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 Elliott Sound Products The State of Manufacturing 

By Rod Elliott
(With additional material by Fred Newton and Mark Hammer,
as well as other material suggested by various readers)
Last Update - 03 July 2013

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Contents
Preface

Firstly, it must be understood that the bulk of this article was written in 2002, and a great deal has happened since then. The most significant was the 'GFC' (Global Financial Crisis) of 2007-2010, and the impact that has had on the economics of the world. More than anything that's ever happened before, the GFC showed us just how misguided and corrupt the major financial institutions can be, and how governments allowed the insanity to continue without a murmur. It is notable that the entire mess was created by institutions that play with money (that doesn't actually belong to them) rather than companies that actually create physical products. These companies were all hurt by the crisis, but didn't play a role in causing the meltdown. As of mid 2010, the repercussions are still being felt, and many countries are still in dire straits with huge national debts.

It's fair to say that the problem was caused primarily by greed and avarice from the financial sector - which includes the stock market, commodities trading, derivatives and all the other leeches involved. Government apathy (or outright hostility) towards regulation just made matters worse, and regulation was, of course, the very last thing the financial sector wanted anyway. Obscene payouts to bank CEOs and other 'top brass' didn't help - especially when they continued to claim their truly outrageous salaries and payouts even after the whole mess they created fell into a screaming heap. The saddest part is that no-one seems to have learned a damn thing from it. Sometimes, I think my cat understands fiscal policy better than those who have set themselves up as the power-brokers of the financial world. With very, very, few exceptions, I wouldn't cross the road to piss on them if they were on fire .

There is considerable evidence that on-going fraudulent practices were commonplace amongst mortgage lenders, and as a result thousands upon thousands of people have lost their homes, savings or even lives due to suicide. Despite this, there has been but a handful of investment banks and their high ranking officials indicted for fraud. It has to be said that most of the large Wall St and international investment banks and their highest ranking officers were involved, and had to have known what was happening. This makes them all responsible, but I suspect that 99.99% of them are still collecting their extraordinarily large salaries rather than languishing in prison where they belong. If they didn't know, then they obviously weren't and aren't capable of doing the job for which they are so handsomely paid (which is, of course, fraud by deception and rat cunning).

Now, I'm not a financier, but from a purely logical perspective I have a problem with the basic premise that caused the problems in the first place. The process was for lenders to loan money they didn't have to people who would be unable to repay the loan. Then, by a stretch of 'logic' I cannot even begin to fathom, these debts could be sold to other financial institutions who didn't have the money to pay for them. Then things got really weird ... other corporations were able to (essentially) bet on the outcome, using all the shiny new methods that have become part of the financial world. According to Wikipedia, "Critics have argued that the regulatory framework did not keep pace with financial innovation, such as the increasing importance of the shadow banking system, derivatives and off-balance sheet financing. In other cases, laws were changed or enforcement weakened in parts of the financial system." (My emphasis.)

Financial Innovation my arse! There was nothing 'innovated' that benefited anyone other than those who created the 'innovation' in the first place, followed by those who saw that they too could commit legal fraud. Legal ... yes; but only because no-one had made laws that prohibited the insane practices that are now commonplace. These practices do absolutely nothing for anyone but a select few, they don't create (or cause to be created) a single solitary tangible item that has actual value. It is gambling, except that the losers aren't other gamblers - it's the whole community that loses. I doubt that anyone would ever be able to convince any sensible person that the shadow banking system, derivatives and off-balance sheet financing have any value to the population at large, and I also doubt that the people who use these 'innovations' actually understand them either. This is all smoke and mirrors, with no benefit whatsoever to the vast majority of the population. Just ask those who lost everything when the 'system' collapsed. Even some economists admit that these so-called "financial innovations" have done absolutely nothing to increase productivity or economic growth. What a surprise - of course there is no effect, because nothing is produced !

There are many who claim (rightly or wrongly is largely immaterial) that no criminal acts were committed that caused the worldwide financial collapse. This is a sad indictment of the state of government, law and responsible behaviour. It's also outrageous ... if any person managed to defraud a company or financial institution of a tiny fraction of the amounts involved, prison time would be mandatory. But when large (and irresponsible) corporations play betting games on money that doesn't exist with money they don't have and cause a complete worldwide financial meltdown, nothing can be done? Bullshit! Of course things can be done, but governments lack the will to go against the institutions that help pay for their election campaigns and may provide them with lucrative careers after they leave politics. Government is polluted by lobby groups, election funding, big business and the power of money. It should be stopped, but by whom? Certainly not those who caused all the problems in the first place.

Most people would have noticed that banks and insurance companies now offer things they call 'products', in the hope that people will think they create something. A bank (etc.) can no more offer a 'product' than a fish can ride a bicycle. I really resent the use of a word that has always been associated (by sensible people at least) with something tangible, being used to describe the offerings of financial institutions. While they may offer services, they are not products, and are not a tangible good. These services are needed by most of us at some stage, but trying to change the name does nothing useful. I certainly don't like my bank any more for offering 'products' ... exactly the opposite in fact.


Despite the doom and gloom, one of the things that tends to hide well in most countries is specialist manufacturing. It has survived the GFC, and will continue to provide things of real value to the community. Most people are unaware that it exists, but there are (mainly) 'SMEs' (Small to Medium Enterprises) all over the world who make all sorts of truly amazing things. Everything from replacement body parts (such as heart valves, hip and knee joints) to jet engine turbine blades are being made in Australia and many other countries, as are countless other items ranging from car parts to fireworks to submarines and everything in between.

It's doubtful that many people stop to think where a railway carriage, traffic light, power pole or artificial limb is made ... they are just there when you need them and no-one gives it another thought. However, this is all manufacturing, and most of it will never be sent off-shore, because people want things to their exact specification and in often small numbers. Cost is naturally higher than if mass produced, but these are not mass produced goods. These manufacturers thrive on relatively small quantities of high-class products. Large consumer goods manufacturers can't do that kind of work - they are geared up for huge production runs of mediocre but (hopefully) serviceable products, not ones and twos up to a few hundred high quality goods.

