[BretLudwig]

Hutchinson on the murder of US manufacturing

"Martin Hutchinson treated his readers at Prudent Bear to a dose of blue
collar reality this morning, mourning the technological manufacturing
future that a generation of American politicians, financiers and
businessmen threw away for short-term gain.
GW

GEs announcement a week ago that it would accept offers for its
appliances business marked the death-knell of yet another US manufacturing
business, one among so many in US manufacturings long and seemingly
unstoppable downtrend since 1980. That decline may seem an inevitable
historical trend, and Wall Streets analysts would claim that the US
economy can prosper just fine without it. Yet impartial analysts of the
putrefying corpse of US manufacturing capability are forced into an
inescapable question: did it die of natural causes or was it murdered?

For the last 30 years, Wall Streets insouciant attitude appears to have
made sense. US manufacturing has slowly declined, as operations have moved
to lower-wage centers in the Third World. However the US economy as a
whole has continued to thrive, as financial services doubled its share of
Gross Domestic Product and grew to provide 40% of the earnings on the
Standard and Poors 500 share index. Prosperity was heavily skewed towards
the very rich, but the majority of Americans continued to enjoy a general,
if halting improvement in living standards.

The collapse of the financial services bubble has however called into
question three of Wall Streets most cherished beliefs about
manufacturing:

· First, Wall Street believes that financial services and other services
can take the place of manufacturing, and that the United States can remain
a prosperous economy thereby.
· Second, it believes that manufacturing tangible products is an
intrinsically low-skill and uninteresting operation, so that the US would
do much better to specialize in €œsymbol manipulation.€�
· Third, it believes that the decline in US manufacturing was and is
inevitable, so that decline would have happened whatever strategies
management had adopted, and whatever resources and attention it had
devoted to manufacturing activities.

The inevitability of manufacturings decline is in some ways the most
interesting question, which has not been addressed much elsewhere. Most
large-scale events of this nature appear inevitable in retrospect, yet if
examined in detail can be shown to have been triggered by a series of
decisions that could have gone the other way.

Management decision-making like most human activities is a slave to
fashion: whichever guru has captured the attention of business academics
and the business press at any given time is likely to have an inordinate
influence on management decisions. In the 1920s through the 1950s, the
production engineering of Frederick W. Taylor was fashionable, and the
United States built the first mass-production economy. In the 1960s,
MBA-credentialed top management was thought able to run anything, and so
both conglomeration and strategy consulting came into fashion. From the
early 1980s, it became received wisdom that all organizations could
usefully be €œdownsized€� and that the traditional corporate welfare
protection of employees was wasteful. All these theories had their
virtues; the reality however is that they cannot all be universally true
since they are largely mutually incompatible.

In the 1970s the new and very fashionable Boston Consulting Group
introduced the €œstrategy matrix€� under which businesses were divided
into stars, cows, dogs and question-marks, according to their growth
prospects and profitability. Stars, the businesses with the highest growth
prospects and profitability, were to be nurtured and given resources, dogs,
of low profitability and low growth were to be closed down and
question-marks, of high growth but low profitability, were to be given
modest resources to see whether they turned into stars or dogs. The whole
operation was to be paid for by milking the €œcows,€� those businesses
of low growth but high profitability. Cows, as their name suggests would
be denied capital investment, since such investment should not be wasted
on low-growth situations. Instead their cash flow would be milked to
provide capital investment for the stars and the more favored
question-marks.

There were several problems with this mechanistic, clever-clever approach
to business management. One was that the businesses typology could not
be identified accurately; which businesses were treated as €œstars€� was
more a matter of the business cycle and doubtless of office politics than
of the long term underlying reality. A second, even more fundamental
problem was this: cows that are milked and not fed quickly turn into dogs.
Businesses that are treated as not part of the companys glorious growing
future quickly wither on the vine, as new opportunities in those business
areas are missed. Their profitability starts to decline and quickly the
cash flow that was their corporate raison detre disappears.

When examined dispassionately in the light of posterity, it appears that
far too many of these €œcow€� businesses were manufacturing operations
which were milked for cash flow that was diverted into more fashionable
businesses in the service sector, particularly in finance. Westinghouse,
for example, one of the most important names in electric equipment until
1980, had split up and left manufacturing altogether by 2000. To be fair
Westinghouse management had a good excuse; one of their leading and most
successful businesses had been the construction of nuclear reactors, an
activity that disappeared in the 1980s owing to political cowardice in the
face of environmentalist harassment.

