Because lean as we know it today is almost synonymous with the Toyota Production System, lean discussions of the auto industry tend to focus on the contrast between Toyota and the U.S. automakers.
As a result, we sometimes overlook another company that can provide some lean lessons: Honda.
An article in The New York Times this week notes that U.S. auto sales for the first seven months of this year are down 11 percent overall, with most major automakers – including Toyota – posting declines.
But Honda sales were actually up by three percent.
Is that primarily because of lean? No. It is primarily because Honda has always focused on building fuel-efficient, environmentally friendly cars, and has never made full-size pickups or SUVs.
In today’s economy, with gasoline now close to $4 per gallon, Honda can barely keep up with demand. Sales of its four-cylinder Fit are up 79 percent so far this year.
But the article, written by Bill Vlasic, notes that Honda is flexible. And being flexible – a lean characteristic – certainly helps.
Unlike many other automakers, Honda has been able to capitalize on the switch in demand to cars because of the flexibility of its assembly plants.
At Honda’s plant in East Liberty, Ohio, for example, the assembly line can switch almost seamlessly from Civics to CR-Vs.
The article doesn’t mention lean. And lean thinking may not be as deeply embedded in Honda’s DNA as it is in Toyota’s. But it’s there – and it makes a difference.
Because lean as we know it today is almost synonymous with the Toyota Production System, lean discussions of the auto industry tend to focus on the contrast between Toyota and the U.S. automakers.
Posted by Ralph Bernstein at 8:50 AM
True commitment is when you stand by your principles even when it is difficult.
Case in point: Toyota.
On Aug. 8, Toyota halted production of pickups and SUVs at plants in Texas and Indiana, idling 4,500 workers. But because of its commitment to lean principles, Toyota is not laying anyone off.
An article in Financial Week (by Lindsay Chappell of Automotive News) describes what is happening.
“This was the first chance we've really had to live out our values,” says Latondra Newton, general manager of Toyota’s Team Member Development Center in Erlanger, Ky. “We’re not just keeping people on the payroll because we're nice. At the end of all this, our hope is that we'll end up with a more skilled North American work force…
”It’s an expensive proposition. Toyota won't estimate the financial hit. But keeping 4,500 of its workers on the clock at full pay and benefits for 14 weeks, even at a conservative estimate of $20 an hour, would represent at least $50 million. The shutdown also means a production loss of 30,000 to 40,000 big-ticket pickups and SUVs. At an estimated wholesale value of even $25,000 per vehicle, that translates into as much as $1 billion in lost revenue.
Other complications are developing. Toyota’s assembly plants that still are producing are leery of others getting an advantage in intra-company competition for future work. So they are vying to take part in the retraining programs.
It was Ms. Newton who first received word of Toyota’s decision last month (of the production halt.) Her instructions were clear: All affected workers would remain on the clock at full pay until assembly resumes in November.
No one had developed a contingency plan, so that left Newton and her Kentucky staff with about two weeks of late-night meetings and weekend scrambling to create a plan of action.
Their solution: Move the affected work force through a nonstop schedule of classes and training exercises aimed at improving their assembly skill levels.
Among the classes they are rotating through: safety drills, productivity improvement exercises, presentations on material handling and workplace hazards, diversity and ethics classes, maintenance education and a stream of online tests to measure and record their skill improvements.
But just as the plan got under way, things became more complicated.
In Toyota’s manufacturing system, its plants compete for each new vehicle program based on their achievements. If one plant gets a leg up on worker skill levels or safety achievements, it could sway a future decision on where a new vehicle gets manufactured.“
Our other North American plants that were not affected didn't want to get left behind by the skill improvements, so they have asked if they could also participate in the programs,” Ms. Newton says…
Rotating the unaffected workers through skill programs will create manpower issues on Toyota’s busier assembly lines. That likely will mean that Toyota will use San Antonio and Princeton workers to relieve employees on lines elsewhere.
The automaker also is considering ways to shift Texas and Indiana workers temporarily to Toyota plants in which assembly lines are moving at full speed, such as the Camry assembly plant in Georgetown, Ky.
