Yves Smith at Nekkid Capitalism:
The Decline of Manufacturing in America: A Case Study
One frequent and frustrating line that often crops up in the comments section of this blog is that American labor has no hope, it should just accept Chinese wages, since price is all that matters. That line of thinking is wrongheaded on multiple levels. It assumes direct factory labor is the most important cost driver, when for most manufactured goods, it is 11% to 15% of total product cost (and increased coordination costs of much more expensive managers are a significant offset to any savings achieved by using cheaper factory workers in faraway locations). It also assumes cost is the only way to compete, when that is naive on an input as well as a product level. How do these “labor cost is destiny” advocates explain the continued success of export powerhouse Germany? Finally, the offshoring,/outsourcing vogue ignores the riskiness and lower flexibility of extended supply chains.This argument is sorely misguided because it serves to exculpate diseased, greedy, and incompetent American managers and executives. In the overwhelming majority of places where I lived in my childhood, a manufacturing plant was the biggest employer in the community. And when I went to business school, manufacturing was still seen as important. Indeed, the rise of Germany and Japan was then seen as due to sclerotic American management not being able to keep up with their innovations in product design and factory management.
But if you were to ask most people, they’d now blame the fall of American manufacturing on our workers. That scapegoating serves to shift focus from the top of the food chain at a time when executives have managed to greatly widen the gap between their pay and that of the folks reporting to them.
Could part of the reason our economy has been flatlining so long have something to do with the fact the we don’t make anything any more?
Seriously – what industry exactly is gonna generate a recovery? Food service jobs? Tech support? Government employees? I kinda doubt it will be the home construction industry.
We have lots of people who grow stuff, sell stuff, transport stuff, insure stuff, fix stuff and/or install stuff, but nobody in this country MAKES stuff.
We sent all our manufacturing jobs elsewhere and now everything is cheaper but nobody has any money to buy it.
Did the housing/credit bubble hide the fact that we fucked ourselves?
Well?
Filed under: Uncategorized
I think the mid 90s was when the concept of an information economy really sprung up. It was the idea that America could function solely on innovation and that we could extract all the wealth and productivity from lesser countries who just performed labor. One of the problems is that we buy more things than ever and they are mass produced overseas. No one wants to put an addition on a house that’s having trouble selling, but a new iPad is something you can take with you.
The article hits on one point and misses another. The average Chinese worker makes something like $3000 a year, but the savings from outsourcing are relatively small. This isn’t about outsourcing a few line workers or your production floor. What you get overseas is a black box. You tell them what you want and they bend over backwards to give it to you. They give you the grand total. You don’t have to worry about how much a worker gets paid or how much time off they have. You don’t have to worry about maintenance bills or OSHA or insurance.
Most big companies are publicly owned. The CEO isn’t making all the decisions. The shareholders don’t even dictate policy. Those fund managers who move money from one company to another based on the stock price during a day drive what are seen as cost reduction measures. It’s what eventually led to ValueJet being such a fund manager’s dream while being a safety nightmare. And those guys are using people’s 401K money to do this.
Right. You only have to make sure it’s not a staggering piece of shit (in the case of software) or it’s not made from a toxic material (which can ruin your reputation and your market) or some other mistake (tab A won’t fit into slot B). Then you have to fix those problems or pay fines or lose customers because you are now functionally a piece of shit.
Brilliant management and just short sighted enough to be a major problem for the US economy. Oh yeah, offshoring is just fucking great.
That’s the other thing. You have to TELL them you don’t want lead in your products. You have to require documentation for software. You have to spell everything out. And you’re going to need to check your product. But they won’t tell you their employees need a cost of living increase.
By and large, companies just accept there will be a certain amount of junk and compensate with liberal warranty processes.
Guess that would explain why our cars are marginally less reliable these days than the imported ones.
That’s where the KIA 10 year warranty came from. People didn’t trust a Korean car, so they gave a large amount of coverage. They learned how to make them better and people eventually chose them for reliability.
Have you actually done this? Worked with foreign development teams in disparate locations to pull together an enterprise application?
You can send very rigidly specified design documents which could be used by developers in the US with no problem whatsoever and, when you get the modules back, they still don’t meet quality requirements. They don’t ever meet requirements and, unless you are really lucky, various modules don’t function well together. Frequent communication with the disparate teams doesn’t help much either. The problems, which everyone denies having, usually show up in the verification process.
You can never release anything like that so engineers in the US wind up going through it and fixing enough bugs that it can be released, but not at the same quality level as in times past. Then, once it’s out, the bugs get reported and the maintenance costs come into play. Over the life of a large enterprise app, that more than makes up for any dev savings and then some. It’s a loser in the long run.
Like cars, I assume this will get better with time but I did it for years and it showed little sign of it when I finally said “fuck it” and retired.
