Manufacturing Update: Foreign investment as an industrial policy?

Hello everyone, happy Monday to you all on Economic Populist. Today marks the return of a series I had put off for health reasons (actually this is the second attempt, sorry). On this inaugural I would like to focus on the foreign investor. As many readers of my past columns know, Manufacturing Monday has been a staunch advocate of building products here. Primarily focusing on promoting our current captains of industry to open up a shop here instead of say Asia or Mexico. Or in getting new (green) industries going. If they (being foreign countries) are "taking" our jobs, how about us getting some from their companies?

A smart kid and KIA

Two incidents brought this to my attention. First was a July 4th BBQ I attended, and a CNN story. At this BBQ, I happen to sit next to the parents of this young man. They harped on about him on how he knew Korean and Chinese and (if you can believe it) Japanese. Asking what he does, the parents said that currently working as a translator trying to get an Asian firm to open up a microelectronics plant in Texas (I believe it was Texas). He was in high demand, being employed mainly by state governments who needed folks who could speak those languages. Just goes to show you, anytime a conservative says cut school funding, bring up an example like this!

The second incident was that CNN story I had seen on the television. It was was about KIA opening up a plant in West Point, Georgia. Now originally I wanted to post the video to that story, but their site is well...not noob friendly. Suffice it to say they do have a story in print on the web and there is a link to that video!

Plans for the new factory have transformed a community that during the past ten years has been becoming a ghost town. Textile mills that once defined West Point shut down in the 1990s, leaving many out of work. Debbie Williams, co-owner of the popular Roger's Bar-B-Que, was worried her business would go under. "We'd go downtown and there was nothing there," Williams said. "I thought my little town was gonna die." Margaret McManus was laid off last year when the textile mill she worked for closed. The 52-year-old went back to school to study information technology. In April she landed a job as a trainer with Daehan Solutions Georgia, a parts supplier for Kia. McManus said she didn't think in a million years she'd be making car parts. - excerpt from "Town hits economic jackpot to become 'Kia-ville'", CNN, 2009.

While I'm not exactly a big fan of their cars in the past, the fact that they decided to open up shop here in the US and employ Americans has boosted them in book. Now I know what you're thinking. They went to the South to avoid the Unions. They got one hell of a tax deal. And who knows what else that Governor proposed. The fact remains is this, we had a town dying, and it got saved NOT from GM, NOT from Ford or Chrysler, but from a foreign automaker.

Looking into the West Point situation it reflected what is going on nationally. It's no surprise that this country, industrially speaking, has been going down the tubes. Free trade deals that are neither "free" nor much of a deal, have screwed over the industrial base that had decided to stay here...be it company and worker. Wage arbitrage was really the game going on. Industrial production has been falling for a long time now. (What you thought only the Godfather of Econ blogging had the charts?)

 

Industrial Production, Year over Year % Changes (source: the Federal Reserve Board,chart from Freelunch.com , 2009)

1983 marked the high in the Y/Yr % change in industrial production in the United States. Since then, despite some "bull runs" late 80s, much of the 90s and finally in the early part of this century, what you have here is nothing short of a disaster. If this were a stock, it would be considered a secular bear market, with what has to be the mother-of-all-down trends. There's a reason why a portion of this country is called a "rust belt." We are at levels of "growth" actually a trough not seen several decades! Trust me it shows, take a gander at the next few charts (don't worry, I don't have too many).

Back in the day, a person could walk into a hardware shop and most of your hammers and tools were made here. Up the value chain, the same could be said for machine tools, appliances. You name it, we made it. Heck, in many cases, we invented it! Sadly the legacy of industrial invention and manufacturing may not be passed on to our children. Local sources of production of such items has been diminishing year after year.

Yr/Yr % Change in Machinery Production (source: Federal Reserve Board, chart courtesy of Freelunch.com, 2009)

Tool and die and glass blowing and other such knowledge dissappears when you lose a workforce trained in that. You close down a plan making certain precision parts AND you don't find work to meet those skills that go into making such things, then eventually you'll lose them. Why? Ask a child today if he or she wants to learn (insert industry that has left us) and you tell me what they say. I've seen metal shop programs cut down in high schools because of this situation, let alone college programs in mechanical engineering.

Redefining American made

Two questions kept hitting me. What do we do to preserve these skill sets? And what do you do, as a state or municipality, if you can't find an American investor to open up shop in your area? The latter has been asked at county or local development boards the moment the major employer shuts down. I hate to say it, but we will have to redefine "American made". You'd be surprise at the hostility towards this notion.

