Winter 2003
Made in China
Minnesota Technology® Magazine

By: Mary Lahr Schier
Contributing Writer, Minnesota Technology magazine

Martin Renk understands abrasion. His company, United Machine and Foundry of Winona, makes iron and alloy castings used in road construction and coal-fired power plants. United's augers and other components are rugged, well-designed items; they can stand up to lifetimes of constant wear from gravel, cement, and glass. Like other manufacturers, however, Renk's firm is facing a different kind of abrasion now. Lower prices from new competitors-many in China-are grinding away at his company's business.

He's not alone, either. All over Minnesota-and around the nation-manufacturers are cutting payrolls, looking for ways to improve efficiencies, bidding low, and scrambling to compete with the cheap labor and enhanced manufacturing facilities offered in China and other parts of Asia. In Minnesota, manufacturing employment has slumped from its historic high of 448,000 workers in August 2000 to 402,000 by November 2002. This loss of approximately 46,000 manufacturing jobs wipes out the increases in manufacturing employment that helped fire up the state's economy in the 1990s. A survey of manufacturers in Greater Minnesota conducted in January by Minnesota Technology, Inc. found that many outstate manufacturers are feeling the squeeze from China. Of those surveyed, 52 percent reported that they faced competition from China and 50 percent said it was hurting their business. Moreover, half said they expected competition from China to reduce their sales by an average of about 20 percent in 2003-and they were no more optimistic about the next few years.

Nationally, the picture is just as bleak. Manufacturing employment has dropped each month for the past two and a half years, cutting more than 2 million jobs. While the current economic climate certainly has played a part in that decline, company owners and those who study manufacturing economics echo the sentiments of those participating in the Minnesota Technology survey. Many believe that the real long-term threat to manufacturing-and to the rural communities dependent on manufacturing jobs-is what Donald Zoubek, co-owner of Automated Inc., a Ramsey-based machining and extrusion tooling firm, calls "the big red giant."

"More and more of our customers are feeling the pressure from China," says Zoubek, who has seen a 50 percent decline in the electrical discharge-machining portion of his business. "There are no profits to speak of. We're just turning cash. That's the way manufacturing is now, just turning cash and trying to find some way to make money in the future."

"It's hard to tell in a lot of cases where the business is going," says Jan Meier, treasurer of Meier Tool and Engineering, an Anoka-based metal stamping firm founded by her husband, Richard. "It's just gone." Sales at Meier's company have also declined by half since 2000.

"The recession may go away, but China's not going to," says Meier. "We're on a level playing field with most countries, but not with China, and it's going to take a lot to get there."

China's advantage
On a recent visit to China, Martin Lehman, CEO of Entronix, a Plymouth-based maker of electronic circuit boards, toured Wuxi, a suburb of the sprawling manufacturing city of Shanghai. "I saw a Sony plant going up that was the size of Disneyland," says Lehman, who also serves on the board of directors of Minnesota Technology, Inc. "Next to it was a Pioneer plant." He goes on to list half-dozen prominent multinational electronics firms opening manufacturing facilities in the same Wuxi industrial park. They can't resist the economic incentives the Chinese government is offering in order to create up to 29 million manufacturing jobs and bolster its efforts to build a middle class. Many companies get land for free or nearly so. The government subsidizes plant construction. It charges virtually no tax, and labor costs a fraction of what it might in the United States. In addition, China's enforcement of environmental and labor laws is lax compared to the United States. These advantages offset the hefty transportation costs in bringing goods from China, says Fred Zimmerman, a professor of manufacturing systems engineering and international management at the University of St. Thomas.

The incentives, plus foreign direct investment from global companies, also have beefed up China's ability to compete for complex, higher-value manufacturing projects. While there is plenty of low-skill manufacturing being done in China, Minnesotans who have visited the county say that the Chinese manufacturing landscape is changing-and at a rapid rate. "You'll see people on three-wheeled bicycles delivering products to the most modern facilities," says Jim Haglund, president of Central Container Corp., a Brooklyn Park-based packaging manufacturer, who visited China this fall.

The Minnesota Technology, Inc. survey found that while about 50 percent of state manufacturers consider China the most significant international competitor they face, many did not think Chinese manufacturers had better equipment and technology or could produce better-quality products.

Not everyone agrees with that perception, however. That may have been true five years ago, but "it's not just about cheap labor anymore," says Tom Schabel, president of Alexandria Extrusion Co., who participated in former Gov. Jesse Ventura's 2002 trade mission to China. "You see a wider spectrum of manufacturing in China than in other parts of the world. There are some very crude operations with very low productivity, basically set up on the street. Then, you'll walk into a factory that's so modern it could be anywhere in the world."

Still, not everyone views the movement of manufacturing to China as an economic threat to Minnesota. Toby Madden, a regional economist with the Federal Reserve Bank in Minneapolis, says, "it's like the Chinese people giving us a gift. Overall we're better off because we are trading with China."

Madden also notes that more manufacturing in China has meant lower consumer prices, less pollution, and other "negative externalities" associated with manufacturing. He adds that jobs lost in the manufacturing sector can be replaced by new, perhaps better jobs in other sectors of the economy. With 1.8 billion people, China also represents a huge potential market for goods and services.

Minnesota companies have been successful at selling to China, says Tony Lorusso, the director of export promotion at the Minnesota Trade Office. China is the state's fourth-largest trading partner, after Canada, Japan, and Ireland. Minnesota companies sold $619 million in goods to China in 2001, a nearly 50 percent increase over sales four years earlier.

