I have been thinking about the following for some time now, as it speaks volumes about what is happening in the world at large.
On Jan. 1, Caterpillar locked out its 450 employees at its London, Ontario, locomotive manufacturing plant, after a short negotiation. Caterpillar was paying the London employees around $35 per hour in salaries and benefits, plus statutory costs. Caterpillar has a similar facility in Illinois, where the employees ear around $12 – $18 per hour. Caterpillar offered the Ontario workers $16.50 – take it or leave it – and put the lockout in place, and refused further negotiations. Caterpillar said that Ontario workers had to meet the costs of the competition – in this case, the plant costs in Illinois needed to be matched. I believe the Ontario plant was not losing money, but it wasn’t as profitable as the Illinois plant.
The Ontario workers immediately went to the picket lines, and said there is no way they would accept a 55% cut in pay. On February 3, Caterpillar advised them that they would be closing the plant. The plant closure is non-negotiable. Caterpillar has a history of non-negotiation and being willing to wait out lockouts for the long-term. In this case, they decided to move production to the low-cost Illinois facility.
This says a lot about what is happening in the world at large. Companies invariable go to the lowest cost source of viable production. That is rational. They also are becoming extremely adept at placing themselves in strong positions with regard to labor negotiations. One way they do this is by opening similar plants in various locations throughout the world, and then playing the costs of one facility off against the costs of another. In this case, the Illinois plant was the low-cost producer, and Caterpillar leveraged this against the workers in Canada, and by so doing increased its profits by around $17 million per year plus statutory costs. Additionally, Caterpillar dramatically improved its ability to negotiate future contracts with any other facility, as the consequences of failing to bend to the company’s will is now fully established.
Unions have long wielded the upper hand in heavy industry, as can be seen by the salary structure in Canada, where unions used their power to negotiate wages of $35 per hour, or $73k per year plus statutory costs. That is entirely unsustainable for unskilled workers in a global economy. When push came to shove, the union preferred that the workers lose their jobs rather than meet the market demands. That is not unusual, and I have seen it many times. They do not care for the individual worker. Rather, unions are prepared to let these 450 workers lose their jobs rather than risk the “contagion” of concessions spread to other facilities. Attempting to maintain non-competitive wages will ultimately lead to more and more plant closures. Unions generally make no effort to create a sustainable future for the company, but rather any short-term union advantage is levered for short-term gain at the expense of the future of the business. US auto companies are prime examples of this process, which have survived only as a result of government subsidies.
Further, western world workers have not come to grips with the reality of the world. Low-skilled workers have very little economic value in a global economy, and are readily replaced. The belief that low skilled workers can support a middle-class standard of living and then enjoy a comfortable retirement is erroneous, and is being shown so throughout the world. The world is full of low-skilled workers and the competition for that type of work is fierce around the globe. The desire for middle-class lifestyles and comfortable retirements as the fruit of low-skilled employment will be unfulfilled.
So, this is the situation. Companies act ruthlessly to maximize profits, and are totally prepared to set up situations so as to leverage their bargaining power and to minimize cost. Unions have behaved in a very short-sighted fashion when negotiating from positions of relative strength, but are now finding those negotiated wages and benefits unsustainable in the global economy. Further, they are unwilling to compete when faced with global opposition, as they believe granting concessions will become the norm. Rather, they prefer to let companies fail or close facilities, and hope to “kick-the-can-down-the-road, similar to how politicians do, hoping for some miracle to arrive before all the factories close. And workers fail to influence the decision-making, as they have not come to terms with the fact that low-skilled workers cannot achieve a middle class lifestyle in the modern economy.
I believe that companies are acting rationally and in the interests of the shareholders by maximizing profits and doing all possible to ensure the survival of the company. That said, it is unpalatable to see the extreme ruthlessness of these companies. It may be necessary, but there are human consequences. The consequences for the 450 Canadians will be severe and uncomfortable at best.
Unions are trying to maintain the status quo, and it is not working. Companies have, in general, learned how to combat the unions by spreading their production around geographically, and leveraging one facility against the other. The unions have not learned any lesson from over-playing their hands in the good times, and see their wages and conditions as hard-won and not to be relinquished no matter the human cost. That is a failed position, and is leading to their irrelevance and destruction.
And the people cannot overcome their mistaken belief that as Americans/Canadians/Europeans that they are entitled to a grand lifestyle, despite being small contributors economically. This leads them to catastrophic decisions, where they sacrifice everything as opposed to accepting the new reality.
