Catch 22 confounds cheers for manufacturing

Manufacturers appreciate that we have a new Chief Cheer Leader for our sector of the economy, but fear President Obama fails to appreciate the underlying dynamics of the wee shift of 100 MasterLock jobs back to the states.

The return of any jobs to the United States, in this case to a devastated section of Milwaukee, deserves a “You-Rah-Rah,” and it certainly got center stage attention with a mention in the State of the Union address and a presidential trip to the plant last week.

But, if this were a Harvard B-School case study, it would reveal a cruel paradox that cheers will not make go away. From the perspective of one who started working on the floor of the Peerless Chain Company in Winona, Minnesota, nearly six decades ago and has been involved in managing factories for most of time since, it is this:

The only way a U.S. manufacturer paying $20 per hour for a factory job can compete with a Chinese plant paying $2.50 per hour is to compress the labor content of the component piece going down the line. (Health costs add another $4 to $6 an hour in the states vs. zip in China.)

Look at it this way: If labor costs were 1% of final costs, labor costs wouldn’t make much difference. Because they are 15%-20%, about the norm for direct and indirect labor in a typical U.S. plant, then labor becomes a defining factor for where the work goes.

So the trick for MasterLock and other U.S. manufacturers, as they try to compete in a global economy, is to bring the labor costs as close to zero as possible. That can be done with automation – substituting capital costs for labor costs.

It can also be done with the engagement of the workers through lean disciplines. That philosophy of management engages the full talents of every worker to drive costs and waste out of the production process. It is American ingenuity at its best. It is continuous improvement to deliver better quality, service and price, which add up to value.

My job at Peerless, on the banks of the wonderful Mississippi River, was to move pallets up and down three floors via an old freight elevator and to operate a simple wire-forming machine. It was an extremely inefficient plant compared to today’s factories.

I remember indelibly the foreman saying, “Hey, kid you’re working too fast; you’re going to work yourself out of a job.” (I’m sure he came to understand the opposite as inexpensive tire chains from Korea started coming into the states.)

But, unfortunately, when full worker engagement and automation are combined, the number of jobs required to produce a product goes down. Production and productivity rise, but employment falls.
That Catch 22 explains why the percentage of American workers in manufacturing has dropped to 9%.

For historical perspective, one-third of American workers were employed in manufacturing 50 years ago.

For another perspective, agriculture employed 50% of the U.S. population early in the last century. Today, American farmers feed this country and big parts of the world with 1½% of our people.

American farmers, aided by American manufacturers of fantastic equipment and agronomists, got smart and got automated. Nobody, not our president, is suggesting that agriculture go back to the old days. American consumers couldn’t afford food with the old time labor content.

The same macro scenario is playing out in manufacturing, exacerbated by the intense foreign competition from countries like China, where it is national policy to build an economy through manufactured exports. Only a small percentage of Americans will be needed in manufacturing as the decades play out.

Let’s get used to the new paradigm: less than 5% of us will be producing all the food and goods we can put in our mouths and two-car garages.

Where will the rest of us be working? The service sector, of course. We are already there. What’s so wrong with a picture of 5% producing all our goods and services, so the rest of us can take care of the elderly, keep us well, educate the young, entertain us, provide public safety and plow the streets.

Maybe what the president was trying to say, but didn’t say, is that the services can’t happen without the primary producers of food and products doing their job first. They pay the way for all the rest. Early settlers took care of their livelihoods first, the farms and businesses, and then built the churches and the schools.

I scoured the press coverage of the president’s cheer leading for manufacturing, looking beyond the rah-rah to substance. What was he proposing now that he hadn’t championed in his first three years in office that would help manufacturing?

He said he would step up enforcement of fair trade laws. Great. He has kept up the heat that the Bush Administration applied to the Chinese to harden up the Yuan. Great. He talked about more attention to the theft in China of intellectual property. Needs to happen.

He needs to do all of the above without starting a trade war with China, where we all lose.

He said he would welcome a proposal to drop federal income taxes on manufacturers. His fellow Democrats control the U.S. Senate, so that should be eminently doable. The Republican House would surely pass and send such a bill to his desk.

Wisconsin has already removed its tax on manufacturers. Let’s get ‘er done. On the federal level.

At the end of the day, though, manufacturing will not provide the jobs it once did. The players know that. Cheerleaders on the sidelines will learn it.

In short, we in this country need to reinvent our economy, something we have accomplished many times. The president should ask American entrepreneurs to do so. Don’t try to figure it out from the mountaintop or the sidelines.

Just empower and cheer America’s innovators. And have faith. They will get it done from the grass roots up.

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