The Status of Manufacturing in 2005

1. Society of Manufacturing Engineers January 5, 2005 The Status of Manufacturing in 2005 Fred Zimmerman University of St. Thomas

2. The job market in the company’s home town peaked a decade ago, and workers can no longer take raises and bonuses for granted. Every year,,,the company buys more parts overseas, and its hundreds of domestic suppliers are having to compete ever harder with foreign rivals, sometimes by cutting prices so low that many cannot make ends meet. Many are quietly closing their doors because the outlook is so bleak. New York Times, October 21, 2003 The Story was about Toyota City, Japan.

6. The manufacturing world is now characterized by • widespread technical capability, • rapidly expanding industrial capacity, • aging populations in industrial countries, • worldwide stresses on employment, and • burgeoning public budget deficits.

7. Widespread Technical Capability Trend # 1

8. Math Scores Singapore 604 6.3 8 14.4 Korea, Rep. of 587 2.0 8 14.4 Chinese Taipei 585 4.0 8 14.2 Hong Kong, SAR 582 4.3 8 14.2 Japan 579 1.7 8 14.4 Belgium (Flemish) 558 3.3 8 14.1 Netherlands 540 7.1 8 14.2 Slovak Republic 534 4.0 8 14.3 Hungary 532 3.7 8 14.4 Canada 531 2.5 8 14 Czech Republic 520 4.2 9 14.4 Malaysia 519 4.4 8 14.4 United States 502 4.0 8 14.2

9. Science Scores Chinese Taipei 569 8 14.2 Singapore 568 8 14.4 Hungary 552 8 14.4 Japan 550 8 14.4 Korea, Rep. of 549 8 14.4 Netherlands 545 8 14.2 Australia 540 8 or 9 14.3 Czech Republic 539 9 14.4 England 538 9 14.2 Finland 535 7 13.8 Canada 533 8 14.0 United States 515 8 14.2

10. High Tech Exports 1997 2000 2001 US 31.5 33.2 32.1 2% Canada 14.0 17.2 15.3 9% Mexico 17.1 22.0 21.7 27% Japan 25.9 28.1 26.0 0% China 12.7 18.4 20.4 61% Singapore 55.1 61.5 59.7 8% Malaysia 47.8 58.2 56.9 19% Indonesia 11.0 15.5 13.4 22% India 6.4 .. .. n/a Korea 26.0 34.2 29.1 12%

12. Rapidly Expanding World Capacity Trend # 2

13. Rapidly Expanding World Capacity • World steel production has increased from 200 million metric tons in 1950 to 900 million metric tons in 2002 and capacities have risen even more. • Capacity is accelerating in other industries such as large aircraft, paper, cement, aluminum, electronics manufacturing, and many other industries. • Overcapacity exists even in those countries expanding capacity at this time. • The investment firm of Goldman Sachs & company estimates that by 2006, China’s production of vehicles will reach 6.9 million but internal demand is estimated to be 2.2 million units. • One Korean company, Posco, will produce 27 million metric tons of steel in 2003, compared to about 100 tons for the entire industry in the U.S..

14. Aging Populations in Industrial Countries Trend # 3

15. Aging Populations in Industrial CountriesRocking chair ratios for selected countries(% of people > 65 as % of people under 20 years old) Italy 95.17% Japan 86.63% Spain 83.97% Germany 80.23% Switzerland 67.50% Portugal 66.52% Hungary 64.13% France 63.89% United Kingdom 62.39% Czech Republic 61.34% Ukraine 56.33% Canada 49.88% Russia 49.81% Poland 46.02% Australia 45.32% United States 43.70% Korea, South 25.43% China 21.62% Chile 20.53% Brazil 14.17% Indonesia 11.62% Colombia 11.52% South Africa 11.42% India 10.80% Iran 10.12% Mexico 10.04% Egypt 9.07% Pakistan 8.01% Philippines 7.95% Iraq 5.76% Nigeria 5.14% Saudi Arabia5.12%

16. Population under the Age of 20 in 2001 India 440,599,263 China 417,143,908 Indonesia 91,025,549 United States 80,796,199 Pakistan 74,310,917 Nigeria 69,478,347 Brazil 67,802,421 Bangladesh 65,546,458 Mexico 44,661,537 Philippines 38,468,855 Russia 37,434,676 Japan 25,854,638 Germany 17,293,423 France 15,038,908 U K 14,946,114 Korea, South 13,624,019 Italy 11,094,599 Spain 8,263,411 Canada 8,089,233 Australia 5,339,605

17. Worldwide Stresses on Employment Trend # 4

18. Unemployment Rates Country 1995 1999 2000 2001 Poland 16.1 18.2 Spain 22.9 15.8 14.0 13.0 Italy 11.9 11.2 10.4 9.5 Finland 16.2 10.2 9.7 9.1 France 11.7 10.7 9.3 8.6 Czech Republic. 8.8 8.9 8.2 Germany 8.2 8.6 7.9 7.9 European Union 10.7 9.0 8.1 7.6 Canada.. 9.5 7.6 6.8 7.2 Australia. 8.6 7.0 6.3 6.7 Belgium. 9.9 8.6 6.9 6.6 OECD, total 7.5 6.8 6.3 6.5