It is a bad situation overall. It is what it is, and I do not see it changing. Rather, I see this type activity escalating. The middle-class is in dire trouble, and will largely disappear, I am afraid, to be replaced by a perpetually struggling lower-class. There will be a top 20% or so, composed of high-skilled people, who will do well, and the balance will struggle mightily. All the screaming in the world will not make low-skilled or semi-skilled workers a valuable commodity in the global marketplace. It is not what anyone would have hoped.
I thought I remembered from a few years back, parts of the rust belt auto industry moving across the border into Canada as costs were cheaper due to Canadian national health insurance, and that the companies were fleeing the US due to rising cost of employer provided health insurance in the US?
I’ve also read some articles about Caterpillar threatening to leave Illinois altogether because of high taxes and the greedy bankrupt state government.
Lot of conflicting information floating around.
Marissa – a lot of things can affect cost. For instance, in 1995, the exchange rate was something like $0.75 ?Us to one Canadian. This could be a huge factor. Snice then, things have swung back to parity, more or less. Timing of contracts can make a big difference as well, as can general economic situations at the time contracts are negotiated.
Caterpillar is one of the companies that plays real hardball. I do not remember them ever caving in once they set their position.
This stuff has been going on for years. Americans cant win against anyone in the world because our standard of living is higher.Or like this.Do you picture someone in China or India buying our products?no because they cant afford them.
This global free trade is only good for the rich who own the factorys.They are so greedy they move whole factorys overseas to save on labor costs.
We need a whole rethink on this. Mabe Obama is working on reducing us to a third world country so we can compete for those dollar a day jobs.
I say make it here,sell it here.at the very least put tarrifs so products from other countrys are in the same price range as american products.Other wise our country has no future.
LLPOH, you’re right about the wildly fluctuating exchange rate, I wasn’t thinking about that.
I took the kids to Banff and Lake Louise summer 2002 or 2003. The Canadian dollar was worth .55 to the USD. I remember thinking the whole country was on sale for half price. Banff was jammed with Japanese tourists spending wildly.
But still Caterpillar has been making some pretty ugly threats against Illinois too.
Ron – unfortunately, the make it here/sell it here model is not an option. First, it promotes uncompetetive practies – those same practices that saw the rise of Japanese cars when the US automakers became so fat and lazy due to no competition that they started putting out high priced junk with no consideration of the customer. This would occur again if the borders are shut. Second, we simply cannot live without foreign goods – oil for example. In order to get foreign goods we would need to offer something in return. The somethings we would offer in return are simply uncompetetive in the model you suggest – the oil sellers would be able to do better elsewhere. The idea that unskilled people can live affluent lifestyles is not viable. Wanting it like the old days when there was no global competition is a wasted effort, I am afraid.
Marrissa – the Canadian exchange rate was very beneficial for a while. Caterpillar, to my experience, and I am well acquainted with that industry, will do exactly what they say they will do, and they are totally ruthless. Illinois hasn’t been the bastion of comfort for companies for a long time. Southern states offer much better terms and conditions. Illinois can match them, or their overseas equivalents, or see companies pull out of the state. Ruthless perhaps, but it is the way of the world.
I’ve majored two Cat engines within the last couple years, all with after market parts from Regal for a savings of about 18k. This after some ten or fifteen years experience with after market Cat parts and seeing no significant difference in quality. Yes I know I’m like the Walmart shopper but survival is becoming the name of the game for me.
Underfire – it wouldn’t surprise me if the parts are identical, samme mame mfgerer and same tooling. Cat wouldnt make all of its own parts.
Well, score one for the U.S…
LLPOH, I appreciate your emphasis on the standard of living angle as this is absolutely key to many issues…
The Canadian wage is an awesome one, really. It could support quite the high-fallutin’ lifestyle. At today’s exchange, a factory worker could feasibly purchase a vacation home in Northern California/ Oregon besides their frigid igloo or whadevs those people live in…
Or two cars…
Or a flatscreen in every room…
Or nights out at the escargo pallace, or whadevs those people eat…
Or stock in resource extracting companies…
For a factory worker. I admit… unsustainable in a world full of unskilled skinnies who walk miles for a pot of dysentary-infested water to send their kids to school, dodging bullets and ducking conscription by warlords.
