Tag: global competition

OM in the News: The Toll of Cheap Clothing

Relatives hold photos of workers missing in the Rana Plaza collapse
Relatives hold photos of workers missing in the Rana Plaza collapse

In April 2013, when the Rana Plaza building in Bangladesh crumbled and killed more than a thousand garment workers, Western clothing executives were chastened. They were the ones, after all, who’d been pressuring Bangladesh’s apparel factories to cheaply reproduce runway trends for consumers in the U.S. and Europe who’d grown used to $10 dresses. Following the accident, H&M, Zara, Walmart, Gap, and other major brands announced they’d fund and oversee factory inspections in Bangladesh, demanding improvements from facilities that fell short and cutting off business with those that didn’t get better.

“Three years have passed, and an uncomfortable truth is emerging,” reports BusinessWeek (Oct. 31-Nov.6, 2016). Of some 1,600 factories, more than 80% are behind schedule on improvements. The government, too, has made limited progress: It’s shut down just 39 facilities that posed an “immediate” danger to workers. Meanwhile, investigators keep finding defects: faulty sprinklers, exit stairwells used for storage, missing fire doors.

Surprising? The craze for cheap, on-trend clothing that helped turn Bangladesh into the world’s second-biggest apparel exporter, after China, has actually intensified since the disaster. Low-priced brands keep undercutting one another, and that keeps squeezing the factories that produce their clothes. This is the backdrop against which factory owners are expected to make time-consuming, expensive improvements.

So far, the government has shut down only those factories that posed an imminent risk to employees. If it lets imperfect, if not immediately dangerous, factories continue to operate, that could endanger garment workers. At the same time, the garment industry is a major employer, credited with helping to cut the country’s poverty rate almost in half since the 1990s, to just over 31%. Also, Bangladesh’s garment industry is facing serious competition from other countries, and if it becomes costlier to source clothing from Bangladesh, Western brands could migrate to Cambodia, Vietnam, Burma, or Ethiopia.

Classroom discussion questions:

  1. What is the ethical dilemma facing both U.S. brands and the Bangladesh government?
  2. Why are the safety fixes not corrected more quickly?

OM in the News: Will Manufacturing Jobs Ever Return?

The production line of a lamp factory in China. Despite efforts to revive manufacturing in the U.S., economists say the chances of a recovery are slim, and developing countries face extra challenges as industry fades.
A lamp factory in China. Developing countries face extra challenges as manufacturing jobs fade.

Half a century ago, harvesting California’s 2.2 million tons of tomatoes required 45,000 workers. In the 1960s, though, scientists at U. California-Davis developed an oblong tomato that lent itself to being machine-picked. César Chavez’s United Farm Workers union was furious and made stopping mechanization its No. 1  priority. In 1980, the Carter administration declared that the federal government would no longer finance research that could lead to the “replacing of an adequate and willing work force with machines.” The freeze on research may have slowed the mechanization of California’s harvests, but 20 years later, only 5,000 workers were employed to pick a 12-million-ton crop of tomatoes.

In America’s factories, jobs are disappearing, too. Despite political rhetoric, though, the problem is not mainly globalization. Manufacturing jobs are on the decline in factories around the world, reports The New York Times (April 27, 2016). “Global employment in manufacturing is going down because productivity increases are exceeding increases in demand for manufactured products by a significant amount,” says Joseph Stiglitz, Columbia U.’s Nobel economist.

Will America be able to produce a manufacturing renaissance at home? “The likelihood that we will get a manufacturing recovery is close to nil,” says Stiglitz. Over the course of the 20th century, farm employment in the U.S. dropped to 2% of the work force from 41%, even as output soared. Since 1950, manufacturing’s share has shrunk from 24% to 8.5% of jobs–and is still in decline. But the shrinking of manufacturing employment is global–and a worldwide zero-sum game. Japan’s long stagnation is a consequence of a decades-long development strategy that left it overly dependent on manufacturing. What options does the U.S have? Health care, education and clean energy, to name a few.

I highly recommend you read this thoughtful article. It is a great piece to share with students as you cover Chapter 1.

Classroom discussion questions:

  1. Why are manufacturing jobs important to any nation?
  2. What is keeping the U.S. from regaining millions of factory jobs?

OM in the News: U.S. Steel’s Last Stand–Alabama

Nucor's plant in Decatur, Alabama
Nucor’s plant in Decatur, Alabama

“At this unionized U.S. Steel World War I-era mill near Birmingham, the construction of a new furnace signals a major shift for American steelmaking, as the country’s major steel producers face mounting pressure from a flood of low-priced imports,” reports The Wall Street Journal (June 19, 2015). U. S. Steel’s first electric arc furnace in decades is a step toward replacing the iconic steelmaker’s stable of iron-ore-reliant blast furnaces with a more flexible scrap-based process that allows for stopping and starting production when there isn’t enough demand to keep churning out steel.

