Dr. John Psarouthakis, Executive Editor of www.BusinessThinker.com, Distinguished Visiting Fellow at the Institute of Advanced Studies in the Humanities, University of Edinburgh, Scotland, publisher of www.GavdosPress.com and Founder and former CEO, JP Industries, Inc., a Fortune 500 industrial corporation
After I launched JP Industries in the 1980s and was growing it into a major auto components firm, new acquaintances usually asked me how big the company was. If I told them it was a half-a-billion-dollar company, they were likely to say: “No, I mean how many people do you employ?” That question no longer defines a company, and no one asks it anymore. For sure no one asks that question about General Motors, except in wonderment at how America has changed since the 1950s. But neither does anyone use workforce size to define new non-manufacturing icons such as Amazon or Facebook. Sales and profits determine the size of a company today. Some politicians and pundits have a quick, cynical, simplistic explanation for that new dynamic: corporate greed. They are wrong—wrong enough and populist enough to lead the gullible over the cliff we discussed earlier.
The nation’s formerly largest corporation, for example, did not have a history of pushing workers out the door to maximize profits. The overly generous remuneration of the General Motors workforce, on the job and in retirement, was in fact one major cause of GM’s financial catastrophe. Big government and big manufacturing both spent the last half of the 20th Century laying land mines beneath their own feet. How can one quarrel with that description of entities that wind up with retiree costs dwarfing current payrolls? It is complicated. Demographics of an aging population, efficiencies that require fewer and fewer employees to accomplish the same work, global competition driving down profit margins, that same competition leading to better products that last longer . . . it is an intricate picture. But unless one’s mind is mired in a utopian, socialist fantasy, the bottom line is quite simple: compete or die. You can’t make a bad product and sell it into a market of good products. And you can’t sell a good product that costs twice as much as someone else’s equally good product. This dynamic—a few outlier examples excepted, as in every endeavor under the sun—is not about greed. It is about centuries-old market truths, which are becoming even truer.
An eerie parallel to the GM saga can be found at the bottom of the government and taxation food chain, where numerous municipalities around the country have been lining up to declare bankruptcy or de facto bankruptcy. The only competition in the local government arena is with state and federal governments for tax dollars. At this most labor-intensive level of government, however, “legacy issues” are the same in a bankrupt city as in the old smokestack industries. Overly generous retirement and health-care benefits, padded payrolls, and slipshod fiscal management have left some cities struggling to pay retired workers even while current workers—including police officers—are being laid off. As a footnote to that fact, here—and in numerous other paragraphs of this book—I could easily add an exclamation point that asks: “Why did a thousand headlines proclaim that ‘America Is Not Greece’?” Are you kidding? Show me a bankrupt American city and I will show you Greece without the Mediterranean.
In 1914, only 17 years before Brave New World was published, Henry Ford’s assembly line workers were rejecting oppressive, mind-numbing production work in astounding numbers. Ford needed to hire and train more than three men if he wanted to find one who remained on the job at year’s end. To solve this costly and counter-productive problem, Ford stunned the world by doubling workers’ wages to five dollars. Ford’s new pay scale famously increased number of consumers able to afford a car, but this was a mere footnote to his strategy. Ford’s motive was to solve a productivity problem while keeping his product competitive. From a worker’s vantage point it was all about a 100 percent pay increase (plus the bonus of an eight-hour workday instead of nine). From a business vantage point it was all about productivity (the eight-hour day meant Ford could operate three shifts a day, instead of two), getting those Model T’s out onto Woodward Avenue, not wasting time spent hiring and training workers, and solving an acute labor shortage.
The automakers applied that template far past its rightful expiration date, into an era when labor costs were allowed to exceed common sense and management muffed a latter 20th Century challenge from foreign manufacturers. Almost 100 years passed from the $5 day until competition and technological realities and failure to live within their means brought the automotive American Three (formerly the Big Three) to their knees. In the real world, the sun rises and sets, death and taxes are certainties, and any business that doesn’t compete will sooner or later—usually sooner—go bust.