These small manufacturers cannot produce 10,000 TV set-top boxes, toasters or shovels a week, because they are set up to make the parts that others cannot. In some cases, specialist manufacturers may make individual tools and machines needed by large scale manufacturers. All this is good news - there is a lot of "hidden" manufacturing going on everywhere, but the fact remains that most western countries have lost the ability (and the will) to make the countless everyday items that people need (or think they need).

There will always be niche manufacturers making exclusive items of all sorts, and I suspect that almost every country on earth has at least a few of them. The range of things made is endless, but these companies (often with very few employees) do not make up for the manufacturing ability that's been lost in places like the US, UK, Europe and Australia. With the loss of manufacturing there is a loss of jobs ... that is to say satisfying jobs where the worker actually creates something during the day. There isn't a lot of satisfaction to be had shuffling papers around or performing relatively mindless tasks on a computer. I think that it's in the very nature of people as a whole to build and create things. The fact that DIY has grown so far and so fast everywhere (and in a vast number of different fields) is evidence that people like making stuff.


The remainder of this article is pretty much as-written in 2002, with only a couple of small changes made. There has been no change at all since 2006. So, while some of the details are somewhat dated now, they are no less relevant then they were in 2002, and the problems described had been going on well before then. All that's happened since is that governments the world over have demonstrated that they are incapable of reining in the rogue financial operators, and continue to show no interest in doing so.

Despite governments, banks and the stock market, people have (mainly) managed to survive, and if anything, the niche manufacturing area has actually grown stronger. In May of 2010 I attended the National Manufacturing Week/ Austech exhibition in Sydney, and it was bigger and better than I can remember seeing it. Consider that this was held at the trailing end of the GFC, and many people are still struggling, so it is heartening to see so much equipment and interest.

On this basis, the remainder of the article should not be seen as pessimistic, but as a statement of reality. Eventually, we will see the light, but it will not be due to anything done by governments or financial institutions despite their claims to the contrary. The light we see will largely be created by small businesses and individuals who will make a difference despite the hurdles placed in their way.

Now, what was that saying about who'll be the first against the wall when the revolution comes ... .


Introduction - as of 2002

In one of the sorriest news items I have heard for some time, it was revealed that job losses in the manufacturing sector were the highest of any industry in Australia. Australia is not alone in this, as major companies and corporations rush to Asia to get the lowest prices they can for manufactured goods.

This push is partly because everyone wants their consumer goods to be cheap, and the labour content is the thing that (allegedly) pushes up the price. Cheap goods are not necessarily sold cheap, of course - profit maximisation is another reason to seek the lowest labour rates you can find, while selling the product at the same price.

By way of a direct example, a recent story in the newspaper ... A major Australian airline is getting uniforms made overseas and it saves them $1M / year - supposedly. The effect of this locally is that some 300 people will lose their jobs, so at even the most basic wage, that works out to around $6M in lost wages, plus flow-on effects. Sounds like a real bargain to me .

This same airline is now talking about outsourcing their aircraft maintenance! Suggested locations are New Zealand, China and Indonesia. I shall leave it to the reader to see the many flaws in this idea, but the world's safest airline is unlikely to remain that way if this lunacy is allowed to continue. It is incomprehensible that anyone could be so bloody stupid to think that this is a good idea.


Is Anyone Thinking?

It seems that none of the major corporations, and even less our governments, are looking to the future - what happens when a country has little or no manufacturing capability left? This is already happening, and I'm sure that everyone who reads this will have knowledge of a factory (large or small) that has been shut down because the product(s) are being made elsewhere.

So, when we have closed all but a few small-time manufacturers, when the machinery has been sold off (or scrapped!), when everything is being made in the "Far East", where is our independence? What happens if there is a major crisis, and goods (for whatever reason) cannot be obtained? Worse, what will we do when (not if, when!) the cheap labour that we currently enjoy says "Sorry, but we are forced to increase our rates. All rates are now double." The chances are that they will double again soon, and we have absolutely no choice.

There is no competition, since we no longer have any factories capable of making the products, we no longer have the machinery needed to rebuild the factories, and we no longer even have the factories to make new machinery.


Greed

The 'Captains of Industry' (and that is meant as an insult), the stock holders and we, the consumers, are basically greedy - despite what was claimed in the '80s, greed is NOT good - it is selfish and self destructive. In the rush to be cheaper than everyone else, or to have higher profits than everyone else, or maximise profitability and 'shareholder value', most of the Western countries have blithely thrown out the baby with the bathwater.

This is serious. It will get worse. The electronics industry in Australia is decimated, ruined by incompetence and stupidity. Most other manufacturing is in the same position - the clothing and footwear manufacturing industries have been beaten to death, steelworks and shipbuilding yards have closed, and more disappear every day. Both governments and industry alike are to blame for this - and most Western countries are either the same, or heading down the same path of destruction.

Australia (like almost every other country) is still blessed with a few small 'boutique' manufacturers making whatever they can, and usually doing it well - despite government. Is it any different in the US? Europe? It may not be as bad in some other places, but it is certainly unlikely to get better. Very few governments are smart enough to be able to see the inevitable, and the major corporations are just as bad, if not worse. Would these boutique manufacturers be able to fill the void if the cost of all imported goods suddenly doubled? No, of course they couldn't, because they don't have the machinery, the space or the capital, and even worse, they would be unable to find people to use the machines even if they did have them.


A Definition of Manufacture

It is time for all countries to look at manufacturing differently - manufacture is creation, it is a noble activity, taking raw materials and making something that wasn't there before. The whole concept of 'blue collar' work is wrong - it is not something to be looked down upon and disdained, it should be glorified and revered (Ok, that may be stretching the limits a little, but you get the idea ).

We all need things to be made. Very few people could make their own car or washing machine, even if they had the tools. Only a relatively small number of people can make their own clothes - even with a sewing machine. The skills that we are losing are irreplaceable - it's not the tools or the materials that make manufacture what it is, it is skill. The ability to use a machine to make something is not 'manual labour' or 'production work' - it is a skill. The fewer factories we have, the fewer skilled people are employed, and the lower the demand for training - this is a self-fulfilling prophesy, and eventually there will be virtually no technical colleges teaching manufacturing skills, because there is no available employment in the industry, so there will be even less demand for the training.

It is the lack of skilled workers more than anything else that will be our undoing. There will be no-one left who has the knowledge of a production environment, the ability to use the machinery, or the logistics of a manufacturing plant.


