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Thread: The Profit Squeeze for US Manufacturers

  1. #1
    Banned Melonie's Avatar
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    Default The Profit Squeeze for US Manufacturers

    here's a recent report that you'll never see quoted in mainstream media ... if nothing else, Chart 2 'Profits and Investment in (US) Manufacturing Industries 1987 - 2004' is worth checking out as it provides a much needed 'reality injection'.



    (snip)"The Profit Squeeze for U.S. Manufacturers paints a quite different picture of our industry than of the rest of domestic business. Just as the recession hit manufacturing while relative prosperity continued for the rest of the economy, so too have profits languished for much of manufacturing while they have steadily climbed at double-digit rates for the rest of American business.

    This report reveals an unprecedented fall in profits in over half of manufacturing between 2000 and 2003. This 67 percent plunge from historical trends, as shown in Chart 2 of this report, has only partially been erased. Profit growth is so sluggish that manufacturing profits have risen only to what was the previous low point for profits in the past 40 years (in the first quarter of 1986). This is not a positive trend for either industry or for the nation’s overall economic health.

    There is no question that strong profit performance is the hallmark of successful business and a strong economy. While shareholders, including many retirees and 401(k) pension plans, are the beneficiaries of roughly half of corporate profits in the form of dividends, the other half of profits are used for investment in new plant and equipment, research and development of new products and processes, and in the hiring and training of new employees. In the absence of healthy profits, companies that wish to expand must turn to issuing new stock or borrowing and incurring debt.

    Our key findings in this report are that:
    • Manufacturing profits from 2000 to 2003 in over half of the industry were 67 percent lower than they would have been were it not for adverse trends in health care and pension costs, commodity and energy costs, and import price competition in large measure resulting from imbalanced exchange rates;
    • The five sectors most affected are industrial machinery, computer and electronic equipment, electrical equipment, motor vehicles, and chemicals.
    • Fierce international competition and the resulting lack of pricing power have prevented companies in these sectors from passing on cost increases to their customers.
    • The other half of manufacturing has been affected as well, albeit not as significantly.

    Our report does not provide a prescription for these trends. Rather, it shows that the rising costs affecting U.S. manufacturing are taking their toll. Our earlier joint report, 'How Structural Costs Imposed on U.S. Manufacturers Harm Workers and Threaten Competitiveness', provides a wider discussion of some of the steps that federal and state governments should take to bolster American manufacturing [available at - sic]. The Profit Squeeze is a sequel that shows that these costs are continuing to undermine the health of U.S. manufacturing.

    Elected officials who seek a better future for 14 million manufacturing employees and the 6 million Americans who work in related, support industries—such as wholesaling, finance, and construction—should redouble their efforts to hold the line and reduce costs for health care, regulatory compliance, taxation, energy, and litigation."( big snip)

    "Contrary to popular belief, profits do not end up in the pockets of senior management—executive compensation accounts for no more than 4 percent of total profits on average. Rather, profits are returned to shareholders in the form of dividends, labor in the form of new jobs and training opportunities, and assets in the form of increased investment in equipment and R&D. For these reasons, strong profit growth is everyone’s concern, whether it be the CEO or the assembler.

    It is widely recognized that U.S. manufacturers face an increasingly competitive environment. This analysis has clearly shown that such competition is the primary culprit behind the soft pricing environment, which explains 70 percent of the recent decline in durable goods manufacturing profitability. The scope and quality of this competition will only continue to grow. Penetration of the “Asian Tigers” into U.S. markets was followed by Mexico and Brazil and, more recently, the emerging economic superpowers of China and India. This means that efforts to shore up profitability must focus on the cost side of the equation.

    U.S. manufacturers have been doing just that for more than a decade. They have tirelessly improved productivity such that they are alone among major economies to have held unit labor costs in check since 1990. They have continued to invest in R&D and capital equipment, increasing their use of debt recently to do so.

    But, productivity improvements and investment can go only so far. As this analysis shows, the cost of providing employee benefits—especially health insurance—has accelerated in recent years, and is responsible for over one-fifth of the recent decline in manufacturing profitability.

    In addition to direct production costs, U.S. manufacturers (both durable and nondurable) are saddled with regulatory compliance costs, corporate tax rates, and litigation costs that are generally more burdensome (often significantly so) than manufacturers in our major trading partners. These also urgently need to be addressed in order to improve profit performance."

