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Can Connecticut Compete
State's manufacturers likely to survive only by concentrating on high value-added products, say most experts
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Business New Haven
1/5/2004
By: Lisa MiCali
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It's little surprise manufacturers today are under extreme duress, including in greater New Haven. In less than three decades the region, along with the rest of the country, has evolved from a labor-intensive manufacturing powerhouse to a capital-intensive international services market.
Most would argue that it's the natural progression of a highly skilled workforce turning away from its smokestack in favor of a "new" global manufacturing future in high-tech information services. Others assert the sector has shed its weighty image, buoyed by trim thinking and modernized processes, only to emerge as a state-of-the-art manufacturing sector.
Yet despite the implementation of improved manufacturing methods and lean automation techniques, manufacturing revenues remain flat at best, and product demand stale. And since 2000, a gradual decline in employment has rocked the industry, taking away nearly 2.8 million U.S. manufacturing jobs - one in every six. In Connecticut in 2003 alone, nearly 10,000 manufacturing jobs have vanished.
The current crisis afflicting the entire U.S. manufacturing sector can be attributed to a number of interlocking factors, including companies moving or outsourcing overseas because of cheaper business costs, stiff international tariffs, unfair tax outlays, and foreign countries, such as China, seemingly blatant disregard of fair international trade practices. The loss of jobs and the enforcement of existing trade agreements are also high on the list of concerns.
"The key thing people need to recognize is an awareness of the importance of manufacturing in Connecticut and in particular, in the New Haven area," says Jerry Clupper, executive director the 90-year-old New Haven Manufacturers Association. While working on the legislative agenda with the Greater New Haven Chamber of Commerce, Clupper noted that "The economic impact of manufacturing in the New Haven area is $4.9 billion, directly contributing to the state's economy. In the [New Haven] area, there are 1,500 manufacturers with about 40,000 employees. In spite of the [job] losses, it's still one of the major engines for the economy of the area."
While Connecticut and New Haven manufacturers have been innovative, productive and comprised a key center of economic strength over the last two centuries, can manufacturing ever again make economic sense in the state? The answer from Clupper and other industry supporters is a resounding yes.
The question, though, highlights a number of important and often troublesome issues currently affecting the sector.
With 40 years of hands-on, practical experience in manufacturing management, operations and consulting, Clupper takes issue with the very question. Manufacturing in Connecticut, he says, "makes economic sense currently; it's not just 'ever again.' It just depends a lot on what the manufacturer does and, how he does it. We say manufacturing is not dead - it's different.
"The communities and the legislatures all have to look at the questions of what is it that has built the type of communities we live in, a middle-class," adds Clupper. "What are the total amount of things that you have to have to do to keep this?"
Economists such as Peter Gioia of the Connecticut Business & Industry Association (CBIA) agree.
"It certainly makes sense to keep manufacturing in Connecticut strong, and it's possible to maintain it, as well as aid in the expansion of it," says Gioia. "Not necessarily in the expansion of jobs, but in the expansion of business activity that grows the bottom line of state gross product. A healthy, growing manufacturing sector is a must. But I think a decision needs to made from policy makers on that."
It still makes a lot of economic sense, too, to Frank Johnson, executive director of the Manufacturing Alliance of Connecticut (MAC), which represents more than 300 manufacturing companies and 35,000 Connecticut workers in the state.
"Attempting to have an economy that does not have a manufacturing component is problematic at best," he says. "We can't all keep selling each other services if we don't generate some real wealth in the economy. Basic economics says that the only way to generate real wealth is through manufacturing, mining or agriculture. Since we don't have a lot of mining or agriculture in Connecticut, we have to have a manufacturing base."
Johnson adds that "The base here still represents about 15 percent of gross domestic state product. So it's imperative to us that we continue to have a manufacturing base in the state. We don't believe we [the state] can survive without one."
Industry watchers say their greatest concerns revolve around broad public-policy issues such as globalization, business taxes, transportation costs, health-care costs, workers compensation, energy concerns and an aging work force. Similar concerns echo from other troubled manufacturing centers across the country.
The reality, though, is an entire industry from Ansonia to Hangzhou, China is undergoing a radical and profound transformation. And it's a process that needs not only broad government support, but extensive awareness among constituents - something the candidates running for the Democratic nomination for president have put at or near the top of their public agenda.
"What manufacturing is essentially going through - and it's not just in New Haven or in Connecticut, but around the world," explains Gioia, "is an extreme period of fierce cost competition and challenge because of the build-up of capacity we saw worldwide prior to Y2K. Right now, we are still at only about 75-percent capacity in the U.S. and somewhat less worldwide. Until we work out these capacity issues, we're not going to have the opportunity for companies to see, for example, an ability to have effective price increases."
The effect of both globalization and the Internet has turned more and more products into commodities hindering traditional Connecticut manufacturers who trade locally or regionally - about a third of the state's sector in all. In fact, it's research and development that has become a vital component of manufacturer's ability to differentiate themselves from the competition and keep afloat in today's cutthroat global marketplace.
