According to this Aero-News.Net piece, Sikorsky’s Chinese partner has just produced its first S-76 airframe. This is one of the most sophisticated American-designed products, a helicopter that costs close to $12 million and faces little competition due to engineering and regulatory barriers. For the past 30 years it has been produced exclusively in the U.S. The Chinese announcement comes on the heels of Sikorsky’s major investments in Poland, where factories are producing Blackhawk helicopters for the U.S. Army (more).
I’m wondering whether Sikorsky’s offshore expansion should make us think a little harder about what it will take to restore our manufacturing economy. Rust Belt states have millions of surplus workers. A Sikorsky helicopter faces less competition than almost anything else that we make and labor costs are a relatively small part of its retail price. Sikorsky’s manufacturing operations are subject to FAA regulation, which is easier to deal with when nobody has to get on a plane to Asia or Europe.
If Sikorsky does not want to set up shop in Michigan or Indiana, or expand its existing operations in Connecticut and Florida, why would we expect any other manufacturer to do so?
An alternative statement of the same facts would start with the observation that an American is unemployed when no company believes that, in the current regulatory and tax environment, it is possible to hire that person and make a profit. The American will become employed when he or she gets more education and skills, when the regulations and tax rates change, or when the global economy booms so much that every qualified worker in a foreign country has already been hired. Our government is not doing anything significant with education. Our government is making the regulatory and tax environment harsher for business. Thus we can infer that the government is counting on a global economic boom and an exhaustion of the supply of workers in other countries, which effectively means that whether or not the U.S. employment situation improves is primarily controlled by foreigners.
[A second example is EMC choosing to invest $1.5B in India rather than near its headquarters in Massachusetts (press release).]
Maybe the U.S. should at least revisit it’s unemployment payment system.
There are many folks in my area who ride the unemployment train for at least a full year, drawing a paycheck for essentially doing nothing other than indicating they have contacted several companies about the possibility of a job every so often.
I have had more than one person contact me seeking a job (I own three small, real estate-related companies) but before they asked about a job they’d have someone else call me beforehand to be certain that I wasn’t hiring! Once assured that I had no jobs available, they then used my companies on their “I checked on a job” list. I was asked by one individual if he could hand out my companies names to his laid-off friends so that they, too, could use me as a contact. In short, they didn’t want to be hired/find a job when they could do nothing for 52 weeks and live off of their unemployment checks.
Could the U.S. limit out of work payments to possibly four to six months and use the resulting savings to either offer job skill training to the unemployed or possibly give more tax breaks to small businesses who offer health insurance?
Your statement is wrong in exactly wrong in one respect. You say ” it is possible to hire that person and make a profit” when the exact statement should be ” it is possible to hire that person and make the greatest profit”.
Small change in the statement, big change in the implications.
Otherwise we are pretty much in complete agreement.
Aren’t there political aspects to this too? Probably the Chinese demand some kind of factory in their country before Sikorsky can sell their helicopters there.
seconding Preston’s comment, bigtime. The relentless drive of our corporate class is not to ‘make a profit’ — it’s to ‘make more profit than we did last quarter.’ Because for the average manager, it doesn’t matter how well the last guy running the ship did, it’s all about what he can do to make it 1% better… whether its to make himself look good (or, shall we say, ‘useful in any way’) within the company, or to boost the short-run price of stock (since that’s where most of his compensation is).
a significant portion of offshoring was done by firms in ‘do or die’ mode, but a lot of it was just profit maximization. That’s all good and fine for one individual firm to do. — according to economic theory, at least. But when an entire sector of the economy does it and collapses our manufacturing sector, well it’s pretty astounding that we were so blinded by free-market dogma as to let it happen.
Preston, Lee: In a world drowning in capital (i.e., our world), nearly every profitable business opportunity is very likely being exploited. As long as the return on investment exceeds the cost of capital (currently very low), anyone with a profit motive should be happy to start up or expand. It would be nice if every investment paid off as well as Google or Dunkin Donuts in China, but the existence of such opportunities does not preclude less exciting investments from being made.
Matt: I’m not sure what the political aspects might be. I am pretty sure that the U.S. government does not require Polish content in their weapons. The Chinese are happy to buy fully-assembled luxury cars from Japan and Germany or wherever else that a precision product can be made most efficiently. The executive transport helicopter market is not as competitive as the Accord/Camry/Hyundai market. A Chinese company that needs something with the features and capabilities of a Sikorsky S-76 will not find an alternative from another vendor.
Very interesting post, as usual. My first thought was that of Preston’s, but that’s already been addressed.