Despite Toyota’s contingencies, it is unclear that the large-scale retraining will be enough to see the San Antonio and Indiana workers through until production resumes.
The automaker says it has not decided what employees will do after completing their classes, but they probably will work in community service programs around San Antonio and southern Indiana.
That would put Toyota employees to work cleaning public parks and scrubbing graffiti from buildings around San Antonio, a company spokesman says.
And if executives can resolve logistics and safety issues, they may authorize a weeklong employee assignment to clean up the shoreline of a Texas lake.
Can you imagine GM, Ford or Chrysler doing anything like this?
The program may be expensive in the short run. But in the long run, it will serve to strengthen Toyota even more.
Posted by Ralph Bernstein at 9:03 AM
My wife’s doctor is part of a medical group that has its own laboratory. That is convenient because it means the patient can have a blood test, for example, done at the same place and time as a visit with the doctor. It also significantly reduces the time it takes for the doctor and patient to learn the results of the test.
That kind of integration involves the same lean principles used in setting up a manufacturing cell. You break down the silos and bring together parts of the process that should follow each other.
A story in the St. Petersburg Times describes a similar healthcare example, this one involving a new clinic in New Port Richey, Florida, to do testing related to lung cancer. And this one not only speeds up the process; it might save lives as well.
Typically, when a patient is suspected of having lung cancer, he or she may have to undergo a series of tests, usually at a variety of locations over a period of time.
That drawn-out process exhausts patients and delays treatment of an aggressive disease that kills more Americans than any other kind of cancer.
The new clinic tries to address this problem.
The clinic, which opened last week, works like this: A patient sets up an appointment, either through his primary care physician or through a self-referral, at the clinic, held once a week at North Bay's Cardiovascular Center. He undergoes a range of tests, such as CT scans and blood tests, procedures that have typically been performed on different days and at different offices.
The patient hangs out at the clinic while the test results come back. Then a multidisciplinary team of doctors — a thoracic surgeon, medical oncologist, radiation oncologist and a pulmonologist — review the results, get together in a conference room and develop a treatment plan…
Rosemary Giuliano, the "nurse navigator" who will coordinate the patients' visit and treatment, said the clinic will be especially helpful to younger patients, who may otherwise have to miss multiple days of work to go to various appointments.
Hospitals around the country are using the clinic approach for lung cancer diagnosis. One of them, Sanford Cancer Center in South Dakota, says its patients begin getting treatment within 16 days of coming to the clinic.
That compares to industry averages of more than three months, the clinic says in information on its Web site.
Giuliano said the North Bay clinic, which took about eight months worth of planning, is modeled after a community hospital program outside Atlanta. That program cut the average time from the onset of symptoms to treatment from 83 days to 14.
If you had lung cancer, wouldn’t you want treatment to begin within two weeks, rather than three months?
The article, by Jodie Tillman, makes clear that there are practical problems involved in creating this type of clinic. One is bringing together busy doctors from different locations. Another is that not all of the doctors at the clinic may be part of the insurance company network for any given patient.
But those should be viewed as challenges to be overcome, not reasons to abandon the idea. This is a good, lean concept, and I hope it ultimately becomes an industry standard.
Posted by Ralph Bernstein at 8:47 AM
What is the best organizational structure for tackling a system with huge problems?
Lean advocates will tell you that the structure has to be one that encourages workers at even the lowest levels to be thoughtful and innovative, respects their ideas and encourages them to develop and implement improvement ideas.
As a cover story in the most recent issue of The New York Times Magazine makes clear, perhaps no system has greater problems than the schools in New Orleans, especially since Hurricane Katrina.
