Foundries warned to resist biased foreign trade.
In a time of deep concern for America's loss of domestic automobile market share to overseas competitors, George Booth's comments before the 32nd Annual Management Night Meeting of the AFS Detroit Chapter are particularly timely to foundrymen everywhere. Excerpts from his speech are noted here.
The year 1991 was marked by a shaky world economy that offered little cheer to domestic carmakers. The foundry industry, like the automotive industry, also is being pressured by foreign companies making quality products faster, adding more value and providing niche products at competitive prices.
Increasing environmental regulations over the next decade could regulate American foundries out of competition and further stress already strained resources.
For some time, the global auto industry has been undergoing a massive restructuring that has been redefining costs and standards required to compete. It and its suppliers are readying for a decisive confrontation in most of the world's major markets.
For example, the automotive casting business has gone from products with a nominal 1/8 in. machining stock to improved quality near-net castings with machining stock of less than 0.030 in. Auto companies are in a no-excuses era that places a premium on efficiency and performance. With more than 650 models competing for the North American customers, capacity is more than six million units beyond present demand with more on the way. A dozen major manufacturers are determined to maintain or gain share of this most open of the world's automotive markets. The stakes are high and getting higher.
Japan Looms Large
Recent news reports note Japanese efforts to increase their share of our automotive market as well as to own close to one-third of the European market by the year 2000. Interestingly, they plan to do it by manufacturing where their markets are, not exporting from home. For them, a strong domestic manufacturing base is not a competitive key. To be competitive, they argue, Japan requires leadership in technology, marketing and management.
The U.S. Stake
Cars and trucks built by the U.S. Big Three are better in value, safety, dependability, emissions and operating economy, but foreign competitors, mostly Asian, are making serious inroads with highly competitive products. Left unchallenged, this is a real threat and my concern is that, as we lose our manufacturing base, we gradually will lose the influence of the single biggest wealth-generating sector of our economy. Consider these basic facts:
* Productivity in manufacturing rises faster than in any other sector in the U.S. economy.
* Manufacturing counts for the bulk of private R&D expenditures. In 1988, manufacturing R&D was $61 billion compared with under $6 billion outside manufacturing.
* Manufacturing jobs pay 20% more than jobs outside manufacturing and creates jobs in other sectors. Estimates are that an increase of 1% in manufacturing jobs raises overall employment 2%.
* Shipments by manufacturers, plus their purchases, represent about 60% of gross domestic product (GDP).
The automotive industry represents 4.5% of GDP, the product of over 300 plants in 35 states providing 800,000 jobs and more than $25 billion in annual payroll. GM's recently announced intention to close 21 plants and eliminate up to 74,000 GM jobs, totals 7% of domestic automotive plants and 9% of the direct jobs. Even so, one million American jobs are directly related to the domestic vehicle business. Indirectly, it accounts for some 13 million people employed in this country.
The Japanese would have us believe that they are adding American jobs, but for every job the transplants create, we lose two because the average transplant car produced has only 48% domestic content. The average U.S. car produced domestically has 88% domestic content. This contrasts to the 1% domestic content of an imported car.
In sum, the domestic auto industry is a vital part of the U.S. manufacturing base and a powerful source for jobs and economic growth. Its loss would not just weaken our economy, it would weaken the American standard of living.
The U.S. emerged from WW II as the world's unchallenged economic powerhouse, but in the interim it overlooked the importance of fair trade. Europe and Japan, in rebuilding their industries, placed more emphasis on export than on trade policy.
In the 1930s, Ford was the major automotive producer in Japan with the largest single share of market. In 1939, Japan rescinded Ford's production and sales privileges and confiscated its plant on December 7, 1941. After the war, Japan kept its market essentially closed to outside competition through a combination of laws, tariffs, taxes, certification procedures and limits on distribution. Ford was not allowed to manufacture in Japan until 1974, preventing Ford from exercising its usual practice of producing where it sells. A tax penalizing larger vehicles was not removed until 1988, coincidental with the Japanese entry into the large-car market.
The Japanese enjoy cooperative relationships (we call them external factors) among government, capital institutions, industry and labor. By linking fiscal, monetary and currency policies, they provide "patient" sources of capital.
Recently, the Japanese government announced the availability of tax credits on the import of U.S.-built vehicles into Japan as a way to spur sales and help alleviate the $30 billion auto trade deficit with the U.S. As it turns out, only Japanese manufacturers are eligible. Honda gets the tax credit on its American-made cars; Ford doesn't.
I'm often baffled by our government's reluctance to correct our intolerable and persistent imbalance of trade with Japan, but there may be reasons for its inaction. To illustrate my point, some comments and facts from Pat Choate's 1990 best seller, "Agents of Influence," are pertinent.
Japan, according to the author, is managing its political and economic involvement in America in ways denied our companies in Japan. The Japanese own over $285 billion of America's direct and portfolio assets. They control more than $329 billion of banking assets, a 14% share of the U.S. market, and routinely purchase 30-40% of U.S. Treasury Securities.
Japan spends over $100 million a year for Washington lobbyists, super lawyers and political advisers and $300 million to expand pro-Japanese state and local political networks.
A 1986 General Accounting Office survey revealed that 76 former high federal officials had become registered foreign agents. They ranged from former bureaucrats, White House staffers and congressmen to retired generals. These ex-officials represented 166 foreign clients from 52 countries and two international entities. Almost a third of them work for Japan; so why don't we do the same in Japan?
Simple, Japan does not tolerate top government officials becoming another nation's lobbyist. It does not permit its politicians or its political parties to accept donations from any foreigner, foreign corporations or organizations controlled by foreigners. Japan does not depend upon other nations to finance its long-term role in the world economy.
