Why We Sign Bad Trade Deals

Most of the damage done to U.S. manufacturers by the federal government has been through the implementation of unbalanced trade deals.  Keep in mind that this is coming from someone who was at one time an ardent free trader, and even testified before a U.S. Senate sub-committee in support of NAFTA, declaring that it had not gone far enough.  Why my turnaround?  To quote the economist Paul Samuelson, “Well, when events change, I change my mind.  What would you do?”

We enter into trade agreements under the presumption that they will lead to higher exports and lower priced goods for U.S. consumers, a virtuous cycle that will be a boon for our economy.  In 1995, I believed this to be true.  Yet today, the value of our exports is dwarfed by the tide of imported goods, and our trade deficit continues to worsen.  Since we granted China Permanent Normalized Trade Relations Status (PNTR) at the turn of the new millennium, unleashing a veritable flood of low-cost imports, median household income has actually dropped in the U.S., from $56,800 in 2000 to $51,939 in 2013.  In fact, since China was granted PNTR, median household income has never been higher than in 2000 (the next highest since then was $56,436 in 2007).

From 2000 until 2007, our total trade deficit soared from $372 billion to $761 billion.  Even now, our trade deficit is 36% higher than it was in 2000.  Meanwhile, our trade deficit with China has skyrocketed.  In 1999, the year prior to the U.S. granting China PNTR, our trade deficit with China was $67 billion.  By 2007 it was $259 billion.  For 2014, it was a record $343 billion.

Why is this happening?  Because we are entering into trade agreements with parties that don’t play by the same rules.  If I own a factory that manufactures a widget, and I’m held to certain wage, safety and environmental standards, but my overseas competition is held to minimal standards or no standards at all, then my competitor’s widget will cost a heckuva lot less than mine.   This is simple common sense.  Those who disagree will claim that this is a naïve position and that the issue is far more complicated.  But it isn’t.  And I might even reconsider my position if the lower priced goods coming from overseas meant a better lifestyle for me and my fellow citizens.  But our standard of living, as measured by median household income, has actually suffered.  Yet the same pro-trade arguments are trotted out for the Trans-Pacific Partnership (TPP) as for China PNTR and NAFTA.

The Trans-Pacific Partnership is a trade agreement currently being negotiated between the U.S., Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam.  Note that China is not on the list.  It’s ironic that one of the main arguments in support of TPP is that it will help counterbalance the influence of China in the Pacific Rim.  China’s influence in that area of the world is to a great degree due to our support of their entry into the WTO, our massive imports of China-made goods, and their buying of our debt.  In other words, TPP is a trade deal that attempts to solve a problem created by a trade deal.

One of the greatest dangers of TPP is its potential effect on the nascent apparel manufacturing renaissance in the U.S.  In his presentation at the spring 2014 meeting of the Americas Apparel Producers Network, Roger Gilmartin, Managing Director of O’Rourke Group Partners, an international management consulting firm, estimated that if TPP passes U.S. job losses in the apparel industry alone would number 150,000 if the yarn-forward rule is eliminated.  The yarn forward rule requires that everything from the yarn to the fabric to the cut & sew operations be sourced from signatory countries.  If the yarn-forward rule is negotiated away by the U.S., Vietnam, which is becoming a major exporter of apparel to the U.S., would be allowed to source its fabric from China.  This would, in effect, give China a duty-free back door into the U.S. apparel market.  And let’s keep in mind that even without TPP our trade deficit with Vietnam is already surging, from $16 billion in 2012, to $20 billion in 2013, to$25 billion in 2014.

TPP could also lead to a loosening of our safety standards on imported meat and other foods.  According to a June 2014 report from Public Citizen, if the TPP member exporting country claims that their safety processes and standards are “equivalent” to those in the U.S., and the U.S. refuses entry of their goods, the exporter could bring a challenge to an international tribunal that would rule on whether the U.S. violated the treaty’s protocol.[1]  In essence, we could be dangerously dumbing down our food safety standards.  Further cause for concern is that the FDA has continuously cited seafood exporters in both Vietnam and Malaysia for selling products that contain contaminants.  During the 5-year period from 2007 to 2012, the FDA rejected 1,380 shipments of Vietnamese seafood.[2]  According to Public Citizen, the FDA has placed 192 Vietnamese fisheries on a “red list” due to risk of salmonella contamination.

How and why are skewed trade deals passed by Congress?  In the past, trade promotion authority (TPA) has been used to grease the skids.  Congress periodically grants the president this authority – sometimes called “fast track” – when negotiating trade deals, and Obama is now pressing Congress to renew fast track to facilitate passage of the Trans-Pacific Partnership.  TPA is helpful to passing trade deals because it prevents Congress from picking the deal apart.  After the negotiated deal is presented, they have a simple “yes” or “no” vote.  Trade negotiators claim that without TPA, negotiators from other countries won’t make final concessions because the deal hammered out by the U.S. negotiators may not get through Congress, or may be amended.   The problem with TPA, particularly in regards to the Trans-Pacific Partnership, is that the negotiations are being held behind closed doors, which means Congress will not have adequate time for due diligence on the treaty’s contents before casting a vote.

The administration cannot have it both ways.  If it wants fast track authority, then it must keep Congress apprised of the details of the negotiations as they progress.  If the administration wants to keep the negotiations secret, then no TPA.  Proponents of TPP and fast track authority will claim that it’s not that simple.  Again, this is not complicated; it’s common sense.

