Back from China?
As in hundreds of cities and towns in the once-industrial Midwest, a ghost not only haunts but dominates North Canton, Ohio. It’s a ghost of brick and mortar, glass and steel, of a smokestack that rises directly across the street from the City Hall and the Chamber of Commerce. The ghost’s name is still painted on the smokestack, four years after the factory beneath it clanged to a halt. “Hoover,” it says—as in Hoover Vacuum Cleaner, a company founded in North Canton in 1908 that was the town’s largest employer, and leading citizen, for one year short of a century.
At its height, Hoover’s North Canton empire spread over 17 factories and buildings, one of them a private hospital for local Hoover workers (as many as 7,000 during the company’s flush decades) who took sick or were injured on the job. “This was Hooverville—our own version, not Herbert-Hooverville—a company town,” says Doug Lane, a former city councilor who now heads the Chamber of Commerce. “If the city needed a fire truck, it went to Hoover. If it needed a new school, it went to Hoover.” A city of 17,000 nestled among green hills an hour’s drive south of Cleveland, North Canton was virtually an adjunct of the company. “Boss Hoover,” whose statue rises in the park across from Lane’s office, was also North Canton’s first mayor.
“When I moved here in 1988,” Lane says, “the company still had 4,000 employees in the plants here.” But Hoover no longer controlled its own destiny. It had been purchased in 1985 by a railroad holding company, Chicago Pacific. Over the next two decades, Hoover was resold to Maytag, then to Whirlpool, and in 2006 to Techtronic Industries. The Hong Kong–based conglomerate promptly announced it would relocate the assembly line in the remaining North Canton factory, where employment had dwindled to just 800 workers, to Mexico and El Paso. In September 2007, Hoover left North Canton for good.
There was nothing exceptional about Hoover’s abandonment of its hometown. The Hoover complex was one of 54,621 American factories to shutter its doors during the past decade, a time when Chinese exports rose fivefold while the number of Americans employed in manufacturing plummeted from 17 million to 11.5 million. What was exceptional in North Canton happened on September 6 of this year, when Suarez Industries unveiled, with considerable hoopla, a new production facility in one of the abandoned Hoover warehouses. Even more striking, Suarez was bringing back work—the manufacture of EdenPure heaters and air filters—that it had previously done in China, where 80 percent of EdenPure’s products had been made for the past two decades. “We’re going to reverse that ratio,” said Hope Paolini, Suarez’s production manager, as she gave me a tour of the plant one late September day, “to 80 percent here and 20 percent in China.”
Bringing back production from China—reversing, as it were, the economics of globalization—is no small achievement. It invariably entails the substitution of capital for labor. Since no U.S.–based workers come as cheap as their Chinese counterparts, economies of productivity, of more efficient machines and processes, must make up the difference.
The economies of productivity in Suarez’s North Canton plant are largely the creation of its chief engineer, Neil Tyburk, a low-tech industrial engineer of evident genius. “Neil re-engineered the Chinese heater,” Paolini said. “It had 192 screws—he got it down to 31.” Through many such redesigns, Suarez was able to greatly reduce the size of its labor force. On the day I visited, the plant, still in start-up mode, employed 80 people; the workforce will rise to 250 when it’s fully staffed—a small fraction of what Hoover once employed, and not a particularly large labor force for a plant that will turn out 10,000 heaters a week.
Paolini says that when Suarez officials told business associates they intended to bring their manufacturing operation back from China and still turn a profit, “we were laughed at. People can’t believe this kind of high-volume manufacturing will return to the U.S.”
If they also can’t believe EdenPure’s new hires will enjoy the living standards that Hoover’s workers once took for granted, they’ll be right. When Hoover closed down in 2007, its employees were paid between $13 and $17 an hour, according to Nick Tomey, who headed the local union. EdenPure pays minimum wage: $7.50 an hour for its assembly-line workers. Except there’s no assembly line. On the day I visited, the production workers simply stood alongside long tables, picking up heaters, turning screws, affixing components, then handing the heater on to the next worker, who turned his own set of screws.
