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Made in America?

More and more U.S. businesses are trekking overseas to explore cheaper ways to make their products. But what does that mean for small manufacturers left behind on the home front?
October 1, 2003
URL: http://www.entrepreneur.com/article/64470

Vince Ruffolo, president of SIC Inc., a small Wisconsin manufacturer of metal finishings and coatings, is not too worried about his company's future. Though many of his American peers have gone belly up in the face of intense foreign competition, Ruffolo, 48, believes Racine-based SIC remains strong. "We made a series of good investments in the 1990s, and we're able to cut costs effectively and deliver the type of just-in-time service that distinguishes us from foreign competition," he says. "We still have a strong client base."

Ruffolo's optimism is not shared by many of his peers. Over the past decade, the U.S. manufacturing sector has shrunken rapidly, destroying thousands of jobs. Small manufacturers have been hit particularly hard, and the recent economic downturn has only exacerbated this trend. Like SIC, some small manufacturers have used the downturn to retrench and make themselves more competitive. But many others have simply gone bankrupt, leading some entrepreneurs and economists to question whether small manufacturers have a future in America.

Troubled Times
Manufacturing has had a rough decade. According to the Economic Policy Institute, America's manufacturing sector has been declining for at least the past seven years, losing nearly 2.5 million jobs since 1998. Jerry Jasinowski, president of the National Association of Manufacturers (NAM), says the industry has lost jobs for 32 consecutive months.

And states dependent on manufacturing have been decimated. South Carolina, home to much of the nation's textile industry, has shed thousands of jobs in the past 10 years, a slump the American Textile Manufacturers Institute has called the "worst downturn since the Great Depression." Meanwhile, in Indiana, where manufacturing is responsible for the largest share of GDP of any state, the government estimates the manufacturing sector has lost 10 percent of its jobs in just the past three years.

Small and midsize manufacturers have suffered more than large companies. IndustryWeek's 2000 Census of Manufacturers, the most recent available, noted the number of small manufacturers nationwide was declining at a faster pace than the number of large manufacturers. "Small companies don't have the capital reserves and other safety nets that bigger manufacturers have," says Collie Hutter, owner of Click Bond, a small Carson City, Nevada, manufacturer of adhesive fasteners used on airplanes. "Today is the worst environment for small manufacturers I can remember." Indeed, in some industries, such as toys and shoes, there are already virtually no small American companies left.

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,
$2.26
is created through linkages to other parts of the economy. By comparison, every dollar in services creates only
$1.70
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."

A Little Help From Friends?

Some manufacturing entrepreneurs believe that with a bit more help from Washington, companies could move into higher-value industries, securing a future for small manufacturing in the United States. "The government needs to recognize that manufacturing is still important, because it helps R&D, and it creates well-paying jobs," says Hutter. Indeed, according to researchers at the National Institute of Standards and Technology, manufacturers fund 70 percent of U.S. industrial research and development. Scott's research, meanwhile, shows that manufacturing pays, on average, more than 20 percent more than blue-collar service jobs. And Jeff Faux, a distinguished fellow at the Economic Policy Institute, has estimated that in the 1980s and 1990s, manufacturing was responsible for five times the productivity growth of nonmanufacturing sectors. In fact, a recent report by NAM warned that a continued loss of America's manufacturing activity could, in the long run, cut U.S. economic growth rates by as much as 50 percent.

Manufacturers and economists believe the government could adopt several measures to help small companies. "Before signing future free-trade deals, we need to consider more seriously how exchange rates will affect trade and manufacturing once the deal is struck," says Blecker.

Lubrano believes that, as the Reagan administration did in 1985, the Bush administration could work with other leading economies to reorient currency exchange rates. Faux has suggested that Washington reduce tax incentives provided to companies to invest overseas. Other small manufacturers have argued that, since foreign companies do not have to meet the pension and health insurance demands that American firms do, the government should help promote association health plans, medical savings accounts and other measures designed to reduce companies' health burdens. A group of Michigan small manufacturers has even begun pressuring the Bush administration to establish the secretary of manufacturing as a cabinet-level position. And there are some signs that Washington is listening. A coalition of Democrats and Republicans in Congress is proposing legislation that would slash American manufacturers' corporate income tax rates, while other Congress members are proposing bills designed to raise the amount of material the Department of Defense buys from U.S. manufacturers.

But most manufacturers and people who study the sector do not have high hopes for government assistance. "The Bush administration is very pro-free trade and will not want to talk down the power of the dollar or do other things to help manufacturing," Blecker says.

Lubrano agrees: "I've tried to arrange meetings with Rhode Island senators and [house representatives], and they just ignore our state manufacturing associations." Other entrepreneurs complain that Washington seems to be cutting manufacturing programs. Indeed, the Bush administration has proposed slashing funding for the Manufacturing Extension Partnership, a program designed to encourage small manufacturing firms.

Accordingly, many in the industry fear the economic situation will not improve in the near future. In its most recent national survey of manufacturers, the Institute for Supply Management (ISM), a forecaster of manufacturing, found that less than 50 percent of manufacturing executives expected growth to resume soon. "You have to be a bit crazy to try to make a small manufacturing business work these days," Hutter says. "The obstacles are huge."

Still, some small manufacturers retain their optimism. In July 2003, the most recent month for which information was available, ISM reported the manufacturing sector was expanding. Hutter believes that manufacturers who can get their health-care costs down can remain competitive internationally, while other manufacturers are heartened by the Bush administration's recent trip into America's heartland, in which administration officials got an earful about small companies' problems. And the Department of Commerce recently reported that factory orders rose in June for the first time in months, suggesting that demand for American manufactured goods could be rising. Perhaps the crazies will survive after all.


Survival tactics
  • Deal with your health-care and pension costs. "Part of the difference between U.S. companies and foreign firms is all the extras, like health insurance," says Al T. Lubrano, president of Technical Materials Inc. in Lincoln, Rhode Island. "You have to show employees that health insurance can't cover everything--it should cover the essentials and catastrophic problems."

Greg Scandlen, a health policy analyst at the Galen Institute in Alexandria, Virginia, suggests that small companies use medical savings accounts, which are becoming simpler to use as more insurance providers offer MSAs. He suggests visiting the Galen Institute's health-care policy links for MSA primers or MSN Money's Health Insurance portal.

  • Get out of extremely labor-intensive sectors. "You have to look at your business and think about what parts of it are so labor-intensive that there's no way you could compete with people in India or China," says Chip Coker of Coker Textiles in Anderson, South Carolina. "Figure out which these are, and cut them."

  • Look for federal contracts. "Federal contracts are still one of the places where U.S. manufacturing companies can really develop a cash cow," says Collie Hutter, owner of Click Bond in Carson City, Nevada. Both the SBA and The Catalog of Federal Domestic Assistance offer information on federal contracts.


By Joshua Kurlantzick is a writer in Washington, DC.