Without question, the Chinese recognize the value of manufacturing as a way to build their economy, says Zimmerman, who adds that Southeast Asia turns out roughly six times as many science and engineering graduates as the United States. "From a world perspective, it's probably a good thing that we share our wealth," he notes. "They are studying harder; they are improving their skills. We don't seem to have as much interest in engineering or manufacturing, and that's a big problem."

In their recent book, Manufacturing Works: The Vital Link Between Production and Prosperity , Zimmerman and coauthor Dave Beal argue that the loss of manufacturing jobs is significant because of their multiplier effects on local economies. After studying 232 counties around the country with high concentrations of manufacturing employment, Beal and Zimmerman found that a rise in manufacturing employment could be linked to decreasing poverty rates, lower taxes, and increasing employment in other sectors of the economy. In counties where manufacturing employment was on the rise, every major employment sector grew-with total employment rising between 37 and 63 percent in the counties studied. At the same time, when manufacturing employment was in decline, Beal and Zimmerman found that overall job growth tended to be sluggish. The growth rate was about 10 percent in counties where manufacturing declined, and that growth tended to be overwhelmingly in the health care sector, an industry growing in part because of the aging population.

"When manufacturing thrives, so does the rest of the economy," Beal and Zimmerman write in the book. "When it declines, the balance of the economy weakens. Mining, agriculture and a few other industries also transfer prosperity to other sectors, but manufacturing-with 23 percent of the nation's payroll-is the most significant multiplier of jobs."

A Milken Institute study of manufacturing in California, which has lost more than twice as many manufacturing jobs as Minnesota since 2000, found that each additional manufacturing job produced two and a half jobs in other sectors of the economy. Zimmerman, however, isn't convinced. "There is no evidence that the service economy has a life of its own because it does not generate enough external cash," he says. "Maybe something like the Mayo Clinic might, because of its worldwide reputation, but most of the time, local economies won't grow without manufacturing growth."

Manufacturers respond
Not long ago, Alexandria Extrusion bid on the manufacture of a pulley assembly for a Harley Davidson motorcycle. Later, it discovered the work might be going to China, and asked for a chance to rebid the project. "So we said, 'Hey, we've got to come up with an entirely different process to be competitive,'" recalls Tom Schabel, president of the Alexandria-based aluminum extrusion company. A team of employees went to work redesigning the manufacturing process for the pulley to see if they could make it faster and cheaper. They put in a new bid and were awarded the contract. "It's a balancing act," says Schabel. "The point of the story is that there are ways to be competitive on some products."

With revenues of more than $40 million annually and a workforce of about 300, Alexandria Extrusion has found that investments in technology and employee training are helping it stay competitive. "One of our advantages is the caliber of our people-and we have invested a lot in training them," says Schabel. "Their productivity can often off-set cheaper prices from other manufacturers."

Still, the company has not been immune to pressures from either China or the current economic downturn. Sales at Alexandria Extrusion have dropped more than 25 percent since 2001. But it has been aggressively pursuing opportunities in its niches, which include medical diagnostic equipment, electronics, and consumer durables, as well as the automotive sector. "You can't be doing business as usual now," says Schabel. "That will get you into all sorts of trouble. You have to understand the market-and that may mean going after a different market than you have before. You're going to have to invest in training and equipment, and you're going to have to service the heck out of your customers."

With China as a more prominent competitor, manufacturers may need to expand services or develop more specialized products. Says Zimmerman: "We can only compete if we have highly technical products with large world markets where we do most of the value-added work here."

At Winona's United Machine, providing a more valuable product has required that the company create that product itself. Two years ago, began developing a new type of iron that could be used in many of the castings the company produces. "Not much metallurgic research has been done since the 1960s," says Renk. "Most of the iron and nickel composites used in the business now were developed by mining companies back then. Things look really promising, but it takes time and it takes money."

Staying in business long enough to make that transition has been difficult for many Minnesota manufacturers. "Technology businesses like these are heavily capitalized," says Zoubek of Automated Inc. "The machines cost $100,000 to $300,000, and we're employing skilled workers at high wage rates."

Zoubek and the companies he works for find they simply must keep costs as low as possible in order to compete with similar products from China. "With wages in the high $20s per hour, and with benefits and interest payments on equipment, it's almost impossible to make money," says Zoubek. "It's no wonder so many companies have gone out of business."

Many firms have tried to expand other lines of work to replace work that has gone to China. For instance, Jan Meier's company specializes in metal stamping tiny parts, and cell phones had been a big part of the business. But Meier Tool and Engineering also produces disposable needles and scissors for the medical industry, as well as small components for the electric systems in automobiles. "We're all stretching our brains to figure out how to compete," says Meier. Her firm has tried to increase its presence in the medical field, but the orders tend to be smaller. As a result, the company trimmed its workforce from 55 to 35. "Everybody's got a cell phone, but not everybody has to have surgery," she says.

Zoubek also has been relying on a second service his company provides. In addition to electrical-discharge machining, Automated Inc. makes dies and calibration systems for plastic extrusion of products such as vinyl window frames. The work requires more hands-on effort than other products, and typically Zoubek's employees will go to a client's site to complete the development of the tooling. "They can be difficult to build," he says, adding that he thought it would be one part of the business safe from overseas competition. Then in the first week of January, he saw an ad in an industry publication. A Chinese firm was promoting itself as a toolmaker for plastic extrusions.

"I don't know how they are going to do it," says Zoubek. "But I know they'll figure it out somehow."

Like other manufacturers, Zoubek believes we are undergoing a fundamental change in what kind of manufacturing is done in the United States. "Yes, the economy will come back, but manufacturing will never be like before," he says. "I can't tell you what it will be, but in a year or two years, it will be something completely different."

-Mary Lahr Schier is a Northfield-based business journalist.