The Race to Stay Competitive : Some Firms Find There’s Life After Quotas
Think color televisions and you think Japan or other points east. Think bicycles and you think France or Italy. Think watches and you think Switzerland--or Japan again.
But contrary to popular images, U.S. companies in each of these three sectors have survived and even thrived. And they can thank government policies that have afforded them temporary protection from foreign goods and forced them to emerge after a few years to face the outside world.
Over the past three decades, 16 U.S. industries were sufficiently injured by foreign competition that the U.S. International Trade Commission awarded them temporary protection. According to recent ITC reports, corroborated by studies by the Brookings Institution and the Institute for International Economics, 12 of those industries eventually shed their armor of import quotas or high tariffs in a condition that enabled them to earn their way.
The color television, watch and bicycle industries are prominent among them. All three of these industries function today with a reasonable share of the domestic American market. All three have maintained profits, two have increased sales and one--bicycles--has actually expanded production.
The transformation has not been painless. All industries that have gone through this process have closed plants and fired workers. Except for bicycles, all have shrunk, imported foreign ownership or switched to other product lines.
“Adjustment,” as economists call it, is a process that rubs against the grain of the American political experience. In an economy in which growth and expanding investment are the hallmarks of success, it is almost unthinkable that an industry should be called successful as it becomes smaller.
Still harder to accept is the notion that investing in such economic sectors is almost certainly what the Washington-based economist I. M. Destler dismissed as a futile policy of “expanded investment into a dying industry.” And hardest of all is the loss of jobs that almost always accompanies trade adjustment.
No wonder that Congress has arranged nearly perpetual protection for such trade-embattled industries as steel and textiles. The mere threat of protective U.S. legislation has been enough to persuade the Japanese to voluntarily limit their automobile exports to the United States since 1981. And now, with the trade deficit soaring to record levels every year, House Democrats have committed themselves to passing a wide-ranging protectionist bill this year.
Such protection, in the view of most economists, is accompanied by a host of negatives, including reduced consumer choice and higher prices paid by American consumers. The Institute for International Economics estimates that consumers paid $56 billion in 1984 to protect 19 industries from foreign competition.
But there is another form of protection that even free-trade advocates find beneficial. This is the system of temporary quotas or tariffs that helped the color television, bicycle and watch industries survive an onslaught of foreign goods. Congress has authorized the ITC to recommend such measures--and the President to impose them--for industries that need a respite from international competition to get back on their feet.
At present, only two industries, motorcycles and specialty steel, remain under this form of temporary protection. The limited steel quotas have been in place for barely a year, too short to tell if that part of the steel industry can turn the corner.
But a schedule of tariffs on heavy motorcycles, first imposed at 49.4% in 1983 and scheduled to fall in annually decreasing steps to 4.4% by April, 1989, has enabled the nation’s remaining motorcycle manufacturer, Harley Davidson Motor Co. of Milwaukee, to survive in a field dominated by Japan.
Harley, now a relatively small private company after having been spun off in 1981 as a subsidiary of AMF Inc., has gradually revamped its product line in the direction of heavyweight motorcycles with aluminum engines and is embarking on a long-range capital investment plan to retool its production lines with computer-guided equipment. The result has been dramatically increased productivity--and a 50% reduction in the work force.
Harley’s market share in heavy motorcycles bottomed out at 12.5% in 1983, the year that tariffs began, and now has climbed back to nearly 16%. Production fell during this period from a peak of 52,000 shipments in 1979 to about 33,000 in what has become a chronically declining market.
It May Survive
But within the narrow market that it has defined for itself, Harley may well survive. Thanks to production changes, said Robert Klein, the company’s manager of corporate affairs, “the Japanese manufacturers were put on notice that Harley wasn’t a sleeping dog in the street waiting to be run over.”
After admitted quality problems in the early 1970s, Harley managers began to adopt some of the time-tested Japanese techniques: “just-in-time inventory control” to insure that components are delivered only as they are needed, “process control” to detect errors as they occur rather than at final assembly and a “quality circle” program to bring the reduced work force--now about 2,200, down from a peak of over 4,000 in 1979--fully into what Harley management hopes will be a shared commitment to higher quality and increased productivity.
These improvements “have put us on an equal footing with our competition,” Klein said. The company hopes that a totally retooled plant will be in place by the time protection expires in 1989.
“We can’t just stand idly by and say, OK, we’re protected and our troubles are over,” said Frank Cimermancic, another Harley official. “We think we’ve more than held up our part of the bargain.”
It will be years before Harley’s efforts pay off, if they ever do. But the record suggests that motorcycles today are following a track covered successfully by the U.S. bicycle industry in the 1950s and 1960s.
