The new look of American manufacturing: the emerging model hinges on smaller runs, more flexibility and greater sophistication.

When Richardson Industries shut down its 300-person furniture manufacturing operation in 2002, it was "the most painful thing I ever had to deal with--to look people in the eyes and say they weren't going to have jobs anymore," says Joe Richardson Ill, chief executive officer of the Sheboygan Falls, Wis., company. Chinese competition had gotten the best of Richardson and most of the rest of the domestic wood-furniture business, and the company became a U.S. sales and marketing outfit for imported tables and chairs.

But over the past couple of years, Richardson has put smiles back on the faces of about two dozen of his old employees--and $13-an-hour paychecks back in their pockets--by rehiring them at a new division he launched to manufacture fine wood cabinets for yachts. It was the brainchild of Gary Kane, a manager who had fled Richardson's doomed furniture business for a job managing a yacht builder, who came back to his old boss with the idea. Since 2003, Richardson Yacht Interiors has been stealing market share from European competitors with quality, price, delivery and customer-service advantages.

While it's barely a $10-million enterprise thus far, Richardson believes "this is a manufacturing model that can work in this country. It's not something the Chinese can be drawn to, because they want to make large production runs. This is something that we can build on and grow."

From Richardson, at Wisconsin's oldest family-owned company, to Anne Mulcahy at mighty Xerox, from vacuum-cleaner impresario David Oreck in Mississippi to Fred Keller of Cascade Engineering in Michigan, American manufacturing CEOs are learning how to remain players in a world that is now awash in low-cost goods made virtually everywhere else.

These manufacturing CEOs are striving to create business models that can survive, both for purposes of the bottom line and for what they call a concern for the nation's future. "What made our country great is our manufacturing base, and it's a very short-term view to think that we can just be a service economy now and let the other guys get dirty and make things," says Gary Huss, president and co-owner of Hudapack Metal Treating, which employs 175 people at three plants in southern Wisconsin. "Down the road, that means trouble for our children and grandchildren."

The Innovation Curve

Of course, it's possible to look at any wisp of smoke from a U.S. factory these days as a mere silver lining amid a perfect storm of trouble for American manufacturing in general. The challenges for General Motors, Ford and Delphi in shedding their "legacy" labor costs are making the entire automotive economy shudder. Other old-line manufacturers, such as Caterpillar, are holding onto domestic output only by shaking down the high wages that used to support America's blue-collar middle class.

Overall, more than 100 U.S.-based manufacturing industries lost significant chunks of their domestic markets to imports between 1997 and 2004, says a new report by the Washington, D.C.-based U.S. Business & Industry Council, which represents small and midsized American manufacturers. Nineteen industries lost more than half of their U.S. market, including pharmaceutical preparations, telecommunications hardware and environmental controls. "U.S. manufacturing isn't even able to maintain its share of what is still a growing U.S. market for manufactured goods," says Alan Tonelson, a research fellow for USBIC Educational Foundation, an affiliate, which largely blames federal trade policy. "To me, that's a glaring sign of faltering competitiveness that we see throughout manufacturing--low-, high- or medium-tech."

[ILLUSTRATION OMITTED]

U.S. manufacturers who stay in the game are relying on several types of strategies, often in combination. They are turning to flexible-manufacturing systems using digital technology, a retrained work force and shorter production runs. Some CEOs have made their stands on sublime iteration of lean-manufacturing, Six-Sigma and just-in-time principles and practices. Many companies are concentrating only on complex, value-added final assembly that can afford American wage and benefit levels. Other CEOs are taking better advantage of their proximity to North American customers. And some are bringing R & D and manufacturing closer together to keep their products and applications one or two margin-enhancing steps ahead of commoditization.

"Those American manufacturers who are succeeding today are focusing on doing one thing: innovate, innovate, innovate," says Scott Kingdom, global managing director of industrial markets for Korn/Ferry International, a management consulting firm. "They're doing more valuable, higher-margin, mission-critical sorts of things that are less apt to be outsourced or taken abroad."

James Schaeffer agrees that "in the mature markets of Europe and the United States, companies that win will be focusing on innovation. Ultimately," adds the CEO of Polymer Group, a $1-billion manufacturer of industrial fibers based in Charleston, S.C., "if you want to participate as a manufacturer in the United States, you need to be ahead of that innovation curve."

Yet even as they're trying to preserve a domestic manufacturing presence, many CEOs already have made huge concessions to the inevitable. There's only so much they can do when faced with what the National Association of Manufacturers says is a 22 percent cost disadvantage against the rest of the world due to excessive regulation, taxation, litigation, out-of-control health-insurance costs and ballooning energy charges. Instead, some have focused on convincing employees and communities that a plant is half-full rather than half-empty.

