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Dr. Hess
Dr. Hess SuperDork
6/23/08 9:45 a.m.

A good read and insight as to why you can't buy anything made here: From: http://www.atimes.com/atimes/Global_Economy/JF18Dj01.html

Martin Hutchinson said: Jun 18, 2008 THE BEAR'S LAIR The murder of US manufacturing By Martin Hutchinson GE's 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 manufacturing's long and seemingly unstoppable downtrend since 1980. That decline may seem an inevitable historical trend, and Wall Street's 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 past 30 years, Wall Street's insouciant attitude appears to have made sense. US manufacturing has slowly declined, as operations have moved to lower-wage centers in the Third World. Yet the US economy as a whole has continued to thrive, as financial services doubled as a share of gross domestic product and grew to provide 40% of the earnings on the Standard & Poor's 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 Street's 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 "symbol 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 manufacturing's 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 "downsized" 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 "strategy 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 "cows", 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 "stars" 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 company's 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 d'etre disappears. When examined dispassionately in the light of posterity, it appears that far too many of these "cow" businesses were manufacturing operations 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, run from 1981 to 2001 by ultra-fashionable "Neutron" 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 Welch's 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, GE's 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 can focus on higher-margin businesses. The appliance side has attracted interest from China's Haier Group but is expected to be less interesting to South Korea's LG, because LG manufactures appliances of a higher price and quality. A commoditized and fairly uninteresting business, in other words, currently worth around US$6.3 billion to $6.5 billion, little more than 2% of GE’s $290 billion market capital. However, if you look back even to 1994, a medium year that was already well into GE's Welch-inspired transformation, appliances represented 10% of GE's sales and 8% of operating profit. In other words, the business has been steadily starved relative to GE's other businesses, and has turned itself from a "cow" into a "dog". To see how this happened, think back to the 1950s. Electric appliances were the major growth business of that decade, symbolizing the decade's 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 Asimov's 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 I Robot short stories, was already revolutionizing business management by the late 1950s. Now it's 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? You'd certainly think so from looking at GE's 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. iRobot's standard model runs around $300, less in real terms than an ordinary vacuum cleaner would have cost you in 1980. iRobot's total sales are only $250 million, which GE would no doubt class as a rounding error, but dammit, the company doesn't have GE's brand name or distribution network. Had GE had the sense and innovative skill to develop robot vacuum cleaners, can anybody doubt that that product group's 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 company's efforts to financial services, "Neutron 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 LG's 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.

I agree that U.S. management techniques, as taught in the University system that pumps out MBAs, has been instrumental in destroying our country's manufacturing. It's like the Dilbert cartoon: Dilbert goes to that east Europe country of pigs and mud, teaches the people to make computer chips from sand and comes home. Dogbert is concerned that they will take over the US. Dilbert says "Don't worry, I also taught them our management techniques." I saw this BS being taught when I was in Business School. Not mentioned is outsourcing IT, a whole other discussion, but one that fits in.

Oh, regarding the I Robot he discusses: We have one of those. A Roomba. Now get this: The I Robot company of Massachussetts who sells expensive robotic vacuum cleaners marked "Designed in Massachussetts, Made in China" has developed a vacuum cleaner that does not function in a dirty environment. These people are just brilliant. What's next? A refridgerator that only works if it's cold? Washing machines that only work on clean clothes? Dryers that only work on dry clothes? The Roomba does a decent job, but the maintenance to keep it working takes just about as much time as vacuuming the place yourself, if not more. And I'm talking rebuilding the transmission once a month considered to be "normal" even though the part is not supposed to be user serviceable and it will void your warranty if you crack it open. OK, done ranting on Robbie the Robot. He tries hard, and I keep him working.

Strizzo
Strizzo HalfDork
6/23/08 10:34 a.m.

hmm, very interesting indeed. did you know that GE is planning on selling all of their employees, from basic grunt to management, along with their appliances business. they have recent grads on a rotational program that are supposed to change jobs every 6 months. not if they're there when the place gets sold, so much for "learning the GE business"

GlennS
GlennS HalfDork
6/23/08 10:45 a.m.

Yes, many people buy into business drivel from fancy magazines who are running businesses.

The Roomba is a cool concept that is horrible designed. You can watch all sorts of Youtube videos on the horrors of its gearbox design.

GregTivo
GregTivo New Reader
6/23/08 10:46 a.m.

regarding your high maintanence robot....