In his January 2015 State of the Union address, Obama admitted that past trade deals didn’t work out well, but then asked for fast track authority while assuring that his trade deals (TPP, TTIP) would produce better results.  So, we are being asked to take the administration at their word that this is a fair agreement without knowing its details, and Congress is being asked to give them fast track authority before anyone sees the final text of the deal.  Seems to me Obama should have listened to his own advice concerning Cuba that he gave in the same speech, “When what you’re doing doesn’t work for 50 years, it’s time to do something else.”   Amen, Mr. President.   Since fast tracked trade deals didn’t work out well for U.S. families for the last 50 years, let’s try something else.

[1] http://www.citizen.org/documents/food-under-nafta-wto.pdf

[2] http://abcnews.go.com/Business/consumers-eating-feces-tainted-shrimp-fish-seafood-asia/story?id=17491264

Less is More with 3D Printing

Amara’s Law states that we tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.  So it was with the birth of the internet, and so it will be with the proliferation of 3D printing, the most extreme manifestation of the FEWER principle in action.  3D printers allow the user to manufacture one custom piece.  How does a 3D printer work?  Think of it as the opposite of making a sculpture.  As opposed to taking a solid block of material and slowly chipping away at it until it is the desired shape, 3D printers use a hose-like nozzle to craft a product or part from the ground up, minimizing waste.  The nozzle is directed by a computer graphics software rendering of the product or part.

3D printers have been in use in industrial situations for decades, primarily for creating prototypes to speed up the product development process.  However, over the last 5 years, prices for the machines have plummeted and desk top versions have become widely available.  This has spurred legions of makers to experiment with the technology, leading to further refinements in the technology and potential uses for the machines.  Worldwide shipments of 3D printers will reach 217,350 units in 2015, up from 108,151 in 2014, according to Gartner, Inc., an information technology and research & advisory company.  They also estimate that 3D printer unit sales will more than double every year between 2015 and 2018, by which time worldwide shipments are forecast to reach more than 2.3 million.

Although they have traditionally been used by large manufacturers to speed up the product development process, 3D printers are nearer to making the leap to consumer products than many think.  Nike has used 3D printing to create custom sports bags, and in a recent interview, Under Armour’s Senior Innovation Design Manager, when asked whether the company has any plans for 3D printing, responded, “If you want to put something in your hat (figuratively), definitely something big is going to happen in the future.”  It sounds as though a cap tailored exactly to the shape of your head is in the works.

In a January 2015 article on the availability of 3D printed shoes, Andrew Wheeler writes that “as the air of customization reaches the minds of an infinite number of consumers, the show shopping impetus is shifting from ‘let’s see what’s available’ to ‘I want it to look exactly like this’ or ‘this is exactly what the shoe company should do’ or ‘why don’t they just make them like this’ and so on.”  Given the rapid proliferation of 3D printers – and products made by them – one could substitute almost any word for “shoe.”[1]

Local Motors, based in Phoenix, describes itself as a “free online and physical workspace where creativity, collaboration and design drive vehicle innovations.”  This online community, augmented by a small number of employees, designs, builds and sells what they call “badass vehicles.”    Revenue is shared by those in the online community who helped create the product.  At the January 2015 North American Auto Show in Detroit, Local Motors introduced a 3D printed car that can be made in 40 hours.[2]  CEO Jay Rogers noted that fully 95% of the volume of the car is 3D printed; the motor, springs and tires are not.  Clearly Local Motors is working toward the ability to offer a stock chassis and allow consumers to customize body design, number and type of seats, trunk size, etc.  It will be some time before such vehicles are deemed safe for normal road conditions, but time is the only obstacle.

Larger companies are also exploring innovative ways to use 3D printing.  Let’s say it’s your anniversary, you are taking your spouse out for dinner, and you want the chef to serve pasta in the shape of a rose. You simply bring the rose design on a USB drive and hand it to your waiter, who passes it along to the chef.  She installs the drive onto a 3-D printer and serves up the dish in 20 minutes. Seem far-fetched?  The global pasta company Barilla is currently working with a research organization to design a 3D pasta printer that will churn out custom designed pasta at restaurant speed.[3]  Also in the food realm, at the 2014 SXSW trade show in Austin, the Oreos booth featured two custom-made vending machines with a 3D printer that enabled attendees to create and eat custom 3D printed Oreo cookies based on trending social conversations.  Users pick from 12 “trending” flavors and colors of cream filling, then watch their cookie being “printed” in two minutes.  And the  “My M&Ms” website allows consumers to add messages, photos and art to their candies.

Joshua Harris is working on a clothing printer that would allow you to create your own T-shirt at home, styled to your exact body type.  When the garment begins to get a little ragged, you simply load it back into the printer and it breaks down the thread for use in a new shirt.[4]  The fact that 3D printers will one day allow you to make your own clothing at home reminded me of an increasingly common sentiment I saw in the comments section at the end of an article concerning 3D printed dresses.  Someone mentioned that it could be a lucrative revenue stream for the company selling the customized dresses and one wag responded, “Sell it?  Why?  We can just easily replicate the pattern and print it ourselves.  For the price at (the design company) you could buy a high end printer and do it yourself.[5]

3D printers have a synergistic relationship with the burgeoning consumer desire for more customized products, and they reinforce the importance of implementing the FEWER principle in any manufacturing operation.  They are here to stay, they will become more affordable, and they will be increasingly used not merely for prototypes, but for production runs.  It may not be next year, but it will be within 10 years.

