Real Change, Not With China

In Barack Obama’s two day meeting with Chinese officials, I do not expect much on the economic front. Nothing with China will change much unless their government does more to stimulate domestic demand.  As I wrote in a previous post, http://proudlymadeinamerica.com/?p=75, on Chinese consumption, China is very limited to making economic changes while they are so heavily reliant on export lead growth.
Recently, China has made some movement in this area.  For example, the reduction of taxes on fuel efficient vehicles has significantly stimulated domestic demand.  Unfortunately, this is just a drop in the bucket when compared to the overall economy. 
Even with China’s relatively large stimulus package, the current recession has lead to the loss of over 20 million jobs and the closing of thousands of factories.  There is also a massive amount of bad loans being maintained by government controlled banks.  This limits China’s willingness to make any significant changes to the status quo. 
China is in a rough spot. China needs to continue to buy U.S. debt so the value of their current U.S.  investments do not lose value.  To continue to buy U.S. debt they need economic growth.  To get the growth they need export growth.  For China’s exports to continue to grow, they need their largest customer, the U.S., to continue buying their products.  To keep Americans buying, China has further incentive to buy U.S. debt.
For our part, the U.S. relies on the Chinese buying our debt.  This handcuffs us in the level of action we can take against China.  We are virtually powerless in our ability to stimulate the Chinese consumer.  The best we can do is to wait for China to do it themselves.

Maintaining a Good Supply

Last year I read an article, Zagis USA to Invest $75 Million in Two New Louisiana Textile Mills, about a Mexican company opening up yarn factories in the United States.  In reading through the article, it became clear that the driving reason for the new plants was economics.  It will be cheaper to manufacture the yarn in the United States then in Mexico.   Even with U.S. workers earning, on the average, ten times more than Mexican workers, Zagis determined it would be cheaper to manufacture in Louisiana then in Mexico City.  The article does go into some specifics about why, but to put it briefly it is due to the supply chain.

By locating near the source of the major raw material for the yarn, cotton, the manufacturer ensures that it will have the lowest yarn production cost possible. That is not the complete story, by locating in Louisiana the company is also near an active international port which translates into lower transportation costs.

Supply chain management is a large and complex subject that covers every aspect from the acquisition of raw materials or components to the delivery to the end consumer.  Although much of the supply chain management efforts are aimed at cost savings, there is significant emphasis placed on ensuring quality and supply.  Take the recent purchase of a sub-contractor’s production facility by Boeing.

Boeing has agreed to pay $580 Million to take over ownership, from a major supplier, of the manufacturing facility of parts for the 787 Dreamliner.  If you follow the headlines you probably already know that the 787 Dreamliner has been delayed multiple times due to supply problems.  Boeing is hoping that by taking over some of the operations of the supplier they can eliminate some of the problems they are currently experiencing. 

One of the problems with supply chain management is that some components of the process rely on a critical mass of activity.  By that I mean that there needs to be a certain level of activity to provide the efficiencies needed to keep costs low.  This is a problem because for every factory that moves offshore, or closes, our nation chips away at that critical mass needed for an efficient supply chain.  For example, as factories close in a particular area the shipping cost to and from the remaining factories, in the area, start to go up.  Delivery companies lose an economy of scale and pass the costs on to the remaining factories. 

Every time a factory closes there is not only a loss of jobs, there is also a reduction in the economy’s ability to support a competitive supply chain.  As the supply chain continues to erode there will be more pressure on companies to relocate to lower cost areas so they can remain competitive.  I am not sure where that tipping point is, but just like global warming, I am not willing to take a chance of reaching it.  The consequences could be devastating.

If it ain’t broke don’t fix it, unless it is broke

I always knew I was lucky for many reasons, except that up until recently I overlooked one reason.  That reason is my medical insurance coverage.  I have had either good or excellent medical insurance ever since I had my first real job.

I worked at a company that had medical insurance where they paid the entire premium, covered almost everything, and had a very small deductible.   When my daughter was born she had to have a couple of eye operations as well as other medical issues.  Even though my wife and I had almost no money, I do not recall ever worrying about paying any of the medical bills.  Later on, at another company, I had similar coverage for a while.  Then, over the span of about five years the coverage started to deteriorate.  Now I have decent coverage where I have a reasonable deductible and I pay a portion of the premium.

A couple of months ago I was talking to someone I previously worked with.  During the conversation, my former co-worker complained about how bad the medical insurance was at our old company.  Seems that the company I once worked for kept modifying the medical plan to reduce costs.  Although the company I worked for is a “high-tech” company, the story is similar at many manufacturing companies.

For many years, manufacturing advocacy groups have listed the reduction of healthcare costs as one of the top issues in lowering the cost of manufacturing in America.  This is because; using 2008 number, the average cost for healthcare at U.S. manufacturers is $2.38 per hour.  This represents about 13 percent of their payroll cost.

The $2.38 per hour becomes alarming when it is compared to the average cost of $0.96 per hour for our trading partners.  The $1.42 per hour difference represents 7.75 percent of the payroll.  That is a large disadvantage to overcome.  The good news is that much of this added cost can be eliminated.

A McKinsey&Company report from December 2008, Accounting for the cost of US health care” A new look at why Americans spend more, documents that even as far back as 2003 Americans overspent $477 billion on healthcare.  That translates into over 28 percent of our nations healthcare cost being wasted.  Getting rid of the overspending would shrink the $1.42 per hour difference down to $0.88 per hour.  Imagine what that number would drop to if we could make the system more efficient along with getting rid of the current waste.

