Can Trump make U.S. industry great again?

Source: American Method bumper stickers.

Donald Trump in his campaign promised to reverse the decline of American manufacturing.

Can he do it?  I’m willing to be pleasantly surprised, but I don’t think so.

President-elect Trump’s proposed economic policies are the same as what most Republicans and many Democrats have been advocating for 30 years or more—lower taxes, less regulation, fewer public services.

None of these things has stopped the increase in U.S. trade deficits or the increase in economic insecurity of American workers.

Trump did speak against the Trans-Pacific Partnership agreement, promised to renegotiate other trade agreements and threatened to impose punishing tariffs on China and Mexico in retaliation for their unfair trade policies.

I myself am in favor of rejecting the TPP and renegotiating trade treaties.  This would be a step forward.  But it would take more than this to rebuild the hollowed-out U.S. manufacturing economy.

China, Japan, South Korea and most nations with flourishing industrial economies use trade policy as a means of strengthening their economies.

Their leaders, like Alexander Hamilton in the early days of the United States, seek to build up their nations’ “infant industries” under those industries are strong enough to stand on their own feet.

When foreign companies seek to sell these nations their products, their governments demand that the foreign companies not only set up factories in their countries, but that they employ native workers and transfer their industrial know-how to the host countries.  The USA does nothing like this.

Behemoth machines laying railroad track

These Plasser & Theurer machines are awesome.  It is even more awesome to think that the U.S. transcontinental railroads were all laid by laborers with hand tools, without such machines as these.

We owe a lot to those old-time railroad laborers, like John Henry in the song.  But we also owe a lot to the inventors and industrialists who made it possible to do the work without back-breaking labor.  Notice, though, that there are workers all around the track-laying machine.  The machines don’t run themselves.  Human beings are not obsolete.

‘Assembled in the USA,’ but made in China

Walmart is selling TV sets with the label, “Assembled in the USA,” but the Association for American Manufacturing has complained to the Federal Trade Commission that the TV sets are actually made in China.

FTC rules say that a product can’t be labeled as assembled in the USA unless the principal assembly takes part in the USA, and the assembly work is substantial.  Walmart’s supplier, Element Electronics, doesn’t do enough assembly to qualify, the complaint says.

One reason American manufacturers have shifted production overseas is to meet Walmart’s demand for low prices.  Walmart is the USA’s largest importer.  That’s something for American Christman shoppers to think about.

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How Walmart Destroyed U.S. Manufacturing by Molly McGrath and Brad Markell for the Walmart 1 Percent.

Walmart Workers Ramp Up Protests for Black Friday by Diane Krauthamer for Labor Notes.

Big Brother and the ‘Internet of things’

The ‘Internet of things’ is the next big thing in technology.  Supposedly you will have combinations of sensors, RFID tags and Internet links that will be as much a part of you as your clothes, and will allow you  to control everything in your life, from your thermostat to your garage door.

But this is not just a new technology for people to control things.  It is a new technology for people to control other people as if they were things.

“The next wave is wearable technology, like Google Glass, smart watches, and smart vests,”  [Jason] Prater of Plex systems explained.

The advantage of these devices is that they “will allow you to continue using your hands without having to input or look for data.”

The data will be sent to the factory’s computer where every movement and drop of sweat will be recorded and analyzed.

In Gartner [Inc.]’s words: monitoring, sensing and remote control … …

“Today, decisions are made instantaneously,” Prater said. “We can’t wait to hear about things after the fact.”

And then the industry insider too had an intriguing forecast: “Turning people into essentially walking sensors is going to be the future.”

via Wolf Street.

“Monitoring, sensing and remote control.”  Hmm.

Engineers will be able to constantly monitor the air temperature, humidity, and working conditions of a factory process, and track employee motions for ergonomics research and safety concerns.

New Internet-based technologies will allow all the data to be managed automatically, so that factory tooling and equipment can be adjusted without human intervention, Jason Prater … said … at the 2014 Management Briefing Seminars.

via Automotive News.

