Crossroads: Crisis or Opportunity: The big picture: The long and winding road

U.S. Trade, balance of payments (BOP) basis, 1960-2001
Figure 1. In the early 1970s, service exports and goods imports diverged, leading to the trade deficit the U.S. faces today.
The goal of the Crossroads series is to explore the exodus of manufacturing jobs, assess the current state of trade between North America and its partners, look at what’s driving OEMs and their suppliers overseas, review what it takes to put a molding or moldmaking operation on foreign soil, and, finally, evaluate what molders here in North America are doing and should do to meet this challenge, enhance their competitive position, and not only survive, but thrive.

This month we look back on the last few decades of trade and commerce in the U.S. and try to put recent changes in the molding industry into perspective. We also discuss current trends with members of the industry and get their thoughts on which road the U.S. molding industry will take now that it’s standing at the crossroads.

GDP, Goods, Services
The U.S. manufacturing heritage is justifiably proud. Starting with the Industrial Revolution, this nation’s ability to design, engineer, and create a myriad of products quickly and efficiently has been demonstrated time and again.

The fact is, however, that since World War II, the American economy, and society as a whole, has shifted from one dominated by manufacturing to one dominated by the service sector (Figure 1). This is not to say that the manufacturing community is producing less. In the 14 years from 1987 to 2000, the GDP of the manufacturing sector has averaged annual increases of 3.9 percent. (The 2001-2002 manufacturing recession helped knock down the 2001 GDP 6.4 percent.)

U.S. gross domestic product, $, billions

So, how is it that manufacturing GDP is trending up in absolute dollars, but down as a percentage of total GDP? The answer lies in the services GDP, which is growing at a faster rate than manufacturing GDP, and each year it comprises a greater percentage of the total GDP (Figures 2a, b, below). From 1987 to 2001, finance, insurance, and real estate GDP grew an average 6.8 percent annually; services GDP (which includes hotels, entertainment, and health, legal, and social services) grew an average 7.7 percent annually over the same 15-year period.

U.S. gross domestic product by industry (in curent dollars) U.S. gross domestic product by industry as a percentage of total GDP

Figures 2a, b. From 1987 to 2000, manufacturing GDP grew consistently (left), but its percentage of total GDP has declined (above), thanks mostly to the dramatic increase in services GDP.

The overall trend toward service is reflected in import/export data as well. Figure 1 shows the U.S. goods and services trade balance going back to 1960. Until 1970 the U.S. generally ran a negative service balance, a positive goods balance, and an overall positive trade balance. But in 1971 that all changed. Almost overnight the U.S. trade balance for goods flipped negative, services became positive, and we began what is now a 30-plus-year run of an overall negative trade balance. The explosion in the quantity of imports to the U.S. is also reflected in country-by-country trade deficit data (Figure 3, below).

It may not be fair, however, to so starkly and appositionally segregate the manufacturing and service sectors of the economy. Bo Carlsson, DeWindt professor of industrial economics and director of Ph.D. programs and research at Case Western Reserve University’s Weatherhead School of Management (Cleveland, OH), points out that large parts of the economy’s services sector are complementary to and dependent on the manufacturing sector. He calls such services “producer services,” and in 1999 published a paper in Economics of Innovation & New Technology that contends that the manufacturing sector is not in as great a decline as perceived.

Carlsson says that thanks to reclassification, several services that used to be associated with manufacturing are now, for statistical purposes, labeled as purely “services.” “I’m thinking of services like architectural engineering, communications, accounting, and management consulting,” says Carlsson. “A lot of these have been reclassified. Where did they end up? It’s the same people doing the same thing in a new entity that happens to be called services.”

Taken together, according to Carlsson’s research, manufacturing and producer services comprised 54.6 percent of GDP in 1977, and 51.6 percent in 1990, showing a decline of 5.6 percent—much less than the 22.4 percent decline in manufacturing alone reported during the same period.

Despite such economic analysis, in the end there’s no getting around the fact that manufacturing’s contribution to GDP is waning, and it leaves molders and moldmakers in the midst of a global shift in the world manufacturing economy.

Brave New World

“I realize that the low wages in other countries are not going to change. We are willing go toe to toe with other moldmakers from other countries, but I want a level playing field.”—Rick Finnie, owner, M.R. Mold & Engineering Corp., Brea, CA
The quandary in which manufacturers find themselves is that the maturation of developing economies is naturally slower than the pace with which multinationals are shifting their investments to take advantage of the cost savings. This systematic change is frustrating to molders and moldmakers because there is little that one person, company, or government can do to affect change in such an open, fast, capitalistic system.

As has been widely reported, many of the U.S. molding industry’s favorite customers have taken their manufacturing elsewhere, including Hewlett-Packard, Motorola, Dell, Apple, Black & Decker, and Ericsson. Just last fall, Ford announced that it would procure from China almost $1 billion in supplies by mid-2003, and more than $10 billion by 2005—all in an effort to whittle down the $90 billion it spends each year in purchasing costs. Case Western Reserve’s Carlsson contends that the manufacturing community being developed north of Hong Kong in Guangdong will “likely become the major manufacturing center in the world in the next decade or so.”