Cascade Effect

The rot spreads much further afield though - if no-one is making anything, then the engineering suppliers (as well as metals and plastics suppliers) disappear as well. These are the people who would normally stock the raw materials, tools, drill bits, and other strange looking tools that most people have never even seen or heard of, that make manufacture possible (even on a small boutique scale). As these essential suppliers disappear, then it becomes more difficult for anyone to even contemplate starting a small manufacturing business. Large businesses grow from small ones, and these days they don't stand a chance.

The process continues all down the line (as always), and until we wake up to ourselves and start encouraging manufacture, the situation will become critical - or more critical than it already is.

Large hardware (and electronics supply) stores used to stock things that people would need every so often - in other words, the stock would sit and gather dust until someone needed it. The bean counters don't like that - stock has to keep moving or it's dead. The remaining stuff that is useful on a daily basis is retained because it makes money - it keeps moving, but where does that leave anyone who needs a 19mm twist drill? Out in the cold, is where (and yes, this is a recent attempted purchase on my part - fortunately, a 3/4" drill bit is 19.05mm so I could use that - 3 hardware stores later I found one!).

Needless to say, if one is in need of lathe tools, or a local aluminium anodiser, then you are seriously out of luck. This is stuff that should be available, and if there was a vestige of manufacturing left (other than kitchens and bathrooms - they are everywhere, and don't really count - sorry) then these items/ services would be available.

Years ago, I could get aluminium cut and bent to the shape I needed, then anodised ready for installation of the components that made it into an amplifier. I still can, but I will have to travel a great deal further, have much less choice, and will pay considerably more (allowing for inflation) than I did before, simply because the demand no longer exists - because the manufacturers who used these supplier's services have gone!

This is not about me, or anything I may be doing. This is a general malaise that has struck down a vast number of manufacturers, both small and large.


The DIY Fraternity

Since my pages are devoted to hobbyists and DIY enthusiasts, it is worth mentioning that the DIY fraternity is capable of making a big difference - why buy something that was made somewhere else, uses proprietary parts that you can't get, is designed so that you can't even get it apart without the inside knowledge of the maker, when you can build it yourself.

Add to that the satisfaction of having made it, and the fact that you have acquired new skills and knowledge (which sadly will not help you get a job). The net result is a win - for you because you have something that you made, for the suppliers you deal with because you and your ilk help keep them in business, and for the country, because that is money that has stayed put, and not gone somewhere else across the sea.

This applies to every field of DIY - from wood turning, cabinet making, electronics, knitting - you name it. It is all local content, saves you money, and gives great personal satisfaction. If enough people do it, the difference to the economy and the community can be enormous. The only losers are the large corporations and their off-shore manufacturing plants.


Locally Made - Not Likely

It is time that governments realised what their policies are doing to local industry, and encouraged people to make things, by supporting the local product (not that there is any), and by offering incentives and even inducements ... "We need 5,000 WhatNots - locally manufactured products will be preferred, even if the price is higher."

The taxpayer obviously pays for this, but look at the advantages to the taxpayer - the more industry there is, the more money flows through the economy, and everyone benefits.  There is always a flow-on effect, and it is high time that the direction of the flow is reversed.

An example is a small local manufacturer who made parts for commuter trains (this is a true story, but the actual items are not named). Despite assurances from government that local suppliers were preferred, he lost the contract to China. They saved less than AU$1 on each item, which was probably worth an average of about AU$200, and that only got the items landed in Australia - the customer still had to collect them at their own expense (the local supplier's cost included shipment to the works where the trains were built). The local manufacturer is now out of business, with the loss of half a dozen jobs and several lifetimes of accumulated knowledge. This is insignificant in the greater scheme of things, until you understand that it is happening every day - every day a small manufacturer (or several) will go out of business. Lost jobs, lost opportunities, and I'm lost for words!

Meanwhile, governments like to tell us about the 'level playing field' they have created by removing tariffs, and opening our markets to competition. Yes, the markets are open, but the playing field is not at all level. Subsidised transport (etc., etc.) is just one area where other countries can undercut the local product. This so-called 'level playing field' has seen the demise of more farmers and manufacturers than ever before - somehow, I don't consider that to be level in any possible interpretation of the word.


Interdependence

We all depend on each other, and your business could not survive without other support businesses - but we are being stripped of one of our most important assets - independence, not from each other, but from the rest of the world. We need trade, but as support, not wholesale replacement of our own capabilities. In times of crisis, we all need to be able to do things on our own, since our major supplier may be the country in trouble (or in extreme crisis, even our enemy).

The oil situation is a perfect example - not everyone has oil to extract, of course, but the outcome is just as predictable with any commodity, whether manufactured or not. If war were to be declared against the country where your car/ fridge/ hi-fi/ dishwasher (etc.) was made, how would you get parts? Would you be considered a traitor for owning something made by 'the enemy'. If no-one in your country made the item in question, what would anyone be able to do without local manufacture? Go without? That is not something we are used to in our society, and it would cause much complaining - and very likely, those who would complain the loudest would be the ones who allowed it to happen in the first place!


Standards

The insistence on 'standards' has ruined a great many small manufacturers too. Not because their products are inferior, but because they have not achieved the required ISO stamp of mediocrity. The standards to a large extent regulate the way you do business, but not how well (or otherwise) your product performs, its build quality or longevity.

This is not to say that standards should not exist - they do help to keep the large corporations (marginally) honest. The small businessman needs integrity to stay in business, not standards. The way the business is operated (provided it is legal, of course) is of no concern - if the employees are happy, the goods are of high quality and the customers are happy, then what possible additional benefit can ISO9000 compliance produce? It certainly won't make the products any better, but it is likely to make them cost more.

Safety standards are another matter, and are in place in just about every country in the world. Daily newspapers and consumer magazines have legions of product recalls - very often because the product was sold without having been tested against the safety standards, or is defective. ISO9000 should prevent that from happening, but it doesn't.

One must also consider the integrity of the overseas supplier. Fake watches, clothing, transistors, aircraft parts and many, many more abound. Is a supplier who may be party to making fake products going to really care that the UL, CE or Australian Standard tests have all been properly conducted? Of course not. If they are found to breach the standards of any country, no-one can do a damn thing about it. The factory just changes its name and continues on as if nothing has happened. Countless safety breaches and non-compliance with applicable standards can be found on the Net, and they will get worse, not better.


