Made in America?

Contributing Factors

A combination of factors has made it difficult for U.S. manufacturers to survive. Foreign competition--most notably, from China--has cut into many small manufacturers' market share because many foreign-based companies enjoy lower labor costs and looser environmental, health-care and pension regulations. Textile workers in southern China earn about 60 cents per hour; in South Carolina, they can make as much as $18 per hour. Low-skilled, labor-intensive manufacturing is perishing in America because of China, says Chip Coker, 32, CFO of Anderson, South Carolina-based Coker Textiles. To avoid falling into the low-skill trap, his company focuses on higher-end, higher-margin goods that still have a future in the United States, a strategy the company embraced before the rise of China. "The technology involved in higher-end textiles is so advanced that other countries can't handle it," he says.

Making matters worse, as industrializing nations develop, they are able to cheaply produce items using more skilled labor, thereby gaining a foothold in medium-value industries. However, they still lag considerably behind American manufacturers in higher-value production. "When I go to China, it seems they're always adopting newer technology, and incredibly quickly," says Al T. Lubrano, 53, president of Technical Materials Inc., a Lincoln, Rhode Island, company that manufactures specialty metal products.

What's more, developing nations' ability to produce goods in bulk at low prices, combined with global overcapacity in many manufacturing industries, has created deflation. For example, as China has come to dominate global bicycle production, the world price for bikes has plummeted. "Maybe a bigger company can wait out deflation, but a smaller manufacturer can't," says Lubrano. His company has kept a strong balance sheet by investing in high-tech proprietary processes that speed up production and allow them to remain competitive. "We also outsource to China a bit by doing the higher-end work here and shipping the product there afterward," he says.

Small U.S. manufacturers have also been hurt by the strong dollar, which has risen more than 30 percent against world currencies since 1995. The dollar is making U.S. exports more expensive and imports relatively inexpensive. "I've met small companies all over the country who can't compete because of the exchange rate," says economist Robert Blecker at American University in Washington, DC. Blecker estimates that the strong dollar has cost American manufacturing more than $100 billion annually since 1995, with smaller companies hurt worse because they don't usually hold foreign assets that can cushion against a strong dollar.

Even a recent weaker dollar has not helped. Though the dollar has fallen about 7.5 percent since its peak in Feburary 2002 against other major currencies, America's trade deficit has barely changed. In fact, as of May 2003, the deficit with China has increased to $44 billion, up 27 percent from $34.6 billion in May 2002. "The dollar is overvalued, and it's going to let China kill U.S. manufacturing," says Robert Scott, an international economist at the Economic Policy Institute, a think tank in Washington, DC.

For every dollar of final output in manufacturing,
is created through linkages to other parts of the economy. By comparison, every dollar in services creates only
Source: Association for Manufacturing Technology

In addition, the global slowdown has made it difficult for small companies to shore up their balance sheets through exports, has complicated long-term business planning, and has made banks wary of extending capital to small manufacturers. Most of America's main export markets--the European Union, Japan, Mexico--continue to struggle through slow growth. And loan officers worried about the economic climate have proved stingy with smaller clients. In a March survey, NAM reported nearly 33 percent of small manufacturers found credit harder to obtain than it had been a year ago.

Small manufacturers have compounded the difficult environment with self-inflicted wounds. Many business experts believe these companies have been too slow to adopt elements of the productivity revolution, such as computerized inventories and e-commerce. Indeed, last year, a NAM survey found that manufacturing companies obtain only about 2 percent of their sales from the Internet.

Down, but Not Out
Not all manufacturing entrepreneurs have been decimated. Despite the strong dollar, some have taken advantage of rapid growth in developing economies to focus on foreign consumers or have moved some operations overseas and kept core staff in the United States.

Others have survived by moving into niche markets, in which technology and higher-skilled workers are more important than cheap mass production, or by speeding up their manufacturing and emphasizing to potential clients how much faster they deliver goods to them than foreign firms. "Lower-skill textile-making is not coming back to the U.S., but the textile industry here isn't dead," says Coker. "We can outsource the cheaper manufacturing to foreign countries and dominate segments of the industry like industrial fabrics, medical textiles and other higher-end [products]. Companies that are in these niches in South Carolina are growing, not shrinking."

Hutter agrees: "The strength of U.S. manufacturing is our ability to innovate, which lends itself better to higher-end products. Because of the freedom business has in the U.S., it's still easier for American companies to come up with new ideas than it is for foreign companies," she says. "We've split our business between commercial and military planes, and we've been able to keep innovating during this downturn."

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This article was originally published in the October 2003 print edition of Entrepreneur with the headline: Made in America?.

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