The Status of Manufacturing in 2005

Fred Zimmerman

University of St. Thomas

Society of Manufacturing Engineers

January 5, 2005

The job market in the company’s home town peaked a decade ago, and workers can no longer take raises and bonuses for granted. Every year,,,the company buys more parts overseas, and its hundreds of domestic suppliers are having to compete ever harder with foreign rivals, sometimes by cutting prices so low that many cannot make ends meet. Many are quietly closing their doors because the outlook is so bleak. New York Times, October 21, 2003 The Story was about Toyota City, Japan.

The manufacturing world is now characterized by

• widespread technical capability,

• rapidly expanding industrial capacity,

• aging populations in industrial countries,

• worldwide stresses on employment, and

• burgeoning public budget deficits.

Widespread Technical Capability

Trend # 1

Math ScoresSingapore 604 6.3 8 14.4Korea, Rep. of 587 2.0 8 14.4Chinese Taipei 585 4.0 8 14.2Hong Kong, SAR 582 4.3 8 14.2Japan 579 1.7 8 14.4Belgium (Flemish) 558 3.3 8 14.1Netherlands 540 7.1 8 14.2Slovak Republic 534 4.0 8 14.3Hungary 532 3.7 8 14.4Canada 531 2.5 8 14Czech Republic 520 4.2 9 14.4Malaysia 519 4.4 8 14.4United States 502 4.0 8 14.2

Science ScoresChinese Taipei 569 8 14.2Singapore 568 8 14.4Hungary 552 8 14.4Japan 550 8 14.4Korea, Rep. of 549 8 14.4Netherlands 545 8 14.2Australia 540 8 or 9 14.3Czech Republic 539 9 14.4England 538 9 14.2Finland 535 7 13.8Canada 533 814.0United States 515 8 14.2

High Tech Exports

1997 2000 2001US 31.5 33.2 32.1 2%Canada 14.0 17.2 15.3 9%Mexico 17.1 22.0 21.7 27%

Japan 25.9 28.1 26.0 0%China 12.7 18.4 20.4 61%Singapore 55.1 61.5 59.7 8%Malaysia 47.8 58.2 56.9 19%Indonesia 11.0 15.5 13.4 22%India 6.4 .. .. n/aKorea 26.0 34.2 29.1 12%

Rapidly Expanding World Capacity

Trend # 2

Rapidly Expanding World Capacity

•World steel production has increased from 200 million metric tons in 1950 to 900 million metric tons in 2002 and capacities have risen even more. •Capacity is accelerating in other industries such as large aircraft, paper, cement, aluminum, electronics manufacturing, and many other industries.•Overcapacity exists even in those countries expanding capacity at this time. •The investment firm of Goldman Sachs & company estimates that by 2006, China’s production of vehicles will reach 6.9 million but internal demand is estimated to be 2.2 million units. •One Korean company, Posco, will produce 27 million metric tons of steel in 2003, compared to about 100 tons for the entire industry in the U.S..

Aging Populations in Industrial Countries

Trend # 3

Aging Populations in Industrial CountriesRocking chair ratios for selected countries

(% of people > 65 as % of people under 20 years old)

Italy 95.17%Japan 86.63%Spain 83.97%Germany 80.23%Switzerland 67.50%Portugal 66.52%Hungary 64.13%France 63.89%United Kingdom 62.39%Czech Republic 61.34%Ukraine 56.33%Canada 49.88%Russia 49.81%Poland 46.02%Australia 45.32%United States 43.70%

Korea, South 25.43%China 21.62%Chile 20.53%Brazil 14.17%Indonesia 11.62%Colombia 11.52%South Africa 11.42%India 10.80%Iran 10.12%Mexico 10.04%Egypt 9.07%Pakistan 8.01%Philippines 7.95%Iraq 5.76%Nigeria 5.14%Saudi Arabia 5.12%

Population under the Age of 20 in 2001

India 440,599,263China 417,143,908Indonesia 91,025,549United States 80,796,199Pakistan 74,310,917Nigeria 69,478,347Brazil 67,802,421Bangladesh 65,546,458Mexico 44,661,537Philippines 38,468,855

Russia 37,434,676Japan 25,854,638Germany 17,293,423France 15,038,908U K 14,946,114Korea, South 13,624,019Italy 11,094,599Spain 8,263,411Canada 8,089,233Australia 5,339,605

Worldwide Stresses on Employment

Trend # 4

Unemployment Rates

Country 1995 1999 2000 2001Poland 16.1 18.2Spain 22.9 15.8 14.0 13.0Italy 11.9 11.2 10.4 9.5Finland 16.2 10.2 9.7 9.1France 11.7 10.7 9.3 8.6Czech Republic. 8.8 8.9 8.2Germany 8.2 8.6 7.9 7.9European Union 10.7 9.0 8.1 7.6Canada.. 9.5 7.6 6.8 7.2Australia. 8.6 7.0 6.3 6.7Belgium. 9.9 8.6 6.9 6.6OECD, total 7.5 6.8 6.3 6.5

Burgeoning Public Budget Deficits

Trend # 5

Burgeoning Public Budget Deficits, 2001

Country Gross Debt as a % of GDPJapan 118.6%Italy 108.3%Belgium 105.4%Greece 99.7%Spain 66.5%France 63.6%Austria 62.4%Germany 57.8%United States 54.6%Portugal 53.8%Netherlands 53.1%United Kingdom 50.7%

Minnesota’s Industrial Strengths

•Minnesota Has A Diversified Economy

•High Tech Employment in Minnesota Was Slightly Above the U.S. Average

•Minnesota Ranks High in Personal Income Per Capita

•Minnesota’s Unemployment Rate — Historically Lower than the Nation

•Minnesota ranks high in Patents

However, •Minnesota Employment and Payroll Have Grown Modestly

•Minnesota Manufacturing Product Growth is Modest

•Minnesota ranks low in Foreign Direct Investment

•Venture capital funding is anemic

•Minnesota’s Export Performance is medium (21st out of 50 states.

