Discrete Talk - Manufacturing and Aerospace

Are We Focused on the Right Borders?

We worry about losing manufacturing jobs to China, India, or Mexico, but how about Arizona, Oregon, or Alabama? The Milken Institute published in June a report demonstrating that state policies make a difference―some states have been increasing their manufacturing base while others like California have been losing manufacturing jobs. We hear a lot about how the US needs to improve federal regulations and trade policies to be more competitive in manufacturing, but are we doing enough at the state level to incent growth in manufacturing? Can we learn from our neighboring states?

What can state government do?

The state government can help create a pro-manufacturing climate that will keep manufacturers in the state and help bring new ones in. This can be done through tools like:

• Tax credits to offset certain costs
• Improvements in infrastructure including transportation, communications, and utilities
• Help to create and attract a skilled workforce
• Access to credit and research funds
• Promotion of industries or products
• Convening of key stakeholders to increase cooperation and create economies of scale
• Alleviating the burden of bureaucratic complexity

Why should state government do something?

Research shows that for every job created in manufacturing, 2.5 jobs are created in other sectors. At the upper bounds, electronic computer manufacturing and aerospace have multiplier effect of 12-16 jobs. Yes, 15 other jobs are dependent on one job created in that industry. Losing manufacturing jobs not only adversely affects the direct industry but also many local supplier industries. Manufacturing is an industry that creates wealth for its workers and drives broad upward social mobility.

Some suggestions

1. Smart Regulation—Efficient, Stable

Streamline regulatory processes with the assistance of information technologies and targeted incentives that reward efficiency. More transparency and accountability should be built into the process by allowing citizens to evaluate their interactions with government agencies through Internet-based tools. Impose deadlines on government processes similar to the deadlines in the patent processes.

Provide stability in government programs that span multiple terms. Protect new business investors from sudden change in regulations.

2. Enhanced Incentives—Accessible, Accountable

The state can provide a single point of entry for businesses seeking information about incentives and a clear, easily navigable website.

Instead of penalizing businesses with taxes on investments the state should allow an accelerated asset depreciation schedule, provide a low-interest loan guarantee to help finance upgrades to new technologies, and offer an additional tax credit if the new equipment will result in lower carbon output.

The state could provide a publicly accessible website detailing who has received incentives, and it should implement provisions that will recoup lost tax revenue if firms fail to create a certain number of jobs or leave the state within a certain period of time.

3. A Public Awareness Campaign for Modern Manufacturing

The manufacturing field needs help with public image. Conduct an industry-led statewide public awareness campaign to highlight the attributes of modern manufacturing, its important role in the economy, its record of environmental stewardship, and the high-wage employment opportunities it provides.

4. Centers for Excellence—Education, Innovation, and Entrepreneurship

Create a network of education, training, research, and business incubation centers around the state to develop a qualified work force, to invent and commercialize advanced techniques, and to assist
manufacturing start-up businesses.

Subsidize the cost of training the underprivileged in low-employment regions. To encourage at-risk young people to work in manufacturing, they could receive a higher personal tax deduction for their first five years in manufacturing jobs. Manufacturers offering a hiring bonus to those who complete a training program should receive a tax credit equal to the bonus. Manufacturers could earn a tax credit for creating positions at or above the company’s median wage. Manufacturers could also receive a tax credit equal to the amount they paid for an employee’s education or training, and the amount would not be considered taxable income for the employee.

References

“Manufacturing 2.0 – A More Prosperous California”. Milken Institute, June 2009
http://www.milkeninstitute.org/

Bringing Back the Romance for Lean Six Sigma

This is a link to a blog entry I liked. Hope you like it too...

http://www.sixsigmaiq.com/article.cfm?externalid=829

Vicente Fox on the Importance of Open Markets for Global Collaboration

I was privileged last week to hear Vicente Fox, former President of Mexico, talking about the importance of open markets and trade agreements like NAFTA in today’s complex global trading economies. It was the highlight of AMR Research’s 2008 Supply Chain Summit and most of the people I talked with were very impressed with the speech.

I admit that it is easy to question trade agreements like NAFTA when we see so many U.S. manufacturing jobs moving overseas. But the arguments in favor of open trade are strong and need to be considered. I will try to share some of Vicente’s thoughts in this article and I urge that you also keep an open mind.  Even if we don’t agree with some of his message, we can respect that it comes from someone that has done a lot of research, collaborated with international leaders, and has a lot of international business experience. Before entering politics, Vicente Fox was a successful President for Coca-Cola Latin America.

I would also like to note that Vicente Fox is a very clear and charismatic speaker. He was able to engage us, make his points with humor, and keep us focused on topics that are usually full of boring political rhetoric. If you ever have a chance to listen to him, don’t miss it.

Paraphrasing some nuggets from the former President...

In the 70-80’s, nationalism and protectionism was the name of the game. Several dictatorships and corrupt governments made it hard to do business and make a profit. While other parts of the world were advancing, Latin America was falling behind.  We had to change and let go of the dictators. We needed new leaders with great vision.

Today we know that in Latin America, democracy and open markets work. We are finally returning to growth in the region. Capital per person is increasing. We are making a small dent on poverty numbers but we know this path works. We need to continue increasing our middle class.

The theme of this conference, Globalization Comes Home, is very important, because globalization is still not a fully accepted concept around the world. Mexico has one of the most open markets in the world with a large number of trade agreements. A lot of of the world’s exported products move through Mexico.

I am surprised that this US nation is moving back toward protectionism. We are also concerned about China, but building walls is not a long term vision. I don’t believe that thinking global translates to losing jobs.

