July 10, 2003
Editor's note: This article discusses three of six contributing factors to the current state of manufacturing—global competition, high business costs, and supply chain management and consolidation—with a focus on California manufacturing. Part II discusses technology investment, the elimination of industrial arts programs, and the lack of industry leadership.
The manufacturing industry is in one of the worst economic slumps in history. California alone lost 167,000 manufacturing jobs between December 2000 and September 2002. Depending on the industry sector or region, this downturn began as early as late 1999 and has no immediate end in sight. This is a unique economic environment that can be likened to The 100-Year Flood caused by The Perfect Storm in terms of its destructive potential.
Why The Perfect Storm? One tumultuous economic event never would have had such lasting or dramatic effect on California's diverse manufacturing economy. However, a confluence of economic factors has created an economic flood of historic proportion.
Six major factors, when considered collectively, have devastated the California manufacturing industry and have caused fundamental changes in the sub-contractor base in the state.
1. Global Competition. Manufactured components are the core of California's economic strength. Since lower prices drive the market, component manufacturing has slowly moved from California over the last 20 years, from domestic competitors, onward to Mexico's maquiladoras, and now to Asia. Today even Mexico is losing contracts to the low-cost Asian regions.
In today's electronic age, procurement, concurrent engineering, and next-day air make international trade an attractive option to cost-conscious buyers. Foreign competitors are culturally valued and heavily subsidized by their governments to encourage investment, research, development, and training. Every year these overseas firms gain additional expertise as U.S. corporations transfer intellectual properties and skills development to these overseas firms. Factors that illustrate the trend include:
Of course, China is the primary example. But manufacturers in countries with weak currencies, lack of labor laws, lack of environmental laws, low wages, government-subsidized raw materials, and little or no intellectual property protection also are a threat.
2. California's High Business Costs. Between 1989 and 1993, California lost almost 1,000 manufacturing plants to foreign and domestic regions. When those facilities left California's high-cost business environment, the contracts outsourced to small manufacturers soon followed, costing jobs and revenue. Today, manufacturers find themselves in a worse economic hole than the 1992 crisis, primarily because there is little or no political will to address the issues that are crippling California's manufacturers.
And relief may be slow in coming. California is the sixth largest economy in the world and the response time to implement policy reforms is slow. From political realization and pressure to economic relief can take three to four years.
Regional individuality (geographic, politics, leadership, and industry clusters) further complicates economic recovery. For example, the major urban areas of San Francisco, Oakland, San Jose, and Los Angeles County have lost 192,000 jobs between December 2000 and September. 2002, while developing regions, such as Sacramento, Riverside, San Bernardino, Fresno, Modesto, and Stockton County, have added 75,500 jobs.
The following points highlight the high-cost of doing business in California:
In addition, legal costs and insurance rates are other mitigating factors.
3. Supply Chain Management/Consolidation. Consolidation trends in the aerospace and defense industry are similar to those within the subcontract chain. Fifty-three major corporations have merged into four global giants. Using California SIC codes, aerospace firms in California dropped from 1,640 in 1997 to 984 in 2000, a 65 percent decrease. An article in last year's Aviation and Space Technology reported that the industry probably will lose a large percentage of its supplier base, which will never come back
The article contained comments from various industry CEOs:
As consolidation continues, it trickles down the supply chain, sucking up contracts that had traditionally flowed to the small firms. Unfortunately for these smaller firms, this is the marketplace at work, and it is creating new winners and new losers.
Similar to factory farms that have put so many family farmers out of business, these new consolidated firms are capable of efficiencies that the smaller firms can't match. The incentives for customers to continue this management track are clear:
Add to these factors the high cost of investing in technology to remain competitive, the shortage of skilled labor exacerbated by the elimination of industrial arts programs, and the lack of industry leadership—all factors to be discussed in Part II of this series—and you have almost insurmountable circumstances. Each factor must be addressed if manufacturing is to recover.