Just over an hour’s drive away, in Decatur, Nucor, the other big American steelmaker, has been turning old cars and refrigerators into fresh batches of steel for more than a decade, with 2 electric arc furnaces and a flexible, nonunion workforce. The 2 companies are the only U.S.-based steelmakers left in the top 50 global steel producers, a list now dominated by Chinese companies. But they represent starkly different approaches to the same business. U.S. Steel has 2,500 workers currently laid off. Nucor has an unofficial nonlayoff policy. U.S. Steel has lost money in 5 of the last 6 years, while Nucor has been consistently profitable.

The Nucor plant in Alabama produces roughly the same amount of steel as U.S. Steel, 2.4 million tons, but employs 1/3 the workers. Managers and workers emphasize their unique brand of steelmaking. Nucor employees call each other “teammates” and talk up their competitiveness. The company’s incentive-based salary structure means worker salary can range from over $100,000 to less than half that. Workers get a scorecard assessing their performance each time that they make a batch of steel. “A high percentage of our teammates are athletes or military,” said Nucor’s plant manager. “We hire can-do innovative guys who want to bust their butts every day.”

Classroom discussion questions:

1. Outline the human resource differences between the companies.

2. Why are there only 2 American steel producers?

OM in the News: Still Made in America

paintbrushesChinese manufacturers long ago wreaked havoc on the U.S. textile, apparel, toy and electronics industries. But disruption has come more slowly to the brush business, writes The New York Times (June 18, 2013).  There are simply so many types of brushes for so many applications that many Chinese manufacturers thought the business wasn’t worth the hassle. Despite the recession, there are still more than 200 brush, broom and mop makers in the U.S. These companies have employed two strategies to stave off Chinese competition: 1) change everything all the time, or 2) don’t ever change a thing.

Kirschner Brushes hasn’t changed a thing. The Bronx, NY company makes brushes the very same way, employing many of the same machines it bought 50 years ago. Kirschner sticks with the old ways because, unlike with toys and T-shirts, a big chunk of the brush business caters to professionals who aren’t merely shopping for price but rather for quality.

At the other end of the business is Braun Brush, which is constantly creating innovative brushes so that it never has any competition. Bruan makes a beaver-hair brush that’s solely for putting a sheen on chocolate, an industrial croissant-buttering brush, a heat-resistant brush that can clean hot deep fryers, and a tiny brush that helped Mars rovers dust debris from drilling sites. When Braun sees other firms making one of it brushes, it often drops the product rather than enter a price war. Braun has grown at 15-20% annually for the past 5 years.

Despite all the doom-and-gloom US manufacturing stories, there are still more than 200,000 small factories, like Kirschner’s and Braun’s, that provide a solid, if rarely heralded, base line of American business. Very quickly though, the US is becoming a nation of Brauns–one in which a product faces extinction, or a rebooting, shortly after it is unveiled. This flexible economy has many advantages–and over time, it delivers more economic growth to the US.

Discussion questions:

1. Which operations strategy will be more successful in the long run–Kirschner’s or Braun’s?

2. Why will customers stay loyal to Kirschner Brushes?

OM in the News: Japanese Manufacturing–Then and Now

When you are in the swamp and an alligator is nibbling on your leg, they say it’s hard to see the big picture. So today, despite the gnawing pain we feel from global competition, let us recall the world just 27 years ago, when Japan was the gator and US manufacturing was being threatened by the likes of  Toyota, Mitsubishi, Sony and many others.

Industrialist Matsushita on Time Cover in 1962

Here is a quote from an OM in Action box in the 2nd edition of our text 24 years ago, based on a 1985 speech by Konosuke Matsushita, CEO of Matsushita Electric Industrial Co., to a group of Western  managers. “We are going to win and the industrial West is going to lose: there is nothing much you can do about it.”

Those were heady days in Japan, when its quality products and overpowering automation were driving its export-led growth.  But The Wall Street Journal (Jan.24, 2012) reports that those days may be over, with a front page headline “End of Era for Japan’s Exports”. Japan  just announced  that it recorded its first trade deficit since 1980, a sign that one of the world’s greatest manufacturing  machines may be running low on steam.

It is a combination of three factors. First, a decline in corporate competitiveness that has been bubbling under the surface for years as Japan transitions into a nation of pensioners. Second, the disastrous earthquake and tsunami last March destroyed factories, crippled supply chains, and idled many of the country’s nuclear reactors. (Before the Fukushima accident, nuclear provided 30% of Japan’s electricity. Now just 4 of the nation’s 54 reactors are in service). And third, despite weaknesses in Japan’s economy, the  yen has remained a strong and safe haven for currency traders (meaning exports are very expensive and creating a need to move production offshore).