Mexico, US and Canada are all losing jobs to China and we could benefit from working closer together. There are also many other stable countries in Latin America like Chile, Brazil, and even Colombia who has been trying to control problems with drug trafficking.

There are also currently a few countries like Venezuela that are causing worries in Latin America. It seems that we have not learned our lessons from the past. Fortunately globalization does not really enable Totalitarian governments to thrive in the global economy. Hugo Chavez withdrew from the G3 Trade Agreement between Colombia, Mexico and Venezuela. The current few dissident Latin American leaders opposing free markets have eroded the process, but it will come back. 

I am not just talking optimistically about democracy and open markets. We have sound figures that show us the results and point to what we have to do to move forward in the future. What we need the most is leadership and institutions that generate those leaders. So we are creating initiatives like Mexico’s Presidential Library to help educate the next generation of leaders for Latin America. We need to recover the time lost during the 20^th century in Latin America.

We hope this great US nation comes back to show its leadership in the area of globalization and open markets; a nation with great ideas and innovation like the Internet.

Not everything that shines is gold. The race to China might be overrated. A big advantage of doing business in Mexico for US companies is the benefit to logistics from the proximity. As an example, in the maquinadoras industry we can turn around raw materials into final product and have it back in the US in one day.  

Mexico also represents a huge local market for the United States. Mexico still has 33% poverty; we need to continue growing the middle class. But the 77% that consume represent a big buying market. Imports from the US to Mexico are bigger than for the rest of Latin America together. Mexico as a market is bigger than several European nations together. Around 70-75% of imports into Mexico are from the US.  

Q: Your book, “Revolution of Hope”, talks about a “Super NAFTA” can you elaborate?
A: We must study and learn from models like the Europe Union. We are learning in Latin America and making some progress. For example, it is not necessary to have a passport to move between Guatemala and El Salvador.  We should pay attention and learn from what is working over there.  

Q: How much can Chavez derail progress in Latin America?

A: We have not increased education levels enough and middle class enough in Latin America, so these leaders have been able to hold on to power. I don’t believe that 21^st century socialism is going anywhere. It is just a nostalgic concept and does not have a plan for future prosperity. There is no long term vision.

Education and democracy is the only way to prosper in the future. It gives people choices. Authoritarian governments will try to keep people ignorant so they don’t have choices. We learned the lesson in Mexico and we have been educating. Now 100% of schools have IT technology and a big percent of them are connected to the Internet. We expect the returns not only in numbers but also in the quality of the education.

I believe that we need to be able to handle more than one issue at a time. We cannot just focus on terrorism. We also need to address issues of trade, immigration, and manufacturing globalization. I have campaigned a lot, and when you campaign you make a lot of promises. Once you sit on the chair, you feel the weight on your shoulders and you ask yourself “Now what are you going to do Vicente?” After the elections, the same will happen here and we will need to more seriously address issues like immigration and the NAFTA trade agreement.

“Better tomorrow” is a great Mexican concept :) But some of these issues need attention now and we should act soon. We need to figure out soon how to turn issues like immigration into a plus for each country.

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More references on Vicente Fox:

http://www.elbalero.gob.mx/kids/government/html/gobierno/bio_foxkids.html

http://en.wikipedia.org/wiki/Vicente_Fox

Information on NAFTA:

http://www.fas.usda.gov/info/factsheets/NAFTA.asp

More on the G3 Trade Agreement:

http://en.wikipedia.org/wiki/G3_Free_Trade_Agreement

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Are we Doing Enough to Develop the Next Generation of Manufacturing Leaders?

My friend Tim Jemal's blog has a great post on California education cutbacks, "California Not So Golden" ( http://jemalpublicaffairs.com/?p=15 ) and it stroke a chord with me.

Other countries are investing in education and its paying off. Medical research, computer software, and manufacturing jobs are leaving the country and moving to these countries that are investing and providing incentives. Once the expertise moves to other places it will be very hard to get it back.

We all need to voice the need for more education budget. I would gladly pay more taxes for this. Instead I am having to donate money and work on fundraisers. Ratios of 30-35 students to one elementary teacher are not acceptable.

Please read Tim's blog entry.

Why is Manufacturing an Important Topic?

Fifty years ago, a third of U.S. employees worked in factories, making everything from clothing to cosmetics to cars. Today, a little more than one-tenth of the nation's workers are employed by manufacturing firms. Four-fifths are in services.

The decline in manufacturing jobs has been accelerating. Since 2000, more than 2 million factory jobs have been cut — about 10% of the sector's workforce. During the same period, the number of jobs outside manufacturing has risen close to 2%.

Many of the factory jobs are being cut as companies respond to a sharp rise in global competition. Unable to raise prices — and often forced to cut them — companies must find any way they can to reduce costs and hang onto profits.

Manufacturing jobs are increasingly being moved abroad as companies take advantage of lower labor costs and position themselves to sell products to a growing — and promising — market abroad.

Some economists say the change in manufacturing, albeit painful, is healthy for the sector and for the overall economy in the long run. I believe that manufacturing is needed to maintain a healthy GDP, trade balance and middle class.

Many U.S. “manufacturers” are focusing on innovation, research and development, and moving actual production abroad. However, not all U.S. manufacturers are following this path. Some are keeping production in the U.S., increasing productivity, and creating innovative business models to remain competitive. We want to highlight these success stories and inspire others to take note and realize that moving production abroad is not the only option.

If you are a manufacturing fan, I hope you will find the information on this blog interesting. I will share ideas, best practices and success stories from companies, teams and individuals that are leading the way to resurgence of a strong manufacturing sector in this country. I hope to recruit some more contributors and perhaps spark some interesting discussion.

Enjoy,
Conrad