U.S. Manufacturers: Caught in a Chinese Box?
Will China destroy the U.S. economy?
Will Chinese factories replace American ones?
Will Chinese laborers steal American jobs?
The answers to these questions often tell you more about the person you’re talking to than anything substantive about the health of American manufacturing.
Kurt Duska, who owns and runs Engineered Plastics in Lake City, Pa., says that American manufacturing is dying quickly. In the 1980s and 1990s, he had a thriving business, making plastic parts for vacuum cleaners, wheelchairs, toys, and many other consumer goods. In the last five years, most of his customers have stopped producing anything in the United States and all of those parts are now made in China. He has seen friends and relatives suffer similar plights. Several friends who owned plastic injection-molding companies have gone bankrupt. His father-in-law had a healthy furniture business until, suddenly, shockingly he lost everything and had to sell his equipment at auction for bargain basement prices.
If you spend much time with Duska and his friends, it would be easy to predict that America's days as a center of manufacturing are over. But that would be a mistake. As it happens, I visited Kurt's shop the day after I spent several hours with Rob Smith at Acutec, the metal parts manufacturer he owns and runs. Acutec makes components for airplanes and helicopters. Smith has only lost one part to a Chinese manufacturer and, after a few months, the customer returned to Acutec because the Chinese did not yet have the skills to produce the part with the precision required. Smith is doing quite well. This week, he will open a large addition to his plant and install several brand new machines. He invested several million dollars in the project and hopes to hire five new machinists immediately. If you spend some time with Rob Smith, you'd imagine that U.S. manufacturing is the best in the world and nobody can compete.
That, in fact, is the strong message that most people in China told me on a recent trip to Hong Kong and Guangzhou. I met with investment bankers and businesspeople and academics. Every one said they can't understand why Americans are so concerned about China taking over the manufacturing sector. China's industry is decades behind the United States, they said. Chinese workers have nowhere near the education that American workers do. China's institutions do not encourage invention and innovation. Most Chinese factories are limited to copying whatever new ideas American manufacturers have come up with. And the big money is in innovation. Create a new iPod or a new type of airplane landing system, and you can charge a huge premium and make a great profit. By the time the product is so well-known that Chinese factories can begin fabricating copies, the profit margins will have shrunk and the Chinese will make a small fraction of what the American manufacturer was able to charge.
So long as American manufacturers can innovate and come up with new and better products or new and better (read: cheaper) ways to make old products, they will be able to compete quite successfully with China.
Rob Smith still makes some of the same airplane parts that he made ten years ago. But now, he and his employees have worked out ways to make them cheaper and faster, so he can charge less but still make more profit. He's cutting costs and increasing profit while maintaining high standards China can't yet meet. At the same time, he is buying new manufacturing machines that allow him to make new and more cutting-edge products which, again, the Chinese are unable to copy.
For Duska, things are far more difficult. The Plastics industry is mature. A plastic dog bowl today is pretty much exactly like a plastic dog bowl from ten years ago. The materials aren't changing very quickly; the machinery is mostly the same. And the work force does not need to be highly skilled. There is simply too little room for innovation. There isn't much that Duska's plant can do that a Chinese factory can't do much more cheaply.
The question on Rob Smith's mind is how quickly will the Chinese learn to do what he does. Ten years ago, Chinese factories could produce textiles, but only had primitive plastics abilities. In the past decade, Chinese manufacturers have learned to become expert in plastics, furniture, leather goods, and other previously safe American industries. If Chinese manufacturers continues to climb the value and skill manufacturing ladder, they could soon become adept at making high-precision metal parts that go in airplanes and on helicopters. Smith imagines this will happen in about five to ten years. But, he says, he'll still be able to innovate faster and stay ahead of the Chinese -- if only just.
While there is plenty of good news for high-end American manufacturers, there is a lot of bad news for manufacturing workers. For decades, now, machinery and robotics have replaced laborers. But that trend will only speed up as U.S. producers find cheaper and cheaper ways to make the same products. Right now, Rob's employees, who make around $20 an hour, have safe jobs. Kurt's workers, who make $6 an hour, could be out of work soon.
It is clear that American workers will be making things in American factories for decades to come. But what is unknown is how many people will work in how many factories. That is something nobody -- not Duska, not Smith, not Chinese factory managers -- can answer right now.
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