The question posed by the bankruptcy filing of Delphi Corp. -- the largest U.S. auto parts company -- is whether manufacturing in America has a future. Or is it sliding toward extinction? Viewed historically, the question is misleading. It's true that manufacturing employment now accounts for only one in nine jobs, down from one in three in 1950. But the decline mostly reflects higher efficiency. Americans make more things with fewer people. From 1990 to 2000, for example, manufacturing output rose 61 percent while employment fell 2 percent, reports economist David Huether of the National Association of Manufacturers (NAM). This is generally a good thing. It frees more workers to produce services (software, education, health care) that Americans want.
Of late, however, the news about manufacturing has seemed particularly dismal. Since mid-2000, 3 million jobs have vanished. Though overall corporate profitability has been strong, manufacturing has until recently been a conspicuous exception. From 2000 to 2004, the sector's profits averaged only 60 percent of their 1999 peak. It's retailing, finance (banks, stockbrokers) and real estate that account for big profit gains. Finally, imports represent a growing share of Americans' consumption of manufactured goods. In a recent report, the NAM cites these figures for 2003: 35 percent for motor vehicles and parts; 45 percent for computers and parts; 22 percent for chemicals.
Delphi's bankruptcy suggests that the whole auto-industrial complex faces another wrenching shakeout. Delphi, once the auto parts subsidiary of General Motors, was spun off in 1999. The idea was to reduce GM's costs by forcing Delphi to compete for its contracts and to sell to other companies. Since then, Delphi's dependence on GM has dropped from about 80 percent of sales to 50 percent.
The trouble is that Delphi isn't profitable. The entire industry is caught in a cost-price squeeze. It needs price discounts (aka "incentives'') to sell vehicles. In 2004, GM's average selling price of $26,479 was $435 lower than in 2002, reports the consulting firm J.D. Power and Associates. Unfortunately, the resulting revenue pinches profits or pushes high-cost producers, such as GM and Ford, into the red. True, GM's distress (and hence Delphi's) stems partly from unappealing vehicles that don't sell well even at lower prices. Since 1999, GM's U.S. market share has dropped from 29.6 percent to 26.4 percent. But high labor costs are also a huge problem. GM and Delphi's hourly wages average about $27 under similar contracts with the United Auto Workers (UAW). Counting fringe benefits and retiree costs (health care and pensions), these soar to $65 for Delphi and $74 for GM.
Since 1948, the UAW and GM, Ford and Chrysler have crafted contracts that turned the companies into mini-welfare states, providing above-average hourly wages (today's average for all manufacturing: $16.60), rich fringe benefits and strong job security. For example, laid-off UAW workers essentially get full salary and benefits indefinitely. With limited competition, companies could pass along common labor costs to consumers and compete on styling and performance. No more. The protected market has given way to imports and foreign firms with nonunionized U.S. plants. Price competition is fierce.
Now comes the reckoning. The market and the welfare state collide. According to the UAW, Delphi is seeking deep cuts in both wages (to about $10 to $12 an hour) and total labor costs including fringes (to $20 to $25 an hour). In an interview with the Wall Street Journal, Delphi chief executive Steve Miller indicated that once retirees become eligible for Medicare at 65, he wants to eliminate any supplementary health insurance coverage.
"If we do this right, Delphi will remain one of the world's leading global automotive suppliers," Miller has said separately. "Yes, with a smaller U.S. manufacturing footprint. And with a more focused approach to selected product lines where we can be the technology leaders. . . . If we do it badly, Delphi may be broken up into small pieces, and America will have lost some of its precious industrial treasures." GM, Ford and Chrysler are also headed toward bankruptcy unless they curb labor and "legacy" costs, he predicted. GM already has 2.5 retirees for every active U.S. worker. Just this week, it tentatively agreed with the UAW to trim retiree health costs by a claimed 25 percent.
The fate of American manufacturing lies largely in American hands. Of course, some labor-intensive production will go abroad. But in many industries, job losses and cost-cutting -- though devastating to individuals -- can sustain production and restore profitability. The U.S. steel industry now produces more than in the 1980s, though it has lost two-thirds of its jobs. Elsewhere, innovation and high-value manufacturing should create jobs. Consider United Technologies. It makes jet engines, elevators, air conditioners and helicopters. Despite extensive foreign factories, much skilled manufacturing remains here. On one popular helicopter, air frames are assembled in the Czech Republic; the high-value electronic systems and blades are mainly American.
But one giant unknown clouds everything: China. Until now, its booming U.S. exports have mostly displaced exports from other countries. As China modernizes -- moves into more advanced industries -- this could change dramatically. The combination of low wages, a huge market and an artificially low currency confers staggering competitive advantages. They constitute a powerful magnet for foreign investment in many sectors, whose output could subsequently be exported. Unless the currency rises substantially, the United States could lose many industries that, by all other economic logic, it shouldn't. Therein lies the real threat of extinction or something close to it.