Once Made in the USA

Manufacturing, says Andrew N. Liveris, thrives in countries that have plenty of customers and a government that significantly supports industry. Right now, he continues, the United States is down the list on both counts.

What is unusual about Liveris' comments on the diminishing presence of manufacturing in America and his criticisms of the American government for letting that happen is that he is chairman of Dow Chemical Company, the giant multinational headquartered in Midland, Michigan. Unlike most of his fellow CEOs of U.S.-based multinationals, Liveris actively campaigns for more manufacturing in this country. In his new book, Make It In America: The Case for Reinventing the Economy, he argues that the United States is at a tipping point -- if manufacturing does not make a comeback soon, the opportunity to do so will slip away, and the nation will inevitably lose its status as an economic powerhouse.

Yet under Liveris, Dow isn't leading the charge back home. Sixty percent of its $58 billion in annual revenue comes from its factories overseas, and that is not likely to change unless the federal government gets more involved in supporting American manufacturing.

"Some call this industrial policy; I call it an advanced manufacturing plan," Liveris says. The benefits of such a policy, or plan, are evident, he continues, in the story of a polyurethane that Dow developed at its research facility near Shanghai -- with the aid of subsidies and other support from the Chinese government -- and now manufactures in China as an insulation material for Chinese-made appliances.

Along with a few other chiefs of American-based multi-nationals -- Jeffrey Immelt at General Electric, for one -- Liveris is challenging the standard view of many mainstream economists and policy-makers. The latter have long argued that America's natural role in a global economy is to be a bastion of cutting-edge technology and the most sophisticated manufacturing, while lesser production goes abroad. But in practice, production and innovation can't be so easily separated. Nor are they easily disentangled from government policies.

Dow is currently preparing to breach another shibboleth of mainstream American thinking. The Chinese government's approach to manufacturing has been to "pick winners" -- that is, to provide special, long-term support to industries it designates as particularly important. In the standard American view, which is also the view of conventional economists, such intervention distorts healthy market incentives. Liveris demurs. With government support, a Dow venture in China is more likely to be successful. "China is doing it right to pick sectors," Liveris says.

The Chinese have recently chosen to target alternative energy -- solar-panel production, for example -- as one of the areas to get special support. In response, Dow will develop and produce solar products in China, although the company already makes solar roof shingles in the U.S. that it could export to China. What drives Dow abroad, Liveris suggests, is the American government's reluctance to give more financial support to domestic manufacturers (through a shipping subsidy, perhaps, or a tax abatement) or to engage in bare-knuckle trade negotiations that pressure the Chinese into opening their domestic market to such items as U.S.-made solar shingles.

The Chinese government, taking a different tack, has helped millions of its families pay for the solar panels -- purchased from manufacturers in China, of course -- that are installed on the roofs of their homes to heat water. The surge in production resulted in economies of scale that brought down the per-unit cost, allowing the Chinese to export the solar hot-water systems at competitive prices.

"You betcha," Liveris says, when asked whether Dow will respond to Chinese incentives to expand its operations in China. "I hope you hear the great sucking sound as we go over there, because it is very important that we compete globally."

In its heyday, during the decade following World War II, manufacturing accounted for as much as 28 percent of all of America's economic activity. Now the 20 percent-or-more club draws its members mostly from Asia and Europe, while in the United States, manufacturing accounts for less than 12 percent of gross domestic product. The giant trade deficit is a reminder of this decline, as are the growing number of products that are either not made in America -- cell phones and Ipads, to take just two examples -- or are made at only a few remaining factories.

Vending machines fall into this latter category. So do incandescent lightbulbs, machine tools, luggage, stainless-steel rebars used in construction, wheelchair-accessible minivans, and the glass marbles that show up in children's games and in paint spray cans, rattling when the cans are shaken and mixing the heavy pigment at the bottom with the lighter oil at the top.