There are millions who will accept a Mexican-built with foreign (read non-American) parts in a Ford or GM automobile as "American." Yet, never...ever consider a Toyota or Volkswagen built in Chattanooga as "American." Even though both the Ford/GM and Toyota/VW use the same suppliers in the past. In fact, I have seen these "foreign" cars have more American-made parts than I have in many GMs or Chryslers. So really, what is "American made"?

The Toyota Camry is more American than the Ford F-150, at least according to Cars.com's annual American-Made Index. The findings further muddy the buy American debate that rages across the country. Toyota Motor Corp. also is the most American car company, according to the rankings of the index in terms of U.S. content in its cars and trucks. The findings are based on where each vehicle is built, its popularity based on sales volume and the percentage of the parts made in the U.S. based on the cost or value of those parts. --------------- The results likely won't go over well in Detroit, said analyst Joe Phillippi of AutoTrends Consulting Inc. in Short Hills, N.J., but the more important point is that the vehicles and many of their parts are made in the U.S. and "we need all the payroll generation we can get." To its credit, Toyota has maintained its headcount in the U.S., Phillippi said. "There have not been wholesale firings and mass layoffs and they continue to employ a lot of people even in a downturn and their game plan is to continue to employ more." - excerpts from "Survey: Camry more American than F-150", Detroit News, 2009

We're living in this game called Globalization. I know, I too have my apprehensions, but we've been drafted and there's really no way out. You have usual suspects attempting to grab jobs that were here. We have to fight, and fight hard to maintain our living standards. That means competing for jobs. There are many that would love to make this a race to the bottom, no one wants to make a dollar an hour because that is the financial equivalent to suicide. Nor should we have to be in that position. But there is still that fight...that fight for investment. We talk about new economies and green shoots or green jobs, and we hope "our" companies make the investment. Sadly, that isn't the case.

 

Yr/Yr % Change in Gross Domestic Investment (source: Federal Reserve Board, chart courtesy of Freelunch.com, 2009)

Now I know Bonddad is going to hate me for using this chart, because really its like using a bazooka to swat a fly. What you have here is the growth rate of investment into capital into this country. Inventory, machinery, factories, etc. The rate has been dropping, and in fact we were lucky if it stuck north of 15%. Compare that to China's rate of growth for investments (yes, I'm aware it has dropped recently, and that the numbers from the government are as reliable as they are from Karl Rove). Obviously we need a new source of private investment to make up the loss from domestic sources, and that is were the foreign company/investment group comes in.

Greenfield projects, plant expansions, and other in-sourcing.

One aspect of this reversal of globalization job flows comes in the form of "Greenfield projects." Essentially, these are developmental ventures ranging from designing a product here to setting up a marketing campaign. Most lead to a permanent situation employing Americans.

Nearly 760 greenfield insourced projects or expansions were announced or opened in 2007. This is the greatest number of planned greenfield projects by foreign companies or their U.S. subsidiaries in any single year during the last five years, and represents a 42 percent increase over the 536 greenfield projects recorded in 2003. Moreover, investments related to the greenfield projects declared in 2007 totaled $35.5 billion, a threefold increase over the $11.6 billion investment total in 2003 for greenfield insourced projects. Cumulatively, over 3,000 greenfield projects or expansions were announced or opened by U.S. subsidiaries of foreign companies over the last five years. The $109.5 billion in investments tied to these greenfield projects are expected to generate almost 175,000 American jobs. - excerpt from "The Impact on the U.S. Economy of Greenfield Projects by U.S. Subsidiaries of Foreign Companies", LocationUSA, 2009.

Besides these projects and KIA, foreign companies are looking to open up shop here. Just one of many examples:

Gestamp Corporation, a subsidiary of Spain-based Gestamp Automocion, a supplier of automotive parts, will invest $90 million to open a stamping factory in Chattanooga, Tennessee, according to state economic development officials. The company plans to create at least 230 new jobs at the facility within three years. - excerpt from "Spain-Based Auto Supplier Investing $90 Million for Tennessee Plant", Area Development Online, 2009.

There is also another phenomenon going on, the rise of foreign corporation using US-based suppliers. This ain't just the European and Japanese automakers using parts from American suppliers. But also everyone from chemicals to computer equipment. Many are small-to-medium businesses, others larger ones, many who have seen their American customers flee to overseas competitors.