[1] http://3dprintingindustry.com/2015/01/27/half-leather-3d-printed-delcams-3d-printed-shoes/

[2] http://www.cbsnews.com/videos/taking-a-test-drive-in-a-3d-printed-car/

[3] http://restaurant-hospitality.com/food-trends/3d-food-edges-closer-reality-restaurants?NL=NED-19&Issue=NED-19_20150105_NED-19_304_CPY1&sfvc4enews=42&cl=article_3_3&YM_RID=CPG03000001472225&YM_MID=2984

[4] http://www.tuvie.com/clothing-printer-concept-for-2050-allows-you-to-produce-your-own-clothes-from-home/

[5]http://www.wired.com/2014/12/dress-made-3-d-printed-plastic-flows-like-fabric/

Why China Labor Costs are Increasing – and Why It’s Good for U.S. Manufacturers

In August 2012, the Wall Street Journal reported that labor costs in China had risen 150% since 2004.[1]  Most analysts expect the trend to continue.  During that same year, wages in China’s Pearl River Delta, considered the geographic heartland for China manufacturing, rose 10.4%.[2]   A 2011 Boston Consulting Group study predicted that wage and benefit increases of 15% to 20% per year will cut China’s cost advantage over wages at lower cost U.S. states from 55% in 2012 to 39% in 2015.

Much of this increase in China labor costs is driven by the simple law of supply and demand.  According to the Asian Development Bank, the working age population in China increased from 407 million in 1978 to 786 million in 2004.  This surge in population created a huge supply of cheap manual labor at precisely the same time that China was ramping up its manufacturing and exporting capabilities.  But the one-child policy, instituted in 1979, had an unforeseen consequence – it has led to a precipitous decline in the number of new laborers entering the workforce.  In 1975, there were six children for every elder in China; by 2035, if present trends continue, there will be one child for every two elders.  The working age population is expected to decline by 7 million per year through at least 2020.[3]

In November 2013, when it finally recognized the approaching demographic train wreck, the Chinese government loosened the one-child policy, allowing an estimated 11 million couples to apply for approval to have a second child.  But the expected baby boom is not materializing.  Officials predicted the new policy would lead to 2 million new births annually, yet only 804,000 couples have applied to have a second child.[4]

Another ominous development is that the new, smaller workforce is predominantly male.  The one-child policy exacerbated a cultural preference for male descendants.  For every 100 female births in China there are now 124 male births, and in some provinces the ratio is even higher.  As the number of total available laborers decreases and the ratio of male to female increases, the workforce will become more demanding, increasingly mobile, and more willing to change jobs to chase higher pay.

Foxconn is a massive manufacturing and assembly operation in China that is second only to Walmart in total employees.  They are known primarily as a key piece of the supply chain for Apple’s iPhone.  In 2013, it was reported that yearly turnover in their Shenzhen Longhua facility was 60%.  Turnovers in most other factories in the same area average 40%.

The increasingly male-dominated workforce is also becoming more militant.  2,000 workers at a Foxconn factory caused widespread damage in September 2012, when they rioted and clashed with 5,000 police officers dispatched to the scene.  Explanations for the riot ranged from a conflict between workers from different provinces to dissatisfaction with pay and working conditions.

In April 2014, more than 30,000 workers at a Taiwanese-owned shoe factory in the southern province of Guangdong went on strike to protest the company’s failure to pay full social security and housing fund contributions. The factory produces athletic footwear for brands such as Adidas, Nike, Reebok and Timberland.   The strike is further evidence of the rising cost of labor in China caused by a shortage of migrant workers, and the increasing militancy of China’s factory workers. Both factors help to level the playing field for U.S. manufacturers competing with China.

At the same time that the labor force is shrinking, the number of jobs in higher paying manufacturing industries in China is increasing.  According to a 2011 report from consulting firm Accenture, average hourly wages for manufacturing workers in both the telecommunications and heavy manufacturing industries are 50% to 60% higher than wages in more traditional light manufacturing.  One importer told me that the China factory from which he sources his line of relatively inexpensive tote bags was forced to shut down for a time after the 2011 Chinese New Year because most of the workers simply did not return after the holiday.  He presumed that most of the employees had taken jobs in other better-paying industries.

As the shrinking workforce in China shifts to higher paying manufacturing jobs in the automotive and high tech industries, companies in light manufacturing will be forced to pay higher wages simply to keep workers.  These rapidly rising wages are creating an expanding middle class, and as factories increasingly turn to satisfying their demands, less factory capacity and labor will focus on exports. Will China’s anemic birth rate of the last 20 years continue to provide an adequate labor force to service both domestic AND overseas markets?  Keep in mind that most businesses will follow the path of least resistance, and it is always easier to service a domestic market than an overseas one.  My bet is that China manufacturers will service the domestic market first.

Media attention to dangerous or unfair working conditions at overseas factories has also played a role in increasing labor costs at those factories.  Major brands and big box retailers are now paying closer attention to the working conditions at factories in their supply chain to prevent adverse publicity.  Even before the tragic Tazreen factory fire in Bangladesh, Apple had been putting pressure on their largest supplier in China, Foxconn, to improve wages and working conditions at its factories.  This is largely due to a series of suicides and labor riots at their factories, and the subsequent bad publicity.   In October 2014, the U.S. Department of Labor reported that over 168 million children (a number which equals half the population of the U.S.!) are working in factories around the world, many of them forced to do so, and toiling in deplorable slave labor conditions.[5]  Brands can no longer turn a blind eye to such atrocities, given the glaring light that social media shines on them.

It is likely that the emphasis in China’s current 5-year plan on developing “strategic emerging industries” such as biotechnology, high end equipment manufacturing, and clean energy vehicles is simply making a virtue out of necessity.  In the near future, factory workers available and willing to take lower paying light assembly jobs in traditional manufacturing industries will be few and far between.  The labor shortage in China, and resulting increases in labor costs, will continue to put upward pressure on the price of manufactured goods coming from China for years to come.  Only time will tell, but not even a tightly controlled economy like China’s can suspend the law of supply and demand indefinitely.

