The Remanufacturing of America : U.S. Firms Regain Competitive Edge

In 1981, when IBM brought out its first personal computer, the only printers to go with it were made in Japan. So IBM, one of the world’s most technologically advanced companies, had no choice but to sell a Japanese printer under its own label.

It was a depressing, all-too-familiar tale: a once-proud American firm abandoning a key market and creating an opening wedge for its foreign competitors. If even IBM could not stem the onslaught, then who in the nation could?

This time, however, the story had a different ending.

Instead of giving up or producing printers in Taiwan, Korea or another low-wage country, IBM designed its own new printer and is now churning them out at low cost at a state-of-the-art factory here in Kentucky bluegrass country. As a result, the computer giant is now one of the largest single producers of inexpensive dot-matrix printers in the world.

IBM’s triumph is no isolated case. Not only does it prove that IBM can still compete in one relatively minor global industry but it also speaks volumes about what is really happening in the American economy today.

All across the land, U.S. industry is developing new ways of doing business and demonstrating renewed success in its ability to stand and fight in the face of intensifying international competition.

It could not be happening at a more important time. Record trade deficits meant that foreigners, not Americans, were making many of the goods Americans were buying. Cheap overseas labor and barriers abroad to U.S. goods seemed to threaten the American dream of an ever-rising standard of living.

But just when so many observers were convinced that the United States was headed inexorably down the road to becoming a second-class economic power, America’s ability to compete in the world economy now shows signs of fundamental improvement.

Crucial to the rebirth is an emerging revolution in production that combines computer-programmed assembly techniques with less regimented ways of organizing the workers on the factory floor. Called “flexible manufacturing,” the new regime is transforming the traditional assembly line and making it far more advantageous to manufacture many products in the United States than overseas.

“You can call it pride, you can call it motivation, you can call it money, you can call it dedication, you can call it innovation--we have no doubt that there are many American companies that do not intend to lose this fight,” said Jack D. Kuehler, head of worldwide manufacturing for IBM. “There is really no reason why our companies, small or large, cannot remain technologically competitive.”

Matching a Challenge

The victories are no longer restricted to such established high-tech developments as Massachusetts’ Route 128 corridor and California’s Silicon Valley, where many titans of the semiconductor industry are now struggling to match a fierce challenge from the Japanese. In southern Michigan’s “Automation Alley,” for example, scores of growing firms are now offering highly developed goods and services for the auto industry and basic manufacturing.

And just as crucial for the long-term health of the economy, many of the old industrial giants that had suffered the longest and the hardest from foreign competition are starting to chalk up impressive gains. Leading the movement are such showpieces as General Electric’s futuristic appliance plant in Louisville, Ky.; Goodyear Tire’s plant in Lawton, Okla., and AT&T;’s rejuvenated business phone manufacturing factory in Shreveport, La.

In every part of the country, innovative companies are putting the lie to the popular misconception that the United States is “deindustrializing.” In fact, the manufacturing share of U.S. economic output has remained little changed, achieving approximately the same 22% of the total in 1986 as in 1947.

The manufacturing work force is shrinking, but the remaining workers are more productive--resulting in a 30% gain in output since the depths of the 1982 recession, a faster rise than even Japan can boast.

Investment as a share of overall economic activity, which has been falling in Europe and Japan, has been on the rise for several years in the United States and now represents about 21% of the gross national product. For the first time in decades, manufacturing productivity, while still too sluggish, rose at a faster pace in the United States last year than in any of its major competitor nations. And, aided by the sharp decline in the dollar, U.S. producers’ costs were slashed nearly 22% last year compared with their competitors’ costs overseas, paving the way for a rise in exports. Industry after industry is beginning to regain lost markets both at home and abroad.

Wrenching Changes

These largely unheralded improvements are turning up in the economic statistics precisely because of what is happening in the factories.

A wide variety of the nation’s big industrial companies are finally starting to see benefits from the wrenching changes they have undertaken in this decade to streamline their operations and modernize their manufacturing facilities.