TriQuint Semiconductor, a manufacturer of Radio Frequency (RF) modules, components and foundry services, announced a $50 million agreement with ZTE, one of the world's largest makers of cell phones. The agreement was formalized at the U.S. -- China Business Signing Ceremony. At a time when semiconductor manufacturers around the world are experiencing slowdowns in orders, worker layoffs, and market devaluation, TriQuint Semiconductor is doing well with revenue up from last year. - excerpt from "U.S. Semiconductor Manufacturer Lands Contract with Chinese Cell Phone Maker", Industry Week, 2009

We need more stories like this. I wouldn't call it a "free trade reversal of fortune." But TriQuint does most of it's manufacturing Hillsboro, Oregon and Richardson, Texas, NOT Shenzhen or Guangzhou. Back in the day, we had firms like Motorola building stuff here in Illinois and other places. Perhaps we will see the rise of new contract manufacturing industry catering to new international clientele versus American ones.

It doesn't have to be a dog-eat-dog competition

The US Dollar will eventually lose its value to our competitors, and China can't maintain that peg forever without feeling more pain. Cost competitiveness will return here. Of course, this will also come at a price with regards of imports being priced beyond the grasp of many. But market forces will soon demand a more "affordable" solutions. Smart companies will wish to maintain markets in places besides China, which I expect in a decade to be the largest buyer of goods.

Today America buys whats made on those factory floors in Asia, tomorrow belongs to China or India or whichever developing nation to emerge as a mature market. We, as a nation have to realize this situation and finally put away this idea of "American exceptionalism" where we think we will be the it market. Pride can also blind us. We've rested on what I believe was the historic macro-economic equivalent of a lottery winning just after World War Two, our investments and the virtual elimination of economic competition, gave us a jump on the economic ladder. I know this may sound harsh, but we rested on our laurels. Neglected infrastructure investment and putting on blinders to the idea that those other people could match us has caused us to pay the ultimate price.

Bottom line, we, as a nation have to realize we no longer are a super power of unequaled strength in (name the field). We're starting from scratch again. And this means competing, but there is a dangerous side to this as well. We've gone from a country competing against other countries to states, acting as if they're countries, competing with other states. This has lead to fears of a "race to the bottom," and other economic insecurities. There needs to be better coordination amongst states and regions. And yes, despite the cries from my many libertarian friends, this means federal government intervention! Two words ladies and gentlemen: Industrial....Policy.

Although industrial policy is often equated with protectionism, Ford and other speakers said the U.S. needs to be tougher with trading partners to maintain prosperity. "Having no policy is a bad policy," Ford said. "Other countries understand this and they work hard to maintain a strong industrial base. They bend or even break the rules to maintain a competitive advantage over the U.S. We need to do something different. Echoing those calls, fellow co-chair Andrew Liveris, chairman and CEO of Dow Chemical Co., called for "a modern-era industrial policy, one built for the 21st century. "The life force and strength of this country has to be rebuilt," Liveris told the gathering of several hundred people."It has to be rebuilt by American industry." Liveris said that "maybe we all became enamored with the idea of making money from money. And we forgot that making real things, real innovative things, still matters." - excerpt from "U.S. Needs Industrial Policy Built for the 21st Century Says Dow Chemcial at Economic Summit", Industry Week, 2009.

Another word —- interdependence —- is worthy of consideration this holiday weekend. Today’s world demands that nations and states such as Georgia simultaneously compete and collaborate across a global field. These often-noisy skirmishes continue through economic times both good and bad. That silence you hear about now, though, may be the sound of the smartest nations and states turning inward to plot strategies that will carry them to the next level of prosperity once the storm tides of global recession calm down. And there’s little doubt that the world’s economic landscape will look different once recovery gains traction. Ken Stewart, commissioner of the Georgia Department of Economic Development, says “Our independence is dependent on our interdependence.” That’s well put and true. Competing in this emerging economic realm will require next-level thinking on the part of governments, businesses and academia. Georgia and the Southeast have gotten a nice head start, thanks to a combination of planning, actions taken and even geography. - excerpt from "About this page No nation an island in global economy", Atlanta Journal & Constitution, 2009

Yes, states need to look after it's workers. But perhaps if some work together, they can build on that initial foreign investment. Develop new industrial bases. Look, anyone can just lower taxes, but eventually that card's usefulness runs out. Then what'll you do?

At the end of the day, we're on what is the biggest public works project ever...the US Industrial Economy. Some solutions will come from our own people, be it in business or government. Then again, it may come from some who aren't Americans at all. We have to be open minded and adapt to the situation. We have to once more earn our right to be the it market again.

 

Cross posted from Daily Kos

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Comments

Welcome back

You might also put a link over on Agent Orange that it's originally posted over here.

You're formatting is running together too, makes it difficult to read.