No, I’m not on the software side. I just have to deal with the results. I have to deal with the hardware with 50% failure rates that have to be fully inspected and repaired. At this point, our 10% margin of savings usually disappears. Our software and firmware developers are pretty terrible. We’re not quite big enough to put in the sales figures to warrant competence. But that’s a whole other problem since nothing can be done when it’s released.
I know exactly what you mean. Size and a demanding customer base can be a developers best friend, when you’re concerned about quality. It’s also very important to have good competition or you can get really sloppy. That was important to me and our competition just wasn’t good enough to push us, after we kept buying the good ones out.
With China, it’s not just labor costs and lax laws, they also insist on a certain amount of work being done in China for good access to their markets. They will subsidize buildings and other costs for Chinese locations so it makes it hard not to use Chinese employees. I think that should be addressed at the government level.
(NSFW)
The last line sums it up
“waiting for waffles”
OT, but as much as I hate disasters, I love seeing stuff like this – local people just helping their neighbors. A few posts on the TX fire community that has rapidly formed on facebook:
The facebook group is full of this, because a lot of the area affected is rural, which means the people there have animals. It’s a lot easier to evacuate yourself than horses and livestock. There are offers of trailers, and labor to load them, and safe pastures and barns to take them to.
In May 1940 the British, French and Belgian armies were defeated and surrounded at Dunkirk. Even before the British government asked for assistance, British citizens began to cross the Channel in small boats and evacuate the troops.
By the ninth day a total of 338,226 soldiers were rescued.
Yep. Don’t get me wrong, I’m all for the govt doing its job and helping and coordinating disaster relief. But that does not negate or replace the responsibility of neighbors and countrymen to take care of their own.
Thanks for posting that.
US economy today is about the same size as Germany, China and Japan combined. In 1980 manufacturing was 21% of our economy, today it’s down to 12%. Manufacturing in Japan and Germany are around 20% of their economies. Manufacturing in China today is 32% of its economy. (On my mobile, not easy to link right now.) In terms of actual manufacturing output, China will probably pass us next year, but today we still make more stuff than they do. Guess the point is we are a very big economy with many different sectors. Some sectors are fading while others are growing. But the overriding theme of our current economic situation is that we are in a recession. The private sector is deleveraging from the housing and financial asset bubble. When we climb out of this deep recession, things will look relatively better across all sectors. Economists seem to debate a lot about the structural versus cyclical reasons for the recession. If one believes that the FIRE sector (finance, insurance, realestate) is the main driver of the current contraction, then the recession is probably more about deep cyclical factors more than structural ones.
The structural economic problem kind of assumes we have to have a certain amount of activity in a certain sector. Before industrialization, 90% of Americans either owned a farm, worked on a farm, or grew a significant amount of food. Most of the stuff in a modern home didn’t exist in the 1800s. I think the percentages of activity in a sector are indicative of a problem. We don’t manufacture half of what other countries do, but that’s only true domestically. We may actually have 25% of our industry in manufacturing, but much of it is in another country.
It’s not that we’ve stopped relying on manufactured goods, it’s that the value added is going directly overseas. Besides the trillion dollars we’re borrowing from China, we’re also leaving $500 billion in value in China every year.
Yes. There’s no way to get out of our predicament also without changing fundamentally our trade model. Obama, the Democrats and the Republicans won’t do it. We’re fucked.
OT:
Assessing Palin Nation
http://pajamasmedia.com/tatler/2011/09/05/assessing-the-palin-nation/
video of at the link
She has Clinton-level magnetism. Bill can even tell that.
I love me some Big Dawg and Hillary, but I have never seen ANYONE who can light up a crowd the way Sarah does,.
Nobody’s fainting at a Palin speech. The fainters at the Obama speeches were probably just trying to get away from his delivery.
Sarah connects on the emotional level. Bill connects with his charisma. They are different, but both are good.
The fainters at Obama’s speeches came from Central Casting.
This is spot on. I went to a Palin rally (well it was a McCain/Palin rally) but he wasn’t there
and you could feel what that commenter said. People were so inspired and so happy, they couldn’t get enough of her! They felt like they “knew” her….like she was a friend. As someone said above…..Bill Clinton was like this too. I went to several rallies of his and I always came away feeling like….”Why were all those other people there when Bill was clearly there to speak to me?!”
I went to a little rally in Austin during the ’08 primaries where Bill spoke from the back of a pickup truck in a parking lot. He met everyone in the crowd I think afterward. He made everyone feel as if they were the only person there. That kind of charisma is kind of magic and it looks like she has it, in spades!