During the manufacturing segment’s American Century zenith, the platitude said that when Detroit sneezes, America catches a cold. That assertion might have been overused, but it was entirely true. Detroit was America’s largest employer. Its indirect economic impact defied calculation. The steel industry, parts manufacturers, electronics and glass companies, road builders, garage mechanics, salesmen—even a huge part of the advertising and newspaper and broadcasting businesses—stayed healthy only if Detroit stayed healthy. That was not just a sneeze you heard at the dawn of the 21st Century. The bigger they are, the harder they fall.
Detroit’s car companies, made vulnerable by complacency and after staggering for several decades, nearly went down for the count. Those humiliating few weeks on the brink might be the place to mark the true beginning of the 21st Century. Historians could find few bookends more aptly symbolic than the $5 Day on one end and The Bailout on the other. All four 21st Century Benchmarks factored into the nearest bookend—global competition, technological advances (the first widespread, heavy-duty, real-world use of the word “robot” occurred in the car industry), the need for education reform (no Henry Ford waits at today’s factory door to hire and train, at double pay, workers straight off the farm or straight off the boat), and a synergistic need for new thinking in our manufacturing segment (for direct job creation, of course; but equally important as a nearby laboratory to continue our status as an exporter of innovation). It all added up to that very 21st Century matter of Vector One companies becoming a source of unemployment rather than a source of new jobs.
Perhaps no image so perfectly signaled the futility of resistance to the coming new century as did those photos of angry American autoworkers taking sledgehammers to Japanese-made cars, even as the Japanese were moving to build cars in America (competitive cost and productivity realities, you know). The days of bludgeoned Toyotas are past, but more sophisticated (and more dangerous) resistance to the new era remains. We need to do more than merely accept that the calendar has turned; in a single grasp, we need to confront the new century and embrace it.
One can forgive the politicians and the pundits and the unemployed themselves for chanting “Jobs, jobs, jobs!” That is after all a noble and very American chant, quite different than “Handouts, handouts, handouts!” The trick will be to move the dialogue (and the chants) away from instant (and obsolete) jobs, while avoiding surrender to the handout mentality. Instead, we need to chant for a new job-creating environment and a new paradigm for producing qualified job candidates. There was a time when it might have been valid in a recession to expect jobs could materialize from a tweaked tax rate here, a money-supply adjustment there, or—mostly, like a fresh breeze inevitably closes out a heat wave—an “uptick in the business cycle.” That always happened sooner or later after Detroit caught a cold. Today’s challenge is not cyclical. It is fundamental and technological. No one would have accomplished much by standing in a 1912 cornfield chanting: “Farm jobs, farm jobs, farm jobs!”
The farm-to-factory social and technological upheaval, though massive, was a small reflection of where we stand today. No one has constructed an oven the size of Kansas in which to bake a much, much larger Mom’s apple pie. If we are smart, we’ll make manufacturing the core—and “core” is precisely the right, if surprising, word—of how we meet and mold the future. We can make the American manufacturing sector our prime route toward “Jobs, jobs, jobs!” once again . . . not as directly as in the past, not in any 20th Century way, but nonetheless as a vital driver of prosperity for all. Millions of lunch buckets won’t be carried into the factories of the future. The livelihood of most Americans, however, will depend on the health of American manufacturing.
As we talk about bringing our manufacturing sector into a new era, we need to keep a couple things in mind about this powerhouse that drove the American Century. More than 70 years have passed since FDR, a year before Pearl Harbor, dubbed our mills and factories “The Arsenal of Democracy.” It has been a long time since you heard commonly expressed awe about our “industrial might.” The numbers, however, remain mighty.
First, the service sector (and especially computer-related technology) has radiated all the workplace sex appeal for a generation or two, but guess what? We remain the world’s largest manufacturer. In 2011 we produced a fifth of the entire world’s manufacturing output. If one must pick oneself up after being knocked down, that is the best possible floor to start from.
Second, it is true that manufacturing accounted for 31 percent of U.S. non-farm employment in 1950 and that 60 years later that percentage had dipped below 10 percent, but guess what? Almost 12 million Americans work in today’s manufacturing sector, a number that posted modest gains in 2010 and again in 2011—the first years that had seen an increase since 1997.