Phil, you mention only the regulatory and tax environments as factors that influence whether an employer chooses to expand operations in the U.S. or abroad. But it seems that other factors can have a significant impact, such as cost of land/construction/utilities/maintenance, proximity to raw materials used in factory production, cost of living (directly reflected in required wages), and probably a host of others that I’m missing. I agree that the government is at least partially responsible for the decline of the manufacturing sector in this country, but it’s not the only culprit.
An interesting thought experiment came to mind as a result of reading this. Let’s say wages were the deciding factor on whether or not to build a factory in Michigan or in China, and it turns out (hypothetically) that the average Chinese factory worker makes 20% of a similar laborer in the U.S. What would happen if Sikorsky were to build a factory in Michigan and create non-unionized jobs that pay 40% of the typical U.S. pay for that type of work (I added 20% there to factor in the overhead of operating abroad)? It would probably be a PR disaster, but considering the fact that the jobs otherwise simply wouldn’t exist, maybe people would apply and it could actually be a net positive for the country. Thoughts?
Naseer: You make a good point regarding infrastructure and raw materials. Almost all of those factors are in favor of the U.S. and doubly so for a company like Sikorsky. The raw materials that we stole from the Indians and the infrastructure that was built up through the thrift and hard work of our predecessors are probably what has kept the U.S. economy from crashing a lot harder.
Regarding your idea of setting up a non-union factory in Michigan… An aircraft plant involves a lot of expensive fixed costs, including FAA production certificate (specific to the particular plant and without which it is not legal to manufacture airplanes). If the Michigan non-union workers decided to unionize, Sikorsky would be required by U.S. and state laws to recognize the union. If the union were to strike, the company would have to stop using the factory. Indeed, the rest of Sikorsky in the U.S. is unionized by the Teamsters. http://www.nytimes.com/2009/02/16/business/16teamster.html reports that they just recently had to pay each worker $5000 as a contract ratification bonus plus an 18.5 percent pay raise. Most of these costs will be passed on to the U.S. taxpayer since about 75 percent of Sikorsky’s helicopters are military and these tend to be far more expensive than civil helicopters (you might ask who in the U.S. can afford to buy a $12 million civilian helicopter and for the answer you can look in the mirror… medevac operations that receive your tax dollars through Medicare are the remaining strong customers).
The Teamsters struck Sikorsky in 2006 (see http://www.foxnews.com/story/0,2933,190246,00.html ), shutting down production of critical items needed by U.S. soldiers in Iraq and Afghanistan. (During World War II, FDR sent in the Army to suppress strikes by workers in arms factories because the public was so angered at the idea of their sons being killed for lack of equipment because a civilian worker wanted a higher wage.)
Phil,
There have been many examples of foreign countries demanding local production lines for aerospace products, even when they could have been built in the US with reduced contract costs to the customer. Most current F-16 export business follows this formula, JSF will too, Korea’s T-50, Airbus A318-A321 in China, F-15 in Japan… The customer states want technology transfer and high-end local employment, and are often willing to subsidize the cost of procurement to achieve those goals.
As for Preston’s comment above, I think you dismiss it too easily. I was laid off by an aerospace firm after a merger with a company that was, IMHO, focused solely on increasing stock price. This company is forcing profitable business lines they now own to wither and die because these lines do not offer sufficient growth potential. This despite having a virtual monopoly in the particular business niche that I was designing for.
I see this issue as analogous to a practice I just learned about (but previously thought likely) in the credit card industry:
http://rortybomb.wordpress.com/2009/12/01/jackie-ramos-and-the-issue-of-fix-pay/
It’s no longer good enough to simply make a reasonable profit; all business operations must be optimized for maximum revenue, regardless of the implications /”morality”.
sean
Sean: Let’s put some numbers on your theory. Suppose that all existing businesses refuse to do anything that will yield less than a 20 percent return on investment (ROI), representing “maximum revenue” and possibly a lack of morality. That means that every investment opportunity here in the U.S. yielding a 19 percent risk-adjusted ROI will not be exploited by anyone. Joe Average has some money in a savings account, currently earning about 1 percent annual interest (and subject to some risk, if his bank fails). My theory is that, upon recognizing this 19 percent opportunity, Joe would move the money from the savings account into the business opportunity. My theory requires only that Joe prefers having more money to having less money. Your theory, however, would have Joe, upon turning into a business manager, refusing the opportunity because it does not yield the “maximum revenue” (20 percent ROI). He will go home and be content with his 1 percent ROI because 19 percent wasn’t enough.
Phil:
Not quite what I was trying to get at… Rather, for a given company already operating in a given business, said company will make decisions that weigh heavily (possibly entirely) in the direction of increased stated revenue ad the expense of other relevant business concerns. And that this is largely a balance sheet manipulation designed to impress analysts and stockholders during the quarterly conference call.