Working the System
One classic example of how all this influence has helped the Japanese involves vehicle classification. Japanese manufacturers pay 25% duty on trucks imported into the U.S. and 2.5% on cars. Because vans and sport vehicles were classified as trucks, the Japanese were at a pricing disadvantage. So they reclassified them as cars. When the Customs Service voted against the reclassification, the Japanese lobbied the U.S. trade representative's office, the White House and the Department of the Treasury. Despite congressional and industry opposition, the Japanese prevailed.
Taking advantage of the independence of our regulatory bodies, these vans and sport vehicles are now classified as cars for the purpose of tariff assessments but revert to trucks once they are for sale in the U.S. This enables the Japanese to pay lower import duties and avoid the higher fuel economy standards and stricter emissions and safety standards required for cars. The cost to America? Over $500 million per year in foregone duties and Japan was neither asked nor forced to make a single trade concession of its own.
They are only taking legal advantage of our import laws, of course, but, clearly, something must be done beyond blatant protectionism and closed markets to allow the same competitive access to their markets.
* The Japanese government must be made to understand and rectify our chronic trade imbalance, reducing it by 20% this year and 20% each succeeding year until it is eliminated.
* Our government needs to recognize that the rules of the game have changed. International competition means changing the way it deals with domestic industry.
* U.S. industry must capitalize on the gains it makes; technology, quality and value will be our most reliable tools.
Quoting recent remarks by Alan Gilmour, president of the Ford Automotive Group, to the Automotive News World Congress, "Cars and trucks will become like refrigerators in quality. When was the last time your refrigerator broke down? .... like most people, you replace it when you want certain new features or your needs change, not because it had a problem."
Lee Iacocca reported that between 1987 and 1990 Japan lost $12 billion in North America in automobiles while it made $36 billion in their own protected home market. They are buying North American market share by subsidizing this market with profits from home.
Now to a topic of utmost importance to the foundry industry: changes in environmental regulations. The effect of proposed changes to automotive-related energy and environmental legislation will be significant, particularly if the rest of the country copies California. Proposed legislation could seriously affect the U.S. foundry industry's ability to compete in one of its biggest markets.
The auto industry commissioned a study to forecast fuel economy capability and it predicted a domestic fleet average of 29.1 mpg by 2001. Two new legislative proposals would mandate standards of 37.2 and 31.8 mpg by 2001 and substantially downsize U.S. car offerings. We can and are improving fuel economy, but clear minds must prevail in setting future standards. Contact your congressmen to add your support for reasonable change.
The Resource Conservation Recovery Act is up for reauthorization this year and parts of it, if enacted as written, could result in a foundry's sand system being directly regulated by the EPA. The Toxic Use and Source Reduction provision in the bill would give the EPA the right to determine the best pattern for your equipment operation without regard to toxic emission levels, operating constraints, customer requirements or cost implications. It would classify as toxic aluminum, iron and chromium, a designation that would have staggering implications for foundries.
The AFS has estimated that this law could result in significant and costly controls on foundries that recycle materials. It would limit a foundry's ability to manage production, attract business and raise annual recycling costs by more than $1 billion.
This would reduce our ability to compete, especially against foundries in countries with less stringent environmental laws. The industry believes in protecting the environment, but there is a need to balance further environmental controls with the costs of such programs and still allow room to compete.
Our domestic foundry industry employs 230,000 people. One of the country's largest recyclers, it reuses more than 20 million tons of scrap metals and more than 100 million tons of sand annually. In 1989, foundries spent over $580 million on disposal costs. Adding another $1 billion would put many foundries out of business and have a major impact on the cost of the products we and our customers sell.
Another regulation affecting foundries' ability to compete is the Maximum Achievable Control Technology (MACT) air toxic standards to be published by the EPA by November 1997. MACT will regulate allowable toxic emissions by iron and steel foundries. Fortunately, the EPA agreed to work with our industry to develop these new standards.
I encourage all with an interest in these regulations to contact Gary Mosher at AFS headquarters, Walter Kiplinger or Diana Waterman of Waterman and Associates (our Washington lobbyists), to offer help and guidance. It's up to us to make our feelings known on Capitol Hill on trade, environmental legislation or any other issues affecting us.
For everyone interested in the competitiveness of U.S. industry, the burning question becomes, "Can American manufacturing, specifically auto manufacturers, maintain its industrial viability?" Unfortunately, for many here and in Japan, the answer is, "No." But, speaking for Ford's Casting Operations Division, we are determined to succeed and not to concede a single market or customer to any competitor in the crucial decade ahead.
As noted earlier, at Ford, GM and Chrysler, business is done differently these days. For example, at Casting Operations we saw the trend toward increased aluminum engine and chassis components in Ford's future products and made a strategic decision to be a major player in that business.
Our people benchmarked the world's best aluminum casting processes and decided that, for our needs, the Cosworth precision sand process was best. Our objective was to use it in a high-volume manufacturing process, and we have been successful. As a result, construction of a production facility to manufacture aluminum cylinder blocks and heads is underway.
Like others in the foundry industry, Ford is proving every day that Americans can do it right. We can compete. Some have made the mistake of underestimating this country's resolve, energy and intellect, but we have a heritage that shines brightest when faced with a challenge.
So, ask not what your industry can do for you, but recognize what you must do for your industry. Remember, it's up to all of us!
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|Title Annotation:||excerpts of George Booth's speech, general manager of Ford Motor Co.'s Casting Operations|
|Author:||Booth, George N.|
|Date:||Mar 1, 1992|
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