So why wouldn’t importers simply shift their procurement to other emerging Pacific Rim manufacturing countries with lower labor rates such as Vietnam?  What about India or Africa?  Many are exploring the possibilities, but most of the countries hoping to compete with China do not currently have the infrastructure (highways, rail lines, ports) that are essential to moving the flood of goods that have been pouring out of China over the last decade.  In addition, even though China has a very spotty record when it comes to creating safe working conditions and complying with environmental regulations, other countries are even worse.  All of this is bad news for importers and for overseas manufacturing companies hoping to break into the U.S. market.  But it bodes well for U.S. manufacturers looking to take back U. S. market share from their overseas competitors.

[1] Orlik, Tom, “Made in China is Getting More Expensive, The Wall Street Journal, August 11, 2012, page B16

[2] Lahart, Justin, and Orlik, Tom, “Fade in China, Made in America,” Wall Street Journal, March 10-11, 2012, page B16

[3] Lommen, Yolanda Fernandez, ADB Briefs No. 6, October 2010, page 2

[4] Burkett, Laurie, “No Baby Boom After Shift in One-Child Policy,” Wall Street Journal, Saturday/Sunday, November 8-9, page A6

[5] http://time.com/3479472/child-labor/

How Wall Street Drove Offshoring

A report released in 2013 by the MIT Taskforce on Innovation and Production noted that some of the fastest growing companies of the past 30 years, including companies such as Dell, Cisco, Apple and Qualcomm, have almost no domestic manufacturing capability.  Why?  The task force places the blame squarely on 1980s financial markets that placed higher valuations on “asset light” companies.  The report notes that “first among the business functions that companies started moving out of their own corporate walls was manufacturing – for that produced reductions in headcount and capital costs that stock markets immediately rewarded.”  Wall Street turned manufacturing into nothing more than a cost center.  This financial strategy, while effective for improving the bottom line over the short term, led to the massive offshoring of manufacturing jobs, particularly after China’s entry into the WTO.  By throwing manufacturing employees out of work, money was taken from the pockets of U.S. consumers that had traditionally been customers of those same companies.

How did that affect small, family-owned manufacturers?  Extremely low wages in countries like China led larger companies to offshore to reduce manufacturing costs.  In order to remain competitive against low wage overseas manufacturers, smaller domestic companies had to slash margins at the same time that their revenue was decreasing.   Ultimately, the math no longer added up and companies either closed or were sold to companies that were already offshoring.

So this is also an issue of large companies vs. small.  Multi-national companies are vocal proponents of trade agreements because many have come close to maximizing their market share in the U.S.  Each additional dollar of sales revenue is tougher to get due to the level of competition here.  For them, the biggest revenue upside is in emerging markets like China.  So they favor trade deals that lower trade barriers into an emerging market, even if the deal is skewed in favor of the emerging market country and against domestic manufacturers.

Take a look at the roster of membership and the list of board members of the US-China Business Council (www.uschina.org), which lobbies to expand commercial relationships between the U.S. and China.  You won’t see many names of smaller companies like Quill or Just-A-Stretch.  Council membership is composed primarily of companies more interested in selling into China than rocking the boat with China over unfair trading practices.  In a January 2013 report entitled “China and the U.S. Economy: Advancing a Winning Trade Agenda” the Council strongly defended more liberal trade policies with China.  Some of their positions in this report include:

  • Let’s move on from China’s currency manipulation to issues that really do matter
  • We have options when China doesn’t play fair – like the WTO
  • U.S. companies are a positive influence in China
  • Investment from China supports jobs in America.

China currency manipulation is not an issue?  Though he does nothing about it, even the U.S. Treasury Secretary continues to insist that China manipulates its currency to the detriment of U.S. manufacturers.  And do you really believe that we should put faith in the WTO to pass judgment on our trade policy?  Keep in mind that this is the same WTO that recently ruled the U.S. should not force meat producers to put a country of origin label on their products.  Seems reasonable to me to want to know where the meat you are about to eat came from – but the WTO thinks otherwise.   And as to investment from China supporting jobs in America?  Sure it does, but keep in mind that some of those U.S. companies are selling at a distressed price precisely because of offshoring and the resulting inability to compete against imports.  Meanwhile, the Chinese direct foreign investment money used to fund those acquisitions comes largely from their exporting of products – made with cheap labor in sub-standard working conditions – to the U.S.

Some larger companies that were quick to offshore have also neglected to revisit that decision now that the costs of overseas manufacturing are rising.  Instead of merely comparing the price of a part or product made domestically vs. overseas, they should take a closer look at what is called the total cost of ownership.  The total cost of ownership includes variables above and beyond the price of the product itself.  Those variables include transportation costs, minimum order sizes, supply chain risk (port disruptions, political instability, etc.) and a number of other factors that are often ignored when comparing the price of an imported and domestically made item.  The Reshoring Initiative has created a Total Cost of Ownership Estimator, an essential tool for any CFO calculating the relative advantages of domestic and overseas production.   Companies would be wise to keep in mind that the price of an item is not necessarily the total cost.

There has also been a failure on the part of individual smaller companies to adapt to the new global environment.  In my relatively brief experience in the textile business one of the biggest challenges I have encountered is the service level of the domestic vendors whose companies have been devastated by the migration of apparel manufacturing to China.  Many are now surviving, for the most part, on business that is either highly regulated (e.g., seat belt strapping for the automotive industry) or the result U.S. government set-aside programs.  Several of the domestic houses with which I’ve dealt seem not to have learned the lessons of the webbing migration to China.

