An in-depth report asking if there is any hope for America's manufacturing sector.
American homeowners and financiers are feeling the brunt of the global credit crunch, and some would say deservedly so. But well before the first signs of the sub-prime mortgage-fuelled crisis started to emerge in August 2007, it was already clear that the US was going through an industrial crisis of unprecedented proportions.
The succession of massively negative trade balances, quarter after quarter, ended up contributing to the loss of over 3.5 million US manufacturing jobs since 2000, with tens of thousands of factories forced to shut down in the process.
If anything, the current gloomy economic climate has served only to compound the sense of distress for the vast majority of sectors involved in American manufacturing. The recent surge in the price of key production commodities such as oil and steel, as well as falling domestic consumer demand, is forcing companies to adopt all sorts of downsizing, cost-cutting and restructuring measures as they try to weather the storm.
Alan Tonelson, research fellow at the United States Business and Industry Council, says that to understand the current state of affairs in US manufacturing, it is necessary to make a distinction between three large groups of interest.
"The first group would involve US-owned multinational companies which, in my view, seem by and large to have adopted an offshoring-focused business model," he says. "Increasingly, their business model seems to be to supply the US market from very low-wage, almost regulation-free developing countries.
"These companies need US markets very much, but they decided that they don't need US-based workers or US-based factories. In my view, this is an extremely short-sighted policy because, if US customers can't earn a decent living, then these multinational manufacturers will wind up getting hurt as well because it's still US consumption that is the major engine of growth for the world economy."
The second broad category of manufacturers that Tonelson sees as shaping the fabric of industrial America are foreign-based companies that have established plants in the country, mostly as a way of expanding sales there. A common route to that end has been the incorporation of existing assets via mergers and acquisitions of domestic firms.
But it hasn't been the only method. The automotive sector has generally proven an exception to this sort of practice, with Japanese, German and Korean auto makers all deciding to set up brand new plants to cater for the North American market.
"These foreign investors, especially when they set up new factories, have received benefits from individual American states that often their old US counterparts did not enjoy," notes Tonelson. "Most US states are so desperate for capital investment that they're willing to extend all manner of tax breaks and other forms of subsidies to foreign companies in order to lure them to their jurisdiction."
The German automotive giant Volkswagen, to give just one example, has recently been offered $577m in incentives by the state of Tennessee to set up a new plant in Chattanooga. Considering that the total cost of the facility will be $1bn, that's more than half the initial capital investment that Tennessee is happy to help Volkswagen with.
Apart from these incentives, a weakening dollar and increasing wages in traditional low-cost labour markets such as China and eastern Europe - combined with the fact that US worker productivity is held in high esteem - is in many cases tipping the balance in favour of the US when it comes to European and some Asian manufacturers making production offshoring decisions.
The third and final large group of manufacturers operating in the US is what Tonelson describes as the "domestic manufacturers, which are companies that, by and large, make their products in the US and want to continue doing do as long as economic conditions remain relatively normal and there are no dramatic changes". But, he says, this isn't proving easy: "Even though they're often extremely competitive from technology and quality standpoints, they really can't rely on pure price competitiveness as a major part of their business model. This is because, as long as the US remains a wealthy nation, it will always be a relatively high-cost country."
High voltage hopes
Perhaps like no other sector in the US manufacturing landscape, the automotive industry continues to struggle, to the extent that none of the so-called 'Detroit Three' - Michigan-based General Motors, Ford and Chrysler - have quashed fears that they might go bust if things don't drastically improve for them. We could see just two giants soon, as GM and Chrysler are reported to be considering a merger.
Even for an iconic firm such as GM, racking up losses of more than $50bn over three consecutive years - as it has now done - while seeing the value of its shares plummet by 60 per cent in less than 12 months, is not sustainable.
Both Ford and Chrysler are experiencing similar problems. With petrol prices hitting $4 a gallon at the point of the oil price spike back in July, consumers didn't think twice and abruptly put an end to their love affair with the sports utility vehicles that American manufacturers had concentrated on producing for them.
Unlike some of their Japanese competitors, particularly Honda, the Detroit Three were caught out by not having developed enough flexibility in their production lines to be able to respond to such rapid shifts in consumer demand.
The steady decline in US auto production is one of the main reasons behind the state of Michigan currently suffering from an unemployment rate of 8.5 per cent, the highest in the country.
But all hope is not lost. Apart from working round the clock to improve the energy efficiency of their conventional, petrol-driven models, American auto makers are investing in a new generation of vehicles powered by alternative, cheaper energy sources.
It's not as if they have much of a choice. By 2020 each new vehicle manufactured in the US will by law be required to run on a minimum of 35 miles per gallon, a 40 per cent improvement on today's average fuel-efficiency levels.
For months, the car industry has been lobbying the federal government for a multibillion-dollar, low-interest loan that would help it meet this sort of target. On 27 September, an initial $25bn loan was approved by Congress. Although in the short term this will bring much-needed cash to the Detroit Three and their suppliers, some argue the price paid for the bailout is an unprecedented state involvement in the way the industry operates.
United Steelworkers (USW) is North America's largest industrial trade union. Despite its name, only 10 to 15 per cent of its total membership is still employed in the steel industry, with the rest involved in a diverse range of activities including the rubber, chemicals, glass, tyre, transportation and pharmaceutical sectors. It claims to have over 1.2 million active and retired workers amongst its ranks.
