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

Even a recent weaker dollar has not helped. Though the dollar has fallen about 7.5 percent since its peak in Feburary 2002 against other major currencies, America's trade deficit has barely changed. In fact, as of May 2003, the deficit with China has increased to $44 billion, up 27 percent from $34.6 billion in May 2002. "The dollar is overvalued, and it's going to let China kill U.S. manufacturing," says Robert Scott, an international economist at the Economic Policy Institute, a think tank in Washington, DC.

In addition, the global slowdown has made it difficult for small companies to shore up their balance sheets through exports, has complicated long-term business planning, and has made banks wary of extending capital to small manufacturers. Most of America's main export markets--the European Union, Japan, Mexico--continue to struggle through slow growth. And loan officers worried about the economic climate have proved stingy with smaller clients. In a March survey, NAM reported nearly 33 percent of small manufacturers found credit harder to obtain than it had been a year ago.

Small manufacturers have compounded the difficult environment with self-inflicted wounds. Many business experts believe these companies have been too slow to adopt elements of the productivity revolution, such as computerized inventories and e-commerce. Indeed, last year, a NAM survey found that manufacturing companies obtain only about 2 percent of their sales from the Internet.

DOWN, BUT NOT OUT

Not all manufacturing entrepreneurs have been decimated. Despite the strong dollar, some have taken advantage of rapid growth in developing economies to focus on foreign consumers or have moved some operations overseas and kept core staff in the United States.

Others have survived by moving into niche markets, in which technology and higher-skilled workers are more important than cheap mass production, or by speeding up their manufacturing and emphasizing to potential clients how much faster they deliver goods to them than foreign firms. "Lower-skill textile-making is not coming back to the U.S., but the textile industry here isn't dead," says Coker. "We can outsource the cheaper manufacturing to foreign countries and dominate segments of the industry like industrial fabrics, medical textiles and other higher-end [products]. Companies that are in these niches in South Carolina are growing, not shrinking."

Hutter agrees: "The strength of U.S. manufacturing is our ability to innovate, which lends itself better to higher-end products. Because of the freedom business has in the U.S., it's still easier for American companies to come up with new ideas than it is for foreign companies," she says. "We've split our business between commercial and military planes, and we've been able to keep innovating during this downturn."

A LITTLE HELP FROM FRIENDS?

Some manufacturing entrepreneurs believe that with a bit more help from Washington, companies could move into higher-value industries, securing a future for small manufacturing in the United States. "The government needs to recognize that manufacturing is still important, because it helps R&D, and it creates well-paying jobs," says Hutter. Indeed, according to researchers at the National Institute of Standards and Technology, manufacturers fund 70 percent of U.S. industrial research and development. Scott's research, meanwhile, shows that manufacturing pays, on average, more than 20 percent more than blue-collar service jobs. And Jeff Faux, a distinguished fellow at the Economic Policy Institute, has estimated that in the 1980s and 1990s, manufacturing was responsible for five times the productivity growth of nonmanufacturing sectors. In fact, a recent report by NAM warned that a continued loss of America's manufacturing activity could, in the long run, cut U.S. economic growth rates by as much as 50 percent.