Looking for the future of American manufacturing, I seemed to have stumbled upon its past (though the past paid better). Tyburk’s labor-saving innovations didn’t require Suarez to shell out much for machinery; the skill levels demanded of its workers didn’t require Suarez to shell out much for labor. In this durable-goods factory in America’s heartland, in this heartening example of reverse globalization, workers make what they’d make at Wal-Mart or McDonald’s.
The very idea of returning manufacturing to the United States—even at EdenPure pay rates—would signal a clear shift in America’s prevailing business models and economic vision. Ever since Jack Welch took the helm of General Electric 30 years ago and proclaimed that American companies should produce wherever the costs are low and the labor cheap, offshoring has been the watchword for both multinational corporations and small and midsized manufacturers as well. Particularly since Congress voted to establish permanent normalized trade relations with China in 2000, the United States has hemorrhaged manufacturing. Domestic employment at U.S.–based multinationals declined by 2.9 million over the past ten years, while their workforce abroad has risen by 2.4 million.
The decline in manufacturing employment has been qualitative as well as quantitative: the unionized manufacturing jobs of mid-20th-century America were precisely the jobs that created the world’s first majority middle class. Even today, manufacturing jobs pay roughly 20 percent more than the median American pay level. As employment in manufacturing plummeted over the past decade, median household income declined with it, for the first time since the Great Depression. This was not merely correlation. It was causation as well.
Ordinary Americans clearly consider manufacturing the key to America’s well-being. In a survey conducted this past June by a bipartisan group of pollsters, respondents overwhelmingly identified manufacturing as the sector most important to the overall strength of the U.S. economy. But only now is this common sense trickling up to the policy elites. During the past year, a growing number of America’s leading economists, CEOs, and elected officials—groups that had long viewed the offshoring of American industry with serene indifference—have begun to acknowledge that America needs a manufacturing sector. The awakening has come partly in response to our growing trade deficit, but there’s more to it than that.
“In the old days, the elites said manufacturing was a goner, and 80 percent of them said it was a good thing,” says a former Treasury Department official. “They conditioned that on our keeping highly innovative manufacturing, like semiconductors. The U.S. had to remain tops in innovation—that was our calling card in the global economy. It was fine to invent things here and make things abroad: That was a proper division of labor. Today, the elites have finally realized that when manufacturing goes abroad, it takes research and development with it.”
This turn in elite opinion was signaled in an influential article in the July 2009 issue of the Harvard Business Review by two Harvard business school professors, Gary Pisano and Willy Shih. Nations such as ours, they wrote, are home to “industrial commons,” regions like Silicon Valley or the greater Boston area, where R&D and high-tech manufacturing are concentrated. “Once manufacturing is outsourced,” they wrote, “process-engineering expertise can’t be maintained, since it depends on daily interactions with manufacturing. … Without the ability to develop such new processes, they can no longer develop new products.” Their conclusion: “An economy that lacks an infrastructure for advanced process engineering and manufacturing will lose its ability to innovate.”
For want of a nail factory, the kingdom was lost.
But it’s one thing to acknowledge the need to bring manufacturing back to the U.S., and quite another to actually do it. This August, the Boston Consulting Group released a blueprint titled “Made in America, Again,” which laid out how such a return from abroad—from China in particular—could and would occur. The key to this homecoming is the galloping rise of Chinese wages, the consequence of a labor force that, as a result of that nation’s one-child policy, is no longer expanding as it used to. “Wage and benefit increases of 15 to 20 percent per year at the average Chinese factory will slash China’s labor-cost advantage over low-cost states in the U.S., from 55 percent today to 39 percent in 2015, when adjusted for the higher productivity of U.S. workers,” the study concludes.
The return of U.S. manufacturing to native soil is not, however, a given. American workers will have to come cheap. The Boston study speaks of “flexible unions/workers; minimal wage growth; high worker productivity,” and asserts that “when all costs are taken into account, certain U.S. states, such as South Carolina, Alabama, and Tennessee, will turn out to be among the least expensive production sites in the industrialized world.” (An earlier draft of the study had compared wages in Shanghai to wages in Mississippi, but after I questioned in a Washington Post column whether Americans wanted to become globally competitive by reducing their incomes to Mississippi levels, the state was dropped and South Carolina inserted.)
