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STRATEGIC SOURCING: Two-way Road That Benefits Americans |
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Written On: May/June 2004 |
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Written By: by Don C. Brunell |
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Last legislative session, more than a handful of protectionist bills were introduced to slow down the exodus of American jobs and operations. Congress also is looking to stem the tide of call centers moving to India and factories relocating to China. Democrats and folks who just don’t like George Bush are saturating the airwaves accusing the President of closing factories, increasing unemployment and creating policies which encourage “offshoring,” the new word for outsourcing.
Aside from the political rhetoric, what is really going on? Does the U.S. need to hunker down and impose protective measures which could trigger a new trade war?
As the economy recovers, job creation has lagged behind. Nevertheless, with a weaker dollar and more business activity, employment totals are improving. Productivity is growing as well, and in the Northwest there are recent new investments in manufacturing facilities.
For example, in the paper industry, Kimberly Clark completed a $55 million project at its Everett plant, and in early March, Georgia-Pacific (GP) celebrated the start-up of its new $200 million paper machine at its Wauna, Oregon operations. Some of those new 110 high-paying, family-wage jobs are held by Washingtonians because Wauna is just across the Columbia River from Cathlamet.
Auto Industry Making Strong Comeback in America
After facing tough competition from Japan, Korea and Europe, America’s auto industry is roaring back in the 1980s. That is evident in places like Michigan and Alabama.
For example, a decade ago, Dick Dauch, a protégé of Lee Iacocca, convinced a group of investors to buy five neglected General Motors plants in the heart of Detroit. These plants are in the heart of the inner city infested with drug traffickers, crime and alcohol abuse.
At the time, Dauch had only two customers in two countries. Today, American Axle and Manufacturing (AAM) has more than 75 customers in a dozen countries, and the company has now joined the ranks of the prestigious Fortune 500.
AAM, which manufactures axles and drives for light trucks and SUVs, has 12,000 workers in 17 manufacturing facilities located in the United States, Brazil, Mexico and the United Kingdom. Most of AAM’s workers belong to the United Auto Workers (UAW).
When so many other companies are caught in the price squeeze of cheaper foreign competition, how does AAM continue to grow and prosper? What’s the secret?
Dauch’s Secret is Technology, Quality and “Associates”
First, Dauch, who had a great deal of experience dealing with the UAW during his days at GM, Chrysler and Volkswagen, went directly to the unions and told them they had to work together to make the operations profitable or there would be no jobs. Union leaders agreed, and they are now “associates.”
Second, Dauch bought up the area around the plant. Today most of it is green space along a major freeway heading into downtown Detroit — that is, except for a neighborhood church.
Third, he retooled the plant. Today, more than 80 percent of the original equipment has been replaced with newer technology. AAM now has the most technologically advanced plants in the industry and is pouring money into research and development to stay ahead of the competition.
Fourth, AAM invests heavily in worker training programs. When you tour the plants, the people operating the machines are friendly and knowledgeable. Indeed, they seem to enjoy their work and telling people about their accomplishments.
Fifth, the plants are immaculate and brightly lit. There is no graffiti on the lunch or rest room walls. They are places with pleasant work environments.
AAM’s Goal is Zero Defects and No Customer Complaints
Finally, AAM sets high standards for quality and customer satisfaction. Dauch’s goal is zero defects, zero returns and zero customer complaints. They are achieving that goal consistently. Considering that the company’s truck parts require precision measured to one-tenth the diameter of a human hair, this is quite an accomplishment.
Dauch’s reputation for turning AAM into a profitable American manufacturer earned him the title of a “Hero in Manufacturing” by Fortune magazine. AAM is now a publicly-held company, and its stock has climbed from $17 per share to $37 in four short years.
Dauch and his team see a bright future for their company, and they are committed to staying in America. They talk about in-sourcing, not outsourcing. In fact, AAM is bringing products and jobs into the United States.