Yet the equilibrium of capital must take into account the general wealth of consumption (I know, a macro pipe-dream) and more importantly… stability and business atmosphere….
So the U.S. has an edge over the warmongering Frigid Ice People to the north in this one. Yet I have to ask: What is the general timeline for a big biz outfit when seeking low labor inputs? A Firestone factory in Liberia comes to mind, as an example… are the actuarial projections so ignorant of demand destruction in addition to the effect of poverty that this variable is overlooked completely?
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I guess 80 years is a pretty long time, though. Yet the cost of business,in a purely econoomic profit sense I imagine, might be a little higher than what the accountants report…
The union bosses get their dues, WTF do they care if their members have jobs or not? The unions are likewise spread out across the nation, so losing 450 members is but a fart while napping. And, at the end of the day, they always have the public employee unions, gold-plated in law, the last ones standing, all courtesy of the taxpayer and democrats. Unions will never go away until our country is finished; a few months from now.
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The Canadian dollar is kicking our asses, thanks to Bennie and the inkjets.
all this will be meaningless when peak oil begins taking its toll.we need to think about going local for our needs—-the only caterpillar will be the one crawling in your garden.
Hemmeroid:
Perhaps you have forgotten the 80’s.
You know, it really makes you wonder where hourly wages would end up if there were no unemployment insurance. If there was true supply and demand for jobs.
EF
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American manufacturing is becoming more competitive at the margin. Large products that are expensive to ship and have a lower labor component are less expensive to manufacture in the US.
Where I live if you know how to weld you will be pulled off the street and put to work. However it is only at 10 to 15 bucks an hour.
Wages in the US are growing at 1-3% and 10 to 15% a year in china. China is becoming less competitive against the U.S. but it is at a glacial pace.
A lot of good insight here. Colma, well put. I know you have voiced a lot of disapproval re globalization. Unfortunately it is what it is. I cannot answer re payback re re-locating your plant. It is specific to each industry. Some are low capital and pay back immediately. High capital plants are a different kettle of fish.
Glacier pace is right, A Cruel Accountnat
First, it doesn’t SEEM to me that building locomotives is low-skilled work. I don’t envision it like an auto assembly line, but more like building aircraft. But, I’ve been in a locomotive plant so, I could be all wrong.
Second, $12/hr – $18/hr is a mere $25,000 – $38,000 annually. Jeezus. That ain’t shit. I was making almost that back in the 70’s (adjusted for inflation). How can a person support a middle-class life style on that?
For example, how much house can one afford on $38k per year ($780 /wk. gross)? Of course it depends on the interest rate, down payment, debt load, and other factors but a general ball park figure would be $115,000. Maybe that would buy a house in Iowa (or, a slightly run down mansion in Detroit) but you couldn’t you couldn’t buy an outhouse for that here in NJ.
How does a family of four live on $38k a year (and that’s the “high” wage)?? I dunno. And Marissa says, “Caterpillar has been making some pretty ugly threats against Illinois too”. Goddamn. What does Caterpillar want to pay? McDonalds wages? Fuckity fuck.
Double post? WTF?? How’d that happen?
Stuck – it is low skilled by and large. Some pretty specific tasks but they can train up someone to do it in a hurry. It is just a really big car. Low skill = low pay. Skill level is relative not quantitative. Manufacturing is not going to provide middle class jobs – not anymore.
One more comment and back to bed. It probably takes LONGER to train a McDonalds worker than a lot of the manufacturing workers. So why would you expect manufacturing workers to earn more than McDonalds workers? Manufacturing has largely perfected assembly line/automated processes. The single hardest thing for those workers building trains would be abiding by the quality system. By far
That is the point I have been making – people in the middle class are largely doing, and have been doing, jobs that anyone can do with very little training, and there are hundreds of millions of people out there who are willing to do those jobs for no more than a bowl of rice, and they will work harder and complain less.
Not to pick on Ron, who I like, but his vision is rooted in the past. Those days are over. It doesn’t matter what people think they should make, or what people can live on. They will only get the wages the market will bear. End of story. If they can live on that – great. If not, not. Don’t shoot the messenger.
Fortunately there are a few factors that mitigate the low cost of labor. The primary factor is distance and the problems that causes. But at $30k per year plus benefits and mandatory government charges, a manufacturing worker costs 10 or 20 or 30 times more in the US than in China or India. And they are not burdened by govt like the US is. That discrepancy is very difficult for companies to ignore, and is difficult indeed to overcome.
