Thoughts from the frontline
May 10, 2005
March 2005 "Fabricating Update" Survey Results
In a recent "Fabricating Update" newsletter, we asked subscribers to choose their operations' leading concerns from factors often cited as contributing to manufacturing's woes. Steel prices—the No. 1 response—outranked the next highest-rated concern by 2-to-1.
"Manufacturing and Steel Prices," a February 2005 paper authored by college professor and former chief economist of the U.S. International Trade Commission (ITC) Peter Morici, stated that "steel prices have notbeen a significant factor affecting U.S. manufacturing." Based on a study sponsored by the American Iron and Steel Institute (AISI) and the Steel Manufacturers Association (SMA), the paper went on to say that "steel is a relatively small component of cost in most steel-using industries, and recent increases in U.S. steel prices generally have been matched by price increases abroad, leaving U.S. manufacturers at no comparative disadvantage."
Morici said, "U.S. manufacturers are at a substantial competitive disadvantage because of other factors, including an overvalued dollar; higher health care costs than those borne by manufacturers in other countries; and various other regulatory costs."
Also in February, the Motor & Equipment Manufacturers Association (MEMA), the largest trade group representing automotive suppliers, reported that distortions in the steel market, including record-high steel prices, are being fostered by the U.S. government and are causing a crisis that has impacted automotive and heavy-duty suppliers across the country, triggering unprecedented bankruptcies and job losses.
The MEMA report found that in 2004, U.S. steel producers enjoyed their highest profits in years. The domestic steel industry noted record earnings in 2004, leading to market value increases of 60 percent or more for the largest of these companies. Not only are current profits trending upward for steel producers and downward for automotive suppliers, projections point toward continued disparity. Both market participants and analysts are predicting a strong 2005 for the steel-producing industry—similar to the best-in-recent-memory results seen in 2004.
Clearly, the metal fabricating community disagrees with Morici's findings and agrees with the MEMA report. In our survey to determine metal manufacturing's leading concerns, steel prices (36 percent) emerged as the No. 1 concern (see Figure 1). Health care costs (18 percent) came in second.
Twelve percent of respondents chose the skilled labor shortage as their greatest concern, followed by materials availability and foreign competition (10 percent each); unfair trade and tax policies (7 percent); overvalued dollar/undervalued foreign currencies (5 percent); and other (2 percent). Subscribers shared their thoughts about these issues.
Regarding the impact of steel prices, a tube fabricator wrote, "Our company has been impacted by the rising steel prices, which are being passed on to us from our suppliers. Our products have a selling factor that places materials at 50 percent of the selling cost. That's huge when our customers refuse to acknowledge any increases and consistently are demanding that we produce at ever-lower prices."
Subscriber Jim Phipps agreed that steel prices are a great concern. "Steel prices impact all of us, and with the strong competition in the world, these prices will remain an issue that all metal manufacturerswill have to deal with. This is not a unique U.S. problem."
Attesting to the global impact of steel prices on manufacturing, a reader from Mexico also listed steel prices as his company's leading concern, followed by competition from China and a skilled labor shortage.
Despite record earnings, the steel industry maintains that it still is subject to serious problems should import restrictions enacted to aid the ailing industry be lifted—a measure that many steel consumers think is necessary to their survival. These steel producers applauded the ITC's recent decision to extend the antidumping and countervailing duty orders and suspension agreement covering imports of hot-rolled steel from Brazil, Japan, and the Russian Federation for an additional five years.
The Consuming Industries Trade Action Coalition (CITAC) Steel Task Force said the ITC decision troubles steel consumers. "Steel consumers in the U.S. need access to stable, adequate supplies of globally priced steel, and the ITC decision ensures that they will continue to suffer from high prices, long lead-times, and quality problems," said Lewis Leibowitz, counsel to CITAC.
Subscriber Larry Martin said he believes that the government never should have enacted steel tariffs. " [The president] was ill advised a few years back in implementing the Section 201 tariff on steel imports. Not only did this action violate our World Trade Organization agreements, it also failed in its objectives, at a high cost to consumers, downstream steel users, and even the steel industry itself.
"At the time of the tariff implementation, imports were high, and prices were way too low. The rise in prices was not caused by 201, but by the natural forces of a free market. Had there been no 201, prices and profits still would have risen, resources still would have been stretched, and new resources found.
"But 201 made things worse. It put artificial stresses in the marketplace, displaced or bankrupted many small businesses, and cost us all money, for naught. Only a few benefited. All of the rest of us in the industry were stressed, while big tariffs went to the government, with little benefit to us. The current strong position enjoyed by the steel industry today is solely a result of free enterprise.