For example, a business manager can cut a line item like payroll through layoffs, show the cost as a “one time” restructuring charge, and shore up his bottom line profit number by reporting per-share revenue exclusive of one time charges. A relatively easy way to inflate profitability and keep the stock price high. But it might not be in the best interest of the company on a longer term basis, given the loss of talent, increase in individual workload (along with resultant quality lapses), and decrease in morale amongst others.
In the instance I linked to, there was evidence that credit card companies are abusing their less-well-off customers by continuing to offer them high-risk credit in an effort to drown them in fees and exorbitant (30%) interest rates. This as opposed to the “responsible” lending behavior of cutting off credit to a customer in trouble and refinancing their debt into a manageable mid-term installment loan with a reasonable (~6%) interest rate. This is done to maximize revenue from this customer in the short term, even if the practice destroys their financial standing and ability to complete the terms of the credit in good standing. If this practice expands to a significant portion of their customer base, there will likely be a negative reaction to their business practices. It will also likely hasten the development of regulation designed to control such behavior. But since it leads to profit now, the practice is encouraged.
As for my personal experience, I engineered parts critical to the attitude control of medium and large sized satellites. My company had an exclusive supplier relationship with the aerospace prime that developed these systems for nearly all domestic satellite programs. A decade ago the incumbent supplier lost (and we eventually won) the business after they were acquired, when their new parent stopped supporting the line even though it was demonstrably (though modestly) profitable. Now 10 years later, the parent company that bought my employer is looking to do the same thing.
The conventional wisdom is that government over-regulation of business and unionized overpaid American workers have killed our manufacturing sector. This belief is wrong on both counts.
Government does not control or oppress business in America; the reverse is true. Trans-national corporate capital is in effective control of America’s government. Through corrupt campaign financing, lobbying, and public-interest/”astroturfing,” corporatists have removed restrictions on nationality of ownership and the international flow of capital. These same interests have now institutionalized the insanity of supply-side economics and continual tax cuts, heavily favoring those in the higher income percentiles, and instead of being used to provide jobs for Americans, this capital was invested overseas to increase ROI, without regard for the costs to American workers.
American workers need higher pay because the costs of living in America are higher than in overseas countries, and because Americans enjoy a higher standard of living. This is what makes America, America. Do you want to live in a third world country? Then move to one, don’t turn my Country into one. Americans need higher wages because consumption is what makes possible a production-consumption society. Even uber-capitalist Henry Ford realized this, and paid his workers a scale that would allow them to buy his products. Relative to the auto industry, unionized workers did not make the stupid marketing and design decisions and suffer the corporate complacency and addiction to the availability of cheap oil that has gutted this sector. The blame for those things must be laid on corporate management. And union workers throughout American industry have had nothing to do with the disastrous “free trade” policies that have cost millions of Americans their jobs.
The de-industrialization of America over the past thirty years was not an accident, nor was it inevitable. It was a deliberate policy orchestrated by corporate capital and enacted through the American government they control.
I’m running for Congress because I stand for reversing this process. That can be done by reversing the disastrous trade, economic, industrial, diplomatic, and energy policies that have devastated the American economy and savaged our middle class and working people. Please visit my website, http://www.holbertforcongress.com, to learn about my campaign. Thanks.
Phil,
I just read something in Fortune that reminded me of this blog post. I’d be curious to see what you think about it in light of what you wrote originally.
http://money.cnn.com/2010/05/06/news/international/china_america.fortune/
From the article:
“The gap between manufacturing costs in the U.S. and China is shrinking,” explains John Ling, a naturalized American from China who runs the South Carolina Department of Commerce’s business recruitment office in Shanghai. Ling recruited Yuncheng to Spartanburg, and others too: Chinese companies have invested $280 million and created more than 1,200 jobs in South Carolina alone.
It looks like we are correcting some of the problems that you cite in your post, and making doing business in America a more attractive proposition. Creating subsidies for foreign companies isn’t as good as removing the major obstacles faced by all business owners here, but it’s a start. We’re not out of the woods yet, but this seems to be a positive indicator.
Nasser: Thanks for the link. The Chinese are now among the world’s greatest manufacturing nations so it doesn’t surprise me that in some cases they’d want to set up plants close to customers. I don’t think that this is evidence that Americans have improved. It might only be evidence that the smaller local suppliers have all gone bankrupt, leaving gaps in the market for foreign companies to exploit.
One factor cited in the article was cheap American land. That’s not something we can take credit for. Land is cheap here either because we stole a lot of it from the Indians or because we have melted down a local economy (e.g., Detroit).
The article cites 1200 jobs created, each one subsidized by U.S. taxpayers, and that’s nice but it doesn’t reverse a trend that has left 15 million Americans unemployed.