It isn’t 1970 anymore, Stuck. That was the beginning of the end – that was when US manufacturing went to shit and stayed there, and Japan seized the opportunity of US crap manufacturing. Thhe US had an opportunity to stay on top and keep driving forward. Instead it decided it was too great to fail and didn’t need to be excellent in what it did and decided it could afford to kowtow to the unions. Forty years later it is too late. The opportunity has been lost.
The middle class are toast. I am sorry for their loss. But there it is.
I was blessed to have a father and grandfather that had very accurate vision of the future (now that what they said has come true).
One thing they kept emphasizing is the oceans protecting American’s standard of living will slowing become insignificant. After WW2 we had the only manufacturing and we did not have to worry about competition. Then as the world manufacturing rebuilt we had the advantage of oceans protecting/isolating us from competition.
We have now reached a point where it is as if the oceans do not exist and all competition is “local”. Just like water which will always find level, American’s standard of living is now part of a world pool and as such the American standard of living will fall as the rest of the world rises. This will continue until parity is achieved.
We have a government that makes doing business harder than it needs to be. It will be like a weight and it will help sink Americans’ standard of living. This has all been repeated many time in history. Unions make it even harder and as many have said they do not care one bit for the individual, only the Union matters.
People will have to adjust their expectations to enjoy life. It is just a fact. Learn to live cheap.
I had a friend who figured it out years ago. In whatever city he got a job, he would look for land just outside the city where the prices started to fall dramatically. It was usually about 15-20 miles out. He would buy 5-10 acres and put a mobile home on it. Drove only used cars/trucks. In 5-10 years the cities pushed people out to his area, land prices increased and he would sell for a huge profit all the while spending next to nothing to live there. He repeated that three times. He retired last year, and bought a real house (really nice one) out in the country. Last time we talked he was laughing about all the uppity people (mostly Liberal/Progressives) that laughed at him, called him white trash, or a redneck. They are all stuck with debt and underwater mortgages…his place is paid for free and clear. He laughs all the way to the bank.
He has three kids, all in there 40s, all live in mobile homes ( all college educated in non-Liberal Arts) and are repeating his model.
Now it the time more than any, to learn how to live below your means, and laugh at people that thank they are better than you, because you will get the last laugh.
LLPOH,
Great post, and I agree. Reality bites, but the reality is the economy, the manufacturing, the money, the wealth, the jobs, the dreams are not just the western hemispheres rights anymore.
We have shot ourselves in the foot and we keep walking in a circle.
My cousin works at Herman Miller, unskilled as they come, can’t even write a complete sentence, yet makes $18 an hour assembling chairs. His days are numbered but does he see that yet? Fuck no he doesn’t. He keeps spending money he hasn’t made yet, piling up the debt, and he will blame everyone but himself when he loses it all.
I work in manufacturing as well, West Michigan used to be 100% union shops. We had a paper mill, Sealed Power, Brunswick, Lift Tech, and many other union shops where in the 70’s you could get a job right out of high school for $18 an hour. Most of those factories don’t even exist, paper mill closed and talk is of turning that site into condos. For who? Nobody can afford to live in a condo where there are no jobs!
There is only one union shop left and that is L3 Communications who survives on government contracts to keep them alive.
At one time in the the mid 80’s this facility had two plants that employed over 5,000 working three shifts six days a week.
Today, one plant has been demolished, the other now employs 150. Do we get it yet? Fuck no we don’t.
My god, I was talking to a young man who was eating alone, he said he wasn’t welcome in the union room. He was about 32 and had a family. He was just hired as a cylinder head welder. Apparently he was reprimanded by his union brothers for working too fast, if he continued to out pace his brothers it would cost him his job.
This is a shop that according to the union contract you get paid whether you produce a good part or a piece of scrap metal. Presently according to the engineers they produce 42% good parts, the rest is scrap, their other plant in Detroit produces 49% good.
So you are correct when you say the average American worker believes this is our right to not work as hard but to enjoy a better lifestyle than the rest of the world.
LL; OK, this explains what is happening to the unskilled workers. But how about the crooks, liars, and thieves at the other extreme. Our elites, banksters, Wall Streeters, &tc. These worthless, greedy fuckers would be dumpster divers if they weren’t backstopped by the taxpayers. How do we stop the abuse at the other end?