Safety and the Environment

I have been advised recently (from someone who was working is Asia) that there is another side to outsourcing to developing nations. While I've also seen it myself, that particular penny hadn't dropped when this article was first written.

Most 'western' societies have very strict OH&S (Occupational Health and Safety) standards, and employers are expected to provide a safe working environment for all employees (including sub-contractors). Breaches cost companies dearly, both in bad publicity and financially - heavy fines are imposed for breaches, especially if someone is injured or killed in the workplace.

Likewise, companies that produce waste are expected to dispose of it in an approved manner, and this area is tightly regulated. Breaches can be very costly, since here too heavy fines are imposed for breaches, and the publicity can be particularly damaging. Anything that is even slightly toxic must be handled, stored and disposed of in a manner that is set down in the law. For example, spray painting booths must not allow any 'significant' solvent or particulate matter to escape, and there are very strict regulations that dictate exactly how the solvents and particles shall be filtered, and any waste disposed of.

Naturally, we also have minimum wage standards, compulsory superannuation contributions for employees (only so the government won't have to pay pensions in our latter years, but that's another story), etc. These are all burdens on local industry, but they are necessary to ensure a reasonable living standard, and to prevent screwing up the planet any more than is deemed necessary at the time.

Many of the 'cheap labour' countries do not have any of these schemes in place. OH&S is up to the individual - basically "you get hurt and can't work, you don't get paid". Superannuation? You must be kidding. Waste disposal? The recent massive toxic waste spill(s) in China tell us what we need to know about that. In short, all the things we take for granted are missing. The workers are paid a pittance by our standards, but to them, it's very good money. Why would the employers make life any harder for themselves by employing best practices for OH&S, superannuation or environmentally friendly waste disposal?

Let's face facts here - most of the western corporations would quite happily dispense with these 'unwarranted exploits of their profitability' if they possibly could. Our governments have imposed these things upon them, very few are voluntary. Wages and conditions have been fought for over a long period by unions, and although it must be admitted that some union claims are outrageous, many of the benefits we now enjoy were the result of prolonged battles between unions and employers. No employer wants to pay any more than absolutely necessary, and every government or union demand is seen as a threat.


Since our (now former) scumbag government castrated our labour laws, we have seen a rash of unscrupulous employers 'offering' current employees their own jobs at a reduced wage - or risk the jobs going offshore. This is simply blackmail, and we have lost a significant number of manufacturing jobs recently to cheaper overseas alternatives. Unions in general have nipped such tactics in the bud in the past, but it is getting harder for employees to negotiate a fair deal - and this with the government's assistance! Much of the damage has since been reversed, but it can be re-reversed at the whim of a new government despite promises not to do so. I believe that's called "a democracy" for some obscure reason, although "a stupidity" is more descriptive.

This is not to say that all union claims (or their own blackmail tactics) ultimately benefit the workers - far from it. Nor are all government impositions well thought out - think of the European Union's 'RoHS' directive (restriction of hazardous substances), and the lead-free solder debacle!

Ultimately (and this is really the whole point), when a critical mass of jobs has gone overseas, the original countries (Oz, US, UK, Europe, etc.), will also lack the critical mass of purchasers. At around that time, the economy simply implodes.

I know the above is a bit of an over-simplification, but the net result is that economies will implode, and it will happen sooner rather than later if governments don't act. The signs are already present ... record numbers of bankruptcies, huge debt per head of population, more and more jobs disappearing overseas, and even migrant workers brought in to 'solve' the skills shortage. Why do we have a skills shortage? Might it be that people can see the writing on the wall for manufacturing anyway? Perhaps because the government has done nothing whatsoever to encourage apprentice employment? Maybe the consumer society in which we live considers 'manual labour' to be beneath us?   All of the above.

To an extent, we might say that the (major) retailers are true villains in this, but we are also to blame (we believe their advertising drivel, after all). Promote the consumer society, push the latest 'must have' models, squeeze the local manufacturers until they are no longer capable of bleeding, and sell, sell, sell (at all costs). Buyers must be convinced that the CD player or TV they bought last year is so passé that it must be replaced at once, lest they be seen as being 'so last week'.

The time will come when the buyers become sufficiently scarce, and the competition for the lowest price sufficiently fierce - regardless of how insanely low it might be - then the retailers will implode too (it has happened to several here already). As soon as people feel scared for their job security (what job security??), they slow down their spending. All we need is the critical mass ...


Consumerism

This article is not about promotion of consumerism (rampant or otherwise), planned obsolescence and new models every three months. That is the 'model' pushed by large corporations, endorsed by governments and suffered by everyone else. Consumerism is the very thing that has created many of the manufacturing woes we see, and is putting repair people out of business as well. Why would you get something repaired for $150, when you can buy a new one for not much more - or perhaps considerably less?

What happens to all the old ones - whatever they may be? In some cases they will be recycled, but re-use is vastly kinder to our environment. Re-use means using the parts to make something else, or making the product work again so someone less fortunate than ourselves can have one. The economics of this don't make sense any more, because the goods we buy are made to be made - in other words, they are built with the intention that they will not be repaired. The manufacturing process is much more difficult if you have to consider the poor service person who will have to work on it later, so that too is history.

The ever increasing levels of complexity are inevitable, since we expect a new appliance to work at least as well as the old one (not necessarily the case, of course), and new techniques can improve efficiency and the environment is all the better for that. But even if efficiency is improved, if the expected life is reduced, then the net gain will very likely be negative - it will always take far more materials and energy to build a new one than to repair the old, so the alleged economy is false.

As an example, a 10 year old product is still working, and is maybe 70% efficient. Used (say) twice per week for perhaps one hour or so, it uses 1kWh* of electricity per usage. The 'new improved' model has an expected life of perhaps five years, but is now 80% efficient, so uses 0.88kWh per use to perform the same work. 0.12kWh per use is saved (0.24kWh per week), but by the time it has failed, a bit less than 63kWh has been saved compared to the old 'inefficient' model.