In addition, an explosive growth in smaller firms has created millions of new jobs and now shows signs of helping to renew the nation’s productivity and sustain America’s place in today’s complex global economy.

“The American economy is being rebuilt from the bottom up,” said David Birch, author of the recent “Job Creation in America,” whose pioneering studies at Massachusetts Institute of Technology uncovered the crucial role of small business in generating jobs and economic growth.

“The large companies are under great competitive pressure and are getting leaner and more flexible,” said Birch, now president of Cognetics Inc. in Cambridge, Mass. “Meanwhile, more and smaller businesses now do what fewer and larger ones did before.”

Economic Chaos

Admittedly, the rebuilding is obscured by a kind of economic chaos not seen since the early years of this century, when industry replaced agriculture as the dominant force in the economy and many of today’s big companies were born.

Now those once-impregnable monoliths are being forced to shed layers of operations and people. As a group, the nation’s 500 largest industrial corporations have slashed their overall employment level by almost 2.8 million since 1980 while shutting down thousands of obsolete plants.

“It’s a very competitive world because of better computers, better systems, better everything,” said GE Chairman John F. Welch Jr. “So every company knows it has to improve to survive.”

At the same time, however, the dramatic expansion in small-business activity is taking place; last year it produced nearly 1.5 million new companies, individual ventures and partnerships, compared to fewer than 500,000 in 1966. That helped to add more new jobs than ever in U.S. history--12 million since the beginning of the 1980s and 36 million over the last two decades. This is more than triple the job growth in Japan and Europe, whose combined economies are even larger than America’s.

Finally able to escape the burden of an overvalued dollar, U.S. multinational firms are no longer rapidly shifting production abroad. Indeed, according to a recent survey, they are now expecting to expand three times faster at home than overseas.

Competitive Caldron

Despite the threat from overseas, the essential changes that are making the U.S. economy a competitive caldron now come largely from within. Driving them are profound technological and social trends.

“In the near future,” argued James Brian Quinn and Christopher E. Gagnon in a recent issue of Harvard Business Review, recent developments in “the same technologies that once permitted manufacturing to (migrate from advanced industrial nations to developing countries) could lead to the ‘remanufacturing’ of Western countries.”

As important as technology and the recent decline in the overvalued dollar is a change in attitude. American industry, lulled by inflation-fed revenue increases, grew complacent in the 1970s. Only in the crisis atmosphere of the 1980s has U.S. business finally begun to recognize the compelling need to examine alternatives to encrusted industrial practices of the past.

“The recession of the early 1980s was critical,” said Michael Piore of MIT’s Sloan School of Management. “That is what finally seems to have convinced a huge number of American managers that they can’t go back to the old ways of thinking.”

A Shift in Manufacturing

The result, say Piore and co-author Charles Sabel, is what they have made the title of their recent book: “The Second Industrial Divide.”

The first industrial divide, according to Piore and Sabel, was the shift from craft manufacturing--the artisan’s workshop of old--to the mass production made possible by the assembly line in the giant factory of the 20th Century.

The assembly line produced an abundance of goods for mankind. But it had its limits. Because it depended for its economies on producing the same goods for a long period of time, it was inflexible. Consumers could buy one of several models, perhaps, but they paid dearly for custom-made goods.

And because innovation required massive and expensive retoolings of production facilities, the most efficient industries were paradoxically the slowest to introduce new products.

But worst of all for the United States, which had more at stake in the traditional mass-production systems than the rest of the industrialized world, technological advances in production techniques and management techniques made it possible to transport the assembly line anywhere in the world. Low-skilled, low-paid workers in developing countries could turn out many of the same goods at greatly reduced costs.

‘Post-Industrial Society’

For a time, economic thinkers in the United States were lured by the prospect of a “post-industrial society” in which the poorer nations would produce most of the world’s manufactured goods while Americans sold services and lived off “thought” work alone. But many experts now believe the nation must continue to guard against the collapse of the U.S. manufacturing sector.