In fact, the Chinese economy is improving so well that Moody’s recently raised its outlook on China’s long-term foreign currency bonds from positive to stable, thanks primarily to a surge in exports (fueled by foreign direct investment) that helped boost the country’s currency reserves.

This largesse can be attributed in part to the fact that in November 2001 China won accession to the World Trade Organization (WTO), ushering it into the rarefied air of more open and accessible trade. Membership in the WTO also binds China to a host of guidelines and restrictions on trade and investment. The ultimate goal is to bring Chinese trade policy in line with that of other WTO members.

Among the items added to the China to-do list after joining the WTO were to implement a tariff reduction strategy; eliminate import and export barriers and quotas; improve protection of intellectual rights; eliminate import licensing as a trade barrier; eliminate importation approval processes designed to favor domestic producers; bring taxes and charges levied on imports into compliance with WTO guidelines; and eliminate subsidies on industrial goods per WTO statutes.

Unfortunately, China to date has been slow to comply with WTO statutes. A 2002 report on China issued by the U.S. Office of the Trade Representative says, “Understanding of WTO rules remains limited, . . . particularly outside of Beijing and Shanghai. Membership in the WTO will bring substantial changes—both economically and socially—but it will not remove all commercial problems and the implementation process will take time.”

Ironically, the WTO guidelines and bylaws to which China must now adhere will likely prevent the U.S. government from taking any protectionist action of its own. As the Bush administration learned when it moved to protect the steel industry last year, the international community doesn’t take kindly to a country increasing tariffs as part of industry preservation. When any WTO member acts to use tariffs as a barrier to trade, a wide array of punitive actions can be invoked to correct the offending country. If the U.S. wants to move to preserve the manufacturing economy, it will likely use other methods.

U.S. trade balance, 1985-2001
Figure 3. Among America’s five biggest trading partners, the U.S. deficit with China has steadily become the largest.
Gaining Perspective
When considering the monumental changes the molding industry is going through, it’s hard not to become concerned that we are watching the beginning of the end of injection molding and toolmaking in the U.S. However, finding agreement on what the decline of manufacturing means, and where it’s taking the nation, is a daunting challenge.

Carlsson contends that the market forces taking molding jobs to Asia cannot be reversed. He says—pointing to the agriculture and steel industries as examples of what not to do—that it is unreasonable to expect the U.S. government will take substantive action to protect molders and moldmakers. The United States’ prime interest, he contends, is to maintain the nation’s robust and safe investment climate—even as the trade deficit balloons.

Carlsson thinks the industry itself should take advantage of the change. He estimates that it’s probably not unreasonable to expect that manufacturing’s total share of GDP may drop to as low as 10 percent in the next decade. “I don’t think there’s much stopping this shift,” he says. But, he adds, that shouldn’t stop the industry from devising ways to survive, by playing to its strengths.

“Let’s do what we do best and let [developing countries] do there what they do best,” he says. “But let’s not lose track of the front end of this—the high technology, the new developments, developing new markets, new customers, and new products. We can help ourselves through this transition, but we have to recognize that this change is very real.”

This change is resulting in an odd paradox for manufacturers: The only way to survive and grow is to remove labor and add automation; so, as productivity increases, employment decreases. A molder must, basically, choose between his employees and his business. Once this is done, it’s then time to start looking at the advantages U.S.-based molders and moldmakers bring to customers.

This sentiment was echoed at IMM’s first Crossroads Roundtable held in Cleveland in November. Spencer Siegel, VP market development at Classic Industries Inc. (Latrobe, PA), said “getting into and fully understanding” a customer’s business has become a competitive advantage. “Our engineering team becomes an extension of [the customer’s] engineering team,” says Siegel. “We become the manufacturing arm of its organization and work closely with our customers to improve efficiency. Because when you talk about cost, efficiency is cost.”

“This very approach is right on target,” said John Aue, president of Venture Plastics (Newton Falls, OH). “I think that is about the only way you can do it. We’re going to have to look at the areas that we can contribute to here on the domestic side that perhaps they can’t do in Asia.”

Taking this concept one step further are larger molders and contract manufacturers like Nypro and United Plastics Group, which have located facilities worldwide in an effort to take advantage of low-cost labor. Next month’s Crossroads report will look more closely at this trend, but certainly OEMs are not the only ones who stand to gain by moving some operations to developing countries.

“Taking raw materials and making something of value out of the labor applied has historically generated sustainable wealth creation. If we allow ourselves to be just consumers we will end up washing each other’s clothes. More importantly, we bestow as a result enormous power to those who supply us, and become vulnerable to their dictates.”—Paul Tontsch, principal, Precision Injection Molding, Surrey, BC
Such sales, marketing, and operations strategies are rapidly becoming the cost of survival for molders and moldmakers, but these tactics don’t address the other side of the equation: fair trade. This is the most contentious issue in the current discussion over the future of U.S. manufacturing. China’s membership in the WTO means that it will, someday, have trade policies that more closely match those in the U.S. and elsewhere, but in the meantime, OEMs around the world are increasingly enticed by the shareholder-pleasing cost savings of overseas manufacturing.