*   1KWh - 1000 watts per hour. A 1000W heater operated for 1 hour uses 1kWh of electricity

Since we do not know the exact figure for the energy usage to make the new product, it is difficult to make a fully informed decision, but a reasonable guess is probably not far off the mark. If we guessed that 100kWh of energy were used to make the product (not too unrealistic), there is a net loss of 47kWh for the new model versus the old - it would have to last almost 8 years just to break even. This is not an improvement. The efficiency is completely false, and also fails to take into consideration the energy that was used to make the old one in the first place.

To give you an idea, the iron and steel manufacturing sector is the largest energy consuming industry in the world. As an whole, it uses some 10 - 15% of the total industrial energy consumption. To exchange an old (steel) product for a new one, it will need to last for a very long time, or be extremely efficient before there is a net gain. At present, it takes 350kWh per tonne to smelt steel, which may not seem like a great deal (0.35kWh per kilogram). If an appliance is built using only 10kg of steel, there is 3.5kWh just for the initial production of the base metal. It hasn't even been formed, rolled, cut to the required size or shipped yet.

When all other processes are added in the production of a typical appliance, the energy costs mount up very quickly, since energy is used in every process of manufacture - from the reduction of raw materials into the base material (be it steel, aluminium, glass or plastic), then the rework to shape, mould, paint and pack the product. Then there is distribution, delivery to your home, and disposal of the old unit.

Perhaps manufacturers should be forced to provide not only an energy efficiency rating for new products, but should also indicate the total energy consumption required to build it. This may not directly influence the consumer's decision, but it should, since we all pay for the emissions of power generating plants, by way of greenhouse gases and depletion of the world's resources.

This is not a new topic, but it is more relevant now than ever before. New is 'good' - even if we have to somehow convince ourselves that it really isn't as bad as we first thought. We are bombarded with advertisements for the latest and greatest product in every category - we MUST have this new improved model (or what exactly will happen? Oh, we may be thought unfashionable ... well deary me! - Hardly a heinous crime in my books

Am I cynical? Of course I am - and you should be too. There is a great deal to be cynical about - we all know that our governments lie to us when it suits them, and look at the large corporations that have collapsed because their web of lies and deceit finally unravelled. Are the remaining ones honest and caring, looking after their customers and employees as they should? I don't have to answer that, because you already know.

The European Union has introduced laws for recycling, but there is already some evidence that these are flawed. Certainly the idea is good, but the idea is in the execution and compliance with the laws. We will have to wait to see if any of this actually works.


The Future

Unless there is a turnaround by big business and governments, the situation will just get worse and worse. The attitude of "why should I make it here, when (somewhere else) can make it for less" has to go. Not that anyone would want to deny the Asian countries their income, but not at the expense of our own independence.

If other countries want to manufacture products, then that is how it should be, but not at the expense of loosing our own ability to make the same thing. It may well be more expensive, but if the quality is equivalent or higher, then a great many people will buy the local product as a gesture of 'patriotism'. Of course, there can still be problems with this. Current labelling laws in Australia are seriously defective (especially in the food sector), and allow importers and retailers to gloss over the truth.

Most countries have had, at some stage or another, a protective tariff on imported goods. This was seen as restrictive, and disadvantaged the consumer who was forced to pay more. All true. In the process, the local manufacturer was able to compete, the protective tariff entered government coffers, and other forms of taxation could have been reduced (I think I must be dreaming now ).

The fact is that local manufacturing capability is vital, not just to the economy, but for national security. If all (or most) manufacturing is done by a few countries overseas, what chance does anyone have of surviving a crisis? With no local skills, factories or machinery, where will we turn next when the current major manufacturing countries decide to increase their rates - knowing that we have no choice whatsoever?

Supply and demand is about competition - a monopoly is never a good thing, since there is no-one to compete with. A monopoly can do whatever it pleases, at whatever rates it feels like charging. We are very close to that situation for many of the products we take for granted - we can no longer make them ourselves, so rely on others to make them for us, blindly (stupidly) assuming that everything will stay the same, and they will be cheap and available forever.

This is not the way real life is - it never was like that, and it certainly is not about to change.

We will pay for the short-sighted and stupid actions of companies and governments, that much is assured. When will it happen? My guess is about 10 years (somewhere around 2010-2015), unless action is taken now. Real, genuine action, not a few half-arsed politicians paying lip-service!

Update:   As of 2013, the sky hasn't fallen, although we were subjected to the GFC (global financial crisis, 2007-2008) which is a pretty close equivalent. Although we would hope that corporations and governments would learn something and make changes to prevent a recurrence, nothing of any real value has been done anywhere! Meanwhile, (as of 2013) several European countries are still in deep trouble some 5 years later, and it's unlikely that things will get better any time soon.

Naturally, the decimation of our manufacturing sector continues apace (see Fast Forward to 2013 below as an example). Meanwhile, half-arsed politicians continue to pay lip-service to the issue, and economists cheerfully tell us that we'll all be better off when major manufacturing plants close. Tell that to the people who no longer have a job, and all the subsidiary industries that will also have to lay off workers or close forever because their customers no longer exist.

Thanks to a friend in the US, who does consultancy for manufacturers, I can add his perspective to this discussion. Fred Newton supplied this very revealing insight into the real economics involved when manufacturing is moved off shore or across the border.


My Thoughts on The State of Manufacturing (By Fred Newton)
In the US, the actual 'touch labour' portion or the percentage of 'Total Cost to build' of most consumer goods averages in the 17-20 % range. As an example let's take one of the popular brands of computers that is currently being marketed on a global basis. With an average delivered C.T.B. (cost to build at the factory level), price of US $350-$400. The portion of this that is actual touch labour is about $23.00. This is 5.75- 6.5 % of the shipped cost. The remaining cost is distributed between overhead, materials, and warranty, with materials on this specific product generally having the higher remaining percentage.

Now let's relocate this to a eastern rim country where the $23.00 decreases by $18.00 to an equivalent US$4.85 C.T.B. and the touch labour percentage of the new C.T.B. changes to 1.28 - 1.4% of the shipped cost. The new shipped cost is US$332 - $377.00.

Digging deeper into these numbers shows an average decrease in actual C.T.B. of 3.47% to 5.1%. Not a big number by itself, but there are other major costs that have not been discussed here so far. (Sorry for the economics lessons, but this dissertation is very important to all of us on a global basis!)