Old cars took alot of maintanence to stay running. Cars that made it to 100k miles were considered done with their usable life. Every new technology has some defects that get worked out as the technology gets older. One day vaccuuming robots will be as reliable as a 250k mile Honda.

Dr. Hess
Dr. Hess SuperDork
6/23/08 11:06 a.m.

In IT, I see plenty of the fallout from business magazines and schools. I haven't found it, but I'm sure that there is some doctrine that says "Developers must never have access to production systems." Every time we get a new supervisor around, they come ingrained with this doctrine. Fine. We'll just let the production systems colapse under their own weight and you can take the blame for it as the company grinds to a halt. Send an email to Mumbai and they'll get back to you on fixing that sometime next week.

Hey, lets fire 1/3 of the employees. Think of the money we'll save. We can all get bonuses.

I stopped buying any GE products in the 80's because their quality went to E36 M3. Now I see why.

ignorant
ignorant SuperDork
6/23/08 11:21 a.m.

I'm about to graduate from a pretty prestegious MBA.. top 15, Yes we're taught about how great outsourcing is etc.. But the last class, the Capstone, is centered around Entrepreneurship and starting our own companies/ideas..

Hmm.

As a guy who started as a line engineer, I will say, I am not happy with the standard management by accounting style that is all over the place. Check out W. L. Gore. Sure they manage by the books, but they are an innovative place founded by engineers.

In defense of GE, They screwed up and let the product slip. I wanted to buy a GE fridge when I bought my house, but the model I wanted was on a 6 month quality hold. They're innovation is behind the rest of their competition, so it's time for it to go.

Another scenario would be, If you owned a small business of 8 people and 1 out of the 8 was a horrible performer. Maybe that person is your cousin and the darling of the family. The right thing to do , is after trying to fix the problem, boot him to the curb. Can't let it drag you down.

As you can tell by my rambling above, I'm a weird kid....

ignorant
ignorant SuperDork
6/23/08 11:23 a.m.
Dr. Hess wrote: I stopped buying any GE products in the 80's because their quality went to E36 M3. Now I see why.

They let the quality go, because they gave up. Seriously, This is what happens when you stop innovating on every level.

yes I realize that this is mostly corporate speak, but it's true.

beaulieu
beaulieu New Reader
6/23/08 11:59 a.m.

just wait till China has a "USA boycott" month because we pissed them off

where will we get stuff then ?????

ignorant
ignorant SuperDork
6/23/08 12:11 p.m.
beaulieu wrote: just wait till China has a "USA boycott" month because we pissed them off where will we get stuff then ?????

ugh.

beaulieu
beaulieu New Reader
6/23/08 12:12 p.m.

or in other words

We sold our souls to China and they have us by the balls......

ignorant
ignorant SuperDork
6/23/08 12:26 p.m.

supply chain lengths are more than a month long to china. Generally 7 weeks or so to the east coast. If they did go away, which they are because they are pricing themselves out of the low cost country market, it would hurt for a little bit but not much.

http://krugman.blogs.nytimes.com/2008/06/05/transport-costs-and-deglobalization/

Deglobalization is a real phenomenon due to high shipping costs. Tables turn fast when the price of oil is up.

minimac
minimac Dork
6/23/08 12:35 p.m.

Doc, you mean that those smart professors and grad students that kept telling me in college the U.S. doesn't need blue collar workers were wrong? My local community development director keeps telling us that the future is service industry- whatever the hell that is. All I see are some fast food places and housekeeping jobs at the local motels(owned by green cardholders). You don't think the house of cards our politicians and Wall St. have sold us is getting ready to tumble, do you?

Gearhead_42
Gearhead_42 HalfDork
6/23/08 12:39 p.m.

After reading that article, I started "mooo-ing" at my coworkers... if they only knew why, they'd join me...

-"Its even funnier from the inside" Dan

Dr. Hess
Dr. Hess SuperDork
6/23/08 1:07 p.m.

Could be, minimac. I distinctly remember a business comentator on TV or the radio about 20-25 years ago saying that we were heading for a service economy and in 25 years, we'd all be sitting around selling each other insurance. And all those smart professors never had a real job in their life. I remember the slide in class in the early 90's with the groups Cash-Cow, etc. on it. I think they left out the part about taking care of your livestock.