Alabama Incentives Drove Car Companies to Locate There
Tax and regulatory incentives rejuvenated Alabama’s troubled economy. Just a few years ago, the situation there looked bleak. Thousands of jobs were disappearing from Alabama’s textile, retail and industrial sectors — 25,000 jobs lost in the last two years alone.
Faced with this downward spiral, state officials approved a controversial package of tax incentives, training programs, and site work designed to make Alabama more attractive to employers. The incentive packages are similar to those passed in Washington to attract Boeing’s 7E7 and semiconductor manufacturers.
Alabama is now home to a booming automotive industry that employs more than 30,000 people, with a payroll of $1.5 billion. Over the next two years, thousands more jobs will be created as the auto industry is expected to add nearly $3 billion to the state’s economy.
Mercedes-Benz was the first auto maker to take advantage of the incentives, followed by Honda and Hyundai. Just last month, Mercedes celebrated as its 500,000th car rolled off the assembly line at the company’s factory in Tuscaloosa County, a full year ahead of schedule.
Alabama’s burgeoning auto industry has created a second tier of job growth, as well. For example, when Mercedes’ first car rolled off their Alabama aseembly line in 1997, there were some 90 automotive suppliers doing business in Alabama. Today, that number has soared to more than 200, with more than $300 million in construction underway as suppliers build manufacturing facilities that will support the automakers.
Alabama’s success did not come cheap. The state spent more than $650 million in tax incentives, site work, and free training programs to lure new jobs to the state.
It’s All About Costs
Can the auto industry formula work for other American employers? It can with help from Congress, state Legislatures and local governments.
“It is all about costs,” Washington Research Council (WRC) President Dick Davis reports, as part of the Washington Alliance for a Competitive Economy (WashACE), a partnership between AWB, WRC and the Washington Roundtable.
Washington is a high-cost state for employers because of its burdensome business taxes, stifling state and local regulations, rising energy rates, and costly workers’ comp and unemployment insurance systems. Because of our disproportionate costs, Washington led the nation in the percentage of manufacturing jobs lost and has often posted the highest unemployment rate since before September 11, 2001.
Davis reports that this situation is beginning to turn around because of actions taken by the Governor’s Competitiveness Council, the Priorities/Price of Government (POG) process and the 2003 and 2004 Legislatures.
But is it enough? That question will be the focal point of Washington’s election according to Gary Chandler, AWB’s vice president of governmental affairs who was a long-time state legislator.
NAM Study Says Congress Needs to Help with Costs
The same is true at the national level. The National Association of Manufacturers (NAM) recently released a study showing that external, non-production costs add approximately 22 percent to the costs of domestic products compared with major foreign competitors. That is equivalent to $5 per hour in wages.
NAM’s study compares the competitiveness of U.S. producers with those in its nine largest trading partners. The trading partners in the study include Canada, China, France, Great Britain, Germany, Japan, Mexico, South Korea and Taiwan.
“This study dispels the myth that most of our industrialized partners face higher manufacturing costs than we do,” said Jeremy Leonard, an economist who authored the study. This report shows these extra costs include corporate tax rates, employee benefits like workers’ comp, unemployment insurance and health care, litigation and skyrocketing liability insurance rates, regulatory compliance, and energy. These external costs are twice the size of the average direct labor costs of U.S. manufacturers and are a major factor in our loss of trade and jobs.
NAM wants Congress to reform taxes, health care, the regulatory process and the legal system. It also wants federal lawmakers to increase domestic energy supplies and lower costs of electricity and natural gas in particular.
Suck it Up and Compete
At the end of the day, Dauch, who currently chairs NAM’s Board of Directors, believes Americans have no choice but to face the competition head on. But, like most business leaders concerned about the migration of jobs offshore and the loss of our manufacturing base, he believes Congress and state Legislatures need to act decisively and in a bipartisan way to lower costs.
“When lawmakers learn competing today is not about political posturing and do what needs to be done, jobs and factories will return,” Davis concluded.
It is not easy, but it is essential.
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