An average plant relocation from the US to an Eastern Rim country or to Mexico is in the $Hundreds of Millions range. One recent plant relocation cost was well over US$200M. So if we begin to look closely at these large, no - huge, relocation costs we quickly begin to wonder where the profit is going to come from! At a marginal increase in profit from the slightly decreased labour cost it will require the relocating company to build and sell more than 11 million units to pay off the cost of the relocation, and start making a profit.

Now without going a lot deeper into this in numbers, it will take the company an average of 2-3 years of full production just to break even, and then only if the volume of products at the same quality level exists. If you add into the equation the required learning curve for the new location assemblers the 2-3 years changes into 3-4 very quickly. So where is the profit?


New Mass Market

In most countries around the world for a product to be sold there a certain percentage of that product is required to be manufactured there. With many of the more highly industrialised countries having had the current technology products available to them for the past twenty or more years, these markets are becoming saturated. The forecasted annual percentage of sales is much lower in these replacement markets than for countries like China and Mexico where less than 1% of the population owns any of the modern products they are now manufacturing.

So ... to reduce all of this down to one line, the companies are relocating their products to the new mass markets, and couldn't really give a damn about the livelihood of the country and its work force that allowed them to grow large enough to be Globally positioned as they are today!

This feeding frenzy is solely for the primary stakeholders within each of the organisations. Enron and the glut of centralised wealth that still exist within its senior staff members is a perfect example of lack of any sort of feeling for anyone other than themselves.

The real sad story here is that this is only the start of a vicious cycle! The economy within these new countries will surely improve with the boost of the economies from these new jobs.

As the new (near poverty) workers get enough income to have purchasing power for more than the bare essentials, they will start demanding, (sound familiar?) a larger portion of the pie! There go the big new profit margins!

The corporations will then start looking for fresh masses to take advantage of. Guess where they will find them? Right back in the old locations where they were in the beginning! These economies will have been depleted from the relocation of their livelihood in the past, but this time it will most likely be the second generation workers of the original employees that supported the growth and development of these remaining companies originally. The first generation will have died off in the meantime.

I think the bottom line from my prospective is that the primary international Corporations are all short term gain oriented, with little or no long term growth and gain goals.


Now, this section looks like the US perspective, but it's not - it applies equally to all of the industrialised countries, all driven by greed, and the shareholders wanting more, more, more.

When are corporations going to realise that the shareholders are primarily gamblers ... they don't care about the company, its employees or its customers, only themselves. It is high time that management digs in its heels, and simply says "No!" to the ever increasing demands of the wealthy gamblers, who will buy and sell stock on the same day if it makes them a profit. Does anyone really think that this effects the way a company should do business? It is illogical in the extreme when a corporation sacks or retrenches a thousand workers, and the share price goes up. This is not business, it is just gambling, but gambling at the expense of the very people who made the corporation in the first place. A business without workers is a non-business, just like a worker with no job is a non-worker.

There is supposed to be a mutual trust between the employer and employees, and in a few companies this still exists. For the vast majority, the worker is merely a pawn in a big game that no-one seems to really understand.

The smaller shareholders will eventually do well, if (and only if) they allow a well run company to do what it knows how to do best ... make its core business work, for the ultimate benefit of the employees, and following as a natural progression, the customers and everyone else (such as the shareholders).

For the gamblers, they can feel free to visit their local bookmaker and gamble properly, rather than manipulate the odds in the stock market - let the people who actually create goods and products or supply services (i.e. The ones who actually make the economy work) get on with their jobs and lives.

As soon as any corporation stops looking to the future (not next week or next month, but a year - 5 years ahead), it immediately loses focus, and in the blind rush to try to keep up with the competition's share price, dishonest and illegal practices become common - until the whole thing falls in a pile - Enron, Worldcom, HIH Insurance are just three where the greed and corruption was exposed, and where the companies either folded or were disgraced. The loss of jobs, business confidence and the pain of the small investor are inestimable.

Why does a company try to insist on 30% growth per annum? 50%? To what end? Surely, the idea of business is to provide people with their needs - jobs, products, security. They don't care about these things any more, and look at the state of the world. Big business corrupts government if it suits it to do so, and we are able to see a pattern emerge, where the rich are very, very rich indeed, and the poor are exploited because they can't afford to fight back.

This is not an ethical way to run a business, a country or a planet - I think that it's high time that we all say that enough really is enough. Everyone has a right to a share of the pie, and making sure that the share is more evenly divided than at present is a good start.

No-one, absolutely no-one, is so smart, so good at what they do or so indispensable as to be actually worth 10 or 100 times (or even 1,000 times) what you or I would be paid for our job. Why should a worker, who knows his/her job and does it well, be paid $10/ hour, while someone else gets perhaps $100/ hr and another $1,000/ hr - in the same company? For some others, they wouldn't get out of bed for less than $10,000, let alone actually do any work. Are these people really that important, clever or hard-working?

No-one will deny that a CEO of a large corporation has a stressful and difficult job, just as no-one will deny that just about every job these days is stressful and difficult. There is not a person on this planet who is a thousand times smarter or better at his/her job than you or I, or who works a thousand times harder or a thousand times faster. There is obviously no reason that these people should be paid a thousand times more, nor 100 times more. Even at the other extreme, do you know anyone who is really (only) 10 times better, smarter or faster than you are?

No?  I didn't think so.


Mark Hammer from Canada provided this additional insight, and has made some good observations that explain the malaise we see. His comments refer mainly to the actions of the stock market, and its effects on the small investor - these are the people who are often (financially) hurt badly by the "buy, buy, sell, sell!" antics of the gamblers, and the corporate attempts to satisfy what I believe is entirely the wrong sector of the market.


Economic "Rationalism"  (by Mark Hammer)
The manoeuvrers that the corporate sector and their economist henchmen carry out are generally all in the name of good intentions. I work in government here, right in the same building as the ministry of finance, the treasury board and scads of economists, in the long shadow of parliament, and in the den of lawyers. They're all good people, but the majority have it wrong when it comes to the relationship between economy, economists and statesmanship. A thriving economy is certainly a worthy goal of a nation, but economic policy is not isomorphic with statesmanship.

So, these busy little beavers toil away on policies and negotiations designed to help 'the economy', often neglecting other things that matter. They believe they are doing the right thing, certainly cast no doubt in the minds of the corporate sector as to whether they are doing the right thing, and everyone sleeps soundly at night believing in what they believe in.

