Tuesday, December 4, 2012

Illinois Doomed? Michigan? ... Manufacturing the Big Stuff in Central Illinois

The U.S. manufacturing industry is a big employer and it used to be a much bigger one.

States like Illinois and Michigan once depended heavily on high paying manufacturing jobs. The UAW and its midwest membership base were big benificiaries of our nation's manufacturing preeminence. Those days are gone.

So when he hear such nonsense from the politicians as GM has been saved by a government bailout, let's remind ourselves that that simply can't be. Private industry creates the jobs that pay the employees that pay the taxes that give the politicians "salvation money." If we cut off the source of funds from the manufacturer, guess what happens downstream to the states and cities and people who benefit from all those funds? It's not a pretty picture.

But now let's look more closely at the state of affairs and the manufacturing advantage that remains in central Illinois today.

While clothing, smartphones and smaller stuff are relatively easy to transport at low costs over long distances, that's not the case for the big stuff. It's best to make it close to where it will be used.

That historical and 'in place' advantage is a major reason why heavy manufactured products are still made in the U.S. And as we'll see, it's especially the case when the global market for the product isn't big enough to efficiently support more than one manufacturing facility. Where the operation originated has the advantage over where it would be produced if the decision were to be made anew. That's a big advantage for U.S. manufacturers, since we pioneered the free market and dominated world manufacturing until long after World War II had ended.

Of course, we now have the opportunity to achieve North American energy independence, and manufacturing chemicals and plastics are natural areas to emphasize when expanding our manufacturing base. But along the way let's not forget our existing manufacturers.

Our country, our states, our cities and our citizens all depend on the private sector's success, and manufacturing is a big part of that private sector. So if want to 'save' anything, let's be sure to start by doing all we can to keep our manufacturing base world class competitive.

In World of Big Stuff, U.S. Still Rules, the focus is on Caterpillar and Komatsu manufacturing sites in Illinois. However, it's really telling us a global story:

"PEORIA, Ill.—Robert LeTourneau, a roving American evangelist and inventor, decided in the mid-1930s that a plot of lakefront land a mile and a half northeast of downtown Peoria would be a fine place to make earth-moving equipment. Skilled labor and suppliers were plentiful; transport links were good.

Nearly eight decades later, Japan's Komatsu Ltd., which owns the plant, still thinks Mr. LeTourneau chose the right location—even though most giant mining trucks made there are shipped overseas to Latin America, Australia, Asia and Africa.

The U.S. may not be much good at making small things like smartphones, but it is still a global leader in some of the biggest products, such as mining trucks as big as a two-story house and capable of hauling 400 tons of ore,

About 80 miles south, in Decatur, Ill., rival Caterpillar Inc. makes its large mining trucks, most of which are exported. Caterpillar, No. 1 in this market, and No. 2 Komatsu account for roughly 85% of global sales of these trucks, roughly the size of two-story houses.

Their presence has created a cluster of skills and suppliers that feeds the industry. At a time when politicians are hoping for a job-creating revival of American manufacturing, this is one area where U.S.-based plants are still global champions. . . .

The U.S. had a deficit of $509.7 billion in trade in manufactured goods in this year's first nine months, largely due to gaping deficits in such major categories as consumer electronics and clothing.


But in certain areas—notably aircraft, industrial engines, excavators and railway and mining equipment—the U.S. exports far more than it imports. These industries produce relatively small numbers of very expensive goods, requiring specialized technology and labor. Their competitive advantage rests partly on expertise built by U.S. companies in making durable, high-tech weaponry and other equipment for the military—frequently applicable to other products.

"We have a very strong and very innovative military," said Cliff Waldman, a senior economist at Manufacturers Alliance for Productivity and Innovation, an Arlington, Va., research organization. That creates an infrastructure for manufacturing and spurs innovation in such areas as metallurgy and engines.

Determining where the U.S. can gain competitive edges is part of the challenge of creating more well-paid manufacturing jobs, a priority of the Obama administration, which is budgeting more money for research into manufacturing processes.