One reason I heard FCDC's were popping up is the skilled workforce. Shame U.S. corporations cannot see that but it's is very good news FCDCs are!

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Our multinationals have to learn or be taught

We have the skilled workforce. For our multinationals, we have the market. But they're still playing the old wage arb game. It's going to take a collapsing dollar to get 'em back, sadly.

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I don't think that's completely true

although the lack of action that maybe the consequence...to turn the U.S. into a 3rd world country...

but there are a host of policy changes that can be done which could stop this global hunt for cheap labor. That's trade, the definition of a corporate entity itself, the tax code, regulation, and then do something to start creating a global minimum wage.

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I don't think MNC are coming back.

I am starting to think that it is basically coming down to this: Do we lower our standards to emerging/developing countries or do they increase their standards to our level. Which is more likely?

If don't like those choices then MNC will only respond to use of a stick (or club).

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I do agree with notion of foreign investment

being a part of our overall Industrial Policy.

However, people should be aware that southern politicians speak with fork tongues when they cry about bailing out GM when their states are giving huge tax subsidies to transplants.

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oh yeah

that stink was about representing GM competitors who have plants in those states.

Well, you can see what KIA has done for that town, I agree, foreign investment yeah, rah! Esp. because a "US corporation" is so benedict Arnold, many don't even pay taxes, so what difference does it make?

Take Acer for example, they have customer support in the U.S. which is more than one can say for HP, who is still busy offshore outsourcing every job possible (or insourcing too).

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You want to hear something sick?

A college buddy of mine works at Comcast, the cable company. When you called them up, one used to hear that oh-so-familiar South Asian voice (you know the country). Then all of a sudden, it changed and you heard an American voice. Well as I brought it up to my pal, whose an installer for the company. There was a flyer about Comcast and "commitment" towards the domesitic economy..yadda yadda yadda. They were one of those companies, that many news services highlighted a while back closing up support in Asia and touting how "the jobs are returning back to this hemisphere." They did bring the jobs "back," when you call you get Alberta, Canada. I asked why there? A lot in fact have asked. They were told because they "sound American."

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I'm not so sure i agree with that notion

Foreign investment to me seems like a HUGE national security risk- kind of kin to me allowing Chase to remain my mortgage holder just because they bought out Citibank who bought out Ameriquest who bought out Countrywide.

Instead, I'm shopping for a local bank who is less likely to commit fraud merely because he is local and has ties to the community. The same should be said of any other business. Businesses that don't have ties to the community WILL find a way to suck your community dry in their search for bigger profits.

If you're not a superpower equal to the MNCs, then your people are just slaves to be used and abused. It's time we started actually letting the government compete with the MNCs directly instead of just rolling over in this war and playing dead.
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Maximum jobs, not maximum profits.

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Maximum jobs, not maximum profits.

I have read and re-read this several times

the past few days, Johnny. I have been processing the academic presentation that you pose to my real world understanding an area of the country that I know very well.
West Point is just across the state border from my home town. In fact, when I was a young pup, industry was vibrant in the area. We had Uniroyal, 2 West Point plants, Diversified Products, Ampex and several other industrial complexes. Now these once manufacturing giants lay barren. Jobs have somewhat been replaced by the nearby University, but most (as my brothers and I have) just left the area and there has been little growth in the area since then.
Yes, all those within commuting distance are very excited about the Kia plant - as they were about the Mercedes plant in Tuscaloosa and the Toyota plant in Huntsville. But, this is really just a small drop in the bucket compared to the industry that once thrived there.

One of my job relocations was to New England - where abandoned factories are refurbished into condos, malls, office complexes or just sit empty due to asbestos.
Upon the prior move to CT,I had a conversation with my Dad in which I relayed how disillusioned I felt to find out that Eli Whitney was from Norwich, CT - as he has semi-deity status in much of the South. My father said, "Of course, he was. That's where the manufacturing existed at the time." The next time I passed by one of the CT abandoned factory villages, I wondered if that was what was happening to my hometown.

So, to your point about whether to welcome foreign investment, it is unavoidable. I agree with seebert that if industry owners are abroad they have less vested in the community. Of course, the track record is not so great for those business owners who were part of the community.

Hmmm, between the Ranger school at Ft Benning, all those college kids, and 2 spectacular golf courses, maybe West Point would be a good place for a casino.

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I won't disagreeing with you

I won't disagreeing with you on companies and investing in the communities they operate. But as mentioned, if our "Bennedict Arnold" companies won't do it we have two other choices. We can get foreign investors or promote new business startups. I prefer the latter, but if it can't happen, then the former.

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