Tom Conway, USW's international vice president, is the top negotiator for some of the union's major industry sectors. Asked which of these sectors are currently bringing him more joy in terms of capital investment negotiations, he replies: "I think one of the successes more recently has been the steel sector, where we have, for example, just completed collective bargaining negotiations with Arcelor Mittal [of India] and US Steel, two of the most global companies. One of the issues with steel is that it's hard to just unbolt a blast furnace and move it somewhere else. The infrastructure to run a steel mill really is not as portable as others. So, in some ways, there is an advantage in steel compared to, say, the auto, auto parts or tyres sectors. It makes it easier for us to bargain on renewed capital and expanded capital issues. But not always - once someone decides they're going to put a mill somewhere else, we struggle with our input penetration."
There's a sector where the USW has consistently struggled to defend the interests of its members in the past few years: the tyre business. "I think you see a strategy in the tyre manufacturing sector in the US where guys are frankly retreating up into [the production of] a high-end, high-tech tyre, while they're losing and letting go the low-end and the light-passenger tyre markets. Perhaps it's disturbing, but it becomes somewhat of a commodity and there we haven't had a lot of success," Conway admits.
It's a phenomenon that Tonelson has identified as affecting not just the tyre industry but several other manufacturing sectors too: "There seems to be a fantasy, strongly held by US leadership elites, that US competitiveness can be based on the nation remaining extremely strong in a relatively small number of super-high-tech niches and that it doesn't need to worry about those sectors that are somewhat lower on the manufacturing and technology food chain," he says.
"One great example would be semiconductors. It's widely thought that, as long as the US maintains its lead in microprocessors, it doesn't have to worry about memory chips, flash chips and things like that, because these are commodities and they should be made by a third-world country. What we don't seem to realise is that the knowledge that countries like China, India or Korea have gained in producing memory chips is likely to wind up producing highly competitive microprocessors."
A sector-by-sector analysis reveals that some industries are struggling more than others. But there are also those for which the new world order doesn't seem to be a major issue.
According to Tonelson: "The US remains very competitive in aerospace; in food processing where there's relatively little foreign competition - it's growing larger but there's still relatively little; in lots of capital equipment such as construction and agricultural machinery; in power generation equipment; and in certain high-end electronic sectors such as telecommunications and semiconductors, although that edge is eroding rapidly."
Aerospace products have traditionally been and continue to be regarded as one of the last strangleholds of America's industrial might. Indeed, the latest figures released by the US International Trade Commission on the nation's trading with China show that, out of 27 different manufacturing activities surveyed, 'aerospace products and parts' generated by far the largest surplus, totalling $7bn in 2007.
However, comparing 2007 with six years earlier we find that, while aerospace exports to China grew by 290 per cent over the period, imports from China jumped by more than 400 per cent in the same period. In other words, the competitive advantage of the US in its most successful sector is shrinking, mainly because of imports of aerospace components.
Moreover, the list of manufacturing sectors that are in serious trouble at present go well beyond the auto sector to include machine tools, furniture, apparel and textiles.
The pharmaceutical industry is facing similar challenges. New York City-based Pfizer, the world's largest drug company, is in the midst of a major restructuring programme that will see it close eight plants and shed 11,000 jobs by the end of this year. Pfizer has blamed tough competition from generic drugs for its falling sales.
But why, how and when did it all start to go so wrong for the industrial America that was so vital in the foundation of a nation which, until a couple of years ago, few wouldn't recognise as the world's undisputed economic superpower?
In Tonelson's view, the roots of the trouble go back to NAFTA, the North American Free Trade Agreement that the US signed with its neighbours Canada and Mexico in 1992.
"I would say that NAFTA really put US trade policy on a fundamentally new track," he says. "The basic idea was to encourage big US multinationals to set up factories overseas and exploit the advantages they would reap in wages and regulatory compliance to supply the US market with much lower-cost goods than they could make at home.
"We think that decision to turn US trade policy into an engine of offshoring has been disastrous, with the effects only having been masked by government and Wall Street gimmickry. Luckily, the rest of the world - basically, America's creditors - has been ready at least up until now to subsidise US over-consumption. We have been able to live far beyond our means long after most informed observers of the economy thought it would be possible."
He adds: "At the root of our current economic troubles is the inability of our goods sector - which means mainly manufacturing because manufacturing output dominates goods output in the US - to satisfy our levels of consumption. We consume much more than we produce, and have done for many decades.
"We're now seeing that if the manufacturing sector as a share of the economy stagnates for too long and even shrinks, then it's no longer big enough to support healthy growth. In this scenario, the economy's only choice if it wants to continue growing is to grow unhealthily by piling up more and more debt."
USW's Conway shares this view: "We would argue that the fundamental of what's gone on in the US [recently] is a combination of failure to invest in manufacturing, mining, milling, the making of things and the adding of value. You just can't run an economy by shifting paper at each other and charging fees while there's no value created, there's nothing in the value stream.
"The only sustainable economic growth we see is increased manufacturing and increased jobs in infrastructure. If this country starts to think about adding value in those terms, then you create good jobs, you get a good, solid tax base and you don't have this fundamental shakiness of a paper-driven economy where everybody is making money off of someone else's mortgages."
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