When you think about the industries we don't have anymore, like steel for example, it gets scarry. The plants are gone, shut down, workers are now selling insurance or meth (of about equal utility to society), There are only a few specialty steel mills left. We can't even make enough bullets for two little piss-ant wars. Have you bought any centerfire rifle ammo lately? Cheap milsurp 308 went from 10 cents each to 60 cents each in about 18 months. 223 is at about the same. You can't even buy bullets. FMJ Spitzer 223 used to be like three cents. They're 13 cents each now.

Energy will stay at these high prices for the foreseeable future. This will de-globalize us. Combined with my and Ahm-a-nut-job's conclusions that the prices are artifically high to drive the US away from international oil as an energy source, and I think it may actually be a good thing in the long run. We are gonna hurt in the short run, though. I predict Sturgis will be a flop this year.

I am concerned that his could be leading to another larger global-sized war. Not sure who'll be playing, but the high energy costs will force countries to in-source and have less use for each other.

Xceler8x
Xceler8x Reader
6/23/08 1:07 p.m.

I liked it when they talked about overpaid and inept CEO's. Reminds me of another thread.

I agree with the guy. We need manufacturing here. We generate wealth on paper as our assets are just that..paper. When are we going to have steel and rubber assets that mean something? Probably when the country isn't run to benefit Wall St. anymore.

ignorant
ignorant SuperDork
6/23/08 1:15 p.m.

if the country doesn't benefit wall street anymore, we'd be socialist or communist or fascist..

I'm in a class on transnational management right now. The new theories about international business are particularly interesting. They are no longer focused on a company having headquarters in one country and production in others, the new theroies are focused on companies that produce different products in many different countries that are flexible, provide products to locals that the locals want, and also are interdependent on the other legs of the business. Different than that was done in the past.

and stop complaining about inept ceo's or pandering to wall street or overpayment. We're in the US, go start your own business.

Statements such as "we need manufacturing in the US" are worthless, except as wishes.

John Brown
John Brown GRM+ Memberand SuperDork
6/23/08 1:19 p.m.

I made the statement two years ago. Invest in the Euro and Learn Chinese. You will need both real soon.

Just in case you realize I am right.

Dr. Hess
Dr. Hess SuperDork
6/23/08 1:32 p.m.
ignorant wrote: Statements such as "we need manufacturing in the US" are worthless, except as wishes.

I'm going to disagree with you there, ignorant. Let me give you an example of what happens if we don't make stuff here. Let's take a product like, OIL for example. We oursource all our OIL production to other countries, like in the Persian Gulf and we let our own OIL industry atrophy while people make lots of money pushing paper or electrons around. Then, one day, the countries in the Persian Gulf decide that they pwn us and are going to tell us what to do and how much to pay for their OIL and we can like it or lump it as our entire economy colapses without their product. They could tell us "You better make sure the Jews don't kill off all their neighbors shooting rockets at them every day" and we'd have to do that.

Now lets look at steel. What would happen if the Chinese one day said "We are going to keep our own steel and increase the export price of steel by a factor of 10 and you can like it or lump it"? We could do without their TV's (no loss) but without steel, we can't build what few cars we still make, put up buildings, fix roads, bridges, build Locosts, etc. They would pwn us.

ignorant
ignorant SuperDork
6/23/08 1:37 p.m.

Strategically yes.... manufacturing in the US makes sense. I see your point.

but blindly saaying ,"we need it here" is silly. It needs to be here because it can be sustainable on its own accord. Period. Years of unsustainable business practices are what got us into this mess.

Seriously, If I read between the lines, you are advocating the US government mandating and setting up factories because it's good for national security?

scottgib
scottgib New Reader
6/23/08 1:43 p.m.

Good article.

I agree with most of what he said, but would add that I have been convinced for years that what benefits a corporation is not necessarily what is best for a nation, its economy, and its citizen’s well being. The primary issue is the current systems infatuation with short term profit. Actually, this short term thinking is not good for a corporation, just top and middle management. The bonus systems that applied to me in throughout my career were never based on anything longer than two years, and most were based on one year. Oh what wasteful games this causes. I believe this is a governmental issue, but the dilemma is that our governmental decision makers in general do not have the relevant experience or sense to fix it. In fact their world also rewards only short term thinking. Martin Hutchinson being a prominent world conservative may not agree with my view here; but, he also doesn’t provide solutions, just a fairly accurate description of the problem (which most of America and the UK have ignored for years). Solutions are not easy, but should probably start with our tax system. We should reward long terms gains and treat short term gains just like wages or worse. There also should be incentives/penalties to get corporations to do more long term thinking with much less emphasis on the short term.