Discussion questions:

1. Is the era its leaders called the  “Japanese miracle”  over? Why?

2. What can the US do to protect its manufacturing power?

OM in the News: Honda Revs Up Plants in the US

When discussing global OM issues in Ch.2, the news that Honda is shifting a major chunk of its manufacturing to the US over the next 2 years is noteworthy. The Wall Street Journal (Dec. 21, 2011) reports that the 63-year-old company is accelerating its move away from Japan after two huge challenges: natural disasters and the yen’s gain of 40% to the dollar since 2007.  (The yen was 78 to the dollar this week, compared to 120 a few years ago). Honda plans to  grow to 2 million cars  in N. America, up from 1.29 million last year. This is to be done by building a new factory in Celaya, Mexico and expanding all 7 existing US plants.

With the expansion, Honda will export 200,000 to 300,000 vehicles a year from N. America, a tenfold increase, while reducing exports from its Japanese plants by 50%.  Because of the strong yen, “It is virtually impossible to make money on exporting vehicles from Japan in the short and medium term”, says the president of American Honda. For the US, the move means good news: thousands of new auto-related jobs and a boost for US suppliers that make components for Honda. The Greensburg, Indiana, plant alone will go from 100,000 to 200,000 Civics per year and add 1,000 jobs.

“It’s almost an economic necessity that they co-locate exports outside of Japan”, adds an industry consultant. “You can expect others to follow”. Today,  37% of Honda’s global production is in N. America: this will grow to 50% after expansion.

Toyota, likewise, has begun making its Corolla in Mississippi and is looking to expand its Baja, Mexico factory. Both firms saw earnings drop 50% this quarter.

Discussion questions:

1. Why are many foreign auto makers now expanding in the US?

2. What is the risk to Honda of transferring a large part of capacity offshore?

OM in the News: Ten US Industries Still Hanging On

Although for much of the 20th century the US dominated global manufacturing, recent  years have not been as kind. We have seen the last US silverware company close its doors, as did the last coat-hanger maker, sardine cannery and shirt maker. But MSM Money (Oct.10, 2011) just found 10 pockets of  manufacturing that  are still hanging tough. It’s an interesting list to share in class when covering Chapters 1 and 2. The question is whether we should celebrate these limited successes–or are they dinosaurs that are still walking?

1. Bowling balls: Down from 12,000 bowling alleys in 1960, today 5,800 still operate as the sport has remained a  family pastime. Ebonite, in Hopkinsville, KY, makes 4 popular brands of bowling balls and is one of several small firms still  manufacturing in the US.

2. Sparklers: Diamond Sparkler, of Youngstown, is one of the few producers of fireworks to survive the onslaught of cheaper Chinese imports.

3. Compact discs: Although CD sales are falling, Sony just spent $72 million to expand its Terre Haute, Ind., plant where 1,300 employees plan to churn out disks for us old-timers for another decade.

4. Pianos: 98% of concert pianists still demand a grand piano from Steinway, consisting of 12,000 parts assembled by 450 workers in NYC.

5. Socks: Formerly known as the “Sock Capitol of the World”, Fort Payne, Ala., still has 20 mills and 600 employees–but certainly off from its peak of 120 mills and 8,000 workers.

6. Ironing boards: Indiana’s HPI-Seymour pumps out 720 boards/hour with 200 employees, thanks to steep tariffs to protect it from Asian competitors.

7. Pencils: General Pencil, of Jersey City, NJ, has ceded the yellow #2 pencil to China, but produces special graphic and colored drawing pencils.

8. Sneakers: With 1,000 workers in 5 New England plants, New Balance is the last standing athletic footware maker.

9. Electric relays: Struthers-Dunn, in SC, is also the final surviving maker of customized relays and controls. The rest have gone to India and other Asian nations.

10. Chopsticks: Georgia Chopsticks, as we blogged recently, is actually ramping up production, making millions per day for export to China.

Discussion questions:

1. What will OM managers have to do to help these businesses continue to operate in the US?

2. Why are many of these businesses surviving ? How many will be here in a decade?

OM in the News: The Startling Loss of US Manufacturing Capacity

The Sunday New York Times headline (Feb.13,2011) reads, “When Factories Vanish, So Can Innovators”. With the closing of the last spoon and fork (“metal flatware”) factory, in Sherrill, N.Y., the US  lost an industry that traces its roots to Paul Revere.  Just as  Sherrill Manufacturing succumbed to less expensive Chinese imports, so have the sardine cannery, stainless steel rebar, vending machine, incandescent light bulb, cellphone, and laptop computer industries.

