The Perfect Economic Storm and The 100-Year Flood in Manufacturing—Part 2

July 24, 2003
By: David Goodreau

Editor's note: This article discusses the final three of six factors contributing to the current state of manufacturing — technology investment, the elimination of industrial arts programs, and the lack of industry leadership — with a focus on California manufacturing. Part I, which appeared in the July 10 issue of, discussed global competition, high business costs, and supply chain management and consolidation.

The manufacturing industry crisis, which continues unabated, 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.

As noted in Part I, six major factors, when considered collectively, have devastated the California manufacturing industry and have caused fundamental changes in the subcontractor base in the state. Factors four through six are:

4. Technology Investment. The time and cost required to implement mechanical, process, electronic, or software upgrades have thwarted manufacturers' ability to modernize. The essential need to upgrade and to change continually is contrary to the traditional cultural characteristics of small and midsized manufacturers.

Modernizing programs, such as implementing an ERP system, can take over a year and hundreds of hours to complete. Essential programs, such as lean manufacturing or ISO 9000, take so long to implement that most firms that have not begun the process already will not be able to complete the technical/cultural upgrades soon enough to benefit from the investment.

Technology has a tremendous impact on a company's viability, as evidenced by the following facts:

  • Manufacturing has become a "capital game" in which $250,000 to $750,000 worth of equipment is able to perform functions so effectively that one machine can outperform 10 people.
  • Today's computerized machine tools, when combined with state-of-the art cutting tools, are so sophisticated and accurate that the combination is rendering many traditional vendors and their processes obsolete. General grinding, jig boring, jig grinding, and honing operations are being eliminated, because those operations can be streamlined into existing (in-house) operations.
  • A 2002 report by San Francisco's Federal Reserve Bank recognized the link between the high capital investment per worker and the high productivity of the region. Although California ranks sixth in the nation in productivity per worker, the report stated that the continuation of this trend hinges largely on the state's ability to attract the brightest workers from other states or abroad, as well as on educating the state's low-skilled immigrants and their children.

5. Systemic Elimination of Industrial Arts Programs. Historically, general high school programs included introductions to the industrial arts that provide the feeder system for manufacturing employment. Today a successful school is measured by test scores, not by the students' abilities to enter and succeed in the work force. As an example, California's high schools have less than 25 machining programs. Clearly, we have lost our link to the skilled talent necessary to keep up with our foreign and domestic competitors. Without young, mechanically astute workers flowing into the trades, our manufacturing base does not have the ability to implement the rapid change in technology necessary to compete.

Furthermore, the smaller manufacturers are left with the bottom percentage of job applicants who do not have the educational background (math and science skills) necessary to add value to the ever-increasing efficiencies of the modern manufacturing workplace. Some frightening facts illustrate the seriousness of the skilled labor shortage exacerbated by the demise of vocational programs:

  • Eighty percent of manufacturers reported a severe shortage of qualified job candidates—two-thirds are in the production area—despite the recession in manufacturing and the overall economic downturn, according to a nationwide survey released by the National Association of Manufacturers (NAM).
  • The California Industrial Technical Educators Association estimated that 60 percent of credentialed industrial technical educators would retire over the next three years.
  • Fewer than 10 percent of those entering high school will have obtained a four-year degree a decade later. One-third of those freshmen class members won't graduate from high school.

The following quote regarding the state of education is from the May 24, 2002, Sacramento Beeeditorial: "I am a counselor in an inner-city high school of about 2,800 students. I continue to marvel at the ignorance of our policy-makers. They are dismantling the general high schools and trying to create a minor league for the universities."

  • At the same time that the educational system is failing our youth, producing high dropout rates and low test scores in core academic areas, manufacturing customers are expecting near-perfect performance from suppliers. Acceptable rates of on-time delivery and quality range from 95 to 99 percent of perfection. Current and entry-level workers with poor academic skills and work habits struggle to function at the high levels of efficiency necessary to meet customer expectations.
  • Membership in technical educational associations is falling, and teachers' unions are philosophically opposed to improving industrial technical education programs.

6. Lack of Industry Leadership. The factors contributing to the Perfect Storm have intensified because of a lack of cohesive leadership from the manufacturing stakeholders. The manufacturers' entrepreneurial and independent natures have been both strengths and weaknesses in determining the future of manufacturing. Their strength lies in the determined spirit to perform better, faster, and cheaper than any other competitor, qualities that have made our manufacturers the best in the world.

This strong independence and competitive mindset become a weakness when various factions of closely related industries form special-interest groups, which create separate yet interrelated agendas opposed to pro-manufacturing policies. These conflicting agendas alter the public perception of manufacturing and affect the public policy agenda as it applies to manufacturing.

The lack of cohesive, effective leadership is illustrated by the following:

  • Industry trade organizations have been losing membership consistently over the last 20 years.
  • Manufacturing unions have been decimated by foreign trade, plant relocations, and lost contracts. These unions have little clout within the policy arena when compared to service and professional unions.
  • Small manufacturers are disproportionally burdened by regulatory and human resource issues. They are fairly unsophisticated managerially and focus their attention on working intheir companies rather than ontheir companies. As a result, they do not see the value of networking, advocacy, and educational issues that provide long-term stability for their industries.
  • The majority of large manufacturers have moved their corporate headquarters out of California and have taken their government affairs staff with them. The remaining large manufacturers play a diminished role in public forums—the legislature, agencies, and local government—and many have evolved into corporate-centered players that do much of their talking through contributions rather than coalitions and associations.
  • Representation within various state and local policy forums is lacking because industry groups do not have the financial resources to compete with well-funded unions and professional organizations that mandate contributions from their membership. The void of manufacturing leadership in the vast number of public forums is directly related to the strength of the Perfect Storm and the casualties of this historic economic flood.

Without cohesive, effective leadership, none of the other five factors contributing to manufacturing's economic crisis can be resolved.

The Future

Considering these factors and trends, it is clear that the future is going to be quite different than the past. Small manufacturers that currently represent 98 percent of the California manufacturing base are going to face dramatic downsizing to compensate for the trends and their effects. The contracts the small manufacturers traditionally received are staying at midsized manufacturing firms that have the capital, personnel, and resources necessary to service the customer. The trickle-down work load is drying up as the marketplace consolidates and improves production efficiencies.

Every large storm alters the landscape and creates a new environment. Effective public policy that addresses the factors contributing to this Perfect Economic Storm and the 100-Year Flood in Manufacturing will play a significant role in determining how many firms will survive and thrive. In California, the business-regulatory climate will play a significant part in a company's decision to stay put or move to a greener, more manufacturing-friendly pasture.

David Goodreau

Contributing writer
Phone: 818-242-7658
David Goodreau is the chairman of the Small Manufacturers Association of California (SMAC), 1603 Don Carlos Ave., Glendale, CA 91208.