In 1955, when the import-beset industry appealed to the ITC and the Eisenhower Administration for higher tariffs on foreign competition--then mostly British and French--nine U.S. companies were making and selling 1.8 million bicycles a year. By 1979, many years after the special protection had lapsed and tariffs were reduced, the U.S. industry sold 9 million bicycles a year.
But of the nine original companies, only six survived. Industry leaders such as Murray, Huffy and Schwinn developed new models to compete with so-called English bikes--the light, multigear imports.
The industry was lucky that its import protection coincided with an enormous bulge in the population of 10-year-old boys. But management had the wits to seize that opportunity and, in the 1970s, to take advantage as the fitness fad and the oil crisis turned many adults to bicycles.
Highlights Conflict
Employment increased by half. But as factories were built to take advantage of the non-union, low-cost labor of Tennessee and Mississippi, other plants in Illinois, Ohio and Michigan were closed.
“Adjustment in the bicycle industry . . . highlights the conflict between modernizing facilities and preserving jobs,” said Gary Clyde Hufbauer, a Georgetown University economist. Because of plant shifts and restructuring, he noted, “most of the workers in the industry at the time of protection lost their jobs.”
Adjustment in the American watch industry--once venerable and secure, today truncated and shrinking--was far different.
Soon after 1954, when temporary tariffs were instituted to protect the American industry from Swiss imports, the manufacture of high-quality, jewel-lever watches in the United States simply vanished. Proud names such as Waltham, Elgin and Hamilton are today owned by marketing firms that import movements from abroad and sell their products under the once-revered brand names.
Timex, the domestic company that swamped American competitors in the 1950s and 1960s with highly efficient production techniques and aggressive marketing of serviceable, cheap timepieces, controlled half of the U.S. market up to a decade ago. Then, inexpensive digital and quartz watches opened the floodgates to a second wave of imports, this time from Japan, and the ITC estimates that Timex’s U.S. market share is now barely one-third.
Employment in the U.S. industry fell to 7,846 by 1976 from 11,623 in 1951, the ITC says. The number is almost certainly smaller now.
But of the older names in the industry, only one, the New Haven Clock & Watch Co., closed outright, with a sudden loss of 500 jobs. The other companies gradually left the watch business but for the most part survived in other forms, sometimes by gobbling up competitors, often by closing old plants and selling off equipment.
Offshore Production
Elgin Watch Co., for example, stopped making watches in the United States in 1968 and shifted production offshore. Reconstituted as Elgin National Industries of Chicago, the company not only sells watches and clocks, mostly assembled abroad, but also makes specialized engineering, manufacturing and construction equipment for the coal and mineral industries.
In the domestic color television industry, the adjustment to intense competition from Japan, Taiwan and Korea in the late 1970s was more tenuous still. From 1977 through 1982, while the domestic industry enjoyed temporary import quotas on its overseas competitors, it increased profits and, on the evidence of the bottom line, survived its costly failure to anticipate a market for 13-inch receivers as Americans began to buy second, and even third, color televisions.
To survive, however, the industry had to import capital, technology and components from abroad. The only exceptions are Zenith Electronics Corp., now an inventive and competitive manufacturer of computers as well as televisions, and the prospective giant that will be formed if General Electric and RCA consummate their proposed merger.
Nor have all the problems subsided now that the quotas are over. Zenith is still vigorously pressing unfair trade suits that it filed against Japanese competitors a dozen years ago, said John I. Taylor, a Zenith official, and the pressure from abroad has, if anything, intensified.
Recently Zenith, for years an industry innovator, has developed a stereo television receiver and a 27-inch square-cornered picture tube. It has developed a tiny 9-inch screen to compete with the Japanese at the low end of the product scale and it has tried to cut costs by shifting production of those cheaper models to Mexico. It has automated its massive assembly plant in Springfield, Mo., cut its labor force and pioneered the use of circuit boards that can be assembled entirely by robots.
“We have cut costs and increased productivity,” Taylor said. “Cost isn’t the main problem. Price is the main problem.” He blamed “illegal, predatory pricing from the Far East” for the domestic industry’s predicament.
Of the 17 firms making televisions in the United States in 1972, two were Japanese-owned. Today there are 16 firms--eight owned by Japanese, two by Taiwanese and one each by Koreans and Dutch. Counting RCA-GE as one, only four U.S.-owned companies remain in the business. And as more and more production and assembly were shifted offshore, total U.S. employment in the television industry dropped 32% between 1977 and 1983 to about 18,000.
That may not sound like American-style success, but to economists who study international competition, success merely means survival. Hufbauer put it this way: “Successful adjustment on the part of an industry implies that it can operate profitably without further government assistance or protection. If the industry is no longer damaged by foreign trade--in the sense that labor and capital in the industry can once again earn normal returns--the industry has adjusted.”