The city’s disastrously low-performing school system was almost entirely washed away in the flood — many of the buildings were destroyed, the school board was taken over and all the teachers were fired…
In New Orleans, before the storm, the schools weren’t succeeding even in an incremental way. In 2005, Louisiana’s public schools ranked anywhere from 43rd to 46th in the federal government’s various state-by-state rankings of student achievement, and the schools in Orleans Parish, which encompasses the city of New Orleans, ranked 67th out of the 68 parishes in the state. The school system was monochromatically black — white students made up just 3 percent of the public-school population, most of them attending one of a handful of selective-enrollment magnet schools — and overwhelmingly poor as well; more than 75 percent of students had family incomes low enough to make them eligible for a subsidized lunch from the federal government. The dysfunction in the city’s school system extended well beyond the classroom: a revolving door for superintendents, whose average tenure lasted no more than a year; school officials indicted for bribery and theft; unexplained budget deficits; decaying buildings; almost three-quarters of the city’s schools slapped with an “academically unacceptable” rating from the state.
But since the storm, a wide range of dedicated reformers have come to New Orleans, seeing the situation as an opportunity to virtually start over.
The well-written article, by Paul Tough, describes in detail how a variety of strategies are being tried; how the situation is incredibly complex, and how success is painfully slow.
But one point that jumped out at me from the article is the philosophy of the district’s leaders, including new superintendent Paul Pastorek, about how you encourage change.
It is simply impossible, Pastorek has come to believe, for a traditional school system, run from the top down by a central administrator, to educate large numbers of poor children to high levels of achievement. “The command-and-control structure can produce marginal improvements,” he told me when we met last month at a coffeehouse on Magazine Street. “But what’s clear to me is that it can only get you so far. If you create a system where initiative and creativity is valued and rewarded, then you’ll get change from the bottom up. If you create a system where people are told what to do and how to do it, then you will get change from the top down. We’ve been doing top-down for many years in Louisiana. And all we have is islands of excellence amidst a sea of mediocrity and failure.”
That brings to mind a book we publish, Freedom From Command and Control by John Seddon.
In New Orleans, in actual practice, the complexity of the situation and the approaches being tried means that different categories of schools have different degrees of autonomy and success.
It is one of the oddities of the organizational structure that governs public-school education in New Orleans today that Pastorek and Vallas, the high-paid hotshots at the top, are responsible for the schools with the biggest problems and the worst test scores, while the schools that are doing best are the ones furthest from their control, the ones they can claim the least credit for. What the two men will tell you, though, is that this is exactly the way things should be. Under a portfolio model, successful schools can be left alone to do their own thing, while failing schools are subject to increasingly active levels of, first, support and then control…
Although Vallas is a believer, in theory, in decentralization, he and Robichaux are providing a great deal of centralized support for the schools in the Recovery School District. They have created a “managed curriculum” for every school in the district to follow: detailed binders that each teacher can consult to see which skills and what knowledge they should be imparting each week and month in order to keep up with the state’s standards. The R.S.D. requires its schools to administer regular “benchmarking” assessments to each child in the district in each core subject, to monitor how much is being learned — and taught — in each classroom.
I didn’t read the word “lean” anywhere in the story. But consider what is being described here: Decentralization. Standard work. Goals. Metrics. Sounds lean to me.
The task facing the administration and staff in New Orleans is daunting. But by employing lean strategies and tactics, they are on the right track. I wish them luck.
Posted by Ralph Bernstein at 8:58 AM
Money talks, and when it is being used to encourage better quality healthcare, doctors are listening.
The federal Centers for Medicare and Medicaid Services (CMS) is midway through a four-year project to offer doctors incentives for quality improvements in healthcare. The latest data on the program – for its second year, April 1, 2006, through March 31, 2007 – show positive results.
The project involves 10 physician groups representing 5,000 physicians. Those 10 groups received $16.7 million in incentive payments for improvements in quality of care and health outcomes for patients with congestive heart failure, coronary artery disease and diabetes.
And while the CMS news release and supporting documents describing the second-year results don’t mention the word lean, several lean concepts clearly contributed to the improvements.
One focus of the project is technology, such as implementation of electronic health records. Technology is not typically viewed as lean tool, but in many cases the technology was used to provide better information and better tracking of patients. And measurement is clearly a part of a lean strategy.
Several of the physician groups focused on improving chronic disease management and coordination of complex cases. Think of that as looking beyond one department or silo to view (map?) all efforts. Sounds lean to me.