Third, 12 million jobs is a lot of jobs, no matter what percentage they might be of our total workforce. Despite its troubles, U.S. manufacturing obviously has not been driven into antique status by an inability to compete. It is nowhere near extinction. It has so many assets, in physical plant and productivity and business culture, that if we did everything wrong and stayed on the road to government-centric and dwindling world importance, we would still be making things. Not enough things. Not the right things. Our people would suffer from all that dwindling. But we would remain on the list of manufacturing countries. Take just one-half of our current manufacturing might and set it down in any other leading developed country and you would be looking at the new global superpower.
In other words, American manufacturing has big challenges today, and faces bigger challenges tomorrow, but is nowhere near being a disaster zone. Viewed as a single unit in a mind exercise, one could analyze the U.S. manufacturing sector as an underperforming company—one with an upside and a downside the likes of which have never been seen in world history.
The downside would be to allow a vibrant, highly productive, innovative conglomerate atrophy quickly into mediocrity with dangerous consequences for all Americans. The upside would be to refocus the world’s largest, most important “company” in midstride, nip its foreseeable problems in the bud, retool (as all manufacturers do), and soar to new heights as the winner and still champion of a larger, well . . . global pie. The bad news is that American manufacturing has reached a decisive crossroads. The good news is that the proper path to choose is obvious. The further bad news is that American society (meaning all levels of government and the will of the people) must commit to the live-or-die effort (see “infrastructure,” see “education”). The further good news is this manufacturing rebirth can be achieved, if we somehow summon that shared resolve—which seems to be the key to success when one looks at these 21st Century survival issues from any direction.
No one could estimate with acceptable accuracy how many Americans would be willing (or fiscally able) to report to work at the wage rates foreign suppliers pay offshore workers to produce countless low-value products. My best guess is almost none would sign up. Americans already turn their back on jobs paying wages that, although low by our standards, are much higher than millions of manufacturing jobs around the world. If someone in Asia produces wood screws that could be made here by workers earning half the U.S. minimum wage—is that a question worth asking? Should we even bother bemoaning the loss of such jobs? Of course not.
Nor could anyone could estimate with acceptable accuracy the number of American manufacturing jobs that have been lost as a direct result of companies moving overseas, or as a direct result of imported goods taking market share from domestic product, or as a direct result of domestic regulatory and taxation issues, or as a direct result of new efficiencies. Technological advances would have eliminated a certain number of jobs from the factory floor even if no factory existed anywhere in the world except the lower 48 states. That fact is among the reasons it’s impossible to sort out reasons jobs are exported, let alone to add up accurate numbers.
Let’s imagine a hypothetical small-town Midwest plant where 2,000 employees manufacture dishwashers. Let’s say that one sad morning the entire operation disappears to Mexico, where workers are paid a small fraction of Midwestern wages. The reason for the exodus appears cut-and-dried: pay rates. But there are also regulatory issues, including some that do not involve worker safety or sensible stewardship of natural resources. There are tax issues (the dishwasher company has been marginally profitable, at best, for 15 years, but in each of those years it has paid 30 percent of the town’s school system budget, bought all its police cars, and paid a far larger share of water and sewage costs than pro rata accounting would demand). The plant’s union has accepted a pay freeze in several contract negotiations—but refuses to budge on antiquated work rules (antiquated, of course, by new technology), and actively nurtures workforce resentment against management. While the plant’s profitability slouched toward ancient history, two of its major suppliers outsourced key parts to . . . Mexico. For these and other reasons—bottom line being compete or die—there is no way this plant could stay in the Midwestern town where it had been an icon for many, many years.
Keeping in mind that technological advances are irreversible, and that a light breeze of new technology can produce gale-force change in a given market, “tech” clearly is shorthand for both the problems and the solutions we are discussing. Technology’s long-term impact upon the job market, in fact, dwarfs all the headline-grabbing events that first created a new meaning for an adjective (offshore), then a brand-new verb: “to offshore, as in ‘Ajax offshored its parts department.”