“Over the long run, American firms won’t be able to control what they can’t produce,” said John Zysman, a director of the Berkeley Roundtable on the International Economy and co-author with Stephen Cohen of the recent book “Manufacturing Matters.” “If we are going to maintain our high-wage, high-productivity economy, we’re going to have to revitalize our manufacturing sector.”

Enter flexible manufacturing, which combines the best qualities of the artisan’s workmanship and the assembly line’s efficiency. Piore and Sabel call flexible manufacturing “the second industrial divide” because it represents a fundamental shift in the system that has dominated industrial development for more than a century.

In a factory organized according to the principles of flexible manufacturing, the assembly line is thick with automated machinery that can be quickly reprogrammed to change the product. And the workers, set free from traditional constraints, are encouraged to innovate and are rewarded for their productivity.

Shift Gears Rapidly

The system allows manufacturers to economically handle small orders as well as large, to shift gears rapidly in response to changes in the marketplace. It demands, as Piore and Sabel wrote, “permanent innovation and an accommodation to ceaseless change rather than an effort to control it.”

One plant that has crossed the second industrial divide is General Electric’s revitalized railroad locomotive plant in Erie, Pa., where the transformation of the production facility allowed GE to turn out locomotives exactly as demanded by each customer--and at the same time dramatically slashed the cost of manufacturing.

So far the Erie plant has fewer orders than it had hoped for because, as Welch explained, “the railroad companies became more productive. Where they used to have 4,000 locomotives, they now carry the same amount of freight with 2,500.”

Welch is not particularly worried about the long-run prospects of the locomotive business. It will pick up, he predicts, as developing countries build railroads and U.S. rail lines order replacements. Meanwhile, GE’s sophisticated plant is making a slight profit.

Modern facilities such as GE’s are critical to the factory of the future. But they are not enough. The paradox of the new manufacturing plants is that while they use millions of dollars worth of automated machinery, they rely most for success on new ways of organizing work and workers. More than an evolution of technology, they promise a revolution in employee relations.

Charlie Chaplin Film

The traditional assembly line depended on a semiskilled worker, caricatured by Charlie Chaplin’s frantic struggles to keep up with the machinery in the 1936 film “Modern Times.”

But it didn’t trust that worker. It backed him with ranks of staff people to govern him and check him.

“In the old systems, we had a supervisor, a shift foreman, a department foreman, a division superintendent, a department manager and a night supervisor overseeing all of that,” said Stanley Mihelick, Goodyear’s executive vice president for manufacturing.

The new approach wipes out layers of staff and restores much more responsibility to the worker on the shop floor. “We have cut seven layers of management down to two and put our stress on telling every worker what is going on,” said Mihelick.

It seems to work. At its most advanced plant to date, in Lawton, Okla., Goodyear turns out 40,000 tires a day with 1,800 people, while the traditional tire plant turns out 10,000 tires with 1,400 people.

Labor Costs Reduced

Plants such as this have reduced labor costs to such a small share of the overall cost of production that the United States can compete with nations relying on the cheapest workers. “At Lawton,” said Mihelick, “we make tires with $18-an-hour labor and compete with tires produced in Korea with $1.60-an-hour labor.”

How can Goodyear do that? Through constant gains in productivity. At the Lawton plant, 90 miles west of Oklahoma City, productivity grows 7% a year.

The improvements come not so much from corporate headquarters as from below, from the efforts of people like Gary Adair and Terry Johnson, a team of mechanics who are responsible for shifting the production line from one size of tire to another. In a traditional tire plant, a change, say, from 14-inch tires to 13-inch tires takes eight hours and costs the production of an entire work shift. But Adair and Johnson do the job in 109 minutes and hope some day to slash that to one hour flat.

What motivates industrial workers in late 20th-Century America to work like that? The people themselves give a variety of answers. Wages are not high on the list.

Self-Satisfaction

Pay, which runs $13 to $18 an hour including fringe benefits at Lawton--where everybody is on salary and there are no time clocks--has risen 5% in each of the last two years. The pay raises are agreed upon at twice-yearly negotiating sessions between workers and managers.