The United States spends about 16 percent of our gross domestic product (GDP) on healthcare, with about a third of that lost to wasteful medical spending.  With over 46 million uninsured, millions under insured, and millions more worried about losing their coverage our nation needs to act.   The dirty secret is that we are already paying for the healthcare of the uninsured.  What makes it worse is that the uninsured get their healthcare in the most inefficient manner possible, the emergency room.

I do not pretend to know what the solution is; I just know that we need to do something.  That something needs to address the waste and inefficiencies.  This can, as many analysts agree, be accomplished as we increase the number of people covered and improve the overall quality.  In the end, fixing healthcare helps everyone, not just manufacturers.  It would be counter-productive to not do anything.  So, do not let any group scare you into supporting no change.   In this case, if it is broke fix it.

In a Rush to Fail

I almost never have a problem with someone standing up for their convictions.  I also don’t have a problem with people trying to make a living.  But I do have a problem when somebody is willing to put others in peril in support of either of the above.   This is why I am seriously disappointed with Rush Limbaugh.

For those of you who do not know, Rush Limbaugh has called for a boycott of General Motors.  In general, I am not against boycotts.  Boycotts are a good tool when used to illicit a change in behavior.  Boycotts are a bad thing when the goal is just to have someone else fail.  Unfortunately, Rush Limbaugh called for the boycott because he wants anything associated with President Obama to fail.  As reported by the Detroit Bureau, “the most amazing thing here is that Limbaugh appears to be openly admitting that the purpose of this is economic and political sabotage — to prevent President Obama from succeeding at something.”

Other conservative pundits support the boycott because the government involvement in GM is contrary to their beliefs in having free enterprise.  If Rush and the other conservative pundits are correct, GM will not survive due to the government’s ownership.  I have made similar statements about China’s goal to be a leader in the EV market. While I respect the conservatives trying to support a free market economy, I think that if the intended result of the boycott is achieved it can have a potentially dramatic negative effect on the overall economy.

If the majority of economists are correct, the current state of the economy is not good.  Although the economy is expected to start a recovery soon, it is still in a fragile state.  Any unnecessary negative economic event will have a multiplied effect on the long term stability of our economy.

It is unrealistic to think that a majority of the people boycotting GM will automatically buy a domestically manufactured vehicle.  If only 40 percent of the “boycott buys” are imports, our economy will still lose tens of billions of dollars in lost wages and taxes.    Workers will lose their jobs and benefits adding further strain on the economy.  Consumers will lose confidence in the economy and pull further back on spending. 

We are a long way from the time when “what was good for the country was good for General Motors and vice versa” could be argued, but there still is something to it.  Well at least for now.   With both GM and the economy in a tenuous state, we need to do everything to ensure a strong economy.  Calling a boycott on GM is the opposite of what we should be doing.  In this case a boycott is also opposite to the principles of a free market.

Do I really think that the boycott will cause GM and the economy to crumble? No.  I just do not want to take a chance.  If the people calling for the boycott really care about our economy, our workers and our nation they run the risk of a hollow victory.

Productivity Growth, Who Needs It?

As I look at the revision of Productivity and Costs, First Quarter 2009, I see some good and bad in the numbers.  The good is that the overall manufacturing productivity was revised to -2.7 percent from an initial -3.4 percent.  All of that gain, and more, is due to a change in the nondurable good manufacturing from an initial -0.01 percent to the revise increase of +1.9 percent.  The bad news is that the manufacturing productivity of durable goods, went from -10.0 percent to -10.4 percent.  Overall though, I am not worried about the drop in productivity.

I am not worried about the lost productivity for two reasons.  First, productivity always drops during a recession.  Second, the steep drop means employers are keeping on more employees then they need to manufacture their goods.  Productivity will quickly recover once the economy starts to expand again and production starts to pick up.  The retaining of workers is indicative of employers continuing their research and development, and other future benefit activities, even though they are producing less. 

The recent May 2009 Manufacturing ISM Report On Business had two significant improvements: An above 50, or expanding, index reading in New Orders and a much improved index score in Backlog of Orders.  With a 51.1 index, the New Orders reading is a nice positive, but it is only part of the story.  The real important number is the 7.5 improvement in the Backlog of Orders from 40.5 to 48.  This is a significant change in the rate that the manufacturer’s backlog of orders is shrinking.   

It is critical that companies continue to work on the next generation of, or a better way to manufacture their product.  Not all companies can just shed costs, like GM did with the UAW, to improve their cost competitiveness.  Improvements in productivity are what allow manufacturers to keep product costs down while increasing employee compensation. 

Most economists agree that there will not be a significant increase in demand anytime soon.  In addition, companies will not ramp up production until they see that their orders backlog is increasing for a little while.  Backlogs have been decreasing for 13 months, so manufacturers will want to get a little backlog cushion before they do any significant increase in production.  This leave productivity as the mechanism for maintaining profits.  

Once production starts to ramp up we will see productivity shoot up.  On one hand this is a good thing because it makes American manufacturers more competitive.  On the other hand, higher productivity means it takes less to do more.  In a Clemson University study authored by William Ward, it was argued that due to productivity improvements alone roughly 42.4 percent of the manufacturing jobs that existed in 1990 would have no longer be needed in 2004.

Productivity numbers are funny.  A drop in productivity means a loss of competitiveness due to higher unit costs, a bad thing.  A large drop in productivity late in a recession can be seen as an indicator of business investment in future productivity gains, which is a good thing.  An increase in productivity makes a company more competitive, a good thing.  If a company’s productivity increase is greater than the company’s gain in market share and market expansion then job losses are inevitable.  This is a bad thing for the overall economy.

In the end, judging productivity numbers is a hard thing to do accurately.  I guess an old saying is good way to look at them.  Nothing is as good as it looks or as bad as it seems.