Marble King in Paden City, West Virginia, is one of the few marble manufacturers left in America. More unusual still, the company's inputs -- mainly recycled glass -- come entirely from within the United States. That goes against the grain in a nation whose manufacturers import an ever growing portion of the components that go into their final products. Even weapons manufacturers use imported parts in the equipment they make for the military. "We do not know what percentage of our weapons components come from foreign sources," says David Berteau, a senior adviser at the Center for Strategic and International Studies and the director of its Defense-Industrial Initiative.

The Marble King distinction -- not only made in America but sourced in America -- is partly why Beri Fox, the 55-year-old chief executive of her family-owned company, shows up periodically on talk shows as a living example of a disappearing breed. "No one in the marble industry went offshore," she tells me. The once numerous manufacturers disappeared instead, succumbing to withering competition from Chinese marble makers, who got a foothold by supplying colored marbles for artificial flower arrangements, once an important market for the American companies. By Fox's reckoning, only one other marble manufacturer remains in America: Jabo, Inc., in Reno, Ohio.

While Marble King survives, it is as a shadow of its former self, with 28 employees at the Paden City factory, down from 80 a decade ago, and $1.5 million in annual revenue, down from $5 million at its peak. "Labor costs played a role," Fox says, "but if that were the only problem, just cheaper Chinese labor, it wouldn't be enough to beat us." She adds, "The majority of the reason the Chinese manufacturers were so competitive is that their government subsidized their energy costs and their raw materials."

Is there a way the U.S. government could keep Marble King and Jabo from going the way of the other domestic marble manufacturers? A tariff would help, Fox argues, or a quota limiting Chinese marble imports or some other lifeline from the Obama administration and Congress. "These are options, especially since we and Jabo are the last surviving American factories," she says, adding almost bitterly, "Our government protects animal species about to become extinct."

The Marble King story, and others like it, turn up frequently in American manufacturing. They show why this country is losing its crown as the largest manufacturing nation in terms of value added, which means the value added when a strip of steel worth $100, for example, is molded into an auto fender valued at $150, or semiconductors are wired into a computer board, which then becomes more valuable than the sum of its parts.

Value added assessed this way -- the standard international measure of manufacturing output -- keeps rising in the United States, reaching $1.73 trillion in 2009 and $1.95 trillion last year, a respectable increase but not enough to outpace growth in the service sector or in finance. It's also no longer enough to keep up with China. That country's manufacturers, advancing from a distant second place at a faster growth rate, finally passed the United States in 2010, moving into first place at $1.99 trillion in total value added.

The Chinese breakthrough is momentous. Not since the early decades of the 20th century has any country bested America in factory output. And tales coming from American manufacturers themselves -- Liveris and Fox among them -- suggest that the inroads will continue. That is partly inevitable, given that consumer spending is expanding much more rapidly overseas than in the United States and that multinationals such as Dow Chemical produce abroad to serve these customers.

But choices in public policy also play a role in the factory-location decisions of companies. Manufacturing has never been a strictly market activity. Government is constantly involved -- a reality accepted in most of Asia and Europe. In the United States, by contrast, the reluctance to engage in "industrial policy" is palpable.

Or as Ron Hira, an electrical engineer and a professor of public policy at the Rochester Institute of Technology, puts it: "You have a culture within the elites of both political parties that says manufacturing does not matter, and industrial policy will do more harm than good."

In China, the government brandishes both a carrot and a stick in its efforts to get global companies to build factories there. Siemens of Germany, for example, has been able to sell high-speed locomotives to the Chinese government, but only after agreeing to a government requirement that they be made in China, with the government then sweetening the pot by subsidizing some of Siemens' manufacturing costs.

The American indifference to this sort of involvement has been the norm through most of the past 30 years. Surprisingly, the big exception came during the presidency of Ronald Reagan. Starting in the late 1970s, not long before his election, the Japanese gained the upper hand in the production of sophisticated electronics devices and also cars that were less expensive, smaller, more fuel efficient, and of higher quality than those made in the U.S. by the Big Three automakers. Responding to the challenge, Reagan imposed temporary import quotas on some Japanese goods, with the stated goal of giving American manufacturers time to produce autos as reliable and efficient as those arriving from Japan.

