Topic Category: Manufacturing

The increasing global nature of business and supply-chain relationships has had a tremendous impact on U.S. manufacturing over the last decade. And small and medium size manufacturers (SMMs) are adapting with favorable results.

New Trends Cut Both Ways

Two new trends are shaping the future of SMMs, says Jerry Jasinowski, president of the Manufacturing Institute, the research and educational arm of the National Association of Manufacturers (NAM). “First, large manufacturers are increasing their dependence on suppliers of components as they streamline their operations to increase productivity.”

Topic: Manufacturing
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In today’s rapidly changing global business environment, U.S. manufacturers must develop an efficient and cost effective strategy to satisfy regulatory compliance requirements. But in many cases, it’s not easy.

With few exceptions, most companies operate as quickly as possible in order to beat competitors to market. This generally means squeezing every single unnecessary delay out of the product development process. Unfortunately, this often results in commitments to very challenging — if not impossible — product release deadlines.

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The integration of new technologies, sophisticated co-production practices (manufacturing of a product in two or more countries), improved supply chain management and advances in worldwide financing—all spawned by globalization—has transformed American manufacturing.

In turn, resources have shifted to sectors with competitive advantages. And due to the American ability to adapt, innovation has flourished while productivity has skyrocketed. In fact, over the last 10 years, annual manufacturing productivity rose by 4.5 percent, much faster than the 2.7 percent annual growth in overall business productivity, according to the U.S. Department of Labor.

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The United States and Mexico have increasingly integrated their manufacturing industries and rationalized production. In turn, the North American Free Trade Agreement partners have based plant locations on the availability and cost of inputs (labor, raw materials, energy and capital), the quality of supply chains and proximity to markets. Increasingly, however, Chinese trade and investment have affected the U.S.-Mexican relationship and raised questions as to the impact on American manufacturing.

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Some time ago, China realized that in order to grow and prosper, it would have to become globally integrated and make fundamental adjustments. It also understood that to do so meant becoming a full member of the World Trade Organization (WTO).

On December 11, 2001, after 15 years of negotiations, China officially became the 143rd member of the WTO. As part of its accession agreement, China pledged to undergo massive reform that would include significantly reducing its trade barriers. This move was predicted to result in greater access to Chinese markets. It also was anticipated to significantly improve China's ability to attract foreign direct investment — a necessary step in building a globally-competitive manufacturing sector.

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FAQ: Do U.S. production sharing operations abroad destroy U.S. jobs?

Talking Points:

Several anti-globalist groups feel U.S. production sharing (the allocation of different stages of the manufacturing process to different countries) is totally unnecessary and should be eliminated. What they don’t understand is that production sharing actually saves more jobs here at home than would be lost due to protectionist efforts to place a straight jacket on business.

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FAQ: How is globalization impacting U.S. manufacturing?

Talking Points:

The integration of traditional manufacturing, new technologies, national markets and improved supply chain management—all spawned by globalization—is transforming American manufacturing. In the process, resources have shifted to sectors with competitive advantages. As a result, productivity has climbed to new highs, and due to the American ability to change and improve, innovation is flourishing. For instance, the use of muscle on the factory floor is a thing of the past. Today, self-directed workers operate in teams and apply more sophisticated skills to create and run new processes. Concurrently, competitive forces unleashed by globalization are forcing U.S. manufacturers to compete less on price and focus more on product design, branding strategies, productivity, flexibility, quality and responsiveness to customer needs. And companies must continue to push the envelope in terms of greater specialization.

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We are witnessing one of the greatest periods of transformation in history. The convergence of powerful technological, political, economic and cultural forces are shaping the 21st century. For many manufacturers and workers, adapting to this reality is proving difficult—but necessary.

New Factors Changing Our Lives

Technological advances in microelectronics, computers, telecommunications, biotechnology and other fields are changing the way we live and work. The fall of Communism, which added one-third of humanity to the capitalistic ranks, is sharply boosting global competition and creating new markets.

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Primarily due to the “jobless recovery,” global outsourcing has become more controversial in the U.S. In an effort to gain an understanding of its impact, policymakers and others are raising a number of issues — many of which are discussed here.

Outsourcing Manufactured Goods

Traditional U.S. outsourcing mainly involved production sharing or co-production — a process whereby producers in at least two countries share in the manufacturing process. This has allowed U.S. companies to:

Topic: Manufacturing
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In today's dynamic global environment, companies often need to implement new strategies to remain competitive. For many manufacturers, production sharing is part of the answer.

