Made in America? More and more U.S. businesses are trekking overseas to explore cheaper ways to make their products. But what does that mean for small manufacturers left behind on the home front?

Entrepreneur, Oct, 2003 by Joshua Kurlantzick

Vince Ruffolo, president of SIC Inc., a small Wisconsin manufacturer of metal finishings and coatings, is not too worried about his company's future. Though many of his American peers have gone belly up in the face of intense foreign competition, Ruffolo, 48, believes Racine-based SIC remains strong. "We made a series of good investments in the 1990s, and we're able to cut costs effectively and deliver the type of just-in-time service that distinguishes us from foreign competition," he says. "We still have a strong client base."

Ruffolo's optimism is not shared by many of his peers. Over the past decade, the U.S. manufacturing sector has shrunken rapidly, destroying thousands of jobs. Small manufacturers have been hit particularly hard, and the recent economic downturn has only exacerbated this trend. Like SIC, some small manufacturers have used the downturn to retrench and make themselves more competitive. But many others have simply gone bankrupt, leading some entrepreneurs and economists to question whether small manufacturers have a future in America.

TROUBLED TIMES

Manufacturing has had a rough decade. According to the Economic Policy Institute, America's manufacturing sector has been declining for at least the past seven years, losing nearly 2.5 million jobs since 1998. Jerry Jasinowski, president of the National Association of Manufacturers (NAM), says the industry has lost jobs for 32 consecutive months. And states dependent on manufacturing have been decimated. South Carolina, home to much of the nation's textile industry, has shed thousands of jobs in the past 10 years, a slump the American Textile Manufacturers institute has called the "worst downturn since the Great Depression." Meanwhile, in Indiana, where manufacturing is responsible for the largest share of GDP of any state, the government estimates the manufacturing sector has lost 10 percent of its jobs in just the past three years.

Small and midsize manufacturers have suffered more than large companies. IndustryWeek's 2000 Census of Manufacturers, the most recent available, noted the number of small manufacturers nationwide was declining at a faster pace than the number of large manufacturers. "Small companies don't have the capital reserves and other safety nets that bigger manufacturers have," says Collie Hutter, owner of Click Bond, a small Carson City, Nevada, manufacturer of adhesive fasteners used on airplanes. "Today is the worst environment for small manufacturers I can remember." Indeed, in some industries, such as toys and shoes, there are already virtually no small American companies left.

CONTRIBUTING FACTORS

A combination of factors has made it difficult for U.S. manufacturers to survive. Foreign competition--most notably, from China--has cut into many small manufacturers' market share because many foreign-based companies enjoy lower labor costs and looser environmental, health-care and pension regulations. Textile workers in southern China earn about 60 cents per hour; in South Carolina, they can make as much as $18 per horn: Low-skilled, labor-intensive manufacturing is perishing in America because of China, says Chip Coker, 32, CFO of Anderson, South Carolina-based Coker Textiles. To avoid falling into the low-skill trap, his company focuses on higher-end, higher-margin goods that still have a future in the United States, a strategy the company embraced before the rise of China. "The technology involved in higher-end textiles is so advanced that other countries can't handle it," he says.

Making matters worse, as industrializing nations develop, they are able to cheaply produce items using more skilled labor; thereby gaining a foothold in medium-value industries. However, they still lag considerably behind American manufacturers in higher-value production. "When I go to China, it seems they're always adopting newer technology, and incredibly quickly," says Al T. Lubrano, 53, president of Technical Materials Inc., a Lincoln, Rhode Island, company that manufactures specialty metal products.

What's more, developing nations' ability to produce goods in bulk at low prices, combined with global overcapacity in many manufacturing industries, has created deflation. For example, as China has come to dominate global bicycle production, the world price for bikes has plummeted. "Maybe a bigger company can wait out deflation, but a smaller manufacturer can't," says Lubrano. His company has kept a strong balance sheet by investing in high-tech proprietary, processes that speed up production and allow them to remain competitive. "We also outsource to China a bit by doing the higher-end work here and shipping the product there afterward," he says.

Small U.S. manufacturers have also been hurt by the strong dollar, which has risen more than 30 percent against world currencies since 1995. The dollar is making U.S. exports more expensive and imports relatively inexpensive. "I've met small companies all over the country who can't compete because of the exchange rate," says economist Robert Blecker at American University in Washington, DC. Blecker estimates that the strong dollar has cost American manufacturing more than $100 billion annually since 1995, with smaller companies hurt worse because they don't usually hold foreign assets that can cushion against a strong dollar.