Another insightful article:
Western Civilization: Decline – or Fall?
http://www.investorsinsight.com/blogs/john_mauldins_outside_the_box/archive/2012/03/06/western-civilisation-decline-or-fall.aspx
llpoh very insightful
Transportation of goods to America across the world’s oceans has been enabled by cheap oil, as oil prices rises the game will change.
Other countries have figured out how to maintain manufacturing jobs and produce high quality products that people want to buy — Germany in particular. Of course they train their workers a lot better than we do and pay their executives proportionately a lot less — like we used to do. And instead of having these ridiculous labor showdowns, they just give labor a couple seats on the board so they can work out their differences there.
We need to stop whining and start being willing to change the way we do things. And stop being too stupid and arrogant to steal good ideas from our competitors. Before World War 2 this country did not pretend that it had all the answers all the time like it does now.
I agree with those who observe that when oil gets a lot more expensive (like double) there will be some reverse globalization. And probably another revolution in China, since they are most dependent on the current model of relatively cheap transportation costs for their products.
Ther German Vay vorked because they sold all their schtuff to zee Greeks ans other poor nations on kredit. Dis is not going vell for anyone. Bye Bye Deutschland.
IIPOH ,well tell me what jobs we well have if we sent so many overseas? And how can free trade work if other countrys cant afford our products.? Were on the losing end of these deals,it almost dosent make sense.
For years i met several people a month who would tell me about some factory closing up and going to either china or mexico,some truckers were sad because theyre company was helping haul a whole factory away to a shipping port.
I watched as NAFTA was pushing mexican truckers our way who were paid 12 to 15 cents a mile.I was at 40 cents a mile.Who do you think companys would want to use to save money?
I still think we should make it here and sell it here.You cant have a country of fast food workers.
What is your idea of a solution.
card802
Reading your post put me in a nostalgic mood. Sealed Power, Herman Miller, Brunswick …. I’ve been in all those plants many times. I moved from Indiana to Grand Haven to work for a small manufacturer … Kysor Medallion … and made a very decent living. Good old days …. long gone.
Anyway, it’s hard to believe any factory can exist for long producing 48% scrap!! Not calling you a liar, not at all … it’s just fucking mindblowing. If possible, can you name the company?
Turns out Free Trade wasn’t free after all. And one-way free trade was insane and still is. Nothing more than an indirect way to screw over our own children in favor of children in other countries.
Stucky,
Here in God’s Country you can easily support a family of 4 on 50k/year. You can get a decent house in town for 65-80k, a nice house with land for 110-130k. Taxes are about $7/1000. 5% sales tax, no state or local income tax. If you live and work in town you almost never need gas unless you chose to travel. You may have to garden and cut out some luxuries but it can be done. $35k is pretty good money here.
Stucky,
Sure, that’s L3 Communication.
This plant was Teledyne Continental Motors in it’s glory years, then General Dynamics bought them, now they are owned by L3. My grandfather moved the family from the Upper Peninsula to work there in the 40’s.
Today the deal with the UAW is basically an “honest” days pay for an “honest” days work. These guys can go sit down after achieving their quota of parts produced and get paid a full day for producing half scrap. One engineer I know told me they have tried numerous meetings with union members to increase the quality of the product only. Speed can remain the same, just stop making shit. But it’s hard to train the old dogs new tricks.
A year ago there were about 450 on the floor, not many left now, and not many prospects, they have lost a couple of large contracts and anything new is still a couple of years out. Right now it largely depends on who we will declare war on next.
The sad thing is the old union guys don’t give a shit about the company or the next generation, they just use their seniority to bump the younger guys out. And the young union guys I’ve talked to seem to have a firm grasp on the importance of the company being successful, they will be successful.
The old union guys just want a few more years to pad themselves, while the young welder with a family to feed is screwed as the plant will die and his prospects will die as well.
So many here in Michigan want to move but can’t. They got suckered into taking the bribe of a home buyers tax credit and now pay on a home they can’t afford and can’t sell as it’s “worth” 30% less today then when they signed up for another government promise, when will we learn?
Medallion is still there in Grand Haven. Both GH and Holland have lost a lot of manufacturing as well as consolidated plants, translation: layoffs.
This is a slow dieing part of Mich, service jobs paying minimum wage will become the norm.