Technological advances even played a major role in the loss of our mythical dishwasher factory to Mexico, though that might not be apparent. Communications technology and transportation technology, for example, today allow a product to be assembled and shipped in containers from the farthest village on the planet. A warehouse supervisor in Brooklyn (or anywhere else) can tell you in an instant the exact location of a particular unit still in its crate—the kind of tracking that not many years ago would have required time and effort even if that particular dishwasher were sitting in the warehouse 30 yards from the supervisor’s desk. Inventory management, the parts pipeline, quality control—a very long list of chores have been simplified and improved by technology that already has begun to seem old, and which makes off-shoring a competitive solution in situations where it used to be impossible.
Meanwhile, dishwashers—and numerous other home appliances—arrived on the consumer scene to acclaim befitting futuristic technological marvels. But one by one, as their technology became commonplace (as did their mass manufacture), these appliances morphed into mere manufactured commodities. That is, unless they are built by a truly inept company, all models in the same price range are essentially the same in construction and quality no matter who builds them. I would argue—and have so argued—that even today’s automobile, the mass-marketed models at least, have become manufactured commodities. If one buys any major carmaker’s best-selling mid-sized sedan with similar amenities, one can expect to get a good product that will run well, last a long time—and carry the same number of people, at the same speed, in the same comfort, with approximately the same gas mileage and safety as any other best-selling mid-sized sedan. You will of course quarrel with that assertion and defend your favorite brand, for various idiosyncratic reasons. In some subjective ways you may be right . . . just a little bit. But a well-constructed car of a particular class is a well-constructed car of a particular class. Much like, say, dishwashers of a particular size and class.
Any of these durable goods products is infinitely more sophisticated and differentiated than a generic bushel of wheat or a silver ingot, for sure. A side by side refrigerator is a manufactured commodity, not a raw product. But the days when Frigidaire was synonymous with refrigerator (or Kodak synonymous with camera) are long gone. The things that most endear a particular automotive nameplate to buyers these days are cost and service—two things that cannot be manufactured into a product. The cost factor is decided in the engineering and design departments before manufacture begins. Superlative service is something the customer receives after the product has been designed, manufactured, shipped, and sold. Absolutely nothing about these two crucial factors has a thing to do with whether the product is made in Illinois or the other side of the world.
So it’s a wide range of manufacturing that has been, or threatens to be, shoved offshore by competitive forces. Some products—many products—offer no reason whatsoever for trying to keep their manufacture in the U.S. No one here wants to work making, say, Polynesian cocktail umbrellas at 25 cents an hour. We lose no technological edge by letting someone else, somewhere else, do that work. Goodbye, Mai Tai swizzle stick manufacturing sector. Gone for good. That’s easy (and intentionally simplistic). But what about those dishwashing machines? What about, say, the American furniture and textile industries, which have seen historic local economic bases pack up and leave northern locales, relocate in the southern U.S., then move yet again, this time offshore? We’ll leave parts of those valid questions to be answered in later discussion of globalization. Here, let’s stipulate three things—irreversible change is irreversible, free markets are not merely a good thing but the only way to grow that economic pie, and “compete or die” is an absolute. If we honestly acknowledge those three things (and we have no other choice), then any forward-looking discussion about 21st Century manufacturing—painful as it may be for workers who made those dishwashers and textiles and furniture—is not at all difficult to outline.
First, the profit centers in manufacturing (and therefore the best and best-paying jobs) involve deploying the latest technology to produce value-added goods. You can use dayglow paint and the best wood available in the Far East, but you simply are never going to add any value to those cocktail umbrellas. They are what they are, toothpicks and paper, a very bottom-tier commodity. Building a contemporary mid-sized automobile, on the other hand, is not a matter of dropping an engine on a chassis and adding some fenders, which more or less is what happened on the Model T’s horseless carriage assembly line. Today’s car is a manufactured commodity, but it also is a mobile technology center of magnificent scope—loaded with on-board computers and high-precision mechanical components, engineered for safety and reliability that would stun those who designed any of America’s classic cars. Making cars is one kind of manufacturing we want to keep in the United States. Fundamental to understanding 21st Century manufacturing, however, remember that it takes fewer workers to assemble one of these modern marvels than it took to assemble a Model T. No doubt it will take even fewer workers in the future than it does now—as I discussed in that old Grand Rapids speech.
