SURVEY: MANUFACTURING

The way it was
Jun 18th 1998
From The Economist print edition

Manufacturing was a cosy business when countries looked
after their own. Then came competition

AT THE start of the 20th century, industry in America, Europe and
Japan was beginning to assemble itself into large groups. America’s
cartel-busting Sherman act of 1890 fell victim to the law of
unintended consequences by promoting a merger boom. If
competitors could no longer collude, they could combine; and they
did.

Robert Reich pointed out in his 1991 book, “Work of Nations”, that
as early as 1904 a third of all American manufacturing was carried
out by 318 firms with a combined capital of $7.3 billion ($121 billion
in today’s terms). Tariff barriers kept up domestic prices, so it
often made sense to buy up your supplier. When U.S. Steel found
it expensive to import coal and iron ore from Canada, it bought iron
and coal producers in Pennsylvania. Vertical integration—huge
corporations controlling every stage of production from raw
materials to finished goods—had been born.

Add the moving assembly line, and you had cheap mass
production. Henry Ford brought in assembly-line production in 1913
after visiting the Chicago slaughterhouses. He had watched cow
carcasses being carried down a line on which they were
systematically stripped and hacked to pieces. He decided he could
make large amounts of money by doing it with cars instead of
cows, and using the technique the other way round—starting with
small components, and building them into an entire car.

This was how General Motors and then U.S. Steel, General
Electric, American Can and International Harvester were born. In
Japan, similar consolidations produced zaibatsu giants like
Mitsubishi and Kawasaki. In Europe came Siemens, Brown Boveri,
Philips, Compagnie Générale d’Electricité, Imperial Chemical
Industries.

These companies became national champions, and they had an
unwritten contract with their governments. America’s big
companies organised the production of goods in huge volumes; the
economies of scale brought down the costs of production; the
American purchaser could go shopping more cheaply. Prices would
be set high enough, of course, to provide for investment in new
machinery and to give shareholders comfortable dividends (and to
pay salaries and wages good enough to keep managers and
workers reasonably happy). In return, the government would ward
off competition from abroad, and tolerate some price collusion at
home. By the time of the New Deal, in the early 1930s, these giant
corporations were national institutions. In the end what was good
for General Motors was indeed, up to a point, good for America.
Only 4% of cars bought in America were made abroad; the rest
came from the Big Three car companies in Detroit.

A similar process took place in Europe and Japan. In each industry,
two or three big companies became dominant. Wages were set for
the whole industry, rather than company by company, which
limited competition in costs. With little competition from abroad,
prices could be co-ordinated. As Mr Reich put it: “The system
contained its own internal logic. Big Business, Big Labour and the
public at large would subsidise high-volume production in order to
gain greater efficiencies of scale, which in turn would employ a
growing middle class of Americans capable of buying the expanded
output. It was a truly national bargain.”

But it was doomed. These same American companies had gradually
put down roots abroad. Soon they discovered that they could
make goods in their foreign subsidiaries, ship them to America, and
sell them at a bigger profit. And the foreigners, learning the
lessons of American capitalism, were ready to compete. American
consumers began to see that out of Japan were coming cheaper
cameras and television sets. Container ships and better
telecommunications shrank the world. A growing range of goods
could be made where it was cheapest to make them, and then
shipped anywhere in the world. Here, at last, was true
competition.

The lesson written in red ink

In the way of these things, people were slow to see what was
happening. The reality for long remained buried in the accounts of
the big corporations. Richard Schonberger pulls it together in a
new book (“World Class Manufacturing: The Next Decade”, The
Free Press, $30). He cuts through obfuscatory accounting to
focus on one basic indicator of the health of a manufacturer. How
many times in a year does a company turn over its stock of the
raw materials and other things it converts into finished goods? The
faster the turnover, the more efficient the company; and, other
things being equal, the more money it should make.

As chart 4 suggests, manufacturers’ performance in this matter
has gone through a V-shaped pattern since 1945. For a couple of
decades, their stock turnover grew slower and slower. Then began
the necessary reacceleration: first of all, as you might guess, in
Japan. The Japanese began the introduction of “lean”
manufacturing techniques—the habit of carrying minimal stocks,
having parts delivered direct to the assembly line “just in time”,
and making sure the quality was right from the word go. It took
American manufacturers until about 1975 to see the point, when
competition from sharpened-up Japanese companies really began
to bite. IBM’s downward slide, having started later than that of
some other big companies, also went on longer, reaching its nadir
in 1984, Mr Schonberger says: that is how a once-great company
was brought to its knees by newcomers in the personal-consumer
market, such as Compaq.

Mr Schonberger reckons it was the growing adoption of Japanese
“lean methods” that caused the improvement discernible in
America from the late 1970s onwards. He cites star performances
by Ford Motor, John Deere (farm machinery), TRW (an electronics
and engineering conglomerate), Eaton (axles) and PepsiCo. He also
gives good marks to Cummins Engine, Caterpillar, Black & Decker,
Motorola (microchips and electronics products), General Mills (food
products) and Honeywell (industrial control equipment).

Looking back, he sees the 1970s as Japan’s decade. Having
invented lean manufacturing, it could invade the markets of
America and Europe with a formidable array of manufactures
ranging from steel plate and ships to cars, calculators and
televisions. But then the tide turned. The Americans had caught
the point. From the mid-1980s to the mid-1990s was America’s
decade. Just when American magazines were writing agonised
stories about the “hollowing out” of American industry and their
country’s loss of competitiveness, American industry was starting
to prove their lamentations wrong.

The rest of the survey looks at how these pressures affect
manufacturing in different parts of the world, and how companies
respond to them. The best place to start is the American
Mid-West, the one-time “rust-belt” where in the mid-1970s the
car industry and its suppliers in the engineering industries were
falling into decline. It took an invasion of new capital—and new
ideas—to rescue them.