Can the U.S. return to a surplus on manufacturing trade? "Probably not," said Mr. Waldman, "but I think we will do better.". . .

Manufacturers benefit from clusters of suppliers and workers with specialized skills. Such clusters make Taiwan a powerhouse in semiconductors and China nearly unbeatable in smartphones and other consumer electronics. Illinois, home to such heavy-equipment pioneers as Caterpillar and Deere, has maintained its expertise in building large metal structures needed for mining, construction and agricultural equipment.
Crane operators guide a 78-ton Komatsu mining-truck frame on the production line of the firm's Peoria plant.

That local expertise attracted Komatsu. After being owned by Mr. LeTourneau, Westinghouse Electric and Dresser Industries, the Peoria plant was sold to Komatsu about two decades ago as part of the Japanese company's effort to establish a major American presence. Komatsu makes smaller mining trucks in Japan, but its largest trucks, able to carry as much as 360 tons of ore, come from Peoria.

Given decades of investment in skilled labor and nearby suppliers, "it's not so easy just to pick it up and start somewhere else," said Rod Schrader, CEO of Komatsu's U.S. arm. Global demand for large mining trucks is too small to justify more than one plant.

The global market for large mining trucks, those that can carry 200 tons or more, is likely to reach about 1,900 to 2,000 vehicles this year, up from 1,591 in 2011, said Peter Gilewicz, managing director of Parker Bay Co., a mining industry research firm. The trucks typically sell for $2.5 million to $6 million each, executives say.

More than 90% are built at North American plants owned by Caterpillar, Komatsu, Hitachi Construction Machinery of Japan and Liebherr Group, based in Switzerland. Hitachi aims to more than double its capacity for making mining trucks at a Guelph, Ontario, plant, through a 33 million Canadian dollar expansion. Liebherr makes mining trucks in Newport News, Va.

There are potential challengers in other parts of the world, including Belarus-based BelAZ and Xiangtan Electric Manufacturing Corp. of China.

In Peoria, Komatsu over the past two years has expanded manufacturing space about 7% to 764,000 square feet, spread among three buildings, one dating to 1935. Most equipment isn't cutting-edge: There are about 575 factory workers and no robots.

Komatsu tried welding robots years ago, but "we couldn't get the quality where we wanted it," said Mr. Schrader. He said the company continues to look at automation possibilities. . . .

Rio Tinto Bingham Canyon copper mine near Salt Lake City uses 89 Komatsu trucks. Because they are so big, pieces of the truck are partially assembled in Peoria, loaded onto highway trucks or railcars and assembled at the mine.

Like many factories, the Komatsu plant draws on both local and faraway suppliers. The diesel engines come from the Daventry, England, plant of U.S.-based Cummins Inc. Some of the electronics come from Asia, while certain steel parts are molded in Brazil. But Komatsu says the U.S.-made content of the plant's biggest-selling trucks is more than 70%."
Summing Up 
Where the U.S. has historical advantages, such as in the production of heavy equipment, we need to do everything possible to maintain and then build on them.

In that regard, incumbency is both a good and bad thing. The good is that it's always better to build on what's in place rather than disrupt everything and start anew. It's very difficult for the upstart competitor to displace the incumbent once the facility is in place.
The bad is complacency. {NOTE: Look at the history of Detroit and U.S. auto manufacturing for a great example of the bad. We'll look specifically at the effectively bankrupt city of Detroit and the GM auto bailout in a later post.}

When the incumbent takes his position for granted, that clearly works to the advantage of the challenger.

Thus, in global manfacturing, we have the incumbency factor working both for and against us.
Developing countries want those facilities and jobs to help their own economies and jobs.
The point is simple. Peoria and Illinois can serve as good proxies for both our American manufacturing past and our future as a nation. So can Detroit and other cities as well.
Let's hope we wake up and use our 'home court advantage.'

We can't afford to lose in our own backyard.

Our cities, states, nation and We the People as a whole need the private sector to flourish again, and that starts with "saving" our existing manufacturing base.
That's my take.
Thanks. Bob.

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