About the only thing around here expanding is the medical field. But that takes an education. The hospital here was requiring their nurses further their training as there is a shortage of doctors, the union balked, the hospital fired 30 nurses and hired 130 Filipino registered nurses. And I have to say, after many stays for moms cancer, dads cancer, the Filipino nurses were a ray of sunshine and heads above in professionalism compared to the lazy fat ass pop drinking excuses for a nurse that sits in the station looking busy, chatting about all their problems, caused by others of course.
Free Trade is not free. It may better be labeled “The Great Leveler” instead.
@Card802: Thanks for the link. Ferguson has once again, smacked the nail fair and true. (I just ordered the book!).
Free Trade was (mostly) welcomed in this country because we were rich, atop the totem pole of the worlds’ wealthy countries and importing cheaper alternatives from emerging economies (with much lower standards of living) was a great “Whoopie!” for the consumer who, back in 1970, found that he or she could afford much larger and eventually better quality “stuff” thanks to it being built in Japan..
Now, however, beginning in the 1980’s and continuing today in much more virulent ways, we cannot find products with “Made in the USA” and all those “riches” we accumulated being the worlds’ manufacturing king is now being shipped overseas in payment for those foreign manufactured goods (and services too).
In the process, we have slit our financial wrists, and are bleeding our wealth, borrowing or printing money more and more since we have ceased to earn enough as a country to maintain our previous standard of living.
Those foreign countries, having imported the manufacturing capability, are now financing themselves and bootstrapping their internal standards of living while ours falls.
Along with this, instead of trying to modify our situation, let the old way go and invent new ways to outproduce those foreign sources, thanks to crooked government, excessive graft and loss of the rule of law — all in the name of trying to maintain the status quo — will be our downfall.
We are far beyond the point of no return as far as maintaining the Old America standard of living and manufacturing. This America was poisoned in 1971 and the corpse of our once great country is now being fought over and torn asunder by financial vultures, government and political hacks and criminals and when we reach the cliff – and are pushed over – it will not work out well for anyone.
And I have very little confidence the American Public even recognizes the handwriting writ large everywhere around us, much less make an effort to accept the different reality that is being thrust upon us and modify our behavior to exist in a much lower level of “stuff” and relearn the wisdom of those who preceded us so that anarchy does not rule.
MA
PS: LLPOH: Great article as usual.
MA
Some of the finest comments I have ever read on this site, and that is saying something. I can’t get to them all at this time but will shortly.
Ron – I have no absolute fix. We all know what are some things that can be done to help. Just because we want a solution doesn’t mean there is one. And in this case I think that there is no solution. Maybe energy issues will help. I doubt it – it will create more difficulties. The good old days are gone forever. The oppportunity was squandered. Sorry to be the bearer of bad news.
I have some examples of what is happening in mmy business even now.
card802
Thanks so much for answering, and in such detail. Very interesting to me.
llpoh-Very thoughtful piece-thanks.
Sensetti-I am not convinced that rising oil prices will eliminate imports as much as many believe. Shipping freight by barge is the cheapest method (per ton/mile) o move goods. In fact, in the mining business, close access to tidewater is the holy grail for producing low unit value minerals, like base metal ores and coal. Once you account for handling and loading/unloading, the cost to ship by barge is virtually free, and it matters little how far you have to go.
On the other hand, local production requires trucking and/or rail. Rail is relatively efficient, but not more so than barging. Of course if you are talking about REALLY local production or zero availability of fuel, that is a different story. Also such a radically different paradigm as to be another discussion.
This is part of the ongoing implosion of industrial economics. I suggest you read Steve’s “Debt-o-Nomics” series on EU. None of these factory models can survive economically without subsidy. The $16/hr factories will close right after the $35/hr ones. Industrialization is finished as an economic model.
RE
OK, back on-line.
Tator – thanks for the story. You are absolutely right – folks who live below their means and who do not get caught out in stockmarket collapses, etc. come out on top, as a general rule.
Card82 – right you are re the idiocy of unions and the inability of some management to deal with the issues. Re your comments regarding scrap, a fair few years ago I was buying compressor parts in from Japan. I needed to build 100 compressors, and decided, knowing about my general scrap rates, to buy in 105 sets of parts to make sure I fulfilled the order 100%. The Japanese asked me how many compressors I was building – 100 I answered. They asked me why then was I ordering 105 sets. I said to cover me for scrap/non-functioning parts, etc. They replied, and this is a direct quote: “All work, you no make scrap.” They could not conceive of scrap, or damage, or that their parts would not work. They REFUSED to sell me the other 5 sets of parts. And I mean refused. They sent 100 sets. Every set worked. My plant of course fucked up two or three sets, and had to short deliver the order. But they were right in their attitudes.