19. Burgeoning Public Budget Deficits Trend # 5

20. Burgeoning Public Budget Deficits, 2001 Country Gross Debt as a % of GDP Japan 118.6% Italy 108.3% Belgium 105.4% Greece 99.7% Spain 66.5% France 63.6% Austria 62.4% Germany 57.8% United States 54.6% Portugal 53.8% Netherlands 53.1% United Kingdom 50.7%

21. Minnesota’s Industrial Strengths • Minnesota Has A Diversified Economy • High Tech Employment in Minnesota Was Slightly Above the U.S. Average • Minnesota Ranks High in Personal Income Per Capita • Minnesota’s Unemployment Rate — Historically Lower than the Nation • Minnesota ranks high in Patents

22. However, • Minnesota Employment and Payroll Have Grown Modestly • Minnesota Manufacturing Product Growth is Modest • Minnesota ranks low in Foreign Direct Investment • Venture capital funding is anemic • Minnesota’s Export Performance is medium (21st out of 50 states. • State is high cost

23. Investment, Revenue and Costs for Selected Cities, 2002 ($000) Investment Revenue Costs Profit Rank Indianapolis $11,703 $16,761 $15,438 $1,322 1 Colorado Sgs $12,779 $16,761 $15,811 $ 950 2 Oklahoma Cty $11,844 $16,761 $15,826 $ 935 3 Phoenix $11,762 $16,761 $15,911 $ 849 4 Chicago $12,678 $16,761 $15,961 $ 800 5 St. Louis $12,991 $16,761 $16,157 $ 603 6 Dallas-FW $12,303 $16,761 $16,205 $ 556 7 Minneapolis $13,236 $16,761 $16,271 $ 489 8 Houston $12,184 $16,761 $16,521 $ 240 9 Boston $15,756 $16,761 $16,658 $ 103 10 Location sensitive costs as displayed in the report include labor, lease, transportation, utilities, taxes, and operating costs. Location Insensitive cost include materials & other operating expenses. Source: Competitive Alternatives Comparing Business Costs in North America , Europe and Japan, KPMG International 2002

24. Estimated Annual Profit by Location, 2002 ($ 000) Cities Investment Revenue Net Profit Naples, Italy $12,364 $16,761 $2,542 Manchester, UK $16,798 $16,761 $2,395 Winnipeg, Canada $11,401 $16,761 $2,205 Toronto, Canada $12,990 $16,761 $2,162 West Holland, NL $14,757 $16,761 $1,979 Vienna, Austria $17,369 $16,761 $1,772 Toulouse, France $12,759 $16,761 $1,584 Minneapolis, US $13,236 $16,761 $ 489 Darmstadt, Germany $15,311 $16,761 $ 247 Yokohama, Japan $54,570 $16,761 ($2,945) Note: Net Profit = estimated revenue minus location sensitive costs minus location insensitive costs Source: Competitive Alternatives Comparing Business Costs in North America , Europe and Japan, KPMG International 2002

26. Some Further Concerns • Minnesota is Geographically distant from Emerging Markets • The Supplier Base has Fewer Incentives • Minnesota has Few Emerging Big Ticket Industries • Minnesota’s Labor Force Growth is Slowing • Minnesota’s Utility Infrastructure is Weaker • Corporate Mergers and Management Changes have Reduced Industrial Strength • Minnesota Factories are Old

27. Repelling Forces 1. Shortage of land 2. High costs of land, particularly if it is polluted 3. Objections of residents 4. Inadequate infrastructure 5. Insufficient supply of good labor 6. Building codes that block modernization 7. High labor costs 8. Incompetent management 9. Costly or ineffective public services 10. Cumbersome regulation 11. Mergers and acquisitions 12. Poor transportation 13. Companies reach the end of their useful lives 14 Litigation

28. Attracting Forces 1. Shifting locations of major customers or suppliers 2. Work ethic 3. Quality 4. Even-handed Legislative, legal and tax climates 5. Industrial swarming 6. Economic incentives 7. Transportation. 8. Ownership changes 9. Attractive wage rates 10. The weather

31. Manufacturing and Community Prosperity • In the categories where manufacturing was gathering strength, every major employment sector grew substantially. Total employment increased from 35 to 63 percent. The increases were less than 10 percent in the groups where manufacturing was declining, even though the 1990s were generally prosperous. • Counties gaining momentum in manufacturing reduced poverty, more rapidly increased household income, and had lower unemployment rates while those counties with weakened manufacturing experienced deteriorating conditions — even during good times. • Among the 690 counties examined, those with 10 percent of civilian employment in manufacturing averaged about $1,000 in county and local taxes per person in 1992 while the counties with 30 percent averaged $650 and those with 40 percent averaged $562.

33. Conclusions • Competition is tough all over. • US is likely to do better than Europe. • Is higher cost and less proficient than many emerging countries. • Minnesota is more of an average state than it was fifteen years ago. • The assumption that we can retain prosperity without manufacturing is without foundation. • With burgeoning trade and fiscal deficits, along with flat employment, we may need to thoroughly investigate whether the US is in some form of gradual economic decline.

34. Conclusions II • Outsourcing and overseas production are rising not so much because US wages are high. Outsourcing and overseas production are increasing due to the search for • improved supplier and worker capability • improved supplier and worker dependability • heavy levels of investment in plant and equipment.

35. Recommendations • Creatively improve the lot of the intermediate suppliers. • Cooperate with “good” companies -- not losers. • Have people in education work a full year. • Bring people into teaching with industrial experience. • Increase the retirement age to at least 70. • Castrate everybody above the third floor.