"On the downside, because of 201, consolidations were made in the steel industry that may not have been made if [the steel companies were] forced to wait a while longer. For instance, as prices rose, investment money became more available, and we would have had many more players still in the market. That would have been better. Let the planners and winners rise to the top on their own.
"Please, Washington, let us buy and sell as we please. With no more planning than just that, we can do it better than you. We can do it, you can't help!"
All businesses are affected by rising health care costs. "Fabricating Update" readers reported premium increases of 15 percent to 78 percent in 2005. Some small-business employers reported that they had to discontinue their health care plans because of cost increases. Some businesses are working to improve their employees' health and lower health care costs by implementing wellness programs.
Commenting on health care, Dave C. said, "Premiums have gone way up and coverage has gone way down. It's time to eliminate the insurance industry from the health care equation.
"Government can work ... a well-conceived and -run federal system can operate at less than 2 percent of the total cost to provide excellent health care for all Americans. It can be done. It's a simple but not necessarily easy thing to accomplish."
The skilled labor shortage is a long-standing issue that doesn't seem to be abating. In fact, the shortage is expected to worsen as aging baby boomers retire.
Jim D. shared his thoughts about this issue: "To keep employees, health care is a problem, but more important is the lack of qualified machinists who are worth paying the health care for. The schools are not training entry-level students, and part of the problem is the failure to realize that not everyone is going to be a doctor or a professional. The work force needs everyone, from the man who keeps the shop clean to the engineer who designs the products. Until we make the employee who works with his hands (see "Speed Vision," "Rides," "Overhauling") the pride of America—not because he has a high-paying union job that overpays him, but because he is a true craftsman—we will have a skilled labor shortage.
"In our business, we see people who claim to be machinists or CNC machinists, and all they can do is load a part in a vise and push a button. I fault the governments and state and local school boards for doing away with the industrial arts programs and comprehensive high schools that allowed students to realize that being a craftsman was not a looked-down-upon profession. It also goes without saying that too many engineers don't have the exposure to a practical applications class."
Leonard M. said that safety and lawsuit concerns are among the reasons many schools have discontinued industrial arts programs. He now sees the younger work force starting too late to acquire hands-on knowledge, and with business costs skyrocketing, small businesses can't afford to mentor them.
Not everyone agreed that a skilled labor shortage exists. Mark, a subscriber who asked that we use his first name only, wrote, "A skilled labor shortage? Poppycock ... there are more highly skilled workers going begging than you can shake a stick at. Employers just don't want to pay them—partly due to the workers' ages and associated health care cost, and the policies of oft' mismanaged payroll departments (human resources)."
Subscriber Randy Jarvis provided an example that describes why materials availability is an important concern for manufacturers. He said, "Last November, when we had to have some weldments made, our fab shop had a horrible time getting the steel we needed. The shop did an excellent job, but during the quoting process, we were told that we had to answer yes or no almost immediately—not because of scheduling, but because the shop had to confirm with its supplier that the steel we needed would not be bought out from under us!
"I can never remember anything exactly like this in my lifetime. Not only are steel costs all over the map, but availability also is an issue. We are paying more than ever for an unsteady supply. There simply is no way to maintain steady manufacturing costs, and therefore, stable pricing."
The tube fabricator who wrote about being caught between high steel prices and customers consistently demanding lower costs said, "[Our customers] can get away with it because of the disadvantage of foreign competition. We cannot compete with countries with average labor rates of $4, $6 an hour. In this company, the average labor rate is $10 an hour, and that does not include the benefits that we pay, including the regulated ones such as Social Security and break periods.
"We have to survive, and to do so we are going to have to do what our customers are doing, and that's go offshore for components. That means that we also will be helping to put our neighbors out of work. Not a good feeling, and it really is a policy that likely could be a contributing factor to the U.S.'s downfall. Manufacturing moves out, and when the time comes for protective action, we will have to find our defenses built in other countries. Maybe we'll be able to get them, and maybe we won't."
Jarvis echoed some of these thoughts: "In the U.S., we have good wages, pension plans, FICA, health care insurance, and EPA regulations (that mostly work). If you look at what most of the foreign competitors have to deal with, no wonder they are cheaper!
"So what is the real problem here? As I see it, those foreign competitors are forcing the U.S. to take a big hit in its standard of living. What I am seeing is our own government telling us that they are too well off. We are living too well!
"Why not look at the situation from the U.S. workers' viewpoint? Why does our own government tolerate this? Are we so inept at world economics that we are the ones to suffer?"