Western industrialised societies rest heavily these days on a number of things. One is certainly rampant consumerism and the mistaken equivalence between consumerism and 'progress' ("Hey, my phone has 10 brand new ways to annoy me, provoke rudeness on my part, require installation of new transmission lines, require teeny tiny fingertips, and generate embarrassing ring tones on the bus"). Another is certainly the disposable income of working adolescents (though this varies between North America and Europe). A third is the concomitant rise of retirement as a social institution and the stock market (and day trader) as the handmaiden and partner of retirement.

The stock market has always been there, and many people have tucked a little into the market for a few extra dollars. What has changed in the past 50 years is the concurrent increase in the duration/ length of the retirement period for many, the increasing duration of what one might call the 'preparatory' years prior to establishing oneself (including college, university, and the usual adolescent tendency to try to escape the rat race entirely, until it becomes all too obvious that this is not going to work out in the long term). The net result is that a generally smaller portion of one's life is spent earning a decent wage.

The need to amass a personal net worth (current and future) which can provide for a retirement at the socially expected age leads many to either invest much more heavily and nervously than similar persons might have done in 1960 (when retiring at 65 or 67 was considered within the bounds of normal), or to be part of a work-related pension plan which is under pressure to deliver promised benefits. Indeed, retirement plans, pension funds, and personal nest eggs for the purposes of retirement make up a much larger chunk of the stock market than they might have many years ago. A lot of this money is related to retirement in opaque ways. For instance, when a bank issues guaranteed investment certificates, chances are that many of the owners of those GICs have purchased them expressly for retirement income purposes. The pressure on this money to perform is immense.

Correspondingly, the pressure on the organisations invested in to perform is similarly intense. I like to refer to this as 'nervous money'.

So what happens to 'nervous money'? Well, for one thing, to retain investors who are anxious about generating the kind of ROI (Return On Investment) that will keep them in the consumer style to which they have become accustomed - even after they don't work for a living any more - the profit margins have to be robust ... and the BS thick and savoury. My sense is that companies and boards of directors, elect to move, globalise, restructure, merge, buy out, down size, and do lots of economically and spiritually disruptive things in the name of retaining their investors.

Sometimes these moves are intended to increase profits, and sometimes they are simply intended to create the impression of the potential for profit (the stock market being mostly make-up, girdles, and falsies ).

Whatever the case, if so many of these investors were not people who look at their money and see 25 years of their post-retirement life, it would be a different story. You will note that a good many of the folks who got stung by Enron were, in fact, stung for their retirement savings. I.e., they stuck with Enron and believed the BS because their need for retirement income urged them to. (This is not 'blame the victim' here, just trying to provide an aetiology of the current malaise).

The long and the short of it is that many of the things you mention are, to my mind, either direct consequences of nervous money or the spin-off to helpless victims (e.g., small non-public companies) who get caught in the wake of larger public organisations doing the kinds of things that nervous money does, like move out of country. Of course the countries where nervous money moves to are generally not replete with folks who are looking to invest their wages in retirement funds and pension plans because they actually don't have retirement as a social institution there - one would expect the financial planner business in many so called "third world" countries is rather slow - or certainly don't have early retirement as some kind of droit de seigneur.


I live in a town that has two major employers, civil service and telecommunications. Nortel, JDS Uniphase, and Alcatel are all situated here, as are Corel, Cognos and several other software places. Every day on the news, they list how local stocks are doing - something I don't remember hearing on the news as a youth. Do people actually know what the products of these organisations are?

Sometimes I'm not so sure. There are many days when you'd swear that their major business line was their stock. That companies can show huge leaps in stock value simply because the losses this quarter were not quite as bad as the same quarter last year (something which still baffles me) underscores the notion that folks care more about the stock than about what the company actually does.

Now I believe with all my heart that there ARE conscientious brokers who caution their clients to be patient, to accept the slow burn as opposed to being dazzled by risky high yield investments, to invest in companies that are more ethical, that give their commitment to local industry and don't simply chase money over whichever border it happens to cross in its drive to evade taxes or fair wages. They're out there, but not everyone uses them.

What sorts of reasoning do the folks who invest multi-billion dollar teacher retirement funds apply? I have money in one of these, and I honestly couldn't tell you. I imagine the same goes for a lot of pension funds.

I suspect many folks who do public sector work 'for the good of humanity' would be quite surprised to know what their pension fund is doing and the kinds of corporate moves that may or may not have been provoked in an effort to hang onto that investment money. Has General Motors or John Deere closed plants locally and moved them south in order to show a higher profit margin or otherwise retain my TIAA-CREF contributions?

I certainly don't blame folks for wanting to retire, and I don't blame them for wanting to retire without being poor. That being said, however, if there are trickle-down effects of the kind of investment patterns that result from the way that social trends impact upon industry and the economy via the stock market and the nervousness of money, then I think people ought to take a moment to think through the choices they make, know more about the impact of their choices, and make some decisions. It's a long way from deciding to retire at 62, to the availability of decent potentiometers locally, to the living conditions of someone in a developing nation. But they ARE linked, even if by a great many intermediate stages, and one should consider one's values and the social repercussion of personal choices before making them. Yes, it's only one person, but one more person doing something is a lot different from one less person doing it.


Mark said that he often wonders whether people know what the companies around them (or in which they have investments - knowingly or otherwise) actually make or do, and I am convinced that for the most part, the answer is "no". The same applies to the stock market, where investors (many of whom are glorified gamblers), know only that the company may have something to do with 'technology' - what they do with that information is based primarily on whether technology stocks are deemed 'good' or 'bad' on any given day.

The above is only one example, of course - similar 'decisions' are made on stocks of chemical companies, cigarette manufacturers, drug companies (making 'quit smoking' drugs ), or anything else in the market. The problem is not with the small investor, the ethical investment broker, or the company itself. The greatest problems are created by the 'get rich quick' gamblers, who will artificially move a market based on rumour, whim or God only knows what, and cause a cascade effect that affects everyone else.

The company whose stocks are affected will then try to take 'remedial' action, which as often as not, is ill informed, and aimed at the wrong people. People lose their jobs, retirement funds, or in extreme cases (but sadly on the increase) their lives - the loss is more than they can handle, and they commit suicide.