And their U.S. plants now occupy only a part--not always at the pinnacle--of a globally integrated production network that is based on foreign manufacture of most of the components that previously spilled out of foundries and factories across America. "Most companies that have become exceptionally good at creating and enhancing and driving shareholder value view manufacturing as a global thing and understand that outsourcing and low-cost-country strategies are also pieces of the puzzle that they have to manage," says Doug Engle, global leader of manufacturing consulting for Deloitte & Touche.

Xerox Integrates

Dismantling much of its domestic manufacturing was at the center of a turnaround strategy that Xerox launched in 2000 after reporting a fiscal-year net loss of $257 million. The company aimed to cut $1 billion in costs and shed up to $4 billion in assets. Among other things, Xerox outsourced most of its office-equipment manufacturing to Flextronics, eliminating about half of its 1,500 unionized jobs in Webster, N.Y. Now, low-cost Flextronics facilities around the world, including some former Xerox plants, manufacture copiers, put Xerox badges on them and ship them back to the United States for sale.

Yet Anne Mulcahy, who became CEO in 2002, as Xerox was returning to the black and leveling off its revenue decline, insists that U.S. production remains crucial to the company's continued renaissance. "Manufacturing has not only played a key role in helping turn this company around," she says, "but also allowed us to increase our customer focus and deliver world-class products."

The catch is that Xerox has innovated into a very different kind of manufacturing at its Webster complex: scaled back, but higher value. With the typical office copier long gone, the showcase factory now produces only technologically advanced, highly customized printers that retail for up to a half-million dollars.

"We had to transform this factory from a commodity factory to one that's much more geared to building customer orders and aligning itself to technology and customer changes," says Wim Appelo, vice president of supply and manufacturing for the Rochester, N.Y.-based company. "That had an impact on almost everything we do: the mind-set of workers, the speed through the factory to build an order, and the infrastructure that supports the factory and all the functions around it."

Suppliers that Mulcahy calls "best-in-class partners" became more tightly integrated. Union-rule relaxation has made it easier to train and deploy the several hundred remaining workers, part of what Mulcahy says is a "relentless focus on productivity" now. Perhaps most important, a huge new, adjacent R & D center allows customers to kick the tires and train their own employees on the hardware.

And in "refreshing" the design of 95 percent of its product line over the past three years, Xerox scientists and engineers have innovated hand-in-hand with their manufacturing counterparts to help ensure that the plant can set world-class benchmarks for quality and productivity. Assembly magazine recognized the facility as its Assembly Plant of the Year for 2005.

So successful has been the integration of product development with manufacturing prowess across Xerox's vast Webster campus, Appelo says, that the $15-billion company last year decided to build its first new factory in New York in two decades. It is investing $60 million to manufacture a state-of-the-art new toner in a plant that will generate 40 new jobs and retain 50 more.

Manitowoc's innovation strategy is similar to Xerox's but seems even more nationally disinterested. CEO Terry Growcock says that the $3-billion maker of building cranes and food-service equipment has clustered production of related parts around the globe depending on costs, competencies and logistical considerations. At its Wisconsin headquarters complex, for example, the company makes masts for tower cranes that it assembles both in the United States and Europe. But while Manitowoc also produces crawler-crane bodies in Wisconsin for the Chinese market, it manufactures the boom and counterweight components of those machines in China. This is because booms take up a lot of space in freight, and counterweights are very heavy.

And though a fierce devotion to Six Sigma has streamlined its U.S. operations, likewise it has improved foreign plants. "We like to view ourselves as a global manufacturer and not be too concerned about where we build the product--except close to the customer," Growcock says.

Manufacturing close to its customers also dictates Polymer Group's approach to siting production of its engineered fibers that end up in items ranging from baby wipes to automotive air filters. Right now, that strategy means it is sinking $40 million into an expansion of its Mooreville, N.C., plant that is expected to add 50 local jobs even as it doubles efficiency. The addition will meet growing demand by U.S. diaper makers.

Yet that equation also means that Polymer is building a new plant in China as well. And the domestic share of its overall production has dwindled to about 45 percent nowadays from nearly 70 percent just 10 years ago. "We have to be where our customers are," CEO Schaeffer says.

Similarly, the percentage of overall production conducted in the United States by Hand Held Products, Skaneateles Falls, N.Y., has fallen to about 70 percent from 100 percent just seven years ago. Wage rates in upstate New York are five to 10 times those in Asian markets. Yet, says CEO Kevin Jost, an intense devotion to lean-manufacturing and just-in-time techniques has helped the American plant whittle away at the cost disadvantage. So has U.S. engineers' innovative capacity to quickly tailor products to customer needs and get them out the door. "Smart companies will understand where and when to outsource and where and when to continue manufacturing in the United States," Jost says.

Tissues and Vacuums

James Jones has demonstrated breathtaking opportunism on both sides of this issue for the company he co-owns, Seaman Paper. In 2004, the Otter River, Mass.-based maker of fancy tissue paper filed an antidumping complaint with the federal government against Chinese competitors that were selling gift tissue and crepe paper to Target Stores and other Seaman customers "at prices that were incredible," Jones says.