I have often needed samples or short production runs to test new products.  Procuring from a U.S. vendor a sample of a new design to show a customer is usually an agonizingly slow process.  China manufacturers generally respond much more quickly to sample requests than U.S. companies.  It seems that the reliance on longer run set-aside business has actually enabled some U.S. based manufacturers to continue their bad habits from days long past.

Being relatively new to the textile business, it has amazed me that so many of few remaining survivors of the domestic business have missed the lessons of the last 50 years.  For the most part, they seem to be keeping their eyes on the brass ring of large orders from regulated industries, propping up their obsolete business model and turning their backs on small projects with big potential because they view them as too much trouble to pursue.  Meanwhile, the loss of one important customer could put them out of business.

So there is plenty of blame to go around for offshoring.   Misguided government policies and consumer inattention to country of origin were also important factors that we will address at another time.  But when it comes to the massive wave of offshoring that began in the 1980s, Wall Street led the way.

Playing It Safe (Part 2) – Product Safety Regulations Have Changed How We Make and Buy Children’s Products

The TA Creations lunch box controversy in California was merely a prelude to a barrage of product safety news that would change the way companies source – and consumers buy – children’s products.  Three years later, on June 18, 2007, the New York Times reported that all of the 24 toys recalled by the Consumer Products Safety Commission since the beginning of that year had been manufactured in China, including 1.5 million Thomas and Friends trains and rail components.[i]  Two months later, Mattel recalled 1 million toys – all manufactured in China – due to excessive lead levels.  The recall covered 83 products, including Sesame Street and Nickelodeon characters.  These high profile recalls created much controversy in consumer product safety circles and grabbed the attention of the media, federal and state legislators, and the Consumer Products Safety Commission.

Largely as a result of that uproar, roughly one year later on August 14, 2008, President George W. Bush signed the new Consumer Products Safety Improvement Act (CPSIA).  Between 2002 and 2007, the number of recalls of products made in China had doubled, and the law was a direct response to those recalls, particularly those related to the above-mentioned children’s products tainted with lead paint.  The new law banned all products with a lead content of more than 600 parts per million by February 2009, and drastically reduced the allowable level of lead content in any children’s product to 100 parts per million by February 2011.  The law also banned the manufacture, distribution and sale of any child care product that contained concentrations of more than 0.1 percent of phthalates, a compound that previously had been used in a number of plastic products, including some drinking containers.

Finally, the new law set up strict testing requirements to ensure compliance, including a paper trail in the form of a General Conformity Certificate (GCC) that would compel U.S. distributors of products imported from China to document and have available the ultimate manufacturing source.  Thus, importers are now required to have on file a record of an imported product’s “DNA,” including the date and place where the product was manufactured, and date and place where the product was tested.

In spite of the increasingly stiffer U.S. product safety regulations, one need only follow the news to know that many China manufacturers still possess little understanding of the importance of product safety in the U.S. market.  And it is not as though China is dumping unsafe, inferior product only on unsuspecting consumers here in the States.  Rather, it is a pattern of behavior which proves that lax safety standards are both tolerated and even covered up at some of the highest corporate levels.

During the height of the 2008 U.S. recalls of lead tainted toys manufactured in China, executives at the Sanlu Group, China’s largest producer of powdered milk, had discovered that some of their products were laced with melamine, a chemical used to produce plastic and fertilizer.  It was apparently added to the milk powder to boost the measurable protein content of the product.  However, with the Beijing Olympics due to begin in a matter of days, the company opted to bury the news for five weeks to prevent an embarrassing revelation during the Games, and continued to sell the product for consumption by infants.[ii]  Six babies died from kidney stones and other kidney damage, and over 800 were hospitalized.  Two people were eventually executed, another given a suspended death sentence, and three received a sentence of life imprisonment.  So one would think this would be the end of the possibility of finding melamine in powdered milk in China.

Yet, in late 2010 and early 2011, packets of melamine-tainted powdered milk were again found on store shelves in China.  Incredibly, some of the product seized during the 2008 scandal had been reused and put back on retail shelves three years later.[iii]  In July 2012, state media outlets announced that more contaminated formula was discovered in Guangzhou, China.  Tests confirmed that the formula contained excessive amounts of the carcinogen aflatoxin. This was only one month after baby formula with dangerous levels of mercury had been discovered.[iv]

In his book The End of Cheap China, Shaun Rein (no “China basher” by any means) recounts that after the tainted milk scandal re-surfaced in 2011, the Chinese government shut down 50% of the dairies because officials were still finding traces of melamine in dairy products.  The government arrested 2,000 and closed 4,900 businesses, yet Rein comments that this “is likely a small drop in the bucket because the problems are so immense.”[v]

Meanwhile, Raelynn Hughes at Mommy Necklaces continues to fight the battle against imports every day.  Cheap knock-offs from overseas are a constant threat, but her customers trust her and the safety of her products.  Occasionally, mothers of young children who buy her necklaces will send her some of their old jewelry, and subsequent testing will reveal lead levels far above the legal limit.

“Moms stop wearing jewelry because they are fearful it will break,” Hughes relates.  “But what most Moms don’t realize is that this is not the only concern.  Most everyday jewelry is loaded with toxic levels of metals.  We test it regularly and the results are often scary.  It’s ironic that we think about what we feed our kids, what chemicals are in the diapers, environmental toxins in water; but a piece of jewelry that lays on our skin everyday and ends up in our child’s hand – we just don’t think about it.”