Further, consider these descriptions, provided by CMS, of some of the efforts:
Dartmouth-Hitchcock Clinic focuses on improving quality while reducing costs through implementation of evidence-based care initiatives. The clinic uses recognized experts to educate physicians and support staff in understanding evidence-based care guidelines. Electronic tools and reports including disease registries, dashboard reports to track progress on quality measures, and electronic medical record enhancements are used by the physicians and staff at the point of patient contact to identify patients with chronic disease and care gaps. Evidence-based care implementation also requires changing workflow processes and roles for support staff…
St. John’s Health System developed a comprehensive patient registry to respond to the demonstration’s quality improvement incentives. The registry is designed to track patient information, identify gaps in care, and ensure that appropriate and timely care is provided. A key element of the patient registry is the visit planner which is designed to complement physicians’ established clinical work-flow process. It provides a “to do” list for physicians prior to each patient visit, with reminders for needed tests or interventions. The visit planner consists of a one-page summary for each patient showing key demographic and clinical data, including test dates and results. An exception list highlights tests or interventions for which the patient is due and provides physicians with reports on areas where patient care can be improved…
There are elements of training and standard work in these descriptions, and there seems to be a recognition of the importance of processes. Sounds like some steps in the right directions.
Posted by Ralph Bernstein at 8:43 AM
Does it matter whether the top lean person in a company reports directly to the CEO, or is a few levels removed?
Or so says Bob Paquette, who discussed this issue in a presentation at the recent regional conference in San Diego of the Association for Manufacturing Excellence.
Paquette is a “master expert” in the Raytheon Six Sigma program at the defense and aerospace supplier – not the top improvement person in the company, but a middle manager. The Raytheon program, by the way, is not just about Six Sigma, but also involves lean.
He was concerned over the fact that the organizational structure at Raytheon has changed over the years. Back in 1999, the RSS VP reported directly to the CEO. But by last year, he said, that person reported to a senior VP, who reported to an executive VP, who reported to the CEO.
Paquette decided to research the subject. He sent out surveys to 60 companies, asking them to describe how improvement efforts fit into their organizational structures, and to rate the effectiveness of their improvement programs (along with many other questions).
From the results, he concluded that one factor affecting the success of an improvement effort is having at least one percent of your workforce in full-time roles as improvement specialists.
However, he said, “I couldn’t find a correlation between reporting level and level of effectiveness.”
If the top improvement person reported directly to the CEO, or was just one level removed, there was “an indication you had an edge. But it wasn’t conclusive,” he said. “It looked liked it helped, but it wasn’t necessary.”
His conclusion was that what matters is not organizational structure, but the organization’s commitment to making improvement a part of how it does business.
At Raytheon, he said, “It’s alive and well, and I need to get over the fact that It’s not like it was before.”
Posted by Ralph Bernstein at 9:05 AM
Ford has announced that focusing on quality saves money. Too bad it took them so long to find out.
The automaker just issued a news release stating that the warranty repair rate for Ford, Lincoln and Mercury vehicles in the United States is now almost 60 percent lower than it was in 2004, and that this falling repair rate contributed to a $1.2 billion reduction in Ford’s worldwide warranty costs over the past 18 months.
“It all starts with the company’s commitment to developing and implementing standardized engineering processes,” says Art Hyde, chief engineer, Global Product Development System. “By fully utilizing our (Computer Assisted Design) toolsets, we are signing off on all aspects of our designs before we even release the first prototype.”
Hyde says the design and engineering analysis process makes it possible for problems – that previously might not have surfaced until launch – to be caught and corrected in the virtual world.
“We’re using some of the same software and equipment as our competitors, but how and when we use it has given us a competitive advantage,” Hyde said.
A competitive advantage? Really? I imagine executives over at Toyota are having a good laugh over that one. Didn’t the Asian automakers steal vast amounts of market share from the Big Three over the last 50 years by producing better quality vehicles? And didn’t they (or at least Toyota) do so by recognizing that defects and the work required to fix them are waste?
Don’t get me wrong. I’m glad Ford is producing better cars and saving money on warranty costs. And I know that the quality of its cars (as well as those of GM and Chrysler) has improved to the point where it just about matches the quality of Japanese cars.