    Total Burden of Cost Pressures on U.S. Manufacturing’s Raw Cost Competitiveness
    (percent difference relative to U.S. manufacturers) Cost pressure

    Foreign Advantage
    Corporate tax rates -5.6% vs 9 largest ... -15% vs China
    Employee benefits -5.5% vs 9 largest ... -12.6% vs China
    Litigation costs -3.2% vs 9 largest ... -3.9% vs China
    Pollution abatement -3.5% vs 9 largest ... -6.1% vs China
    Natural gas prices -0.5% ... N/A vs China (which allows/uses Coal)
    Total cost advantage of 9 largest trading partners -18.3%
    Total cost advantage of China -37.6%

    U.S. manufacturers' net extra cost burden vs 9 largest trading partners 22.4%
    U.S. manufacturers' net extra cost burden vs China 60.3%

    [net US mfgr's extra cost burden is the reciprocal of foreign cost advantage - sic]

    ---------------------------------------------------------------------------------------

    The obvious first conclusion to be drawn from these numbers is that any US manufactured product which cannot support a 22.4% raw profit margin to cover the difference in U.S. manufacturers' 'mandated costs' is going to result in outright financial losses for the US manufacturer versus competition from any of our 9 largest international competitors. Thus an efficient U.S. manufacturer who targets to operate at say a 33% raw profit margin is only able to book a minimally economically viable 10.6% actual profit after paying for those 'mandated costs' (whereas foreign competitors can book the entire 33% actual profit on the average given equal product pricing)

    The obvious second conclusion to be drawn from these numbers is that it is totally impossible for any US manufacturer to avoid devastating financial losses if subjected to direct competition from China. Thus the efficient U.S. manufacturer who attempts to operate at the same 33% raw profit margin to book a minimum economically viable 10.6% actual profit after paying for 'mandated costs' must price his US made products 27.3% higher than his Chinese competitors - a 'price premium' that most US and worldwide consumers will never agree to pay.

    Not coincidentally, the recently proposed US tariffs to be imposed on Chinese imports in order to 'level the playing field' versus US manufacturers were set at 27.5% - but so far the tariff proposal has gone nowhere in the US Congress.

    The 'not so obvious' third conclusion is that a large number of American consumers are currently enjoying a ' 27.5% discount ' on the prices of clothing, electronics, some durable goods etc. imported from China, or on discount prices of similar items from US and world manufacturers who are temporarily 'eating' unsustainably low actual profit margins (or outright losses) in an attempt to preserve market share. By definition, there are only three ways this can turn out in the long term

    - #1 US consumers will wind up paying 27.5% higher prices for these sort of products (via tariffs / trade restrictions)

    - #2 US manufacturers will go bankrupt with permanent loss of virtually all US based jobs for the manufacturers, their suppliers, and their service companies (or the US company will transfer all manufacturing outside the US with essentially the same end result re US job losses for everyone except corporate execs and sales)

    - #3 the US gov't must eliminate the 22.4% extra cost burden they have 'mandated' that US manufacturers must pay in higher corporate tax rates + employee benefit costs + tort litigation costs + pollution abatement costs + energy costs versus our 9 largest global competitors.

    the 'tin foil hat' crowd is of the opinion that the only politically and economically palatable way to approach this problem will be to devalue the US dollar by 27.5% versus the currencies of the 9 largest global trading partner nations - which would indirectly implement #1 via raising the 'cost' of ALL imported products purchased by US consumers by 27.5%.




    ~
    Last edited by Melonie; 09-23-2006 at 07:50 PM.

  2. #2
    God/dess FBR's Avatar
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    Default Re: The Profit Squeeze for US Manufacturers

    A number of my customers have been able to find niche markets with minimal foreign competition and thus maintain their profit margins. But on average, most fall into the catagory you have described, unfortunately. The clock is ticking.

    Ive had lots of conversations about this with folks I know who are working in what I view as "protected" industries ie: healthcare, government services, military related etc. They look at you like you are an alien. Most have no clue when you talk about the importance of a manufacturing base and in fact seem to view those factory workers as lower class folks deserving of losing their jobs if the world market dictates so.

    FBR
    Once again I have embraced my addiction and have put off the moral dilemma to another day.

  3. #3
    God/dess Deogol's Avatar
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    Default Re: The Profit Squeeze for US Manufacturers

    I second this. I had a few friends working on ERP packages (software for manufacturing.) What they seemed to refuse to believe that, as the factories go - so to do their jobs! Unfortunately, they found out the hard way about that.

    Then add to it - there is this domino effect, because almost no one makes one complete thing anymore - so if one top assembly heads off to asia - all the usual sub-assemblies quickly find their way there too.

    Small towns - when they see the town company go up in smoke - the repercussions are known immediately. Yet - at a macro level - people refuse to see what occurs at a micro level and to top it off - think it is good for the america!

    Not only do we have a problem with "whats for next quarterlies - oh we got to get the next quarterlies up!" we also have a problem with what I term "social investment."

    About the only thing we are investing in is showing our kids how to be rap singers and drug dealers (or little thugs.) We are in for more and more interesting years that is for sure.

    I think a lot of people know we are living on borrowed time - nationally, societally, and individually. How that house is going to fall I don't know. Perhaps history can tell us of bankrupted kingdoms and how that ended up.

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