The fact that Hughes has thought about it, and solved the problem, has turned Mommy Necklaces into a global brand.  She now has customers across the U.S., in New Zealand and Australia (two markets flooded with Asian imports), and over 18,000 Facebook fans.

Michael McKeldon Woody is host of the upcoming television program, and author of the upcoming book “American Dragon,” both of which profile U.S manufacturers successfully competing with overseas companies.  He can be reached at mmw@americandragon.us and on Facebook at American Dragon – Michael McKeldon Woody.  

[i] Lipton, Eric B., and Barboza, David.  “As More Toys Are Recalled, Trail Ends in China,” New York Times, June 19, 2007

[ii] Leiber, Nick, and Rocks, David, “Small U.S. Manufacturers Give Up on ‘Made in China,’” Bloomberg Businessweek, June 26, 2012.

[iii] Melamine – China Tainted Baby Formula Scandal, New York Times, March 4, 2011.

[iv] Mark McDonald, Carcinogen Found In Chinese Baby Formula, International Herald Tribune, July 23, 2012.

[v] Rein, Shaun, The End of Cheap China, John Wiley & Sons, Inc., 2012, page 98.

PLAYING IT SAFE – Product Safety Regulations Have Changed How We Make and Buy Children’s Products

When Raelynn Hughes of Holland, Michigan, founded her company, Mommy Necklaces in 2004, overseas competition was not even on her radar screen.  Raelynn’s goals were safety, fashion and comfort.  As a young mother with a new baby, she noticed that her easily distracted breast-feeding daughter, Megan, would instantly calm down when she focused on the heirloom necklace that Raelynn had received as a gift from her grandmother.  The baby would hold it, twist it, and try to put it in her mouth.  Raelynn was naturally concerned that her baby might accidentally break the necklace, or that the jewelry might contain metals that would be harmful to her child.  So she went to her computer and scanned stores that sold baby toys, trying to find a safe and practical substitute for her grandmother’s necklace.  It would be nice if it was also fashionable and relatively inexpensive too, she thought.  She quickly discovered that there was nothing available.

Then and there Mommy Necklaces was born.  Now a thriving company, with a wide range of safety-tested products, Mommy Necklaces distributes in the U.S. and overseas.  Her product contains no harmful chemicals or toxins, cording with a break-away closure, and beads that will not break, splinter or crack under the regular duties of motherhood.  Hughes has made a commitment to remain U.S. sourced.  She tests all components for product safety, and guarantees to repair any of her necklaces that are broken – no matter how.

Hughes employs a number of young women in the area, many of whom discovered the company as new mothers.  They work on production of the final product either at the Mommy Necklaces design studio, or taking pieces home to assemble.  As she describes it, “There is no sweat shop, child labor, or assembly line.  We’re a puzzle of perfection that could not be put together with the same integrity if we were outsourced and were disconnected from our sources.”

Ms Hughes decided that all cords, components and beads would be sourced in the U.S. because she wanted to support manufacturing in this country.  She chose as her supplier of beads the Greene Plastics Company in Hope Valley, Rhode Island.  Around this time she would read news reports about recalls of China-made products due to excessive lead or phthalate content.  Greene Plastics continuously tested its beads to ensure they were within standards set by the Consumer Products Safety Commission (CPSC).

“From the beginning,” Ms Hughes recounted in a 2012 interview, “I wasn’t trying to scare people, but simply open their eyes to the magnitude of this potential problem.  Our customers could buy our products with complete confidence that it was safe for their baby to be around our jewelry without worry that a transfer of toxic chemicals could occur.”  Her focus on the safety issue when she first started the company in 2004 would prove prescient.

In 2004, the same year that Raelynn Hughes was starting her company, Mommy Necklaces, the California Department of Public Health distributed 300,000 lunchboxes to children throughout the state to promote eating fresh fruits and vegetables.   One third of those were supplied by TA Creations, a Los Angeles company that had imported the products from China.  Two years later, a spot check by a Sacramento County lab discovered that some of those lunchboxes contained lead levels significantly above the legal limit proscribed by California Proposition 65 – at that time  600 parts per million.  All 300,000 lunchboxes were recalled and TA Creations was eventually slapped with a $10 million fine, the largest legal judgment against an offender up to that time.

This was merely a prelude to a barrage of product safety news that would change the way companies source – and consumers buy – children’s products.  With the passage in 1986 of California Proposition 65, businesses were prohibited from knowingly exposing consumers to potentially dangerous substances without clearly notifying them of the presence of those substances.  The burden of proof was now placed on companies, not government, to ensure that they were selling products that complied with official limits on hazardous chemicals.  Products that were non-compliant were required to carry a label stating that it “contains chemicals known to the State of California to cause cancer and birth defects or other reproductive harm.”

Proposition 65 was clearly a challenge for U.S. manufacturers who now had to comply with a more stringent set of safety regulations in California than in the balance of the country.  But it was an even greater challenge for U.S. companies importing finished goods from China.  Many of these importers had been simply shopping product off the shelf of a trade show booth of a China manufacturer or agent in Hong Kong.  They may have never taken the time to actually visit the mainland China factory where the products were manufactured.  They never inspected the materials going into the products they were importing from China; never saw the conditions in the factories.  They were buying from China like one would buy a can of peas off the shelf of a grocery store and simply assuming the products were safe.

But Proposition 65 forced those importers to pay more careful attention to the “DNA” of a product – the base metal from which it was constructed, the chemicals that were used to manufacture it, the composition of the paint that decorated it.  Although these were also challenges for small to mid-size domestic manufacturers, they were far more onerous challenges for an importer with little knowledge or control of a manufacturing process taking place half a world away.  Of course, if you were an importer not willing to comply you could choose to stop selling into California, or simply ignore the law – and put others at risk.