However, don’t tell me Ford is gaining a competitive advantage on quality. They may have caught up with their competitors on quality. But they haven’t passed them.
Posted by Ralph Bernstein at 9:11 AM
I’ve occasionally written about conferences where some speaker from Toyota stood out – not because he or she was a better speaker than anyone else, but because the focus of the talk was different. For example, other speakers might discuss products, and a Toyota speaker would discuss customers.
The Management Briefing Seminars, an annual high-level automotive conference sponsored by the Center for Automotive Research, is taking place this week in Traverse City, Michigan. I’m not attending this year, but I wasn’t surprised to read this description, by Edward Lapham of Automotive News, of the first day’s remarks:
When Toyota's Steve St. Angelo rattled off the family-oriented benefits that the company's manufacturing arm offers its employees, you knew he got the attention of most of the attendees at this morning's session at the Management Briefing Seminars here in Traverse City.
It's not that anything he said was new or radical. Toyota offers a lot. But some of the benefits, such as child care, have been addressed by the UAW with automakers and suppliers.
It was telling that St. Angelo mentioned them in the same forum in which other manufacturing execs emphasized what they have accomplished by improving quality, boosting efficiency and cutting costs.
The message: Don't forget to nurture your human assets.
In the hallway outside the session, an acquaintance from IBM reminded me that once upon a time -- when IBM was the dominant computer giant -- the company offered its employees a host of family-friendly activities and facilities.
Even though some highly visible female execs are exiting the industry for opportunities elsewhere, there still were many women in this morning's crowd because more women are moving into key positions in the U.S. auto industry.
By the way, Dave Cole, Lisa Hart and the rest of the team from the Center for Automotive Research get kudos for having 10 female speakers on the agenda.
Monitoring the number of women on the program is something I do regularly. But, anecdotally, it seems like the most ever -- or at least the most in several years.
Because Traverse City and the Grand Traverse Resort are family-friendly, many speakers and attendees bring their families, which can be problematic if your spouse doesn't come to handle child care. I spoke with one female exec whose parents are here to help take care of her three small children.
The message: Don't forget to nurture your human assets.
Those of us who blog about lean often comment that too many companies try to become lean without including the critical lean principle of respect for people. It seems Steve St. Angelo of Toyota drove that point home one more time.
Posted by Ralph Bernstein at 8:55 AM
Creating the right floor plan is a critical part of a lean operation. It is the only way to optimize flow and eliminate wasteful movement and transportation.
That is true for a small manufacturing cell as well as for an entire factory. Many people are coming to recognize that it also applies to hospitals.
And it applies to jails.
Actually, that is one application I had never thought about until I attended the recent San Diego regional conference of the Association for Manufacturing Excellence. At the conference, Glen Renfro, the retired director of justice programs for HDR Architecture, described how the firm designs and builds lean jails.
He focused on a jail HDR designed in Collin County, Texas. He commented, “The manufacturing process – it’s no different from the jail. Our raw materials are a little bit different. The ‘product’ gets shipped.”
(By that last statement, he meant that an inmate being held at a county jail ultimately leaves that facility, released to either a state or federal prison, or to the outside world.)
What became clear from Renfro’s presentation was that designing a lean jail involves the same key strategies involved in designing a factory or hospital – primarily creating a cross-functional team that engages in extensive planning to address all issues.
For a jail, this involves everything from the flow of the inmates through a facility during the intake process (which may involve several flows for different categories of inmates) to making sure guards have clear lines of sight in cellblocks.
It also involved designing the facility for possible future expansion. That resulted in a “plug n play” plan for up to six clusters of cells, through which a new cluster could simply be connected to existing systems. (Two clusters were built initially; three more have since been constructed.)
A well-designed lean facility is more productive, meaning it requires less staffing. Renfro said the construction “eliminated 125 positions.” His meaning was a little unclear. Since this was a new facility, eliminated from what? If people were actually laid off, that would be troubling, since that is counter to lean principles. However, if he meant that the new facility required 125 fewer positions than a traditional facility of comparable population, that would be positive.
