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The Death of American Manufacturing

  

As you probably know by now, especially if you saw my post on May 1 about the Fortune 500, I have been closely tracking big American corporations for many years. Forty-seven to be exact.
 
This week we crossed a major milestone, as we witnessed the first bankruptcy of a company that was for many years our strongest, largest, and most powerful industrial enterprise: General Motors. In September 2008 that great company turned 100 years old; in June 2009 it financially collapsed. 
 
While GM will hopefully continue on in a new form, it will never be the same GM that I grew up with. It will never again be the largest company, and probably not even the largest auto company. It may end up being a division of another company, possibly even a foreign company, as is happening to Chrysler. What can we learn from this, and how bad is it?
 
I think the first thing to consider is that this is just one of a thousand signs that the industrial age has ended or is rapidly coming to an end. Not just the industrial age in America, but the industrial age for the whole globe. Generally considered to have begun in Europe around 1700 or so with textile mills, coal mines, the rise of steam power, and the like, the industrial age took us out of the age of agriculture and feudalism and was one of the most important eras in human history. It was a period of enormous change as we witnessed the inventions of railroads, electricity, movies, sound recording, automobiles, airplanes, telephones, radio, television, and all the culture impact that came with them. It was a period of dramatically rising personal incomes, particularly in Europe, the United States, Canada, Japan, Australia, and New Zealand, but even – to a lesser degree – in many other parts of the world like Brazil and Argentina.
 
But within 200 years of its beginning, by 1900, many nations had already begun to convert to the age of the service industries or the related “information age.” Trading states like the Netherlands and Hong Kong began to focus on buying and selling things rather than making things. “Tertiary” industries like education, government, healthcare, travel, communications, and recreation and entertainment gradually rose in importance all over the world.
 
The most vivid thing in my mind is the transition of the Fortune 500. When I first studied that list in 1963, it was dominated by steel and chemical companies and heavy manufacturing like machine tools and electrical goods. But as each year goes by, the most important names are increasingly in software, movies, search engines, hotels, cruise ships, hospitals, and a laundry list of other services.
 
We sometimes hear that service workers are lowly and the pay is not as good, but we forget that every construction worker, every nurse, every truck driver, every professor, every doctor, every lawyer, every President and Prime Minister is a service worker.   And, whether you like it or not, it is the way of the future. In fact, the way of the present.
 
Having grown up in a GM factory town, it was clear to me by the time I graduated from Madison Heights High School 40 years ago that GM was not the job provider of the future. It was also clear to me that assembly line jobs were neither challenging nor durable in the long run. Manufacturing jobs are a creation of man, not nature. They will in large part go away, just as they arrived a couple of centuries ago.
 
Of course all of us will need to learn new skills and broaden our horizons, find new ways to be of use to the world. That is one thing that has never changed.
 
This end of the industrial age is not only an American phenomenon – it’s a global thing. Today China is a massive industrial economy, but if they keep their eye on the future they will soon realize that such a strategy will not last. It’s not about cheap labor so much as it’s about automation. Today a steel plant that used to require 5,000 workers can produce just as much steel with 500 or less. Those jobs may require new skills and pay better, but fewer people are required. Fears about the decline of our industrial base are as justified, and as helpful, as were fears about a round earth.
 
This huge global transformation does not mean that manufacturing will disappear, any more than agricultural work has disappeared – in fact, our agricultural industry produces more food than ever in history, despite the fact it represents a tiny share of total jobs. Someone will have to still run those factories, and their products will still be in demand. 
 
In 2008-9, the same time that such old names as General Motors, Chrysler, AIG, and Merrill Lynch nearly went away or got gobbled up, there is not much space in the headlines for the happier stories.
 
Procter & Gamble and John Deere, both founded in 1837, will celebrate their 172nd birthdays this year. Both companies are fundamentally the strongest that they have ever been. Caterpillar, Johnson & Johnson, Coca-Cola, Paccar (Peterbilt and Kenworth trucks) and thousands of other manufacturing companies are as strong as ever. Even some of the younger group of service companies, like Walgreen’s and United Parcel Service, are no spring chickens, and healthy as can be.   In every industry there are those companies which have navigated tough times – over and over again – and proven their resilience and ability to rebound. I wish we would give more time and attention to such companies, and in the future I hope to spend more of my own time studying the reasons for their success and longevity.
 