(In Part 2, to be posted next week, read how dangerous levels of lead in imported toys led the Consumer Products Safety Commission to take action)

Michael McKeldon Woody is host of the upcoming television program, and author of the upcoming book “American Dragon,” both of which profile U.S manufacturers successfully competing with overseas companies.  He can be reached at mmw@americandragon.us and on Facebook at American Dragon – Michael McKeldon Woody.  Twitter: @usdragon1  

Using the “FEWER” Principle to Beat the Imports

What is the “FEWER” principle?

The “FEWER” principle holds that when developing new products, a manufacturing company should focus on those that allow for shorter production runs and/or customization in order to better compete with imports.

Why focus on shorter production runs and/or customization?

Because the concept of having exactly what one wants – as opposed to a “one size fits all” mentality – has become ingrained into today’s consumer, particularly those in the U.S.  There are numerous examples of this phenomenon, but here are three.

Consider how we order coffee today.  In the 1970’s you had basically two options, regular or decaffeinated.  The server would give you the cup of coffee and you would add your own cream and sugar.  But walk into most coffee shops today and the options are almost overwhelming.  Regular coffee, espresso, lattes, decaf, all with a myriad of flavor options plus cream, milk, skim milk, soy milk, etc.

Remember when Lay’s had two types of potato chips, regular and ruffled?  The company just recently held an online poll that allowed their customers to choose whether their next new flavor would be Ginger Wasabi, Mango Salsa or Cheddar Bacon Mac & Cheese.  The winner will be added to options that include barbecue, sour cream and onion, ranch, sea salt and vinegar, etc.  In fact, there are now 51 different combinations of chip styles and flavors listed on the Lay’s website.

Those of you my age recall putting on a record album and listening to songs you did not particularly care for because you had to hear every song on the album side in order to hear the ones you really liked.  Now, we create our own digital music playlists and listen only to the songs we love.  And Google recently announced the launch of a music subscription service that anticipates your mood and plays what it thinks you will want to hear based on your past habits and the time of day and/or venue.  So not only do you now have the option of listening only to the songs you love, but this service actually anticipates and plays those songs you want to hear at a particular time of day based on how you are feeling.

We have come to expect products and experiences customized to our own tastes.  From Burger King changing the fast food business by asking you to “have it your way” to Dell revolutionizing the personal computer business by allowing customers to pick and choose the features on their laptop, consumer expectations have irreversibly changed.  The power of 3D printing is the latest, most extreme manifestation of the “FEWER” principle.

There are numerous examples of large manufacturers using 3D printers to speed up the product development process – and lower its cost – by using 3D printers to make prototypes.  But these printers are nearer to making the leap to consumer products than you may think.  Nike has used 3D printing to create custom sports bags, and in a recent interview, Under Armour’s Senior Innovation Design Manager, when asked whether the company has any plans for 3D printing, responded, “If you want to put something in your hat (figuratively), definitely something big is going to happen in the future.”  It sounds to me as though a cap tailored exactly to the shape of your head is in the works.  So, if you are in the process of creating a new product or service, you want to be certain that you have the flexibility, as a company, to cater to the consumer’s desire for something personalized.

Michael McKeldon Woody explains the FEWER principle

How does focusing on the FEWER principle make me more competitive against overseas companies?

It makes your company more competitive because most overseas manufacturers, when it comes to exporting, have a business model that focuses on long production runs of commodity products.  Given their distance from the U.S., and the costs for transportation, they need to produce long runs in order to keep prices low.  And they need to ship a lot of product at the same time in order to keep the costs of shipping low.

When competing against an overseas manufacturer, hit them where they are weakest.  It is next to impossible for overseas manufacturers to revamp their factories for short production runs or to create customized products.  And even if they did, those companies would still confront the cost inefficiency of shipping smaller quantities halfway around the world.

Makes sense for consumer products, but how does this affect business-to-business transactions?

The same people that have developed a craving for a niche flavor of potato chips and a half caffeinated vanilla latte with no foam are also working as purchasing managers at companies that buy parts.  So they, too, will want precisely what they want, exactly when they want it.  When you go to work, you don’t check your personal preferences at the door.

Also keep in mind that B2B buyers are increasingly focused on maintaining lower parts inventories in order to improve their cash cycle and their companies’ bottom lines.  By developing the ability to make and ship smaller quantities, a U.S. manufacturer can exploit that need.  An overseas manufacturer, with a business model built on making and shipping high quantities of a commodity-type product, cannot.

Davis Industries beats the imports by benchmarking their overseas competitor’s minimum order size, then reducing their own to 10% of those competitors, far below traditional industry standards.  How?  By making a modest investment in new production technology that allowed them to produce smaller quantities with lower set up costs.  They also moved smaller orders into what was formerly their “fast-track” sample production line so these orders would not be stuck in the queue behind larger orders that took more time.  Finally, they lowered set-up charges to remove a significant hurdle to new orders, calculating that they would recoup those costs in repeat orders.

Their accountant fretted about the operational costs of those smaller orders, but I urged them to consider them marketing costs for customer acquisition and retention, not production expenses.  Since implementing the change, their order count has quadrupled and 90% of their orders use the new technology.  Has the new technology displaced workers?  Just the opposite – their workforce has almost doubled in size.

Implementing the “FEWER” principle in your product development and production areas is an essential step in your battle against overseas competitors.  But the “FEWER” principle alone is not sufficient to ensure success.  It must be implemented in conjunction with the “FASTER” and “FINER” principles to have the greatest impact.  More to come on “FASTER” and “FINER” in future blog posts.