Boston Consulting Group managing partner Harold Sirkin sees the recession’s downward pressure on wages as a golden opportunity to build a low-wage manufacturing sector in America that could compete with China’s—a halfway house between the Third World wages of East Asia and the high-wage production of Northern Europe. “With unemployment at 9 percent, the economy can flex in ways that people wouldn’t believe!” he wrote. “Getting the work rules right, getting the wage scales right, the U.S. can be competitive on a global scale.”
The wage scales at Suarez’s North Canton factory certainly justify Sirkin’s confidence in the flexing economy. Outside the factory, when I’d finished my tour, I spoke to one Suarez employee taking his break. When I asked him about the wage level, he immediately answered, “Hey, man, it’s a job! I was out of work for two years!” To make ends meet, he works a second job for a caterer on weekends. He’s living with friends, hoping eventually to have enough money to rent his own apartment.
Does the future of American manufacturing require competing with China (and McDonald’s) on wages? Fortunately, the next factory I visited—which also had brought work back from China—looked nothing like Suarez’s, and paid somewhat better, too.
Last year A123 Systems, a company that manufactures lithium-ion batteries for electric cars, opened a factory in Livonia, Michigan, a half-hour’s drive from Detroit. From the outside, it doesn’t look like a factory at all (it seems more like an office park); inside, it looks like no factory you’ve ever seen. This is a dream workplace, in two senses of “dream.” It’s a comfortable environment to work in, and as I tour the plant with Jason Forcier, the company’s automotive vice president, I see an almost surreal vision of a techno-future brought into the present. In the sealed “dry room,” battery cells coated with “magic pixie dust”—Forcier’s term for the conductivity compound that A123 has commercialized, invented by a scientist at the Massachusetts Institute of Technology—are assembled by a robotized process. A handful of workers, garbed in surgical attire, discreetly move around the chamber. The cells are transported by conveyors and robots to an “aging room” (battery cells, like wines, have to age), where they sit for 40 days.
Like Suarez, A123 brought this work back from China. Though the company is headquartered in Waltham, Massachusetts, it had to begin production in Asia. Americans “didn’t have the equipment or the know-how to make the batteries,” says David Vieau, the firm’s CEO. “Sony had been the first to commercialize lithium-ion technology. So the industry developed there, not here.”
But it wasn’t just know-how that originally drew A123 to Asia. Until last year, the company made most of its product in China, where cheap labor reduced its costs by 20 percent to 25 percent. (The greater part of A123’s costs are in technology; labor constitutes just 25 percent to 30 percent of its total expenses.) But those savings carried their own price. “It was challenging for us to have R&D in Massachusetts and production in China,” Vieau says. “The gaps that emerged in our learning process were big.” But the gap between the costs of Chinese and American labor was bigger.
Then in 2008, with Michigan’s economy reeling from both the recession and the crisis in the auto industry, Democratic Governor Jennifer Granholm persuaded the legislature to authorize funds to attract firms in strategic-growth industries—including makers of electric-car batteries. One year later, the Obama administration’s stimulus package included $2.4 billion to jump-start domestic production of electric-car batteries, more than half of which went to companies that, thanks to Granholm’s program, were already considering building their factories in Michigan. One such company was A123.
“We had funded the company for ten years through venture capital,” said Forcier, as he showed me around the plant. “Without the government incentives, it’s highly likely we would have stayed in China.”
Those incentives came to $249 million, with which A123 was able to build and equip both the Livonia plant and another in nearby Romulus. “In the U.S., you can substitute machines for labor,” Vieau says. “But building a highly automated factory is very expensive up front.” Having the government pick up those expenses, he estimates, “reduced China’s cost advantage to 5 to 10 percent.”
A123’s Michigan operation employs 700 production workers and 400 engineers and managers, who work together in the same campus-like factories. Coming to the Detroit area during the depth of the economic collapse, the company could be highly selective in its hires: “As we were ramping up, we had 20,000 résumés,” Forcier says. “We have guys with degrees in information technology working on the line.”