On the manufacturing front, I also believe that there is actually a rising potential for what I would broadly define as “craft industries.” The world is becoming wealthier and wealthier – I am not talking about 2009 versus 2007 or even versus 1999, but 2015 versus 1985 and 1965. I am not talking just about money or just about the rich nations – lifespans rise, education levels rise, infant mortality drops, and incomes rise in even the far corners of the globe. In this rising environment, the demand for high quality specialized products will only grow. 
 
Forty years ago the demand for high end stereo systems was limited to a few people in New York and other western cities. Forty years from now every major city will have people buying the best. Thirty years ago the demand for really beautiful, classy motorcycles almost went away in the onslaught of less expensive, more practical Japanese bikes. Today – and tomorrow – Harley-Davidson flourishes and the Japanese work to rise to their level. Every day, cheap tap water loses share to expensive bottled water. Markets that were once tiny niches will become larger and larger. 
 
These types of handcrafted – or very carefully manufactured – products do not rely on cheap labor, and will not move entirely to robotic production. The human touch will still be required for the most expensive of fashions, the most beautifully finished furniture, the most intricate of models and toys. Even in the decline of the industrial age, there will be exciting new manufacturing opportunities.
 
At the same time, if you want the most basic and reliable hammer or broom for the lowest price, a large automated factory shipping container-loads to Home Depot, Lowe’s, Carrefour, Wal-mart, or Costco is and will continue to be the best way to go. To surrender the huge gains we have made in mass production and distribution would make all of us poorer. It would particularly inhibit the future of poor people in our own nation and abroad. Global trade is our best hope for peace and prosperity. (Had we banned imported Japanese cars 40 years ago, GM would probably still be exclusively making gas guzzlers, and be even less viable than it is today.)
 
None of this makes me pessimistic about the future. Even something so seemingly difficult as mass-producing quality affordable automobiles in North America is accomplished every day by Honda, Nissan, and Toyota in the United States and Canada. But the real opportunities, for Americans of all ages and for people around the world, lie in providing more and better services to each other, in entertaining each other, counseling each other, in providing government, education, and health services. Over the next hundreds of years services will be the primary sources of jobs and opportunities for all.

   

     

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4 Responses to “The Death of American Manufacturing”

  1. Alisha says:

    So Whose responsible for 300 Million Innocent People’s money going down the gutter? The average American Joe just sits and whines on what hapepned? GM …What about those countless people who are fired and on the road?

  2. Gary Hoover says:

    Hi Alisha,
    I am not sure what “300 million innocent people’s money” you are referring to. While people whose savings were invested in the stock market lost part of their savings, rarely are those losses total, or even close. Some were taken down by the crook Madoff, and that is tragic, but it was not a lot of people in numbers.
    As to the workers, over the last ten-twenty years the American economy has created a lot more jobs than it has lost. Construction, health care, education, and many industries have grown. And even in heavy manufacturing, Paccar, Caterpillar, John Deere, Honda, Toyota, Nissan, and other have added thousands of American jobs. This doesn’t make it any easier on all those who have lost jobs, but this change, the rise and fall of industries, has been going on for hundreds of years. Things are much worse than normal right now due to the recession, but it is still far better than the 1930s, and I am hopeful things will begin to turn around soon.
    Gary

  3. Greg says:

    Interesting insight Gary – as usual.

    I have been pessimistic about our transfer of jobs and wealth to these industry / manufacturing based countries, since my days of running the family hardware stores.

    I still struggle with what is good for America and our recent crises has really got me thinking about this again. In my opinion, it is usually only the upper management and larger stock holders that benefit from moving manufacturing overseas. How many blue collar and now white collar jobs can our economy stand to loose?

    Well the truth is – we’re cooked – the baby is already born.

    But – none of that matters compared to this next statement:

    What happens when the technology and know how to “mass produce” the guns, the bullets the planes and the bombs – all resides with China?

    There is a huge learning curve that we have just handed over to them – one that took the US many years to figure out.

    It not the ability to make one bullet that concerns me – it the ability to make billions of bullets that scares me.

    The last time I checked – they are still a communist country – with very heavy censorship. What is their ultimate goal? – I think I know.

    And GM – well you just can’t continue to pay a fork lift driver $90,000 a year and expect to be profitable.

  4. [...] that Dad was on the way home. You could hear it for miles.   Today, as I discussed in a recent post, that industrial age is over. We move on to the next evolution of our economy. But it [...]

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