This is really interesting. I don’t agree with Palin on anything policy-wise (well, I agree we’re at the mercy of selfish, narcissistic crony capitalists but I don’t agree with her on what to do about it), but I’m simply fascinated with how Palin just bypasses all the political gatekeepers and power brokers and goes straight to the people. She just doesn’t let anyone “handle” her or “manage” her.
I’m not sure it matters if she runs, or she does run, whether she wins. She’s building a right-wing populist movement and moving the political conversation in the direction she wants it to go. Losing in ’08 didn’t stop her, it barely slowed her down.
Hillbuzz has a pretty good analysis of SP’s NH speech.
http://hillbuzz.org/2011/09/05/transcript-governor-sarah-palins-labor-day-speech-in-manchester-new-hampshire-september-5th-2011/#more-35506
What stopped him from doing it these past three years?
The more he talks, the more I want to get rid of him.
I agree… he just drives me nuts…
good grief! he seems to be running against himself!
HE is the one he’s been waiting to run against……
O/T but always appropriate.
John Smart has a link to a poll from a west coast paper/blog asking :
Obama fading, Hillary rising, primary challenge looming? Go and vote.
http://orangepunch.ocregister.com/2011/09/02/obama-fading-hillary-rising-primary-challenge-looming/48871/
Cool, just voted. Hillary has 395 votes, Obama has 12.
A comment from the vote link
There are also comments about the May 31, 2008 RBC meeting, the theft of the primary by the DNC on 0′s behalf–calling it a “travesty.” Didn’t recognize the poster from any blogs.
We are not the only ones who remember.
I’m to blog too drunk. Y’all behave till I get back.
Drunk blogging isn’t allowed here? Well, shit.
must be a New Rulzz.
hic!
You can blog drunk as long as you don’t have puke breath.
The Klown said that is what Fabreeze is for.
True story
does “most favoured nation” status for China have anything to do with the loss of manufacturing?
My most favorite nation is Germany.
They have beer fests, where people sit in big tents and drink beer.
Octoberfest in September of course
is a way crazy blast. I’m told I’ve been to several of them. Wish I could go this year. I really need it. Might have to create my own at the DT ranch.
Ya gotta love a country where drinking beer is the national sport.
Yes. A most favored nation means that there almost no import tax on goods coming from China. With its low labor cost and most important little environmental and worker safety regulations, makes manufacturing in China much more profitable than manufacturing in the U.S.
The toughest trade barrier against Chinese imports would be to let the yuan double its current value against the dollar back to its level during the mid 80s. It was under Reagan when the yuan was allowed to depreciate three fold over the course of ten years into Bill first term. It was finally unpegged into a dirty float in 2005 turning the devaluing back into revaluing, and it’s risen about 25% since. Think the Fed is trying to pressure the yuan up further and the QEs have had that side effect. Yuan value is almost back to where it was at the start of Bill’s first term, but it needs to go further. Inflation in China has been forcing their central bank lately to raise interest rates, so that’s been helping.
That would be another way to skin that cat. But since China is not allowing the Yuan to rise or fall to its true value, then the only other alternative is to take the country out of the most favored nation group until China’s environment is protected from degradation by companies that put profit above the health of people, and also demand that workers are protected from harmful chemicals and work under safe conditions like the rest of us.
Right now we’re not competing on a level playing field.
Favored nation status has become so ubiquitous that it’s simply termed normalized trade relations these days. If we don’t want normalized trade relations with China, we should significantly cut back trade with them. Just complaining or demanding things will not necessarily have any impact. They may actually be ahead of us in green technology development and in aggregate we still throw up more greenhouse gases than they do. Anyway the fastest most efficient way to significantly cut back trade with China across all sectors is to manage capital flows to double the yuan’s value while the dollar is still the predominant global reserve currency. That won’t always be the case in the future. This battle is already underway btw, as China is trying to diversify out of its two trillion in US treasury holdings while they ramp up their military and naval presence in the region from Japan to the South China Sea.
You make excellent points. Tnx.
Europe’s markets crashed today,
The S&P futures are pointing to a 2.5% drop tomorrow.
They must have heard Obama’s speech.
European banks were hit the most because of their sovereign debt. Italy and Greece are the most troubled debts right now, but it’s all about the euro, the banks, the slowing world economy. It’s a huge mess and there’s no leadership in this country. Europe and Asia depend on the U.S. economy to grow.
Obama needs to deliver another speech from some sacred mountain top, like Mount Olympus.
How about from a volcano. While it’s erupting.
Erupting volcano. I like it, could be a real “barn burner”.
He lived in Indonesia, so he’d be at home there. I suggest Krakatoa (Anak Krakatau). It’s been active again.
http://en.wikipedia.org/wiki/Krakatoa
Giant crocodile captured alive in Philippines
Prehistoric
It’s a consensus. Obama stinks.
WP
and he’s lost Democrats, same poll: