By Joel Kotkin
IN THE FACE OF INTENSE foreign competition, American corporations from General Motors to Silicon Valley start-ups have sought economic salvation by transferring their manufacturing abroad. Now a small but growing number of American firms are finding that the best way to beat the overseas competition is by producing their goods right here at home.
"It's not enough to be brilliant marketers or designers," explains Jim Toreson, president of Xebec Corp, a leading manufacturer of controllers for computer disk drives and among the leading spokesmen of the incipient "Made in U.S.A." movement. "You have to combine with the best manufacturing technology. You need the one-two punch or you'll end up, in the long run, as consultants to the Japanese."
What makes the stay-at-home manufacturing strategy of entrepreneurs such as Toreson so significant is that it rests not on such common Washington concerns as preserving jobs or 1984's record $100-billion merchandise trade deficit. It rests upon that firmest of foundations -- corporate self-interest. Not only does manufacturing at home increase corporate control, it:
Has the advantages of staying close to a huge domestic market. "Ninety percent of the potential customers are in the United States," says Bill Schroeder, president of Priam, a San Jose-based microcomputer disk-drive manufacturer that enjoyed sales in excess of $50 million last year. "What customers are in Singapore, Taiwan or the People's Republic of China? I haven't seen any Viet Cong carrying disk drives."
Indeed, Priam's most feared competitor -- Fujitsu Ltd., a giant Japanese electronics firm with over $5.5 billion in sales last year -- has set up its new disk-drive operation outside Portland, Ore. Says Saburo Adachi, director of the planning and research division of Fujitsu America: "We want to manufacture the product where we sell it."
Domestic production also quickens the "turnaround time" -- the time it takes a company to fill a customer's order. That can make a tremendous difference in the often- volatile computer-chip industry. For instance, overseas assembly often adds up to six weeks from shipment to return to the U.S. market. But at highly automated U.S. assembly plants, such as Cypress Semiconductors' new $5-million operation, turnaround time can be cut to as little as three days -- and at substantial savings over more labor-intensive offshore operations.
"If a customer wants our design, he wants it because we have it first," says Cypress President T. J. Rodgers. "He doesn't want to wait six weeks while we wait for it to come back from Penang."
Keeping manufacturing jobs in the United States preserves a company's most important resource -- the dedication of its employes. "It really affected morale when they started laying off the production people," recalls one engineer who worked for Seagate, a high-technology firm that came to rely on Asian manufacturers.
"We weren't affected directly in the engineering group, but we know a lot of loyal employes that got it -- people who were working 12 hours a day for the company . . . . It makes everyone wonder, 'What's going to happen next?'"
Such an approach is not only coldhearted, but also inconsistent with meeting the challenge of automation. Rather than decreasing reliance on people, automation increases the need for better-trained and motivated personnel. Indeed, many automation-oriented firms spend large sums on "upskilling" their work forces. As Xebec's Toreson puts it: "Automation isn't like going off and managing a sweat shop with 50,000 orangutans and two apes. To succeed at automation, we need to move assembly workers up into being knowledge workers."
In fact, this "Made in America" movement is occuring at a time when the labor content of products such as disk drives accounts for as little as 10 percent of the total cost of the product. That allows entrepreneurs such as Toreson to believe that if Americans "work smart," they can more than make up the differential between American wages and pay in newly developing countries. In fact, this is what the Japanese do now.
This is not to suggest that Toreson is part of any "Back to the U.S.A." mass movement. While a handful of other leading companies such as Apple Computers, IBM and Hewlett Packard are pursuing strategies similar to Xebec's, there is little evidence that the decade-long trend toward offshore manufacturing is slowing down.
Yet the aggressive stance taken by these American manufacturers does represent a major departure from the pattern, to use historian Martin Weiner's phrase, of "psychological and intellectual deindustrialization" that has characterized the American business community over the last two decades.
These tendencies have been exacerbated by the increasing popularity of ideas like those espoused by such self-described "futurists" as John Naisbitt, author of "Megatrends." In Naisbitt's cheery world view, America is already well on the way towards a "postindustrial" millenium where American companies need not sully their hands with manufacturing activities and can safely shift those operations to less advanced nations like Korea, Singapore and Taiwan.
As Naisbitt puts it blithely: "Today, in fact, Japan is the world's leading industrial power. That is a little like a new world champion in a declining sport, because the industrial companies of the world are getting out of those old industrial tasks."
Under the spell of such thinking, many American companies have adopted an overseas strategy that radically differs from that traditionally taken by such export-oriented firms as IBM and Hewlett Packard. Instead of using offshore manufacturing as both an adjunct to domestic operations and as a means of effectively penetrating foreign markets, the new thinking is to see overseas production as an excuse to scrap domestic manufacturing operation.
Blake Downing, a highly respected computer industry analyst at the San Francisco- based investment bank of Robertson, Coleman and Stephens, suggests, "Maybe we're at a stage of economic development where we're simply not very good at manufacturing. It sure seems that way."
Yet the evidence -- as seen by such executives as Toreson -- reveals that it is these very industrial skills that have been the key over the past decades to the ascendancy of such Japanese corporations as Hitachi, Mitsubishi and Toshiba as well as upstarts from newly developing nations like Korea. Indeed, largely due to their manufacturing prowess, these East Asian nations have enjoyed growth rates nearly twice that of the United States through the 1970s, while eroding America's competitive postition in a vast array of industries ranging from steel to electronics.
The pioneers in the drive to bring manufacturing jobs back to America reflect a concern that this country cannot survive just by relying on the areas in which it is the acknowledged world leader -- innovation and marketing. Manufacturing is the key linkage between these two great national skills, so this thinking goes.
"It's no longer enough just to churn the intellectual product -- to come out with innovations that you can't manufacture efficiently," explains Xebec's Toreson. "We feel if we want to win the industrial game, we have to learn how to design for automation, to develop the best possible efficiencies for mass production. This is the central challenge we and other American companies must now face."
"The thing that makes (overseas production) so dangerous is that it puts you in the mentality of letting the other guy do the hard stuff," points out Harvard Business School Professor Robert Hayes, a leading expert on manufacturing strategy.
"When the 'other guy' enters the market, he's worked with the process on a daily basis, has a sense of the wider potential of the technology in question, and of possible applications that you won't have been thinking about. He's got all the advantages. Eventually he who can do nothing but sell is at a great disadvantage."
The advantages of manufacturing in America are not restricted to high- technology. Ladies garment fashions, for instance, change virtually every six months -- a pace that would even make the heads of the engineers at Cypress spin. For domestic manufacturers like Rob Shipman, president of New York-based R.J.M.J. Inc., U.S. facilities allow him to respond to new market trends in as little as three weeks. His offshore competitors have to order their fabric and garments a year ahead -- too late to meet sudden, unexpected shifts in demand. Says Shipman, who expects to earn a handsome 15 percent profit on sales of $20 million in 1984: "We killed the offshore guys without flexibility in manufacturing."
Similarly, with his slight Southern accent and down-home manners, 71-year-old Glenn Stahl seems the antithesis of the hard-driving high-tech entrepreneur. And as a aluminum foundryman in Kingsville, Mo., a hamlet of less than 500 an hour's drive from Kansas City, Stahl isn't exactly the sort to be courted by overseas manufacturing promoters from the Far East. Yet Stahl, and his Stahl Specialty Co., also reflect the new commitment to manufacturing that may well prove a crucial element in America's industrial future.
Like Toreson, Glenn Stahl has learned that the only way to compete with overseas manufacturers -- who now control perhaps one-quarter of the U.S. casting market -- is to perfect the art of production here at home. So at a time when capital spending at most U.S. foundries has dropped off dramatically, Stahl Specialty has continued to buy between $2 million and $4 million worth of new equipment every year.
Today the company has more than a dozen of the most modern Japanese-made, computer-controlled machine tools, an IBM System 38 computer for payroll and a $400,000 McDonnell Douglas computer-aided design- and-manufacturing system.
This approach has allowed Stahl to expand his product line into such sophisticated products as the casings for storage devices on IBM's 3380 mainframe computers. Stahl Specialty has continued to grow despite the conventional wisdom about "low-tech business." The balance sheet for the U.S. foundry industry as a whole has gone from a $1.6 billion profit in 1979 to a loss of $527 million in 1983; shipments declined from $21.6 billion to $15.9 billion. But Stahl Specialty has enjoyed consistent profits; its sales have jumped from around $24 million in 1980 to over $41 million in 1984. And its work force has grown from 310 in 1981 to 530 today -- while other foundries in this country have dropped as many as 40 percent of their workers.
"Too many foundries have stayed still. People get killed by imports that way," says Stahl. "They only way to do it is to invest in the latest machinery and have a much higher level of technology than they do. That gives you a flexibility and ability to diversify which they can not compete with. All you need is a commitment to change."
High-technology companies, nonetheless, are among the most interesting examples of companies attempting to manufacture in America. Not only are they breaking new ground in the American economy, but they compete directly with Asian products, while being the targets of aggressive pitches from Asians seeking their manufacturing work.
Apple Computers, for example, recently completed a fully automated assembly plant for its innovative new Macintosh computer in Fremont, Calif.
The Greeley, Colo., disk-drive plant of Hewlett Packard has had stunning results from the use of Japanese concepts like total quality control and "just-in-time" inventory systems. Over the past two years it has cut its cycle time -- the time it takes to make a product from pulling the parts out of the stockroom to completion -- from six weeks to 56 minutes.
"Now that we know so much more about manufacturing," says Gary Flack, a manufacturing consultant instrumental in the changes at the Greeley plant, "we now believe that we can compete in the United States -- rather than getting hopelessly beat, the way we have been."
But perhaps most significant to American firms has been the new strategic emphasis on manufacturing and automation at IBM. IBM has devoted billions in resources to modernizing its manufacturing facilities in the United States, including a massive $350- million automation of its Lexington, Ky., electric-typewriter plant. The company has also pledged more than $100 million to new college scholarships for manufacturing engineers and technicians -- a clear indication, many IBM watchers believe, that the company is driving for world leadership in the automation field.