While Seaman had invested heavily in new, high-speed tissue-folding equipment and had been slicing pricey labor out of its processes, he says, a tour of Chinese factories showed that his competitors "were hand-folding the product while the machines ran slowly." By 2003, the pricing from China already had knocked Seaman's rival, Crystal Tissue, out of domestic manufacturing, Jones says. So he invested about $1 million to protect Seaman's 500 union jobs and gain the U.S. Commerce Department's agreement that the Chinese "were selling stuff below cost and below fair market value."

When the government agreed and slapped tariffs on the Chinese in 2005, Jones says, "It stopped the tsunami that was coming at us," he says. "A lot of major business for us was right on the fence pending whether we were successful or not. So that business ended up staying. At least it helped to level the playing field with China."

In the meantime, the $100-million company also was investing heavily in new techniques that would keep its U.S.-made products ahead of low-cost Asian manufacturers for the long term, such as scenting paper through microen-capsulation technology and adding "holographic sequins" to tissue. Yet, as Jones has seen another big piece of business disappearing overseas--the tissue that is stuffed into shoeboxes by American shoe manufacturers now manufacturing in China--he decided to line up Seaman's own manufacturing in China. "Our heart is in domestic manufacturing," Jones says. "But in today's times, you have to think globally--and offer global solutions to some of your customers."

David Oreck has made a different sort of choice about domestic manufacturing for his Jackson, Miss.-based maker of vacuum cleaners. His American workers produce more than half of Oreck's components and do all of its final assembly. When Hurricane Katrina last fall sacked and scattered his Gulf Coast work force, making it impossible for Oreck to resume production quickly, the CEO could have used the opportunity to ship hundreds more jobs abroad. Instead, Oreck helped feed, house and provide medical care to hundreds of his employees and many more.

Oreck says that being able to make vacuum cleaners under his watch is more important than gaining incremental cost advantages overseas. "You're not always assured of the same standard of quality when you get stuff elsewhere," he says. "We also hold onto significant advantages in freight costs and controlling inventories. I can pick up the phone right now and call my factory, and tomorrow morning they're making blue ones instead of red ones. I can accommodate a customer's needs far sooner than if all of this was overseas."

Lean Practices

One of the realities for smaller and medium-sized manufacturers is that they simply lack the funds to set up shop halfway around the world. "The U.S. is home for us, independent of national pride," says Fred Keller, CEO of Cascade Engineering, the Grand Rapids, Mich., plastic-products company that has 95 percent domestic production. "Long term, the idea of an international presence may be important for us strategically. But right now, we think of ourselves as part and parcel of the U.S. economy."

To keep pace in a highly commoditized industry, Cascade has been using lean practices for more than a decade. The CEO also has been focusing on innovations that can distinguish Cascade from the competition. One product under development is a trash bin that has been imbedded with an RFID chip and is being tested by the City of Philadelphia. Haulers pick up a bin of recyclables and weigh it before dumping it; the chip radios the amount of material to a computer; and the resident receives coupons from Philadelphia merchants. "It improves [recycling] participation rates from 25 percent up to 75 percent or 80 percent," Keller beams.

Even in the half of Cascade's portfolio that is in the troubled auto-components sector, Keller believes that product innovation can keep his $300-million company and its 750 American workers ahead of the industry's woes. Cascade's specialty is fine-tuning its sound-insulation dash matting to allow just the right noises to emanate from under the hood, fitting the personality of the vehicle. "OEMs have driven the innovation out of their supply chains by trying to reduce costs," Keller says. "Small- and medium-sized guys like us, who have retained innovation, are the hope of the future."

The evidence shows that American manufacturers that revise their processes and integrate technology in ways that allow them to stay close to customers can survive the onslaught from China. Adaptability is key above all other factors.

RELATED ARTICLE: Losing Ground

U.S. manufacturers are losing domestic markets to imports in 108 out of 112 industrial sectors. Here is a sampling of where import penetration rates have risen:

Industry                    1997(%)  2002(%)  2003%)  2004(%)

Broadwoven fabrics          20.64    32.11    32.0    37.28
Tire cord and fabrics       15.13    18.00    18.85   22.64
Petrochemicals              10.11    20.42    19.22   18.52
Plastics and resins         11.16    14.27    15.18   15.52
Construction machinery      29.15    39.21    41.24   44.73
Electric computers          13.93    31.65    37.38   41.77
Telecomm hardware           17.66    29.63    36.21   43.18
Household refrig, freezers  10.60    19.87    19.64   23.12
Motors and generators       28.38    46.69    46.71   46.07
Autos                       50.43    63.53    66.78   67.02
Aircraft                    15.24    27.17    24.92   24.51

Source: USBIC Educational Foundation