General Electric, however from 1981 to 2001 run by ultra-fashionable
€œNeutron Jack€� Welch, epitomized the failings of the era. It
under-invested in many of its manufacturing businesses, entered into a
blizzard of divestitures designed to boost its short term earnings, played
games with its pension accruals and built a gigantic financial services
empire of low quality businesses in which it could never be a leader. It
also ruthlessly eliminated its middle management and overpaid its top
management, winners in the corporate office political game. GE was a much
admired operation in Welchs later years; it is less so now, and if the
bloated global financial services business returns to a historically
normal size may finally be seen to have been a disaster.

GE Appliances, GEs home appliance business dating back to 1907, the
early years of electrification, was long dominant in the home appliance
field. GE Chairman Jeff Immelt has now put GE Appliances on the sale block
so that GE could focus on higher margin businesses. The business has
attracted interest from Chinas Haier Group, but is expected to be less
interesting to Koreas LG, because LG manufactures appliances of a
higher price and quality. A commoditized and fairly uninteresting
business, in other words, currently worth around $6.3-6.5 billion, little
more than 2% of GEs $290 billion market capital.

However if you look back even to 1994, a medium year that was already well
into GEs Welch-inspired transformation, appliances represented 10% of
GEs sales and 8% of operating profit. In other words, the business has
been steadily starved relative to GEs other businesses, and has turned
itself from a €œcow€� into a €œdog€�.

To see how this happened, think back to the 1950s. Electric appliances
were the major growth business of that decade, symbolizing the decades
new affluence. Forecasters confidently predicted that by 2000 robot
appliances would be in every household, removing the drudgery of housework
once and for all. As a youthful reader of Isaac Asimovs robot stories I
shared that confidence €“ after all the computerization necessary for
robot control systems, which had not existed in 1940, when Asimov wrote
the first of his €œI Robot€� short stories, was already revolutionizing
business management by the late 1950s.

Now its not just 2000 but 2008. So where the hell are the robots? GE
Appliances has no such offering; if you buy a GE vacuum cleaner you will
still have do all the work yourself. Can it be that the technological
optimism of the 1950s was misplaced, and that home robots will never
exist, or will be invented only in the far distant future? Youd
certainly think so from looking at GEs catalog of products.

However it turns out that GE is simply behind the curve. The iRobot
Corporation of Bedford Massachusetts, founded by keen Asimov readers from
MIT in 1990, manufactures fully robotized vacuum cleaners as well as some
pretty neat robotized mine-clearing equipment for the military. iRobots
standard model runs around $300, less in real terms than an ordinary vacuum
cleaner would have cost you in 1980. iRobots total sales are only $250
million, which GE would no doubt class as a rounding error, but dammit the
company doesnt have GEs brand name or distribution network.

Had GE had the sense and innovative skill to develop robot vacuum
cleaners, can anybody doubt that that product groups sales would today
be several billion dollars, with appropriately high margins? It is thus
clear that by starving GE Appliances of investment and, more important, of
research dollars, and devoting the companys efforts to financial
services, €œNeutron Jack€� and his cohorts have deprived the United
States of a major new business and deprived us overworked consumers of a
major labor-saving technology (unless we are lucky enough to find out
about iRobot or its few small-company competitors). GE has commoditized
its appliance business, forcing down prices by manufacturing in ever
cheaper-labor parts of the world. Instead it should have been enriching
that business, opening up new opportunities for products that could be
sold at higher prices and higher margins and provide more value to the
consumer.

The sad story of GE Appliances is a paradigm of what has gone wrong in the
US economy since 1980. No, manufacturing did not need to leave the United
States; US manufacturing was killed by a multitude of foolish
short-term-profit motivated decisions by inept and overpaid US management.
The other questions can also be answered. Manufacturing is not
intrinsically a low-skill and uninteresting operation, it involves skills
at the highest possible level and can readily employ high-wage workers €“
after all LGs workforce in South Korea are these days very far from
being subsistence-level Third World proletariat. Finally, the US cannot
survive through financial services and tech startups alone; it needs to
reinvest in manufacturing or it will find itself unable to support an
advanced-economy living standard for the mass of its population.

Yes, Virginia, you could have had both robots and the Internet. The 1950s
dream of an infinitely prosperous United States full of household robots
and other high-tech wonders was not a fantasy, it was there for the
taking. Only political and business incompetence prevented us from
achieving it. "

http://majorityrights.com/index.php/...manufacturing/



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