“Track employee motions.”  Hmm.

What the new technology will mean for factory workers is this: Managers will track what every line worker is doing every minute of the day, and make sure that (1) they never let up and (2) they always do things in the “one best way” as outlined in Frederick W. Taylor’s system of Scientific Management.

The key idea of Scientific Management is for industrial engineers to design an optimum way to perform any repetitive task, to teach factory workers to do it that way and to make sure they conform.

This is dehumanizing, but I think it is a bad idea even from the standpoint of economic efficiency—that is, unless you think economic efficiency is the same thing as managerial convenience.

The “one best way” system does not allow workers to use their intelligence and experience to adapt to variability of circumstancs.

And, of course, if you decide to treat employees as if they were machines, there is no reason not to decide to replace them with actual machines.

Telephone operators, data processors and customer service representatives know what it is like to work every minute of the day under surveillance, and to be punished for any slippage from the schedule or deviation from the script.  The new technology would bring surveillance and control to a new level.

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Goal of Becoming ‘Internet of Things’: Monitoring, Sensing, Remote Control – Factory Workers First, You Next by Wolf Richter on Wolf Street. Hat tip to Naked Capitalism.

The necessity of manufacturing

Vaclav Simil, professor emeritus of environment and geography at the University of Manitoba, is said to be Bill Gates’ favorite author.  Simil was recently interviewed by Wired, and I was interested in his remarks about manufacturing.

Let’s talk about manufacturing. You say a country that stops doing mass manufacturing falls apart. Why?

Vaclav Simil

In every society, manufacturing builds the lower middle class.  If you give up manufacturing, you end up with haves and have-nots and you get social polarization.  The whole lower middle class sinks.

You also say that manufacturing is crucial to innovation.

Most innovation is not done by research institutes and national laboratories.  It comes from manufacturing—from companies that want to extend their product reach, improve their costs, increase their returns.  What’s very important is in-house research.  Innovation usually arises from somebody taking a product already in production and making it better: better glass, better aluminum, a better chip. Innovation always starts with a product.

Look at LCD screens.  Most of the advances are coming from big industrial conglomerates in Korea like Samsung or LG.  The only good thing in the US is Gorilla Glass, because it’s Corning, and Corning spends $700 million a year on research.

American companies do still innovate, though. They just outsource the manufacturing. What’s wrong with that?

Look at the crown jewel of Boeing now, the 787 Dreamliner.  The plane had so many problems—it was like three years late.  And why?  Because large parts of it were subcontracted around the world.  The 787 is not a plane made in the USA; it’s a plane assembled in the USA.  They subcontracted composite materials to Italians and batteries to the Japanese, and the batteries started to burn in-flight.  The quality control is not there.

Can IT [information technology] jobs replace the lost manufacturing jobs?

No, of course not.  These are totally fungible jobs.  You could hire people in Russia or Malaysia—and that’s what companies are doing.

Restoring manufacturing would mean training Americans again to build things.

Only two countries have done this well: Germany and Switzerland.  They’ve both maintained strong manufacturing sectors and they share a key thing: Kids go into apprentice programs at age 14 or 15.  You spend a few years, depending on the skill, and you can make BMWs.  And because you started young and learned from the older people, your products can’t be matched in quality.  This is where it all starts.

You claim Apple could assemble the iPhone in the US and still make a huge profit.

It’s no secret!  Apple has tremendous profit margins.  They could easily do everything at home.  The iPhone isn’t manufactured in China—it’s assembled in China from parts made in the US, Germany, Japan, Malaysia, South Korea, and so on.  The cost there isn’t labor.  But laborers must be sufficiently dedicated and skilled to sit on their ass for eight hours and solder little pieces together so they fit perfectly.

But Apple is supposed to be a giant innovator.