That didn't happen -- but the Japanese companies, fearful of American trade barriers, opened auto factories in this country and in doing so, contributed to the value added from manufacturing in America. Reagan's resistance to foreign challenges to American manufacturing dominance, however, soon faded. Throughout the late 1980s, the 1990s, and the first decade of the new century, imported manufactured goods came to dominate a growing number of American consumer markets. At the same time, the big U.S. multinationals -- Dow Chemical, General Electric, Whirlpool, General Motors, and others -- increasingly located their factories abroad. Their timing was prescient: They spread their production overseas just as consumption multiplied in Asia and Europe. And the outcry of the Reagan years gave way to a restless acquiescence.

After Reagan, neither George H.W. Bush nor Bill Clinton nor George W. Bush elevated the decline of manufacturing into a crisis issue. Barack Obama hasn't either, although the nation's trade deficit in merchandise has risen steadily, reaching $647 billion last year. If even half the goods that Americans imported in 2010 had been made here instead, the increase in domestic output would have added a percentage point or more to the economy's growth rate. Instead of the 2.9 percent actual expansion, the gross domestic product would have risen by at least 4 percent, and the nation's unemployment rate would have declined correspondingly, given the additional jobs required to replace imports with domestic production.

"People are starting to realize that something is wrong," Hira says. "I'm not sure they have figured out what it is, but they understand that our excessive reliance on imports can't go on."

Some American companies stoutly resisted the migration abroad. Bucyrus International, a manufacturer of giant cranes, shovels, and earthmovers used in surface mining, was among the most resistant. Until recently, 75 percent of Bucyrus' multibillion-dollar annual revenue came from exporting the massive equipment manufactured mainly at the company's huge, recently modernized factory in Milwaukee. And then, five years ago, Bucyrus added a line of underground mining equipment, supplementing its line of surface mining gear. But rather than expand production in Milwaukee or purchase and equip an idle factory in some other American city, the company's board acquired DBT GmbH, a German manufacturer of underground mining equipment.

What changed management's mind? What prompted a company ensconced in the Midwest since 1880 to venture abroad for the first time and to subsequently transfer, to a factory in China, the cutting and welding of some metal components for the machinery made here? "In this country, there is no longer a focus on growing the manufacturing sector," says Timothy W. Sullivan, chief executive of Bucyrus, agreeing with Liveris' assessment that in Germany and China, to take two examples, government is more supportive.

The German system is particularly instructive. In addition to outright government subsidies, Germany has a built-in bias toward keeping manufacturing at home. It comes in the form of works councils and worker representation on corporate boards. Workers at a factory elect representatives to a works council, which participates in managing the operation. Federal law also provides that workers elect a substantial share of the corporate directors, who in turn decide whether to put a factory overseas. Or as Thomas Geoghegan, a Chicago labor lawyer and expert on Germany, put it in a Harper's Magazine article last year: "If a company wants to start a plant abroad, the workers can pressure the board to plow some money back into a German plant or provide a ten-year employment guarantee."

No such constraints limit American manufacturers. Take Caterpillar, which reached an agreement last year to acquire Bucyrus, adding mining equipment to its line of tractors and earthmovers. Like Bucyrus, Caterpillar has maintained considerable production in the United States and collected 32 percent of its nearly $43 billion in annual revenue in 2010 from its exports shipped from America. It is adding factories in the United States but also abroad, and today, 54 percent of the company's 105,000 employees work overseas. The newest overseas factory is going up in Thailand, to make underground mining equipment.

"I think they felt they needed some manufacturing presence in Asia to compete with the Japanese on certain products," Sullivan says.

Ask Ronald Bloom, the assistant to President Obama for manufacturing policy, whether manufacturing within the United States matters to the administration, and he replies that it certainly does. The military, for starters, depends on American weapons manufacturers. Workers without college degrees, Bloom notes, make higher wages in manufacturing than they do in any other sector, and tens of millions of Americans have only a high school diploma. Then there is the issue of kick-starting a recovery as the economy emerges from recession. Manufacturing historically performed this role, but now its shrinking presence accounts somewhat for the sluggish recoveries from the last two recessions.