•State is high cost

Investment, Revenue and Costs for Selected Cities, 2002 ($000)

Investment Revenue Costs Profit RankIndianapolis $11,703 $16,761 $15,438 $1,322 1Colorado Sgs $12,779 $16,761 $15,811 $ 950 2Oklahoma Cty $11,844 $16,761 $15,826 $ 935 3Phoenix $11,762 $16,761 $15,911 $ 849 4Chicago $12,678 $16,761 $15,961 $ 800 5St. Louis $12,991 $16,761 $16,157 $ 603 6Dallas-FW $12,303 $16,761 $16,205 $ 556 7Minneapolis $13,236 $16,761 $16,271 $ 489 8Houston $12,184 $16,761 $16,521 $ 240 9Boston $15,756 $16,761 $16,658 $ 103 10Location sensitive costs as displayed in the report include labor, lease, transportation, utilities, taxes, and operating costs. Location Insensitive cost include materials & other operating expenses.Source: Competitive Alternatives Comparing Business Costs in North America , Europe and

Japan, KPMG International 2002

Estimated Annual Profit by Location, 2002 ($ 000)

Cities Investment Revenue Net ProfitNaples, Italy $12,364 $16,761 $2,542Manchester, UK $16,798 $16,761 $2,395Winnipeg, Canada $11,401 $16,761 $2,205Toronto, Canada $12,990 $16,761 $2,162West Holland, NL $14,757 $16,761 $1,979Vienna, Austria $17,369 $16,761 $1,772Toulouse, France $12,759 $16,761 $1,584Minneapolis, US $13,236 $16,761 $ 489Darmstadt, Germany $15,311 $16,761 $ 247Yokohama, Japan $54,570 $16,761 ($2,945)Note: Net Profit = estimated revenue minus location sensitive costs minus location insensitive costsSource: Competitive Alternatives Comparing Business Costs in North America , Europe

and Japan, KPMG International 2002

Some Further Concerns

•Minnesota is Geographically distant from Emerging Markets

•The Supplier Base has Fewer Incentives

•Minnesota has Few Emerging Big Ticket Industries

•Minnesota’s Labor Force Growth is Slowing

•Minnesota’s Utility Infrastructure is Weaker

•Corporate Mergers and Management Changes have Reduced Industrial Strength

•Minnesota Factories are Old

Repelling Forces1. Shortage of land2. High costs of land, particularly if it is polluted3. Objections of residents4. Inadequate infrastructure 5. Insufficient supply of good labor6. Building codes that block modernization7. High labor costs8. Incompetent management9. Costly or ineffective public services10. Cumbersome regulation11. Mergers and acquisitions12. Poor transportation13. Companies reach the end of their useful lives14 Litigation

Attracting Forces

1. Shifting locations of major customers or suppliers2. Work ethic3. Quality4. Even-handed Legislative, legal and tax climates5. Industrial swarming6. Economic incentives7. Transportation. 8. Ownership changes9. Attractive wage rates10. The weather

Manufacturing and Community Prosperity

•In the categories where manufacturing was gathering strength, every major employment sector grew substantially. Total employment increased from 35 to 63 percent. The increases were less than 10 percent in the groups where manufacturing was declining, even though the 1990s were generally prosperous.

•Counties gaining momentum in manufacturing reduced poverty, more rapidly increased household income, and had lower unemployment rates while those counties with weakened manufacturing experienced deteriorating conditions — even during good times.

•Among the 690 counties examined, those with 10 percent of civilian employment in manufacturing averaged about $1,000 in county and local taxes per person in 1992 while the counties with 30 percent averaged $650 and those with 40 percent averaged $562.

Conclusions

• Competition is tough all over.– US is likely to do better than Europe.– Is higher cost and less proficient than many emerging

countries.

• Minnesota is more of an average state than it was fifteen years ago.

• The assumption that we can retain prosperity without manufacturing is without foundation.

• With burgeoning trade and fiscal deficits, along with flat employment, we may need to thoroughly investigate whether the US is in some form of gradual economic decline.

Conclusions II

• Outsourcing and overseas production are rising not so much because US wages are high. Outsourcing and overseas production are increasing due to the search for – improved supplier and worker capability– improved supplier and worker dependability– heavy levels of investment in plant and

equipment.

Recommendations

• Creatively improve the lot of the intermediate suppliers.

• Cooperate with “good” companies -- not losers.

• Have people in education work a full year.

• Bring people into teaching with industrial experience.

• Increase the retirement age to at least 70.

• Castrate everybody above the third floor.