Ragman – I do not know how to deal with corruption at the top. No idea whatsoever. I would, and have dealt, with corruption (mainly petty theft) by firing the bastards. I suspect that is the answer, by whover has or can seize the authority to do so. Also, please remember these folks you are talking about pay a disproportionate amount of tax. How would the average taxpayer go if those top earners stopped paying tax? Talk about fucked.
Dragline – Stucky’s answer re Germany is 100% correct. Germany was on the same trajectory as the US re manufacturing until the mid-1990’s. The Eastern European bloc became an open market for them, and the German banks began to finance the sale of German goods to them. This is hanging over them like the sword of Damocles at the moment, as it is very probable the banks will not be repaid. Also, the rebuilding of East Germany aided their manufacturing units, as did Greece (who will NOT repay their loans), nor will Spain, Portugal, Italy, etc. (So how fucked will Germany be when it all comes unstuck? Very.)
Thanks, Muck. you, too, are right as usual.
AKA – I think rising oil prices will help in some ways, re imports, but it will be crushing in many others. Net – I think the rising oil prices will be trememdously bad.
Re what is happening to my company: I am beginning to receive requests daily to requote parts I supply as the customer can get the parts made cheaper in China. I refuse all such requests, as to accede to such would open the floodgates and I would be out of business in a flash, in my opinion.
We were just notified that we would be losing a major component we supply to the Chinese. We developed the part from scratch, and designed/engineered it entirely to meet the customers requirements, but it is not our intellectual property. We have made the component for the last couple of years, and have lost it to the Chinese, who are producing it for around 60% of our price. Our customer has a manager who is in charge of nothing else but identifying parts he can get cheaper in China. The fact that the Chinese will not be able to supply my quality, or to fix/rectify/redesign the part when issues arise is of no consequence in the process, and is given no consideration by this manager. My customer’s production and planning and engineering personnel are all horrified, as they no one day that they will not be able to produce their parts because of this decision – in the long run the Chinese company will not be able to support their needs. But the decision is wholly made by the manager in question who couldn’t give a shit about that – his job and his bonus relies on him getting cost down now, and fuck the consequences a year from now. Such is life.
This is being repeated ad nauseum. I cannot compete heads up with China when their labor costs are 10% of mine, and given they have little or no government regulation to contend with, nor do they have to carry the design and develop burden that I do, which is around 10% of my part cost. They simply have to copy my work. And that they can do.
My business partner and I am making plans to slowly consolidate our facility/business/workforce. Consolidate is code for reduce, in case you missed it. We have opted not to pursue other potential opportunities, as to do so would involve a serious outlay of capital, with no guarantee that the work we get would not be lost a year or two later to the Chinese copiers who do not have to fund the intellectual side of the business.
And so the process continues to erode manufacturing and the future of manufacturing. I have survived by providing high quality goods, excellent service, and superb design/development. They have begun to steal the design/development from me, which is the beginning of the end for my business. If it continues the business will fail in the next few years, and another few hundred middle class jobs will be lost (my emplyees plus my suppliers employees). No doubt about it.
llpoh – My new-found industry is experiencing the exact scenario you presented above. We also refuse to start the tit-for-tat price matching with the Chinese versions of our product line. I cannot say Chinese equivalent, for there is nothing of the sort. It is horrifyingly sub-standard but by God it looks the same when you first unwrap it – and that’s all some of the customers think about. Looks the same, hmmm… well, it must BE the same! (No. It isn’t.)
E – and copying is dirt cheap compared with developing. I do not know how to combat the situation – if customers buy soley on price and not on quality, service, the ability to develop goods for future needs, etc., then the shitflow will simply never stop until every manufacturer is gone from the US.
I’m fairly certain that is precisely the plan.
We briefly lived in Beijing a couple of years ago. The quality of their products were a constant amazement of disbelief for us.
I bought a packet of toothbrushes from our local Jenny Lou’s. They looked like every other toothbrush in the world. As soon as I applied the toothpaste and started brushing my teeth, the entire thing disintegrated and I had a mouth full of plastic bristles and a naked handle.
Bought a ball cap, it looked like any ball cap. No sooner paid for it and walked away than the threads came apart and the brim fell loose.