However skilled its workforce may be, the production-worker pay scale at A123 is modeled on the United Auto Workers’ lower-paying new contracts with General Motors, Ford, and Chrysler. New hires—and everyone either is or was recently a new hire—get $14 an hour, which works out to roughly $29,000 in yearly income. “If we had to pay $28 an hour [the rate for veteran UAW autoworkers], we couldn’t do it,” Forcier says. Like virtually every new American company, A123 offers no defined-benefit pension, just a 401(k) for which there’s no matching employer contribution. But salaried employees are given stock options, and the company’s benefit package, for salaried and production workers alike, is excellent. “I have the same benefits as Jason [Forcier],” Matthew Knox, a college graduate in public administration hired on as a production worker (and just promoted to supervisor) told me. Opportunities for promotion and raises, as Knox’s experience attests, are real—provided, ultimately, that the market for electric cars continues to expand.
Currently, most of A123’s batteries are produced for Fisker Automotive’s Karma—a high-end niche car (“Leonardo DiCaprio owns one,” Forcier told me). But the company is developing batteries for more-mainstream companies. In October, General Motors announced it would produce an all-electric car beginning in 2013 and that A123 would provide the batteries. The company’s stock rose by 27 percent on the day of the announcement.
Share price notwithstanding, the American venture-capital companies that funded A123’s operations in China were unwilling to fund its move to the U.S. “It’s very hard to raise money for a capital-intensive manufacturing start-up” in the U.S., says Hank Notthaft, who’s started and run a number of successful Silicon Valley companies. The conventional wisdom is that with growing markets and cheap labor in China, manufacturing in America is a sucker’s game. The venture capital that’s there for the Googles and Facebooks—software companies that don’t make a physical product and don’t employ all that many people— isn’t there for companies that invent cutting-edge products and want to make them in the U.S.
That leaves government as the venture capitalist of last resort for manufacturing in industries it deems important to the nation’s future. At least, that’s the common practice in nearly every other country. All the 50 states also have funds they use to entice firms to relocate, but when Texas lures a business from Ohio, the American economy experiences no net gain. At the federal level, however, industrial policy is considered an encroachment of government on the prerogatives of the market. Conservatives abhor it for ideological reasons, except in the case of the oil industry, for which they favor permanent government support. Business elites, until recently indifferent to the fate of domestic manufacturing, have seen no need for it.
By investing stimulus funds in both advanced car batteries and solar power, President Barack Obama asserted that there was a need for federal industrial policy if America wanted to lay claim to the industries, the manufacturing, of the future. But his viewpoint has yet to carry the day.
Forcier is a believer. “I’m a Republican by nature,” he told me, “and I know the Republican view is not positive toward this kind of incentive. But in this case, it worked. We have 1,100 new jobs. We’ve brought a new technology to the United States.”
But new technologies alone can’t revive American manufacturing. Then again, as I saw in an Indiana steel mill, old ones can survive by becoming new again.
When Larry Fabina who has the happy title of “Manager of Continuous Improvement” at ArcelorMittal’s 3,300-acre steel mill in Burns Harbor, Indiana, first reported to his job there in 1974, he was given a shovel and immediately put to work. When a worker is hired today, Fabina told me as he guided me around the huge facility on the banks of Lake Michigan, 14 miles east of Gary, he is given a three-week orientation course in all aspects of the factory’s production processes and safety procedures. The school—its curriculum devised and taught jointly by the company and the plant’s United Steelworkers local—also offers a range of courses in the many specialized skills required to run the plant. We look in on week 37 of a 38-week course for electrical technicians, who are busy dismantling air-pressure valves. In another room, Will Ramirez, an electrical engineer, is teaching employees to operate the computers that customize the temperature, flow rate, and pressure levels for the plant’s many and varied kinds of steel.
An integrated mill like Burns Harbor has to run around the clock—if it grinds to a halt, restarting it (particularly firing up its giant furnaces) could take weeks, even months. The plant needs workers who can fix things on the fly—these days, through adjustments entered on computers. In earlier times, Pete Trinidad, an official of the local, told me, a steelworker’s job “was 80 percent back, 20 percent brain. Now it’s the reverse.”