Level Playing Field
At the recent Crossroads Roundtable IMM asked what government could do to help stop the flood of manufacturing jobs going overseas. The most common answer is one heard many times in the last few years: “Give us a level playing field,” said Tim Riley, VP of manufacturing at Perfection/H&H Plastics (Madison, OH).

Molders and moldmakers simply can’t compete head-to-head with a country that pays its employees $15/week. Compounding the problem are tariff discrepancies between the U.S. and China. All of these factors combined most recently to incite—at the behest of Pennsylvania Congressman Phil English—the International Trade Commission (ITC) to launch a Section 332 investigation into the state of the mold- and diemaking industry.

The ITC issued its findings of fact in October, which may be used to initiate a government action—that remains to be seen. In the meantime, the report stands as possibly the most thorough review ever of the state of moldmaking, covering the U.S., China, Hong Kong, Japan, Taiwan, Canada, Mexico, the European Union, Germany, and Portugal. (For the full report, go to www.usitc.gov.)

Jerry Lirette, president of mold component supplier D-M-E Co. (Madison Heights, MI), has been very involved with the ITC’s Section 332 investigation. His concern about the decline of manufacturing extends beyond the toolmaking industry and the dollars and cents involved; he’s concerned that the erosion of America’s manufacturing base will compromise its political power as well.

This concern, shared by several manufacturing organizations, has led to the formation of the Manufacturers for Fair Trade Coalition. It’s composed of industry trade associations and firms, including, among others, the SPI, the AMBA, the Tooling & Manufacturing Assn., the National Tooling & Machining Assn., and D-M-E. The mission of the coalition is to “identify and promote trade policies that advance U.S. manufacturing.” Advancing, in this case, also means preserving.

Web resources for trade statistics, data, and policy
International Trade Commission www.usitc.gov
International Trade Data System www.itds.treas.gov
Office of the U.S. Trade Representative www.ustr.gov
Rep. Phil English www.house.gov/english
Rep. Marcy Kaptur www.house.gov/kaptur
Rep. Don Manzullo www.house.gov/manzullo
U.S. Dept. of Commerce, Bureau of Economic Analysis www.bea.gov
U.S. Dept. of Commerce, Census Bureau www.census.gov
U.S. Dept. of Commerce, Commercial Service www.usatrade.gov
U.S. Dept. of the Treasury www.ustreas.gov
World Bank www.worldbank.org
World Trade Organization www.wto.org
Lirette worries most about the economic barriers erected by China. “Free trade has got to be fair trade—and it’s not,” says Lirette, pointing out that molds going to China currently face a 12 percent tariff and a 17 percent value-added tax, while molds coming to the U.S. face a 3 percent tariff. He acknowledges that the WTO will eventually force down Chinese tariffs, but the current five-year window, he thinks, is too big. “We’re all for zeros on both sides when it comes to tariffs and economic barriers, but as long as they’re at 30 percent, we should be at 30 percent. I think it’s an extremely reasonable demand.”

The no-tariff concept is relatively new; in fact, in late November the Office of the U.S. Trade Representative proposed a tariff-free world on industrial and consumer goods by 2015. International response was lukewarm, particularly from developing countries, which count on tariffs for revenue—not to mention the fact that 2015 is 12 years away, a long time in a globalized world.

Of course, protectionist measures aren’t the only options at hand. The laundry list of potentially helpful government actions include the following:

  • Trade balance initiatives for critical industries among U.S. trading partners.        
  • Domestic content legislation on finished products in critical industries.        
  • Investment tax credits for firms that make capital equipment upgrades.        
  • Accelerating depreciation for equipment and software.        
  • Tax credits for energy-efficient equipment and plant modifications.        
  • Subsidized training and apprenticeship programs.

The first two items are, Lirette acknowledges, relatively radical—especially for an open-market-loving country like the U.S. “We can be a free-enterprise system, but with limits,” he says. “We should be looking at what’s good for the U.S., not just what’s good for the shareholders of our publicly traded companies. If we become primarily a consumer of other countries’ goods, then the strength of our nation starts to erode.”

In an effort to prompt the administration to pay closer attention to the manufacturing sector, Rep. Marcy Kaptur (D-OH) and Rep. Don Manzullo (R-IL) sent a letter in late 2002 to President Bush, requesting that he appoint a task force on manufacturing. If granted, this could lead to the creation of a manufacturing commission. (Currently there is no federal department or organization responsible for assessing the health of the manufacturing industry and how the country might be impacted by its decline.) As IMM went to press in mid-December, President Bush had reportedly not acknowledged or replied to the letter.

The Iceberg’s Tip
Discovering agreement on the issue of globalization and its impact on and meaning to the U.S. manufacturing industry is difficult one. One thing is certain: Change is afoot within the injection molding and toolmaking industries that likely will be looked back on as the turning point. We are at a crossroads, and in the coming months we hope to help you and the industry decide which way to go.

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