We made several trips to the new and crappily rebuilt Silk Market., floors and floors of knock off Chinese crap–Tommy Hilfiger, etc, all western ‘brands’. I bought a Rollex for $8. Within 3 days the battery died, the watchband fell apart and I noticed the number 6 was upside down.
(Whatever you do, never NEVER buy pearls in China. They are everywhere and look beautiful, but 99.9% are junk)
The pollution was_unbelievably_ungodly. I do not know how those people survive in that filth.
We we leery of a lot of the food. Markets are a minefield of counterfeit produce, toxic dyes, god knows what meat, questionable eggs, counterfeit booze.
Nothing, absolutely NOTHING could be trusted.
I like to refer to Beijing as Hell On Earth. Thank you lord, I had a US passport.
“the shitflow will simply never stop until every manufacturer is gone from the US.”-llpoh
They will be gone from every place else also. The economic model doesn’t work in the absence of cheap energy.
RE
@Card: healthcare jobs are the final bubble of our supposed knowledge economy. They depend entirely on cost-shifting arrangements, both government and private, which are not remotely sustainable. Depending which studies you read, health care costs have been growing at 8-10% a year, year over year, or more, which after 20+ years of such growth makes them insane. We may have just a few years left to go before the healthcare payment system collapses, but it’s going down like a meteor. At that point there will remain some jobs for the skilled and adaptable physicians and nurses, and most of the ancillary and administrative positions will go poof as the cost-shifting fat that made them possible evaporates. (Many physicians and nurses will also be out of work if they can’t adapt or just decide that retiring on whatever they have left is better than continuing to work for 1/2-1/3 what they used to make.)
Politicians have made great hay of supposed growth in healthcare, but at the end of the day it can’t be sustained if it doesn’t both provide value and rest upon a foundation of other value-creating industries. As it exists now in the US, it does not.
Hi RE…. Good to have you surface now and then to elucidate and educate. Only problem is that your comments are normal instead of 100 word tutorials!
It would appear that we sit upon a highly unstable inverted pyramid with energy at the very bottom and upon which everything else rests. This does not bode well for our current model of existance here in the USA.
Intellectual property – the design, layout and production of a highly involved product (from a machine tool to a computer memory chip) may be considered dead in this country. Sure companies get patients – publishing data to prove their patient – which, in turn, allows those such as China to merely steal design detail or reverse engineer the item and crank them out at 30-50% less cost.
There is no way to protect your overhead in product ideas, design and production on the world wide market. The WTO is useless, has been and will always be useless and if a company had to defend every cognitive idea that is ripped off, there would be no capital left to manufacture it when the cost of lawyers and similar bullshit are priced in.
When one mixes in peak energy (per RE above), Kuntsler’s “World Made by Hand” becomes more and more likely with the huge and miserable die off that inevitably proceeds it.
It would appear that the Kuntsler model of the future become more likely day by day. If not that, then much worse will happen when we reset the human presence on the planet.
MA
Oil depletion is going to be a big problem. However, there are alternatives that will likely stave off complete reversion to the dark ages for quite awhile. Coal reserves are still pretty good (and can be augemented by burning any vocal climate change greenies.).
Coal reserves are good in terms of resource, and Ok in terms of recoverability with current technologies and energy availability. If oil becomes too precious then coal reserves (recoverable amounts) will decline drastically as much of the remaining coal is too deep or poor quality to be worth mining with 19th century levels of technology. I’ll admit I don’t know the precise EROEI and where the economic reserve number would fall taking that into account, but it will shrink.
It’s hard not to put on a little tinfoil and infer that an orchestrated die-off / kill-off is in the works, so that some small portion of the elites can keep living at a level similar to now, as the available resources decline drastically. And it’s only a half step to infer that the beating of war drums against Iran is part of such a strategy.
It’s hard not to put on a little tinfoil and infer that an orchestrated die-off / kill-off is in the works, so that some small portion of the elites can keep living at a level similar to now: Snick
IMO, the above statement is the key to the United States future, and it is almost always omitted from the conversation.
The powers that be will start a major war before the dollar collapses, why would they not. I always fall back to the position that nowhere in history ( that I know of ) has the most powerful military on the planet went home and declared bankruptcy without being defeated on the battlefield.
I was always amazed at the difference between Japanese quality and Chinese quality.
Good article.
“All the screaming in the world will not make low-skilled or semi-skilled workers a valuable commodity in the global marketplace.”
—–llpoh in his article
Yep.