Subscriber David Withrow shared his experience with foreign competition. "For many years I owned a company that designed and built flat-rolled strip processing lines. Soon after I bought the company in the early '80s, I decided that to be able to supply the most modern and highest-value equipment to my North American customers, I would need to compete successfully in the worldwide marketplace. We decided to have half our business originate from North American customers and the other half from overseas. For years we operated with approximately that mix.
"We learned the good and bad about the foreign competitors, how extensively foreign governments help their exporters, and how Washington and our banks seriously frustrate U.S. manufacturers' exporting efforts. Further, 5 cents of our overall total sales dollar was spent to defend product liability lawsuits. And we never had a product liability lawsuit outside the U.S.! So there are serious flaws in the U.S. economic system that work against exporting. Washington doesn't have a clue."
Metal manufacturers cite the 201 tariffs as an unfair policy. They also cite the North American Free Trade Agreement and similar agreements.
Although Phipps acknowledged that steel prices are a great global concern, he said, "A larger problem is NAFTA and similar agreements in the U.S. In the non-right-to-work-law states, firms leave because of "labor issues,' but the reality is that they do not generally stop in Texas; they keep going south to Mexico to take advantage of NAFTA.
"Typically, the Mexican suppliers are technically proficient with good equipment, but from my survey of many of their firms, they are not reliable suppliers in quality and delivery. That said, U.S. firms [that operate in Mexico] compensate with volume and hope that it all works out.
"Asian-owned firms (read that as Japanese-owned firms) typically do not conduct much business with non-Japanese-owned firms in the U.S. This policy has an impact. These companies also are quite careful to ensure that the items they manufacture in the U.S. contain the required minimum U.S. content.
"This leads back to the question that the Department of Commerce dances around—free trade or a lack thereof. This is an old issue that Republicans and Democrats both ignore. They talk about the strength of small businesses but do little to curb the export of work out of the U.S. The argument remains that NAFTA keeps consumer goods cheaper, but in the long haul it causes significant social cost with unemployment and crime in the former industrial cities in the U.S."
In written testimony submitted April 14 on behalf of the China Currency Coalition (CCC) to the House Ways and Means Committee, John Nolan, vice president and manager of sales and marketing for Steel Dynamics Inc. (SDI), stated that the single greatest commercial disadvantage that the U.S. faces is China's manipulation of its currency and that the situation is urgent. Nolan said that the undervaluation of the yuan acts both as a subsidy for Chinese exports to the U.S. and third countries and as a hidden duty on U.S. products that would be imported into China. He voiced strong support for two pieces of legislation recently introduced that rightfully identify exchange-rate issues as international trade issues and China's undervaluation of the yuan by about 40 percent as inconsistent with its obligations as a member of the World Trade Organization (WTO).
Jarvis cited foreign currency issues and unfair trade practices, along with what he perceives to be Washington's total lack of interest in these problems, as problems even greater than steel prices and health care costs—problems that ultimately will cause the greatest damage to U.S. manufacturing.
Some subscribers were hard-pressed to select a predominant concern. They rightfully felt that several or all of the concerns listed combine to create serious problems for their businesses.
Dan B. said, "All the individual problems cited are bigproblems for manufacturers/fabricators. When they are happening at once, it can be crippling. One more problem is profit margin tightening and OEM's squeezing profitability out of their suppliers. All the above are the causes of companies failing."
Mike B. said, "All of the above, and it's our own fault. We re-elect the #$#%$$$!:???s."
All the issues are major concerns, and none are going away soon. However, some subscribers not only elaborated on the issues, they shared their ideas about what can be done to make things better.
Phipps said, "The bottom line is that several things should occur [to improve conditions]:
Industries and labor must partner to keep U.S. industry in the U.S. and to ensure that we have the trained work force to support it. Ongoing plant modernization must support this effort.
"The government must stop exporting U.S. work through NAFTA and USAID programs. It should give strong incentives to keep firms in the U.S. and provide strong financial incentives for equipment write-off. It also must provide realistic industrial training programs. We know how to do this.
"In general, the legislative and executive branches need to stop and look at the state of U.S. industry, the implications of what is transpiring, and what our kids will have to deal with in the future. This is a situation that makes the Social Security mess look like a nonevent. It remains an issue that the federal government is afraid to deal with."
Others suggested that Washington remove steel tariffs, deal with unfair currency policies, and provide national health care.
Not willing to bank on the government taking these steps in a timely manner, Withrow said, "The challenge isn't to reform Washington—the mountain won't move in our lifetime—but for the U.S. small-business person to tighten up his or her belt and go face the world. Be creative. Be aggressive. Be determined. Be energetic. Believe and prove to all your prospects that your products and services are world-class, and that you are the most qualified for the business. That approach works."