Also referred to as co-production, cross-border manufacturing and outward processing, production sharing occurs when producers in different countries share in the manufacturing of a product. For example, a Detroit auto parts manufacturer may team up with a Mexican company to produce high quality and competitively priced products.

Production Sharing Benefits Are Vast

Cross-border manufacturing allows companies to:

  1. Complement each others’ strengths in order to create greater value;
  2. Gain access to unique technology, raw materials, and specialized intermediate inputs;
  3. Reduce overall costs;
  4. Provide an important market for a company's component exports;
  5. Retain higher wage jobs, product development and design, capital-intensive manufacturing, and marketing-related activities in the United States; and sometimes
  6. Provide the only means to keep companies in business.

Cross-Border Manufacturing Is Growing Worldwide

Production sharing is not unique to the United States. For example, companies in Japan, Korea and Taiwan primarily co-produce in China, Indonesia, Malaysia, Thailand, and the Philippines with a focus on computer hardware, telecommunications equipment, electronic components and appliances.

In the European Union (EU), most co-production involves apparel, auto parts and electronic products and occurs mainly in Poland, the Czech Republic, Hungary, and Slovenia — countries with inexpensive but well-educated labor forces. A growing share of EU co-production also is taking place in Northern Africa.

How big is production sharing? According to The World Bank, production sharing involves more than $800 billion or 30% of total manufacturing trade annually.

U.S. Tariff Code 9802

U.S. exports of components are co-produced abroad and often re-imported by the U.S. as finished goods. In most cases, these imports are entered into the United States under section 9802 of the U.S. tariff code.

Under 9802, U.S. materials assembled, processed or improved abroad can be shipped back to the United States, incurring duty only on the foreign labor and non-U.S.-made materials. As a result, these imports — which often contain substantial U.S. content — can be more price competitive than other imports with no U.S. content.

Outward Processing Advanced in the Auto Industry

Revolutionary technologies combined with production sharing have transformed the U.S. manufacturing industry. As such, levels of productivity and competitiveness during the 1990s increased significantly.

The U.S. auto industry is no exception. As global competition continues to increase, production sharing is one strategy employed by U.S. and foreign auto producers to stay ahead of the curve. This may involve, for example, the capital, technology and engineering skill of a U.S. producers with precision assembly provided by a Chinese partner. The result: an attractive top quality product.

In 2002, U.S. imports under 9802 of automobiles, trucks, buses, bodies, and chassis from Japan reached $18.6 billion. Germany followed with $9.3 billion; the U.K., $1.8 billion; Sweden, $1.8 billion; and South Korea with $1.5 billion.

North American Auto Industry Is Highly Integrated

Since vehicles assembled in Canada and Mexico are eligible for U.S. duty-free treatment under the North American Free Trade Agreement (NAFTA), only a small percent enters the U.S. under the 9802 tariff code.

For example, according to the U.S. International Trade Commission (ITC), in 2002, U.S. imports of automobiles, trucks, buses, bodies, and chassis from Mexico and Canada under 9802 were $618 million and $36 million, respectively. However, in 2002, co-produced U.S. imports of motor vehicles from Mexico not entered under 9802 are estimated at $19.5 billion. Co-production data from Canada outside 9802 is not available.

How Important Is Production Sharing?

In the late 1980s, the ITC conducted a survey of 900 U.S. firms that co-produced utilizing Chapter 98. When asked what they would do if this Customs provision was eliminated, the firms said they would:

  • Turn to foreign suppliers of components;
  • Drop labor-intensive products and import them from East Asia;
  • Move all manufacturing to Asia;
  • Cut back U.S. production and target a market niche not threatened by imports; or
  • Go out of business.

Since then, production sharing has become vastly more important to U.S. companies and workers. According to the ITC, it has been responsible for generating new jobs and retaining those that would have been lost due to intense foreign competition.

Consider the Pros and Cons

Sharing manufacturing strengths with high and low-wage countries has become an important strategy for many companies. However, while co-production has been beneficial for many firms, some have invested in foreign-based production sharing facilities only to find unexpectedly low levels of productivity, excessively high turnover, poor infrastructure, and a corrupt legal system. Consequently, several firms have abandoned their efforts.

Co-production can be a means to achieve a higher level of global competitiveness. However, before engaging in production sharing, it’s essential to fully understand your needs, in addition to the needs of your partners, their culture and their environment.

This article appeared in Crain's Detroit Business, June 2003. (CO)
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