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For more than a century, Emerson Electric Co. rode the business cycle, expanding when sales were high and cutting jobs when revenue went south.
That is still the strategy as the U.S. economy is poised to turn the corner, but there is a twist: The St. Louis-based multinational won’t be hiring at its rural Mississippi plant--that facility is shutting down. Instead, it expects to be hiring in China, the Philippines or Mexico. And it won’t just be assembly-line jobs going offshore. Emerson hopes to move at least half of its engineering work to China and India.
Emerson’s example bodes ill for millions of laid-off Americans, who may never see their jobs return with the economic recovery.
The increased flow of trade and investment across borders played a large role in the economic expansion of the last decade. Now, during an economic contraction, the flip side of globalization is apparent: U.S. firms are finding cheaper places to do business where they also can sell their goods. Along with computer chips and airplanes, it is jobs and investment dollars sailing offshore.
“We want to make sure when we come out of this recession we’ll be ready,” David Farr, Emerson’s chief executive, told analysts recently. “When we finish this calendar year 2002, 70% of our manufacturing will be in low-cost countries. That’s a significant change from where we were before.”
In recent months, Emerson announced the closure of its plant in Oxford, Miss., and cutbacks in Montreal. A factory in Monterrey, Mexico, is closing and some of the work is being shifted to China. By the end of this year, the company will have shuttered 50 facilities and cut its work force by 10%.
“We’ve got to get the same amount of output, the same level of technology without spending as much capital,” Farr said.
Others are close behind. Black & Decker Corp., the nation’s largest power tool manufacturer, has announced the closure of three plants, including a 400-employee Pacoima facility, and a shift of that production to Mexico, China and Eastern Europe. Battery maker Evercel Inc. is closing plants in Connecticut and Virginia and moving assembly work to a joint-venture plant in Xiamen, China. Lear Corp., the world’s fifth-largest auto parts maker, said it will eliminate 6,500 jobs and close 21 facilities, nearly two-thirds in the higher-cost regions of the U.S., Canada and Europe. The company would not provide a breakdown of where the jobs would be lost.
Lear Chief Executive Bob Rossiter said the restructuring represents “tough decisions to right size our company for future success.”
Emerson’s decision to move the work of its Oxford plant to Mexico and China means that 500 jobs--a quarter of the town’s manufacturing base--will disappear.
When Max Hipp, executive director of the Oxford-Lafayette County Economic Development Foundation, first heard the bad news, he tried to persuade the town’s largest private employer to stay. But Oxford, a town of 11,756 where the median income is $20,383, already offers some of the cheapest labor and operating costs in the United States.
“We talked about ways to save it, but with something of this magnitude and the type of competition we face, there’s really nothing we can do,” the Oxford native said. “If we eliminated their [Emerson’s] entire tax burden, that wouldn’t make a difference.”
Labor leaders and other globalization critics had hoped the airport shutdowns and lengthy border delays that followed the Sept. 11 attacks would prompt U.S. firms to keep work at home.
“Certainly we hope that American companies will be feeling patriotic and they will have some commitment to their communities and their workers and will address their cost pressures in some other way than by outsourcing,” said Thea Lee, an assistant director for international economics with the AFL-CIO in Washington.
“With profits at the lowest percentage of corporate revenues in the postwar period, firms are being forced to reevaluate their business models and figure out whether or not things can be done more efficiently,” said Ross DeVol, director of regional studies at the Santa Monica-based Milken Institute. “The recession just accelerates that trend.”
Manufacturing jobs historically have been the most vulnerable to global competition, but the latest round of outsourcing also is hitting telephone operators, graphic designers, accountants and engineers.
Trade experts argue that this global repositioning is healthy, simply stepping up the shift of the U.S. economy toward a more high-tech provider of services and more sophisticated products. By taking advantage of lower costs abroad, U.S. firms can retain their competitive edge and gain inroads in fast-growing markets in Asia and Latin America.
The beneficiaries include export-oriented developing countries slammed by the U.S. slowdown. Leading that list is China, a more attractive place to operate since it joined the World Trade Organization in December and agreed to play by global trade rules. In spite of the global downturn, foreign investment in China was up 14.9% in 2001 from the previous year, according to China’s Ministry of Foreign Trade and Economic Cooperation.
U.S. firms are attracted to outsourcing because it makes it easier to adjust their production and transfers the overhead costs and labor expenses to their subcontractors. From 1996 to 2000, outsourcing by U.S. firms tripled from $100 billion to $345 billion a year, according to John Challenger, chief executive of Challenger, Gray & Christmas, an international outplacement firm.
Since the September attacks, companies are scrutinizing their supply chain for weaknesses and looking more carefully at the stability of their foreign suppliers and the countries where they do business, said John Coyle, a professor at the Center for Supply Chain Research at Pennsylvania State University’s Smeal College of Business Administration.
“Sure they’re really concerned [about Sept. 11] and they’ve put in place safeguards, but no one is saying, ‘We’re not going to be global,’ ” he said.
In the U.S., labor-intensive jobs in textile and apparel manufacturing, toys and light electronics migrated long ago to low-cost production areas in Asia and Latin America. Now, it is more sophisticated industries such as semiconductor and aerospace manufacturing and network computing that are moving offshore, in part because a strong dollar raises the price of U.S. exports.
Belt-tightening in the battered commercial aerospace industry has forced companies such as Honeywell International Inc. and General Electric Co. to look south for cheaper sources of components. Honeywell, which purchases 15% of its $1.4 billion a year in raw materials abroad, held a suppliers conference recently in Monterrey.
“We still probably do less off-shore sourcing than most industries, but with the dollar where it has been the last couple years, there’s even more pressure to look offshore,” said Joel Johnson, vice president of international affairs for the Aerospace Industries Assn. of America. “Aerospace companies are doing more and more work in Mexico.”
Michael Stow, president of Orange-based Arden Engineering Inc., is bucking the trend. Though he lost some commercial aerospace orders in the Sept. 11 fallout, he has picked up business on the military side. By forging long-term contracts with raw-material suppliers and upgrading his machinery, he has been able to keep his 85 jobs in the U.S. and stay competitive. He also produces more sophisticated structural components that aerospace firms are less willing to source abroad.
But thanks to infusions of foreign investment and technology, developing countries are moving up the manufacturing chain quickly.
In Emerson’s reconfigured world, power modules or motors would be designed in St. Louis but engineered and produced in Shenzhen, China, or Mexicali, Mexico. Customers calling Emerson’s ClosetMaid subsidiary would talk to an operator in the Philippines. An accounts-payable center in the Philippines or India would handle the bills for all of North America, a consolidation of 400 offices.
China is fast becoming a linchpin in Emerson’s global empire, contributing 44% of last year’s $1.7-billion sales in Asia. In addition to being a cheap manufacturing base, China represents one of the world’s fastest-growing markets for Emerson’s power conversion and compressor technology and plant automation systems.
CEO Farr believes Emerson has a lot to learn from China about producing a good product at the lowest price.
“They can engineer a product so much faster than we can,” he said. “They can get a product family out in 12 months when it would take us two years’ time.”