Apple!  Boy, what a story.  No taxes paid, everything made abroad—yet everyone worships them.  This new iPhone, there’s nothing new in it.  Just a golden color.  What the hell, right?  When people start playing with color, you know they’re played out.

Click on This Is the Man Bill Gates Thinks You Absolutely Should Be Reading for the Vaclav Smil’s full interview in Wired Science.

Pay vs. productivity growth around the world

Double click to enlarge.

Click to enlarge.

The gap between growth of workers’ productivity and workers’ wages exists in a number of countries, but the gap is much wider in the United States than in other advanced industrial countries.

I took the second chart from an on-line article by an analyst who thinks this is a good thing, not a bad thing.  This analyst thinks it means that U.S. manufacturing is becoming more competitive internationally.

The failure of wages to keep up with productivity could be a good thing if it meant that the profits of U.S. industry were being plowed back into modernizing factories and infrastructure, expanding industrial research and creating new industries.  Do you see any sign this is happening?  Or is this just income being redistributed upward?

Click on US Manufacturing Restores Competitive Vigor for the source of the second chart and an optimistic view by Joseph G. Carson on the AllianceBernstein Blog on Investing.

Click on Signs of Factory Revival Hard to Spot for a skeptical view in the Wall Street Journal.

The closest thing to Star Trek’s replicator

Click on The third industrial revolution for the introduction to a series of articles in The Economist about on how 3-D printing and other advanced manufacturing techniques will level the playing field between high-wage and low-wage countries, and large and small manufacturers.

Winning the race to the bottom

Low wages in states such as Mississippi, Alabama and South Carolina, and rising wages and worker unrest in China, may cancel out the cost advantage of locating factories in China, according to the Boston Consulting Group, a management consultant firm.

In short, the United States is competing by driving down the earnings of American workers rather than on the basis of superior inventiveness, productivity and management.

Here is the situation, as reported by Labor Notes:

Wages for China’s factory workers certainly aren’t going to rise to U.S. levels soon.  BCG estimates they will be 17 percent of the projected U.S. manufacturing average—$26 an hour for wages and benefits—by 2015.

But because American workers have higher productivity, and since rising fuel prices are making it even more expensive to ship goods half way around the world, costs in the two countries are converging fast. …

BCG bluntly praises Mississippi’s “flexible unions/workers, minimal wage growth, and high worker productivity,” estimating that in four years, workers in China’s fast-growing Yangtze River Delta will cost only 31 percent less than Mississippi workers.

That’s before you figure in shipping, duties, and possible quality issues. Add it all up, says BCG, and “China will no longer be the default low-cost manufacturing location.”

Labor costs typically are only 10 to 15 percent of the total cost of a manufactured product, so a small wage differential doesn’t make a big difference.

Volkswagen’s transparent factory

Hat tip to Bill Elwell

China as number one

China, which has overtaken Japan as the world’s second-largest economy and Germany as the world’s largest exporter, is poised to overtake the United States as the world’s largest manufacturer, according to the Financial Times of London.

China has been a manufacturing and exporting powerhouse throughout most of its history, going back to ancient times when the Romans bought Chinese silks transported over the central Asian silk road.  The Chinese lost the preeminence only after the Industrial Revolution in England and, at that, it took the Opium Wars for the British to obtain a favorable balance of trade.

So, as the FT points out, the rise of China shouldn’t be surprising.  It is a giant both in area and population.  It has the resources to create a high-tech sector the size of Germany’s while maintaining a low-wage sector the size of India’s.

China’s progress could be a good thing for the United States, if we ourselves were not falling behind. We have more to gain from the prosperous China of today than the starving China of the 1950s and 1960s.  China could be as a good customer for our companies as it is for German and Japanese companies.

China has a lot of problems, which may cause its economy to falter or crash. I would not wish to live under the autocratic Chinese government. But the Chinese leaders get one important thing right.  They understand that the key to national power is a productive economy, and their priority is jobs, jobs, jobs.