Nonetheless, George Koo tells American high-technology companies, "You do what you do best and let us do what we do best." Koo is the Chinese-born president of Microelectronics Business International, based in Mountain View, Calif., an equity investment firm that actively solicits American companies for Taiwanese high-tech manufacturing ventures. "Americans are great at inventing and marketing products," he says. "But we are the ones who know how to manufacture well and cheaply. The people in the Far East are better. They have more of a work ethic and work longer and harder than you do."
The inducements to locate overseas offered by promoters like Koo are substantial. Entrepreneurs in leading California high- tech centers like Silicon Valley and Orange County are deluged with phone calls and glossy brochures promising a faraway high- tech heaven with deferred taxes, cheap credit, low-cost, highly motivated labor and even state-of-the-art equipment. Nobody, one executive notes, makes the case for manufacturing in America.
"The temptations were tremendous," recalls Toreson, who rebuffed several attractive offers to locate his manufacturing facilities offshore. "But as an engineer and an American, the whole thing made me puke. It implies we can't make anything anymore in this country. It just created a sense of challenge in me to prove everything they were saying was bulls---."
As a result, Xebec has chosen to invest more than $30 million in new equipment, automation software and training expenses. To further cut his costs, Toreson also located his new, automated manufacturing plants in Nevada and Pennsylvania's Lehigh Valley, areas with lower wage rates and more stable work forces than in the Silicon Valley.
More than personal pique turned Toreson against manufacturing abroad. It is now clear that many of those young high-tech companies that went that way -- including such highly touted firms as Televideo and Atari -- have not solved their problems permanently.
Televideo, for instance -- whose reliance on its low-cost Korean factories once made it the darling of Wall Street -- has nonetheless been rocked by competition from automated Japanese producers and innovative, U.S.- based manufacturers like IBM. As a result, Televideo's once-huge profits have all but evaporated. And Atari Corp. -- whose February 1983 decision to lay off 1,700 workers sent shock waves though Silicon Valley -- recently was the object of a bizarre fire sale. Its corporate owner, Warner Communications, handed Atari over to entrepreneur Jack Tramiel without requiring any cash down and loaning Tramiel more than $18 million.
The futility of the overseas strategy has been particularly evident among American makers of microcomputer disk drives. These are the crucial memory devices that store the data and retrieve it for display on a screen.
At the same time that Xebec is gearing up for to manufacture its new Owl disk drive in the United States, nearly all the industry's established leaders -- including Tandon Corporation, Seagate and Shugart Associates (since 1974 a subsidiary of Xerox Corp.) -- have committed themselves fully to production overseas.
Until recently, their faith in the "offshore strategy" did appear to have some justification. Tandon used low-cost facilities in Singapore and India to crank up its production in the early years of the microcomputer boom. But it now appears that, rather than providing a bulwark against Japanese competition, over-reliance on overseas manufacturing has created a whole new set of problems. Tandon's far-flung overseas operations, for instance, are blamed widely among both industry analysts and former executives for exacerbating the company's reputation for producing inferir quality products.
"It's tough to control quality across the nation, but it's more of a problem across an ocean," remarks Bill Frank, an analyst at Infocorp. "If (Tandon) had overcome that quality problem, he'd been king of the hill. But he couldn't."
The profits of Seagate, the other big off- shore disk-maker, have nearly disappeared because of coordination problems created in part by the company's move last year to Singapore. According to one top Seagate engineer, "The engineering department is so removed from manufacturing because the product is being built overseas. We don't even see the problems that crop up for weeks. It's not like you can go and check it out yourself on the line."
Saddest of all, however, has been the fate of Shugart, once the technology leader in the disk-drive industry. In January, Xerox wrote off its subsidiary, taking an $85 million loss, while selling off its line of 51/4-inch disk drives to Matsushita Tsushin Kogyo, its prime offshore manufacturing contractor.
Indeed, the dreaded Japanese, the oft- cited excuse for moving offshore, seem totally undeterred by the moves of their cost-cutting American rivals. Despite wage rates three or more times higher than those in Korea, Singapore and Taiwan, highly automated Japanese producers seem likely to dominate such key, mass-commodity areas as 5 1/4-inch floppy disk drives, an area where sales are expected to double this year over last. That market was once controlled by American enterpreneurial companies like Tandon.
Market penetration like this is why, over the past few years, too many stock analysts, venture capitalists, and entrepreneurs have accepted the conventional wisdom that American companies are somehow intrinsically incapable of competing at home against the manufacturing strengths of Japanese and other foreign companies.
And this "wisdom" is unlikely to change until the "Made in America" companies prove through their results that Americans can compete in the world of high-volume manufacturing. "You know, when we went out to raise our money, everyone expected we'd be driven out . . . . They told us we couldn't deliver the product at the right place," recalls Xebec's Toreson. "Well, they didn't understand and still don't. You can't fight the Japanese by running from them. You have to match them by being better the way they are better. You don't build a sand castle -- you build a house of stone."