Michael McKeldon Woody is host of the upcoming television program, and author of the upcoming book “American Dragon,” both of which profile U.S manufacturers successfully competing with overseas companies by using the principles of FEWER, FASTER, FINER.  He can be reached at mmw@americandragon.us and on Facebook at American Dragon – Michael McKeldon Woody.  Twitter @usdragon1 

Why Arguments Against Government Mandated “Buy Made in USA” Programs Are All Wrong

Over the last few years, several states have considered bills that would mandate preferences for U.S. made products in the government procurement process.  An effort in Maryland was ultimately successful, and a Texas bill passed overwhelmingly in a bipartisan vote before being vetoed by Texas Governor Rick Perry.  In spite of the obvious benefits of such policies, constituencies opposed to the measures made strikingly similar arguments against them.  Here is a recap of the arguments typically made against “Buy American” provisions – and why those arguments are wrong.

Argument #1 – Buying American would raise the costs of the project.

Yes, the price of the project may be higher, but if all companies bidding for the project are under the same “Made in USA” constraints, then the playing field would be level for all bidders.

We must also consider the total cost to the city, state, or federal government.  If the price to the government entity for the “Made in USA” project is X% higher, is that X% premium covered by the taxes paid by the U.S. workers employed because of the “Made in USA” provision?  Conversely, if those jobs are lost due to the lack of the “Made in USA” provision, what is the cost to the government entity of unemployment and other benefits?

Thus, although the price of the project may be higher, the difference between the higher price and the actual cost to government may be ameliorated, or eliminated, by these other factors.

Argument #2 – It’s impractical – some intermediate parts may not be available here in the U.S.

Yes, that’s possible in some cases.  However, most “Made in USA” provisions of which I am aware are expressed as preferences.  Thus, if the price is too high, or the product is not available from a U.S. vendor, then bidders are typically allowed to source outside the country.

Argument #3 – Even though working conditions are deplorable in most low cost manufacturing countries, by buying there we help create better living conditions for the jobless in those countries.

This is a public relations argument often used by multi-national manufacturers, brands, and big box retailers to justify offshoring.  It’s ironic when large corporations characterize their sourcing model as a form of philanthropy for developing nations, when what the sourcing model truly reflects is the slogan “always the lowest price, always.”  For example, it’s apparent that apparel importers started sourcing in Bangladesh not to help the Bangladeshi people, but to buy at the lowest possible price.  It is only since the Tazreen factory fire that those same companies are now touting their sense of “social responsibility” for the people of Bangladesh as the reason for not moving their apparel purchases to another country (or back to the U.S.).

Of course, anyone with a shred of empathy is concerned about the poor in developing countries.  But should that concern drive government purchasing policies?  Should U.S. government procurement be a form of social welfare for other countries?  Is that not the role of foreign aid?

Argument #4 – We should let the free market rule and buy where the goods are cheapest.   In the long run, it’s better for all.

This argument is based on the economist David Ricardo’s theory of competitive advantage.  In a nutshell, it says that if you produce X efficiently and I produce Y efficiently, then I shouldn’t waste my labor producing X and you shouldn’t waste your labor producing Y.  If each of us does what we do most efficiently, then we can trade X for Y (and vice versa) and we’ll both be better off in the long run.

It’s a nice theory, but when Ricardo developed it he presupposed perfect competition and undistorted markets; neither of which exists when it comes to our trading relationship with China, the country from which we import most of our finished goods.  When China lets its currency reach market value, protects intellectual property, and invests in the manufacturing costs required to make goods that comply with CPSIA and FDA guidelines, then we will be nearing the state of undistorted markets under which the comparative advantage argument might be considered.

Finally, let’s remember that China is a strategic threat to the U.S., so the trade policy tail should not be wagging the foreign policy dog.

Argument #5 – Government preference for “Made in USA” is protectionist trade policy – China cites “Buy U.S. Made” rules as a justification for their own discriminatory policies.

This is a spin-off from the “comparative advantage” argument, often used by multi-nationals more interested in selling into China than rocking the boat with China.  If China didn’t have “Buy American” policies as an excuse for their own trade barriers, they would find another whipping boy.

Argument #6 – If it’s good to buy USA-made, isn’t it even better to buy Texas-made?  And if it’s good to buy Texas- made, isn’t it better still to be Dallas-made, etc.?

Hoover Institution economist David Henderson actually made this weak “reductio ad absurdum” argument for a John Stossel column written in November 2011.  Why is it weak?  Because the debatable proposition is not whether it is good to buy “Made in USA.”  Rather, it’s whether it is in the best interest of the U.S. and its citizens for U.S. government purchasing policy to establish a preference for products made in the U.S.A. under reasonable circumstances.  This is a more nuanced proposition than the one set up by Henderson.

There is no downside to government mandated “Buy American” provisions in Maryland, in Texas, or in any other state, as long as that mandate ensures flexibility if the comparable U.S. product is much more expensive or simply not available here in the U.S.  Sadly, the point may soon be moot.  The Trans-Pacific Partnership trade agreement currently being negotiated with Pacific Rim countries is likely to further weaken – if not eliminate entirely – government mandated “Buy American” provisions.

Michael McKeldon Woody is host of the upcoming television program, and author of the upcoming book “American Dragon,” both of which profile U.S manufacturers successfully competing with overseas companies by using the principles of FEWER, FASTER, FINER.  He can be reached at mmw@americandragon.us and on Facebook at American Dragon – Michael McKeldon Woody.  Twitter @usdragon1