Less noticeably, says The Times, the imported portion of components that go into American-made products has risen from 17% to 25% over the past 13 years. For example, the wings of many Boeing  jets are now made in Japan. With the inclusion of these imported components, manufacturing’s share of the GDP is actually 10.5%, not the government-reported 11.2%.  (This, of course, is down sharply from 14.2% a decade ago and 30% in 1950). Moody’s chief economist states: “I think there is a growing recognition that a diminished manufacturing sector will undermine our economy”.

 The US has long appreciated that low-wage workers abroad would cut consumer costs on a wide array of manufactured products. But the theory was that US producers would be the world’s best innovators, developing (and at least initially, producing) sophisticated new products here at home. Somehow, though, Apple’s spectacularly designed  iPad and iPhone are being made in Asia, not here. Likewise, Maglev (high-speed rail) was invented here, but the technology and production has  transferred to Japan.

Many experts  believe that the engineers and factory workers in Asia may become the next innovators. One economist is quoted as saying: “The big debate today is whether we can continue to be competitive in R&D when we are not making the stuff that we innovate. I think not”.

Discussion questions:

1. Do we need to worry that “young people stop thinking about making things” in the US?

2.If consumers have benefited from unrestricted lower-priced imports, what is the negative of the equation?

3. Is innovation falling in the US? Rising in Asia?

Good OM Reading: Make It in America

Andrew Liveris’ new book, Make It in America (Wiley,2011) is certainly timely. The author, CEO of Dow Chemical, calls for  a national strategy to revive manufacturing, a plea repeated by President Obama in his State of the Union talk last night. Liveris wants the government to draw a  plan to encourage more manufacturing, to cut taxes, and to make regulations uniform, as in Europe and Asia.

No economy as large as the US can sustain itself without manufacturing, he writes. “Accepting such a future (as a nation of great innovations, and not as a manufacturing society), means accepting a level of joblessness that would make recent years look like a warmup”. This is a good point. If we look at a Top 10 of big time innovators (say Amazon, Apple, Dell, Facebook, GE, Google, HP, IBM, Intel, and Microsoft), we see they only employ an average of 61,000 workers. Since there are 29 people working at Wal-Mart and 2 at Disney for every one at a big time innovator, it becomes clear that we cannot count on innovators for job creation.

Being passive, as we have been for 4 decades, is not a growth strategy, Liveris adds. China has a strategy  to be more than the world’s low-cost toy manufacturer. Brazil is moving beyond its role as an agricultural leader. Some Americans imagine we can thrive by dreaming up new Kindles and iPods, while the Chinese make them. But when we move our capacity to make high-tech products overseas, we lose skill for whole sets of products.

Liveris gives the example of the Kindle. Amazon invented it, but couldn’t find the screen-making expertise and capacity to produce it in the US, so it went to Taiwan. He closes by writing: “Manufacturing is America’s future. Not just its past. Manufacturing is the foundation upon which our economic  prosperity, our growth and wealth and jobs depends.”

Click here to read excerpts of this excellent book.

OM in the News: China Writes the Rules for Wind Power

 It surely seems as though the headlines every week relate to China taking a dominant manufacturing position in another industry. What the US will do about the continuing loss of  global manufacturing market share might be of concern to every student in an OM class. Today’s front page New York Times story is called “To Conquer Wind Power, China Writes the Rules”.

As we have blogged recently, the pattern is repeating: Chinese firms acquire the latest Western technology by various means, then take advantage of government policies to become the world’s dominant, low-cost suppliers. This is the case in high-speed trains, drones, jet fighters and commercial jets, solar power, nuclear reactors, cell phones, and desktop computers.

Gamesa, a Spanish firm, and a world leader in wind energy turbines, has just learned that the competing for China’s lucrative business means playing by rules stacked in Beijing’s favor. Gamesa’s share of the Chinese market dropped from a third in 2005, to 3% today. The Chinese now control half of the $45 billion global market for wind turbines, and are taking direct aim at the US, where GE has long been the leader. Sinovel, backed by $13 billion in Chinese government loans, is opening offices across the US.

How has this happened? Four reasons, according to the Times: low -interest loans, cheap land from the government, preferential contracts from state-owned companies, and dramatic “local content” laws. The latter, trade lawyers say, are direct violations of the WTO. But the Chinese government has bet–correctly–that Gamesa, GE, and other multinationals, are unwilling to risk losing a piece of the Chinese pie by complaining. Says one wind industry CEO anonymously, “Everybody was too scared”.

Discussion questions:

1. What is the US government position regarding such Chinese dominance?

2. What other industries have followed this pattern?

3. Why is China so successful with this manufacturing strategy?