Self-satisfaction and teamwork are much more crucial. “The management levels here, they work with you, get right down in there and work on a one-to-one basis,” said a tire builder at Lawton.

At IBM’s plant here in Lexington, the company kept its no-layoffs vow. It retrained hundreds of its production workers as computer programmers and system technicians and made them “owner-operators,” fully responsible for keeping several machines performing efficiently. Now the people on the production lines, like the engineers in the white coats, talk of costs and quality.

“We used to have a wall between the designer, the manufacturing engineer and the guy on the factory floor,” said J. Charles Rogers, IBM’s product manager responsible for developing its inexpensive Pro Printer line. “We’ve had to break that down so that the entire organization can work together to produce a product with world-class quality at the lowest possible cost.”

To many skeptics, quality in American industry seemed a lost art, treated as something relegated to faddish “quality circles” and Boy Scout-like oaths to foster teamwork. All the emphasis of industrial engineering was focused on little more than reducing costs.

Design for Quality

“For years, we designed things for cost reductions,” GE’s Welch said. “You designed something and said it’s going to cost $4,000, and then you cut the cost to $3,800. But that’s the last thing you should do. Design for quality first, for zero rejects. Yes, it’s hard to hold back a $100-million line at 10% production until you get zero rejects. But once you do, productivity just explodes because you eliminate rework, which in some cases used to take up a third of the plant.”

The old system had several unfortunate consequences. Products that were designed to meet a cost figure were constantly trimmed and cheapened to cope with inflation. They looked bad compared to Japanese and European products. American companies gained an unhealthy reputation: that they couldn’t make quality goods.

But that is changing now with the discovery that quality means economy, not luxury. “Building quality drives you right to the customer,” Welch explained. And that enables GE to distinguish itself from the competition and achieve enough output to dramatically cut costs anyway.

Adopting only parts of the new style of manufacturing at a dishwasher facility in Louisville, Ky., GE was able to boost productivity by more than a third and cut repair calls by 50%. That allowed it to raise its share of the domestic market from 31% to 43% and pushed back--at least for now--threats that the Japanese would drive American producers out of their home market.

‘We’ve Won Here’

“We are, we believe, the low-cost producer in major appliances,” Welch said. “We’ve won here.”

Such victories don’t come cheaply. GE spent $1 billion in five years to renovate its Louisville appliance plant and is only now in a position where the automated facility is capable of turning out a wider variety of products. IBM, which was already spending $3 billion a year to computerize its manufacturing processes, has recently upped the ante to $4 billion annually in a drive to achieve lower production costs than any competitor, foreign or domestic.

Investments of this sort are neither total nor random. “You compete where you control the pace of technology,” said Welch, explaining why GE recently traded its television set manufacturing division to a French company in exchange for a medical equipment business. GE led the U.S. market in sales of TV sets, but in medical equipment it now leads the world.

As a whole, U.S. industry increased spending on computer-integrated manufacturing from less than $7 billion in 1980 to about $16 billion last year. By 1990, according to forecasts by the San Jose consulting firm Dataquest, investment in computer-integrated manufacturing should reach almost $30 billion.

The process is far more demanding than even the most sophisticated firms are accustomed to. When IBM launched its effort in late 1982 to produce a low-cost printer for its personal computers, the company could not rely on existing Japanese designs, which typically had more than 160 parts that had to be painstakingly put together in a costly, labor-intensive assembly operation.

Hard to Compete

“Even if all those parts washed up on shore for free, we still would have a hard time putting together a competitive product in the United States,” IBM’s Rogers said.

Instead, IBM decided to develop a printer consisting of just 60 parts that could be put together without a single bolt, screw or fastener. It gave itself just two years--half the time it once took the firm to prepare a new product from scratch.

“The old way was to design first and then figure out how to build it,” Rogers said. “What we’ve done is reverse the process and design it from the start for manufacturability.”