Do you know of any other types of facilities were lean design makes a difference? What is your experience?
Posted by Ralph Bernstein at 8:47 AM
You don’t hear a lot about lean principles being applied to marketing, so I was pleased to attend a session on exactly that topic at the recent San Diego regional conference of the Association for Manufacturing Excellence.
The speaker was Jerry Fiala, a managing vice president of Capital One. For those of you who live in caves and have never seen any of their distinctive TV commercials, Capital One is a credit card company. And in recent years it has expanded its financial services footprint by buying a couple of banks.
But as much as what it does in actual financial services, Capital One is a marketing company. Fiala is a marketing executive, his role being to help the company get more customers.
The processes for doing that are “not markedly different from typical manufacturing processes,” Fiala said. Appropriately, his beginning-to-end name he uses for those processes is the Acquisition Value Chain (AVC).
The AVC annual volumes are impressive:
Several thousand different “creatives” developed
Several hundred solicitations executed
4,500 different Web pages
Over one billion mail offers
Millions of applications processed
Millions of welcome kits mailed
Capital One began its lean journey in 2003. The benefits being achieved are neither surprising nor unusual for anyone familiar with what lean can do, but they are significant.
For example, Fiala said that when he first joined the company, “I could get a direct mail piece out faster than I could change anything on my website.” A website change was taking 180 to 200 days. And at that time, the company wasn’t measuring things like cycle time or quality.
The initial lean initiatives reduced time in the Internet marketing process by 77 percent. Since then, further initiatives have not had much impact on the time in the process, but resulted in what Fiala said were big increases in capacity.
(As an aside, Fiala offered an interesting insight into marketing trends. “Much to our chagrin, direct mail continues to go away,” he said. “Its effectiveness is going down and down. There needs to be another way to acquire customers.”)
And as with lean transformations everywhere, the “soft” issues are the most challenging. Capital One trains employees extensively in an effort to create a lean culture. Also, Fiala commented, “Lean management is key to the transformation.”
Has your company attempted to make its marketing processes lean? What is your experience?
Posted by Ralph Bernstein at 8:50 AM
Business ought to be all about the customer. A company should always focus on providing the value that the customer wants, which is what lean is all about.
And in a customer-driven mindset, the only valid reason for raising prices is that you believe you provide enough value the customer will be willing to pay the increase.
Too many companies justify raising prices by saying that their own costs, usually for materials, have gone up. (Mark Graban at the Lean Blog recently focused on this practice in the auto industry.) That is a bad attitude, partly because it shows no consideration for the customer, and partly because it ignores the possibility that process improvements can reduce expenses and compensate for higher material costs.
I recently read an example of this in an Associated Press story (here on the Chicago Tribune website). In this case, the culprit is a hospital.
An expansion at the University of Iowa Hospitals and Clinics will result in an increase in patient costs, but officials said they don't yet know how much…
The planned expansion is expected to cost from $700 million to $850 million.
The expansion will include a new children's care center and a critical care tower. The expansion will ensure that most of the hospital's rooms are single-patient.
In May, the Iowa state Board of Regents authorized the hospital to begin planning the expansion. At that meeting, a proposal to increase patient costs by 6 percent was approved to reflect increases in the cost of utilities, supplies and drugs.
University Hospitals Chief Financial Officer Ken Fisher said there's no way to tell how much patient costs will rise because the size of the project and how it will be financed have not been resolved.
Fisher said building now rather than later is a good move for the consumer. With construction costs increasing each year and favorable lending conditions, the project would be more expensive in the future.
"We know we're going to have to build. The question is when we ought to do it," he said.
Fisher said that by adding about 500,000 square feet, the hospital will be about the same size as other major academic hospitals.
"We're essentially trying to say we need to bring our basic footprint to that of other facilities," he said.
Fisher said the principal driver of patient costs is labor, consisting of 50 percent of the hospital's budget.
There is so much wrong here, I hardly know where to begin.
First is the overall attitude: Patient costs must go up because our costs are increasing. Even though patients may not get more for their money? And will patients get reductions if costs go down?