Trinidad’s ratios aren’t just hype, as a tour of the plant’s hot-strip mill—a nearly mile-long building that yearly customizes four million tons of steel to its clients’ specifications—makes clear. At first glance, the steel-shaping process may look old-school. Slabs of steel, each ten inches thick, are heated by furnaces to 2,350 degrees Fahrenheit. Then, glowing a bright molten yellow, they’re transported at speeds up to 40 miles per hour down a series of sluices and conveyor belts, during which they are reshaped to anywhere from 26 to 76 inches in width and as little as .03 of an inch thick. They are then cooled and coiled. Seventy percent of this coiled steel ends up in cars made by General Motors, Nissan, Chrysler, Honda, Toyota, and Mercedes-Benz.
The role of labor in the steelmaking process has changed. While 18 steel workers are assigned to each shift in the hot-strip mill, hardly any are on the shop floor. They’re on the walls—in monitoring booths positioned along the catwalks on the side of the mill, high above the molten steel racing down the center of the floor. The booths are filled with rows of computer screens that register what high-tech measurements say about the steel: its heat, tensile strength, thickness, whether it’s conforming to the pre-programmed specifications, and whether the lasers and robotic tools that are shaping the steel are performing correctly. The plant also uses global-positioning technology to identify each slab of steel as it moves down the line, to ensure that it emerges, as a coil, with the alterations that the client specified.
Frank Munoz, who’s spent 42 years at the plant, has been running one of these booths for the past two and a half years. Watching the screens as I look on, he adjusts several knobs. “We can see all the properties of the steel as it flows,” he says. “I can tell if something is wrong, and if needs be, get in touch with the guys at the furnace, or with the techs,” who are monitoring the computer programming that directs the flow of the steel in booths along the opposite side of the mill.
By some measures, the American steel industry has been dying for decades—a casualty of its failure to modernize and keep up with state-subsidized foreign competition. United States Steel, once the nation’s largest private-sector employer, had more than 340,000 workers on its payrolls in the 1940s. Today, it has roughly 50,000, spread across the U.S., Canada, and Eastern Europe.
The entire American steel industry now employs about 160,000 people. The Bureau of Labor Statistics predicts that number will drop by a further 13 percent before this decade is out.
But the industry is still alive, by virtue of the huge productivity gains it’s made in recent decades—the result of the innovations on display at Burns Harbor. “Thirty years ago, it took ten hours per worker to produce one ton of steel,” says John Surma, the CEO of U.S. Steel. “Today, it takes two hours. Our productivity is so high it negates China’s advantage in labor costs. Their advantage is a state subsidy, which enables them to sell abroad at any price, even if it’s at a loss.”
Such productivity gains come with a cost, of course: It takes fewer steelworkers to make the product. When Bethlehem Steel opened what is now ArcelorMittal’s Burns Harbor plant in the early 1960s, the factory employed many more workers than it does today; its labor force peaked at 6,600 workers in the 1980s. Today, it employs 3,400 production workers and 600 managers and engineers. The good news is that the steelworkers, who are unionized, still make a decent living. The starting wage for production workers at Burns Harbor is $19.56 an hour, which rises to $26.32 as workers gain seniority. With premiums and overtime, workers can make up to $73,000 a year. “You can earn a middle-class lifestyle working here,” says Madhu Ranade, Burns Harbor’s general manager. “And you don’t have to take out student loans.”
The challenge for plants like Burns Harbor, and for the whole once-mighty American steel industry, is how to compete in an age of global oversupply, particularly when Chinese steel is subsidized by the state. For now, Burns Harbor’s solution is to continually upscale its product and production. The plant has its own power station, which is able to recycle the mill’s byproduct gases to generate 60 percent to 70 percent of its own energy needs while also providing power to 30,000 homes in northwestern Indiana. Plant engineers work closely with researchers at ArcelorMittal’s R&D center in East Chicago to produce stronger, lighter steel that will enable cars to meet higher gas-mileage standards. “We work with our own designers to see how you can make the Chevy Cruze lighter, how to take 30 to 70 pounds out of it,” Ranade says. “Then we show the work to the auto companies.”