The payoffs are impressive. The Lexington plant that IBM chose to make its factory of the future began more than 30 years ago making typewriters. Through gradual improvements it had reduced the time required to make a typewriter to four hours as recently as two years ago. But with the new flexible manufacturing system, the Lexington plant has slashed typewriter and printer production time to less than 30 minutes and is capable of turning out an array of such products, many of them with interchangeable parts, at the rate of one every 17 seconds.

Equally important, a firm that commits itself to new manufacturing practices is in a better position to overcome the well-known American failure to transform the perpetual wealth of new inventions into commercially successful products. At IBM’s Lexington plant, like others of its type, the facility is flexible enough that it allows rapid improvements in the products in response to customer demands without requiring major retooling or a large-scale shutdown.

“Over the next 25 years, all over the world, semiskilled labor--whether cheap or expensive--will rapidly give way to smart machinery as the key element in competitiveness,” said Daniel Roos, a leading technology researcher at MIT in Cambridge. And American industry must race ahead to avoid being overtaken by other industrial powerhouses in Asia and Europe that are also in the chase, he argued. “Neither cheap Korean labor nor expensive American labor is our real problem. Rather, the challenge lies in rapidly introducing and perfecting the new generations of design and process equipment--and the complex social systems that must accompany them.”

The advantages of computer-integrated manufacturing and factory reorganization are not limited to such giants as IBM and GE. They are just as adaptable to the more than 100,000 small job shops, with fewer than 50 workers, that form the heart of American industry.

And small manufacturing firms are moving even faster into factory automation than their larger counterparts. Computer purchases by small plants, according to Boston’s Yankee Group, have been rising at nearly 35% a year and are projected to continue at that rate through the end of the decade. That contrasts with an expected 23% pace for medium-sized firms and 18% for the largest companies.

Even in such industries as textiles, where easy entry and low wages had given developing countries an overwhelming cost advantage as they began the process of industrializing, the new approaches can allow clever American firms to compete.

High-Tech Link

For instance, United Merchants, a small, old-line textile firm in Fall River, Mass., linked up with a high-tech firm named Iconics to develop a computerized manufacturing system tied directly to a group of designers in New York. An innovative system of printing color on cloth allowed new patterns to be transmitted electronically into the manufacturing operations of United Merchants’ curtain factory. Sears, Roebuck, the nation’s largest retailer, now relies on the company to supply as much as 70% of its curtains.

Of course, textiles and other large sectors of U.S. industry are making such advances only after very deep declines. And some, such as steel, apparel and machine tools, will never return to their past glory.

While some of the declines have been due to overwhelming economic trends, it is also clear that in the United States senior management grew increasingly inattentive to production. “Manufacturing took on a subordinate role and it lost status in the business schools,” said Carlton Braun, who heads a new management training and education center at Motorola Inc. outside Chicago.

When the initial rush to automate began, U.S. industry made many mistakes in its zeal to catch up with the Japanese. Both IBM and GE acknowledge that they overautomated in their first, bedazzled efforts to incorporate new technology. And critics such as Stephen Cohen of the Berkeley Roundtable question Welch’s long-term commitment to maintaining leadership in GE’s basic businesses and worry that the company may rest on its laurels and let the Japanese reverse its victory in appliance manufacturing.

Tried to Replace Workers

Even more damaging, General Motors, which sought to become the auto industry’s low-cost producer after spending $40 billion over five years on factory automation, fell far short because it tried only to replace workers with machines and failed to recognize that reforming the workplace was essential to success.

By contrast, in GM’s joint venture with Toyota to produce the Chevrolet Nova in Fremont, Calif., Toyota concentrated on workplace reorganization rather than expensive machinery. That plant is now among the most productive of GM’s factories without anywhere near the advanced technology incorporated into the company’s other recent projects.

Often, said Richard Hall, a production expert at Indiana University and author of “Attaining Manufacturing Excellence,” the attention of company executives “degenerates to just a single aspect of competitiveness, like quality improvement or flexible automation. However, a global competitor must be outstanding in one or two aspects of operations and have no major countervailing weakness. It has to do it all.”