The gamblers are of little consequence, and their actions are destructive to the company, its employees and its customers - should the gamblers lose their fortune, no one will care. That their actions can cause - directly or indirectly - the downfall of an entire corporation is deplorable, and it is high time that all companies (and governments) started looking to those who matter - those who are involved for the long term, and ignore the antics of the high flyers - let them crash, not the company or the economy.


Fast Forward to 2013

Sometimes you see something that makes your blood boil, and I have just read about a 'paper' written by an economics professor entitled "There is no future for Australian car makers". The author (Professor Sharma from Charles Sturt University's School of Accounting and Finance) said "the closure of Ford Australia's manufacturing plants in 2016 should not be a catalyst for more industry assistance".

Unfortunately, this is exactly the kind of addled 'thinking' that one expects from a bean-counter. Everything has to be in the black (as opposed to the 'red' in accounting terms), and there is no thought for the future and no comprehension of the role played by the manufacturing sector as a whole. There was a lot more inane crap sprouted by the Professor, but I'll spare you the details. Yes, of course it's cheaper to use 'cheap' foreign labour (never mind the exploitation that often comes with that), but that's hardly the point. The allegedly cheap labour overseas may well turn out to be far more expensive than anyone imagined.

It's not all about economics, and economists (aka glorified bean-counters) are probably the very last people who should have a say in the matter. Manufacturing capability is essential to the survival of a nation in a time of crisis (for example we had a couple of quite big crises early and mid last century). Hopefully, such crises will never eventuate again, but if something bad should happen, we won't be in much of a position to help ourselves if all we can manufacture is breakfast cereal.

The car industry (for example) supports many smaller manufacturing companies, and if the car making goes, so does all the support infrastructure. I'm afraid that the author of this 'paper' doesn't seem to have a clue about the real world and the interdependence of different industries that are vital. You won't know what you had 'till it's gone, and once it's gone, the skills that made it possible will go too.

Obviously, it is not possible to prop up every ailing industry because "we might need it at some time in the future", but Australia (along with a great many other 'western' countries) is rapidly heading for the point where we won't be able to make any of the things that a modern society needs just to survive. I think that most people like the low prices that we pay for most things - even 20 years ago they would have seemed impossible. However, it's unreasonable and short-sighted to assume that the planet can sustain the globalisation that we all take for granted, with a great deal of new technology equipment being essentially unrepairable. The throw-away mindset is another that's guaranteed to annoy most people in engineering, and few countries have done enough to reclaim materials that are otherwise destined for land-fill.

We used to make radios and TV sets in Australia. While it would be impractical and silly to think that we could/should still do so, with the loss of those industries we also lost the ability to make other (possibly essential) electronic equipment too. There is still some electronics manufacturing here, but it continues to shrink both here and elsewhere. No country should ever let itself get to the point where essential capabilities are lost, whether it's electronics or heavy industry.

Does Prof. Sharma know how to use a soldering station, operate an oscilloscope, lathe or milling machine? How about all the other machines that are used in manufacturing? In reality, there are very few people left who can use these machines, and many of them are either approaching or have passed retirement age. Few new recruits are being trained because the manufacturing sector has already shrunk dramatically. According to the bean-counters, we don't need any of them - they should be re-trained to do something else. No-one can state what that should be of course. Oh, I know - make breakfast cereal!

We have already lost a vast amount of manufacturing capability and skills, and losing more is unthinkable. Some things have to be supported, even if they seem to be costing the taxpayer money. If government assistance is needed to ensure that we are able to build things if we need to, then so be it. Manufacturing is a critical piece of the overall capability of a country, and while many people from other sectors may not see the importance, that doesn't mean that we can just import everything because it's cheaper to do so than to make it here (or in the US, UK, etc., etc.).

Bean-counters can't get their heads around that simple fact, but it's about time they learned about reality. At the time of writing, Australia is supposedly in the middle of a mining boom - we dig stuff out of the ground, and promptly send all these raw materials overseas. Very little refining is done here ... "Oh, but that uses energy and creates greenhouse gas so we can't do that." Does anyone think that the CO2 generated in other countries is somehow less harmful than that created here?

They must, because we export huge amounts of coal, natural gas, iron ore, bauxite (aluminium ore), along with uranium ore and various others, without having done a single useful thing with any of it.

It's not just about the red and black in the balance sheet! Some things are difficult to quantify until something bad happens, and you discover that nearly all the machinery that we used to have to do all kinds of manufacturing is gone. What's left is either running at full capacity or is in a state of disrepair. The skilled labour that's needed to operate the machines is in very short supply because it's cheaper to import everything.

It would be silly to imagine that we should still be able to make everything that might ever be needed, but at the moment we have government, academia and industry cheerfully throwing the baby out with the bathwater, and they don't even see it as a problem!

There's also a continued push for labour 'reforms' to improve productivity and reduce costs. This almost always means that workers should be paid less and made to work harder, which is hardly a recipe for workplace harmony. Everyone will have heard tales of the exploitation of overseas workers, including factory fires, collapsed buildings, and subsistence wages. Is this what we want for our country?

In some sectors (especially government and semi-government organisations) there is a real opportunity for workplace reforms, but despite rhetoric from all sides of politics nothing has ever improved. Government red-tape just gets worse and worse, and anyone trying to actually do something has to jump through more hoops than ever before. This applies to manufacturing, building and almost everywhere when people want to create 'stuff', rather than importing it ready-made. Australia can't even refine crude oil to meet our needs any more! Apparently, it "not economical" to have enough of our own refineries to meet our needs, so we have to rely on imports.

I know that many of my readers will see this as a problem without a second thought, but those supposedly in control can't see the forest for the trees .


 

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Copyright Notice. This material and all material contained in this web page, including but not limited to all text and diagrams, is the intellectual property of Rod Elliott, and is Copyright (c) 2002. Reproduction or re-publication by any means whatsoever, whether electronic, mechanical or electro- mechanical, is strictly prohibited under International Copyright laws. The author (Rod Elliott) grants the reader the right to use this information for personal use only, and further allows that one (1) copy may be made for reference while constructing the project. Commercial use is prohibited without express written authorisation from Rod Elliott. Additional material is copyright (c) 2002, Fred Newton and Mark Hammer, and reproduction of their material is subject to the same conditions as shown above.
Copyright (c) 2002 Rod Elliott