Dr. Hess
Dr. Hess SuperDork
6/23/08 1:48 p.m.

No, the government doesn't need to mandate and set up stuff. Unless you really want it screwed up. However, the government can direct, guide, suggest, prod, etc. in certain ways. As much as I hate to admit it, I think that trade tarriffs were probably in our best interest. Sure, I like buying cheap stuff of reasonable quality at Harbor Freight, but now the Chinese own us because of it. On the other hand, trade barriers kept GM, Ford and Chrysler from making a decent product for an extra twenty years. Maybe more, as they refused for whatever reason to keep up with Japan's quality. It's a tough one. And given the politics that invariable creeps into every such system, there may be no good solution. What we have now is berkeleyed, though.

scottgib
scottgib New Reader
6/23/08 1:52 p.m.

Dr., I added a sentence that better explains what I mean by government involvement.

I do share your fear of the goverment's ability to screw things up. I don't label myself as a liberal or concervative or Republican or Democrat.

alfadriver
alfadriver GRM+ Memberand New Reader
6/23/08 2:03 p.m.
Dr. Hess wrote: When you think about the industries we don't have anymore, like steel for example, it gets scarry. The plants are gone, shut down, workers are now selling insurance or meth (of about equal utility to society), There are only a few specialty steel mills left.

Interesting that you use Steel as an example. Most of them are either gone, or owned by some non US firm, yes. But there are a handful of companies that went bankrupt, and were bought out by the employees- I don't know the name, but one is in Gary, IN- these guys put out some of the best steel in the world, make money, and do it very cost effictively.

Another example that one could use as an example are cars. Most people think that the US is a bad place to build cars due to the unions. Partially true, maybe. But cars ARE made in the US that are exported all over the world, and make a big profit- Honda, Toyota, BMW, Mercedes- to name a few- have found that blue collar workers in the US are paid both the right amount, and are very skilled at what they do.

OTOH, GM, Chrysler, and Ford continue to struggle... The whole GE thing in the article makes me tingle in fear. Seriously- when Jac the Knife took over here, he used GE and Jack Welsh as examples on how TO do it, which explains why many products were miiked to thier life's end, and to much riddicule, instead of proper investment and market leadership (off the top of my head- Taurus and Ranger were two of the worst).

Too bad most of the employees would be too scared to make the jump to buy the company and get on with it. Thinking about it- Ford is worth quite a bit less in stocks than what it has in cash, and in the plants.

Need a real visionary- take Panoz, or Saleen, or some US car maker, buy a plant, and get on with it. Too bad it takes something like $1-3B to develop a new powertrain....

So at least I'm not the only one who thinks that Harvard Business School is to blame for the decline in the US auto industry....

Eric

racerdave600
racerdave600 New Reader
6/23/08 2:40 p.m.

Another area that we now outsource is ship building. Most people look at you with a dumb stare when you bring this up, but it's very important from not only an economic point of view, but also from national security.

And I've been preaching for years that the US is poorly lacking in long term planning. Everything we do is built around next quarter earnings, not what's best for the country or even the company producing the goods. Shareholders aren't concerned with long term goals in many cases. One very important tidbit that management geniuses seem to forget, is that the country that has the most resources wins, and that's economically, militarily, standard of living, everything. Unless you're sitting on a pile of oil, this applies to you. We're slowly giving this to China.

As for GE, my father's company produced a product for them to re-label and market, but they went and bought their contract back as they were driving it into the ground and giving almost non-existent customer service. It's no wonder they're in the shape they're in.

Dr. Hess
Dr. Hess SuperDork
6/23/08 2:40 p.m.

I wrote an article once titled: "The Destruction of America through Better Accounting: A Parable by Hess [before I was 'Dr.']." It never got published. I did get a couple of "almosts" then I got tired of messing with it and graduated. It was based on observations I made working in the business world and was not kind to bean counters. Things have only gotten worse since then with outsourcing added in.

The company that sold me to the outsourcing people (wiping out the entire top level of management, serves them right), is now priced at probably half of what it would be worth split up. Short sighted goals and bonuses based on volume regardless of profit (Hey, we'll wrap a dollar around each package. That'll boost volume and I'll get my bonus) has left it severely crippled. A new group recently moved in, buying 9% of the company with a billion dollar annual sales for $20 million, near as I can figger. They are headed by a couple of generations ago management. We'll see.

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