Moreover, the hospital CFO seems to be saying that whenever expenses increase, whether due to increases in drug costs, higher utility costs or expansion, all of the increase will be passed on to patients. Why? To preserve the hospital’s margin? Not a very friendly approach.
Next is the CFO saying expansion is necessary to match the footprint of other hospitals. What kind of justification is that? Why isn’t he saying anything about a need or demand for additional services? There may be such a demand, and building a children’s care center and a critical care tower may make sense. But that doesn’t necessarily have anything to do with the hospital’s footprint.
He also notes that the principal driver of patient costs is labor. I grant you that healthcare is a labor-intensive business. And adding new facilities and services may increase labor costs. The problem here is the unstated, underlying assumption that nothing can be done to make processes more efficient so that less labor (not to mention less everything else) will be required.
A further example of this is Fisher’s statement, "We know we're going to have to build.” Maybe they wouldn’t have to build if they used lean methodology to increase capacity.
Can somebody set these people straight?
Posted by Ralph Bernstein at 9:42 AM
Why have millions of U.S. manufacturing jobs been lost in recent years? Is the cause outsourcing by U.S. companies? Competition from foreign sources, accompanied by currency manipulation? Or productivity improvements?
Politicians like to point to foreign competition and outsourcing. Lean advocates focus more on productivity gains, noting that actual manufacturing output has not declined in the same way as the number of jobs. Further, we note that much of the growth of manufacturing overseas is to produce goods for those local markets, not to replace goods manufactured in the U.S.
But that doesn’t mean foreign manufacturing has NO impact. And a new report from the Economic Policy Institute argues that China is a big source of problems for the U.S.
The report, which studies jobs in the U.S. in relation to exports and imports from 2001 to 2007, states:
The growing U.S. trade deficit with China has displaced huge numbers of jobs in the United States and has been a prime contributor to the crisis in manufacturing employment over the past six years. Moreover, the United States is piling up foreign debt, losing export capacity, and facing a more fragile macroeconomic environment…
Between 2001 and 2007 2.3 million jobs were lost or displaced, including 366,000 in 2007 alone…
Because U.S. exports to China are much more commodity intensive (i.e., comprising products such as grains, steel scrap, and paper scrap) than Chinese imports (99% of which are manufactured products), average wages earned in jobs producing U.S. exports to China paid 4.4% less than the jobs displaced by imports from China. More than one-fourth of U.S. exports to China on a value basis were commodities…
Rapidly growing imports of computers and electronic parts accounted for almost half of the $178 billion increase in the U.S. trade deficit with China between 2001 and 2007. The $68 billion deficit in advanced technology products with China in 2007 was responsible for more than 25% of the total U.S.-China trade deficit. The growth of this deficit eliminated 561,000 U.S. jobs in computer and electronic products in this period. Other hard-hit industrial sectors include apparel and accessories (153,000 jobs), miscellaneous manufactured goods (134,000), and fabricated metal products (102,000); several service sectors were also hard hit by indirect job losses, including administrative support services (139,000) and professional, scientific, and technical services (128,000).
The report also focuses on the issue of currency manipulation:
A major cause of the rapidly growing U.S. trade deficit with China is currency manipulation. China has tightly pegged its currency to the dollar at a rate that encourages a large bilateral surplus with the United States. Maintaining this peg required the purchase of about $460 billion in U.S. treasury bills and other securities in 2007 alone.2 This intervention makes the yuan artificially cheap and provides an effective subsidy on Chinese exports…
While the overall U.S. trade deficit improved significantly in 2007, largely as a result of the 30% decline of the dollar against major currencies since 2002 (including a 44% fall against the euro), the U.S. deficit with China increased $26.6 billion, in large part because China allowed the dollar to fall only 12% against the yuan between 2002 and 2007.
I’m sure currency manipulation is a real issue. But there are still some U.S. manufacturers who compete successfully on a global scale because they embrace a lean strategy.
Do you believe China is a cause of U.S. job losses? Is a lean approach enough to deal with the forces shaping global markets? What is your experience?
Posted by Ralph Bernstein at 8:56 AM