focus on profits has done more to hurt manufacturing than probably any other thing." What are the chances of there being a U.S. that does not manufacture anything? "Unlikely," says Case Western Reserve's Carlsson, even as he contends the U.S. could do without its steel industry. The continuing movement of manufacturing from the U.S. to other places in the world "frees up resources here" to produce new products and services, "not just hardware, but all kinds of knowledge-based products," he says. Biotechnology and other sophisticated sectors of the U.S. economy are already developing technologies for the future, he notes. "They may not be very large now, but that's what we're going to be living on in 15 to 20 years." But even American biotech companies won't be manufacturing exclusively in the U.S. For example, Cambridge, Mass.-based Biogen Inc., which already has a 250,000 square-foot manufacturing facility in North Carolina's Research Triangle Park, is building a 340,000 square-foot manufacturing facility in Hillerd, Denmark. For U.S. manufacturing companies, "I don't think the answer is to try to build everything in the United States. And I don't think the answer is to give up leadership," states Ken Taormina, senior vice president at BearingPoint Inc., a McLean, Va.-based consulting firm. "American companies need to decide that if they want to compete globally, they will have to determine what their total strategy is going to be."