The Chinese are coming!
Commentary, By Joseph Geck, for SBT
When I read about the activities of SAM (Save American Manufacturing) and listen to all the "American industry is being hollowed out" rhetoric from many diverse sources, one word comes to mind; luddite.
The Luddites were a late 18th century early 19th century movement in England that had as their goal the destruction of all machinery for the making of cloth. Flying in the face of the industrial revolution, the Luddites failed in their task but at least gave the world a new word for those who try to stop technology or advancement in the face of an unstoppable world trend.
Now, the SAM people and their many complaining American allies are not destroying equipment and on the positive side are focusing attention on a real phenomena. However, they are flying in the face of some major trends, and their complaining distracts attention from actions that US industry must take if it is to survive in the global market.
The first and biggest world trend that they are up against is the opening up of the world to free trade. This is actually a trend that is as old as mankind and is the force that led to the "discovery" of the Americas in the 15th century.
But in recent history, the movement for free trade has been accelerated by the demise of Communism and the advance of communication and travel technologies.
The flood gates have been opened
The world, except for pockets of the Middle East, has begun to embrace the US message of open markets, open societies and freedom, especially free markets. Now there are billions of people in poor countries around the world who are literally hungry to work and supply goods to richer countries.
So should the response to that trend be to limit the imports from one region or another because we think the playing field in uneven (which it is in a lot of ways, but not necessarily in the ways most people think)?
To try to limit imports from those countries will just hurt US industry in the long run. Since Japan, Germany and other countries have companies which source from low-cost countries, protecting US manufacturers from those imports will hurt our larger companies in the competitive world market place.
That leads to another trend or fact of life of the US economy. US consumers are absolutely focused on getting the most for their dollar, no matter where in the world a product comes from. Not many people go to Wal-Mart and look at a product to determine where it is made. People buy the cheapest products.
The third trend is that the world economy is moving from an industrial one to one with a technology and information base.
Experts have labeled it the movement to an information economy. But technology plays such an important role in making an information economy possible that it is important to understand the technology component. That means that products that are not part of that movement will, by their very nature, slip down to lowest cost commodity possible. In that type of economy, the customer and marketing become even more important.
If you are just making a product and are not involved with your customer in a special relationship, or if that product is not cutting edge, you are in danger of becoming extinct.
There is as much sense in having government take extra measures for your survival as it is to fund an effort to bring back the dinosaurs.
I was in a bike store recently. On a rack of bike tools, an "all-in-one tool" for bikes caught my eye. It was brightly packaged with eye-catching and descriptive wording on the package. After browsing I saw another tool with exactly the same function. That tool was not packaged well, although from the looks it was exactly the same. It sold for $5 less than the effectively packaged tool. Most people looking at the rack would not have seen the low-priced tool.
The more expensive well-packaged tool was made in Taiwan – and probably some of the piece parts made in China – while the less expensive one was made in the US.
The US marketing manager for that tool should be fired.
What can US manufacturers do to survive the onslaught of foreign competition from low cost countries? First and most important is to do what it takes to stay competitive.
The US is hailed as a country with unbeatable management expertise. I don’t think that is true anymore in the manufacturing sector. It is about time to recognize that we are not as smart as we think and get to work.
I would bet that many of the companies that are going out of business today do not have an effective quality program and do not have any ongoing process-improvement program. Forget about lean manufacturing or Six-Sigma, many small and medium-size companies still do not have their basic information systems under control.
I’m sure you will find some very well managed companies going under due to imports from China or Mexico, but they will be in the minority.
On a recent trip to South Korea, I met up with a gentleman who worked for an American oil drilling supply company. We talked about the loss of jobs in the US. We analyzed the kind of US companies that we saw failing. Those failing companies fit a pattern:
1. Many companies are family-owned and the founder had left the company to his offspring. Although well educated, the inheritors were not very interested in operations but only in the perks of ownership.
2. The companies had not made investment in new technology or equipment in 20 years and were doing things the same way they had since they were founded.
3. As a result, worker moral was very low.
4. Then these companies met with competition and failed.
What does it take to get competitive?
As I said above, quality improvement and process improvement have to be continuous and effective to the point of making 10% improvement in productivity every year. Companies need to be their customers’ best suppliers. In addition, companies need to take the low-tech, high-labor content parts of their supply chain and either automate or source them in low-cost countries.
That sourcing process has to be done effectively. An example that comes up a lot is companies that are introducing lean, but only in a single department to get it started, most often manufacturing.
Likewise I’ve heard of companies sending whole products to China to be made, and the next thing they know they have a Chinese competitor with a knockoff of their product on US store shelves.
All strategic moves have a downside that must be planned for and, if possible, avoided. When I say move a part of your supply chain that is the low content to a low-cost country, there are a lot of reasons for that.
US political leaders, rather than waste time listening to the whining, should attack structural problems that affect the competitiveness of US manufacturers as they compete around the world.
One of the biggest right now is our health care system. We spend more than twice as much per capita on health care as any one else in the world, and the cost is almost entirely born by employers. Yet our health care statistics are mediocre, at best.
Also, how can we compete with Western European countries when our current tax system is so out of line with theirs? Our system encourages consumption and theirs doesn’t, and the result is seen in the fact that there is an underlying tax on our exported goods that companies based in Western Europe do not see. Somehow, that imbalance has to be addressed either with changing our tax structure or getting some allowances for our system in trade agreements.
So instead of holding the hands of those complaining about goods from China, politicians should get to work and be willing to take some political heat for addressing some of these issues.
There are numerous other societal problems that affect our manufacturing base from competing effectively, like the problem of frivolous lawsuits. However, we get poor service from Republicans or Democrats as they are more interested in fighting among themselves. Whenever issues are discussed, our two political parties usually take two extreme positions, neither of which is practical, and then they argue the issue to death.
Unfortunately, there are no easy answers to many of these problems, and they will need intelligent problem solving by intelligent neutral thinkers. Neither conservatives nor liberals get good grades from me for dealing effectively with the societal ills facing us now. Both seem to be mired in the debates and failed experiments of the ’60s, ’70s and ’80s.
Wake up, those of you who see the demise of US industry. I think you have correctly seen the symptoms of some cataclysmic forces at work, but you are like "Chicken Little" when you run around complaining or saying we should shut down trade with China.
US business leaders need to make sure their organizations are as competitive as they can be. Instead of trying to persuade politicians to close borders, we should hold our political leaders responsible for the societal inefficiencies that make us less competitive.
I recognize the value of all this discussion in creating awareness. However, the response suggested is like the turtle pulling its head in its shell.
Joseph Geck, principal of Accelerated Solutions in Waukesha, is a business and international trade consultant.
June 27, 2003 Small Business Times, Milwaukee