Doing it all will be painful. Manufacturing employment--nearly 20 million today, almost exactly the same as 20 years ago--will surely shrink, and management expert Peter Drucker forecasts the loss of as many as 7 million blue-collar production jobs over the next 15 years.

Smaller Employers

At the very least, millions of Americans will find themselves working for other, probably smaller and less secure firms. That process has already begun: One out of 10 Americans who took a new job in 1970 joined a new, small firm; today one in four does.

So far the shift has been mostly spontaneous. Much more attention needs to be focused, analysts believe, on retraining those workers for radically different kinds of jobs--frequently in the service sector--and on developing cooperative efforts between government and business to help individuals shift careers.

Already, however, more than two-thirds of the displaced workers who lost their jobs in the early 1980s have found new work, according to a Labor Department study. And the majority of them are earning at least as much as they did before.

The process is inherently disruptive. About 500,000 businesses fail every year and another 700,000 start up. In every region of the country, about 10% of all workers change employment every year because their job is eliminated; another 10% switch voluntarily, according to Birch’s research.

America’s Best Recipe

But inside these apparently destructive moves, many analysts believe, is America’s best recipe for sustaining its economic might and its high standard of living. Time after time, the most successful areas are those that generate the most new jobs, not those that manage to preserve the largest number of existing ones. In fact, from Detroit in 1910 to Silicon Valley in the 1970s, plant closings and business failures actually occur at a higher rate in the most rapidly developing regions of the country.

In the long run, innovation promises the only true security, said Michael Porter, a Harvard Business School professor who served as staff director of the President’s Commission on Industrial Competitiveness, which produced a widely respected report in 1985.

“Most of the important factors in gaining a comparative advantage are no longer inherited within a nation but are freely traded in world markets,” Porter said. “But, with the proper approach, we have the capacity to foster enough really competitive industries to flourish. The reason, in large part, is because the United States remains an incredibly fertile environment for innovation.”

The outcome of the next wave of competitive battles, of course, is far from settled. The United States is still a wealthy nation, but it no longer stands, as it did at the end of World War II, as the lone productive colossus in a world of struggling, poorer nations. West Germany and Japan have pulled almost even with America in overall industrial output and technological abilities. Such newly industrialized countries as South Korea, Taiwan and Brazil are steadily expanding their shares of world trade.

‘A Real Dogfight’

“We’re in a real dogfight for at least the next 15 years,” said Joseph Bower, a top professor at Harvard Business School. The challenge, he said, is likely to become even more intense now that foreign competition is camping on U.S. industry’s doorstep as Japanese and European companies invest the dollars accumulated in the years of U.S. trade deficits to build new operations over here.

At the same time, a once-underground political debate over how the federal government should respond to Japanese trade and industrial practices and the similar strategies of some newly industrializing countries is rising to the surface. It promises to dominate debate over domestic issues through the 1988 election campaign no matter what happens to the trade bill now in Congress.

Some analysts fear that trade protectionism will abort the new industrial revolution by breeding new foreign barriers to U.S. goods. And they are not yet convinced that most U.S. business leaders have discarded the inefficient ways of the past and embraced the principles of flexible manufacturing.

“We now know all the right buzzwords,” observed management consultant Tom Peters, co-author of the best-selling “In Search of Excellence,” “but we still have not faced up to the magnitude of the task ahead.”

Those who are leading the charge, however, are confident that the tide is beginning to turn.

When Troubles Began

Many of the nation’s economic troubles started, said IBM’s Kuehler, “when many companies were satisfied with their position. Perhaps they elected not to invest as heavily in automation, or in new creative skills, or to take significant risks. And perhaps they misjudged the competitors from across the sea and let them get a long way down the path.”

But that day is past, he believes. “The result of the competition becoming a lot tougher has been to make American companies much better. We’re doing a better job.” The reason? “Because Americans respond to challenge.”