Can all this innovation keep the Chinese wolf from the door? Productivity in U.S. manufacturing has increased at a fairly consistent 4 percent annual rate since 1989, when there were 18 million manufacturing workers in the U.S. Employment numbers held steady through 2000, when there were 17.3 million such workers. But then China won normalized trade status from Congress and the numbers declined precipitously. Lower labor costs and subsidized imports trumped productivity. Even though steel work is highly skilled, companies insist that new hires start at a lower rate with a reduced benefits package—though the Steelworkers’ union has thus far largely been able to resist the establishment of a permanent second tier for new hires, now the norm in the auto industry. “With very few exceptions,” says United Steelworkers President Leo Gerard, “the employers all say [the lower wage rate] is because they have to compete with China.”
Can manufacturing come back to America? Even if it does, the stories of companies like A123 and Suarez raise a second question: Can it, or will it, pay enough to re-create a sizable middle class?
America’s policy elites—having now largely recognized that the decline of U.S. manufacturing was on the whole a bad thing—come at these questions with solutions that, while desirable in themselves, may not address the problem. Everyone agrees we should make the R&D tax credit permanent. Everyone agrees we should promote education in the STEM disciplines: science, technology, engineering, and math. In fact, the educational reform that would most help manufacturing would be establishing technical and vocational schools that turn out a skilled workforce, as in Germany.
Beyond such affirmations of motherhood and apple pie, however, consensus breaks down. Not just elite, but mass opinion too, is divided over the need and merits of industrial policy. But as the recession refuses to end, the public’s opposition to government support of manufacturing may be weakening. This June, the Democratic Mellman Group and the Republican Ayres McHenry firm conducted a poll asking whether the government should refrain from helping manufacturing or assist it any way it can. Respondents favored governmental assistance by a 5-to-1 margin.
Even so, President Obama will have to make a far stronger case for government intervention than the one he’s sporadically advanced. The details of industrial policy are devilish, as the controversy surrounding the Obama administration’s grants to solar-panel-maker Solyndra illustrates. The easier case for reviving manufacturing is that of economic nationalism, of favoring production within the United States, just as public policy in every other nation favors production within its own borders. But this is an argument the president has been reluctant to make, as evidenced by his silence on the issue of Chinese currency manipulation.
Wall Street and the leaders of multinational corporations remain invested, financially and ideologically, in business ventures that thrive on global arbitrage and cheap overseas labor. For them, economic nationalism is a nonstarter. But for a growing number of business leaders, troubled by the erosion of the middle class, promoting domestic production has become a new battle cry. The cry has also been taken up by such centrist Democratic organizations as the Progressive Policy Institute (an offshoot of the old Democratic Leadership Council) and Third Way.
With no prompting from their betters, however, the American people are already on board for a more nationalist economic program. In the Mellman-Ayres-McHenry poll, 90 percent of responders supported giving tax breaks to manufacturers that expand production and create jobs in the U.S., to be funded by eliminating the tax breaks companies receive for moving jobs abroad. The Senate’s recent bipartisan vote to impose tariffs on Chinese imports in retaliation for its currency manipulation, and Mitt Romney’s vow to do the same on his first day as president, attest to the growing strength of economic nationalist sentiment. Obama, who’s declined to support such a measure, dismisses it at his peril.
At bottom, the decline of American manufacturing has deep systemic roots. The combined forces of technology and globalization have reduced the number of industrial workers in most advanced economies, but nowhere has the decline been so precipitous and profound as in the United States. What made us different is that these two trends coincided with the rise of the most extreme form of shareholder capitalism—elevating the concerns of investors, the primacy of profits and share value, over those of the workers and communities to which the earlier, pre-1980 form of stakeholder capitalism also paid heed.
It’s no coincidence that Germany, the only advanced economy to expand and upgrade its manufacturing sector in the age of globalization, is also the primary practitioner of stakeholder capitalism. Corporate boards are composed of equal numbers of labor and management representatives, while an entire sector of banking is devoted to funding small and midsized manufacturing ventures, freeing them from the pressure of capital markets. The resulting quantity and quality of German manufacturing have produced an economy that’s the envy of the world. “Germany is socialistic, it’s green,” says U.S. Steel CEO John Surma, “and it’s kicking our ass by any capitalistic measure.”
The United States is not likely to become significantly more socialistic or green anytime soon. But through trade policies and industrial policies that promote domestic manufacturing, we can begin to realign the practices of American business with the urgent needs of the nation and its people.
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