"R&D is becoming more and more critical in states like Connecticut compared to other places," says Gioia. "It is acutely important here in Connecticut because once a product becomes commoditized, companies in higher-cost areas such as Connecticut are at an extreme disadvantage. That's why a company's products must become truly unique to that firm."
Short- and long-term public policy issues revolve around research and development, capital intensity and workforce development. "Where manufacturing has strength in the state it is because of R&D, and capital intensity and then, a very high-quality workforce," says Gioia. "The first two, R&D and capital intensity, are affected by certain types of costs such as taxation of business machinery and equipment. That's a public-policy issue that makes Connecticut manufacturing more expensive relative to competing states, let alone other global destinations."
Competitiveness in the 21st century stems from creating the innovative, value-added products that successful companies thrive on. Connecticut companies in particular, emphasizes Gioia, need to embrace this reality.
"They need to consistently turn out new and innovative products and concentrate on products that, if they're not high-tech within themselves, rely increasingly on technology and capital rather than labor for the development of the product," he says. "Connecticut labor has got to be high value-added, highly skilled labor. Commodity type labor is at an extreme disadvantage in Connecticut."
Connecticut manufacturers' long-term strength and prosperity is directly linked to non-commodity products and their success in overseas markets, though not all firms in the state export. Only about 25 percent of state firms currently trade internationally, a number that state advocates are working to increase - and for good reason. Of those companies trading abroad, the Progressive Policy Institute found in a survey this summer that the benefit goes directly into workers' paychecks in the form of higher-paying jobs.
Companies dependent on technology with higher valued products such as chemicals or pharmaceuticals compensate workers more. As a result, states whose companies are not global traders, the study concluded, risk being left behind with heavy job losses and an ebbing middle-class tax base.
Of Connecticut firms that do trade internationally, many are finding it increasingly tough going in the global market. Manufacturing trade experts suggest the U.S. should be more aggressive in its pursuit of world markets and much more aggressive in enforcing fair and free trade practices.
"Right now, manufacturers are facing ferocious international competition," says Gioia, "and they need all the help they can get. Companies that have a broader swath of the marketplace are more protected when there is fierce competition or economic downturns. With sales to local and regional firms, companies are at a disadvantage in terms of their ability to negotiate decent prices for their products. They need to seek new customers, new markets. And they may need to have some cost relief in order to remain viable."
On the regulatory side, a stable and fair international trade environment is in itself a critical industry issue. But regulations also need to incorporate more of an international dimension by considering the global implications and effects of regulatory actions something the steel tariff didn't take into consideration.
The notion of making "free trade fair trade" - that is, making changes in international trade law including enforcing existing trade agreements - comes at a delicate time when international diplomatic relations are soured due to the Pentagon's decision to bar nations that did not support the war in Iraq from bidding on billions in contracts.
Other federal initiatives that would help reduce the cost of manufacturing in the U.S. and would make U.S. manufacturers more competitive with their global counterparts is also on Congress' agenda next year.
"It's critical for the state and federal government to get involved and help Connecticut manufacturers compete," explains the NHMA's Clupper. "Success requires awareness, a team commitment from government, management and employees, all of those things have to be in some kind of a balance to make a successful community as well as a successful manufacturing base.
"What we need to look at is the balance," Clupper says. "For the things that have gotten out of balance, government - sometimes on the federal level, sometimes the state level, sometimes on the local level - must encourage and establish a climate that will support opportunities while holding down costs and developing a skilled workforce."
On the state level, nearly all agree that costs in Connecticut must be reduced if state manufacturers are to remain competitive. Some costs can be reduced and supporters are pushing for reducing labor costs, workers compensation, unemployment costs, health care, overall tax costs in the state. These have been an extreme burden on the state's manufacturing industry.
Another long-term issue, which will have significant impact on public policy, is the rapid graying of the Connecticut manufacturing workforce. Gioia says he does not expect new net manufacturing jobs to be created over the next decade, but there will be thousands if not tens of thousands of replacement jobs that will need to be filled if manufacturing in Connecticut is to compete successfully. That means K-12 science and math skill levels need to jump and that the quality of engineering will have to improve.
Manufacturing productivity in the state and region remains high, with improved efficiencies. Recent reports suggest that an economic recovery is starting to show signs of trickling down to struggling manufacturers. The sector was hardest hit and it has pulled out later.
Connecticut manufacturers are taking steps to improve operations, bolster their competitiveness and expand their markets, all while dealing with the challenges of a slow economy and doing business in a high-cost state. The plight of the manufacturers has finally garnered notice by state and national officials who will have new legislative initiatives on their agenda, but advocates say there has to be a decision by policy makers as whether or not they want to have a solid and successful manufacturing base in the state. If so, pressing legislative imperatives is essential to stem the hemorrhage.
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