Finally, Bloom continues, there is the issue of research and development. Manufacturing has proved to be the most important breeding ground for innovation, and innovation can't be separated from production. "If you let manufacturing go, over time that will have a negative gravitational pull on innovation," Bloom says. "Recognizing this is very important. Many people said that we can have a strategy of 'invent it here and make it there,' but now they are realizing the two can't be separated."

By the standards of the day, that is strong language coming from the White House. The actual policies, however, haven't been so strong. To be sure, the administration pushed through as part of its stimulus package a tax credit to encourage the production of solar panels and wind turbines in this country. The "buy America" clause in the stimulus served a similar purpose, requiring contractors to purchase American-made equipment, whenever possible, for the infrastructure projects that the federal government funded.

But President Obama could have done more. He could have appointed a secretary of commerce who would have campaigned more forcefully for manufacturing in America than Gary Locke, the current secretary, has done. He could impose tariffs and import quotas as Reagan did in the 1980s. He could also push Congress to cancel a corporate tax break that exempts from taxation profits earned abroad by American companies, until those profits are repatriated. The tax exemption is, in effect, an invitation to reinvest the profits in overseas operations, not back home. On another front, the president could bang the desk in favor of an international agreement that lowers the value of the dollar and thus makes merchandise exported from the United States less costly to buyers abroad.

"A leadership vacuum exists, and the president should fill it," Hira says. "The federal government could subsidize exports, but we aren't even close to having that conversation."

So why isn't there a drumbeat of public concern? Why has the once lusty debate over manufacturing's importance all but disappeared? And why has making things -- craftsmanship -- lost importance as a form of learning and knowledge?

One problem is clout. As manufacturing's presence shrinks, so does its influence. Not that the nation's manufacturers are milquetoasts when it comes to lobbying, but the voices from the growing financial and service sectors are louder, and globalization continues to be the flavor of the day. "If anything, business schools are teaching their students the importance of offshoring," says Yoshi Tsurumi, a professor at the Zicklin School of Business, Baruch College, City University of New York.

Even labor has a diminished stake in defending manufacturing, since the portion of the workforce employed in the sector has shrunk to 10 percent today from 26 percent in 1960 and 13 percent as recently as 2000.

That decline can be reversed, but the will to do so -- the laser-like focus on making things in America -- may no longer exist or may be too compromised to be easily revived. The most powerful lobbyist on behalf of manufacturing is the National Association of Manufacturers. But its members include multinationals like Dow Chemical and Caterpillar with factory networks across the globe, thus dividing their loyalties. Even the NAM's numerous small members aren't as rooted in America as they once were, which helps to explain the NAM's support of free-trade agreements that suppress barriers to the movement of goods across borders.

Take the NAM's newly elected chair, Mary Vermeer Andringa, who is also chief executive of Vermeer Manufacturing Company, started by her father in Pella, Iowa, in 1948. The company's seven principal factories remain in the Pella area, producing farm equipment (hay bailers and mechanical rakes, for instance) and machines that dig trenches.

"I am very much a big believer that manufacturing is extremely important for our country," Andringa says, adding that 30 percent of Vermeer's $1 billion in annual revenue currently comes from exports. But some parts for the machinery built in Iowa are no longer made in America by Vermeer or its American-based suppliers. They come from abroad. And 10 years ago, the company even opened a factory in China, adding to the billions of dollars in merchandise and parts that American companies now manufacture outside the United States.

"When I first went to China in the 1990s, the Chinese asked, 'When are you going to start manufacturing in China?'" Andringa says. "Every time I went there, they asked me that question. And we finally did. Sometimes you need to have a local presence in order to be able to export to a country."

No one from the American government, apparently, ever asked her to keep manufacturing here.

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