Second, any manufacturing that uses high levels of new technology is the kind of manufacturing we want to keep on these shores. That’s true even if its labor force is small, even if its direct contribution to GDP is so tiny as to not show up on economic radar. Why do we care about such a company? A tiny, technology-intensive company surely means nothing to the economy in the way a car manufacturer’s payroll does. Absolutely true; a GM job roster is a precious thing to be treasured, even if it is but a shadow of its old self and even as it shrinks because of new efficiencies. But it isn’t workforce size that makes the car companies—plus any companies that demand new technology but amount to mere blips in the economy, plus all other technology-consuming companies of any intermediary size—the core of our 21st Century economic paradigm. Almost all these companies, just like 19th or 20th Century companies, will continue to demand varying degrees of raw materials and finished parts, require vendors of every type, and hire their share of accountants and sales reps, and plant maintenance people—every job description imaginable. What makes these companies uniquely vital to the 21st Century, though, is not their direct labor forces, but all that technology consumption. That’s because . . .
Third, technology—rather than the durable goods our manufacturers produce—could fairly be viewed our most important product in the 21st Century. It’s a close-knit synergy. For example:
- Technology, as noted, fuels the most prosperous manufacturing industries, which are excellent creators of new wealth, the lifeblood of any vibrant, growing, free-market economy.
- It logically follows—and experience usually supports the logic—that high-tech manufacturing wants its best sources of new technology to be located nearby. A sophisticated manufacturing facility that winds up thousands of miles from its laboratory will, if possible, tend to move the lab near its manufacturing facilities. Similarly, an industry that has its labs and all the best related outside intellectual support based in the United States has, obviously, a good reason to “stay home.”
- New technology derives from both private and public research, sometimes jointly and sometimes singly, but in either case demanding a world-class university system.
- The United States currently boasts the foremost graduate schools on the planet, as evidenced by the world sending so many of its best and brightest here for an American education. One could compile a long manifest of reasons we should sustain this technological/educational leadership. For reasons apparent within this book’s context, we must maintain that leadership.
- The concept of technology as a “product” is not really a figurative thing. Technology is intellectual property. It makes things work. Once a product’s ingredients advance beyond raw materials and sweat and toil, it is technology that adds value to that product. The right technology in the right application is a profitable thing. Companies buy and sell technology every day. Occasionally a nefarious company (more often a nation) will steal technology, or will produce a quasi-legal clone of a technological process. Technology is real, as solid as the chair you are sitting in.
- A new piece of technology—in its pure conceptual form, or as a plan for application in manufacturing, or as a completed high-tech manufactured product . . . or in the nascent form of a new Ph.D.’s brainpower—will be our greatest 21st Century export. Again, it must be thus, or this is most definitely not going to be a great century for the U.S.
That is the “smart manufacturing” component of our four Benchmarks. We must manufacture value-added products that consume new technology. To do that we must create the new technology our manufacturing sector needs. Then we need to train, endlessly, a manufacturing workforce that can get the job done. And along the way we need to make smart choices about plugging this new “manufacturing might” into global markets. It’s a spectacular synergy. But I think you can see why even though it’s “all about technology,” it’s also all about a new 21st Century manufacturing sector.
“Jobs, jobs, jobs!”? Yes indeed. But not in any 20th Century form. Before too long, in fact, millions of jobs will exist that none of us today can describe, anymore than Columbus could describe, accurately, where his little ships were headed. That same unpredictability could be said of entire as-yet unborn industries. Who can predict the precise layout of a high-tech manufacturing matrix derived from new technology several generations into our future, when we don’t yet have a handle on new technology’s impact this afternoon? This is not a time for planning instant obsolescence with short-sighted, laborious, bureaucratic, faux precision. The proper path is obvious, but is not marked by GPS coordinates. It is indeed, as those old guys said on the shop floor decades ago, “all about the United States continuing to make things.” Our universities and those free-market manufacturers who perform best can get us to our destination, but only if the politicians—and a lack of public will—don’t mess things up.
See also the Book “The Technology Imperative: What Jobs! Jobs! Jobs! Really Means in the 21st Century”, Gavdos Press, 2012. (www.gavdospress.com)