Ensuring a strong industrial base

Sept. 11, 2005
How government and industry can work together to lighten the domestic burdens that weigh down U.S. competitiveness.

American manufacturers are burdened by forces they can't control, including the rising costs associated with healthcare, regulatory compliance, taxes, tort litigation,and energy. Combined, these add at least 22% to the overhead costs of U.S manufacturers versus their major foreign competitors. American companies have done much to cut production costs, improve productivity, and eliminate waste, but many can't overcome these competitive disadvantages on their own. That's why they're asking their local, state, and federal governments for help.

According to Al Frink, Assistant Secretary for Manufacturing Services, U.S. Dept. of Commerce, "I don't think anyone intended to create a burden on manufacturers; it's been layered over the years. We need to level the playing field to make it more desirable for America to keep manufacturing here and to keep jobs here."

"Many of the things that make quality of life in America so great are borne by the employers of America. We pay the health insurance premiums and fund private pension funds. We absorb regulatory costs in the name of cleaner air and water; we pay for insurance in case one of our workers is injured on the job. When the domestic employee loses his job because all this costs too much, who then will pay for these services?"

John J. Baker, Diamond Tool & Die Co.

So what can be done? Ask 10 people what they think, and they'll provide 10 different answers based on the size of their business, their industry sector, and geographic location. For shops that must have operators in front of machines, healthcare reform tends to be a priority issue. Companies seeking automation, on the other hand, are clamoring for tax incentives for capital-equipment investment. Large, publicly owned manufacturers worry about how new regulations for corporate governance will impact their bottom lines. And manufacturers in Western states are worried about the escalating prices of workers' comp and energy.

What everyone can agree on is that the government needs to step in to help U.S. manufacturing survive and thrive in a world where globalization is changing all the old rules.

"I don't think U.S. manufacturing is dead," asserts Rob Akers, director of operations for the National Tooling & Machining Association (NTMA). "I think we're revitalizing ourselves and adjusting to globalization. However, we need regulatory and legislative processes put in place to help our manufacturers."

"Big business, which is sending work offshore, doesn't seem overly concerned about our shrinking manufacturing base. I wonder how long it will take to bite them in the tail. Those higher paying industrial jobs are the ones that create the disposable income to buy their products."

Jim Neumann, RB Royal Industries

Curing healthcare woes
In a recent survey by the NTMA, members reported their number-one legislative priority was containing healthcare costs. Take Diamond Tool & Die Co., Dayton, Ohio, for example. According to President John J. Baker, healthcare is the third largest line on his income statement after salaries and materials.

What legislators fail to understand, explains Baker, is that as companies continue to cut costs, healthcare benefits will be among the first to be eliminated. So where will the sick turn?

"The costs for employee healthcare will have to be borne by some public agency, meaning the taxpayers," he emphasizes. This is already happening in the Miami Valley of Ohio, where Diamond Tool & Die is located. The region's Good Samaritan Hospitals reported about $20 million in uncovered medical expenses in 2003. The number this year is closer to $50 million.

Although the healthcare crisis won't be an easy fix, one immediate way the government can help is by enacting a bill that creates Association Health Plans (AHPs). Such plans would give small manufacturers greater leverage in negotiating the cost of health insurance with providers. "Associations could offer group healthcare packages across state lines, which would be a huge benefit to NTMA's member companies," comments Akers.

Joe Tenebria, owner of Myers Precision Grinding Co. Inc., a 16-man shop located in Warrensville Heights, Ohio, supports AHPs. "I belong to a group called COSE (The Council for Smaller Enterprises), which helps us contain healthcare costs. But it's a local group in the Cleveland area. For a broader fix, Congress needs to take a closer look at AHPs."

To support this legislation, Akers suggests interested parties visit the NTMA website (ntma.org). "There, you will find letters to fill out and send to your congressmen or elected officials." Other industry trade groups offer similar programs on their websites as well.

The road to regulatory reform
A National Association of Manufacturers (NAM) study pegs the total burden of environmental, economic, workplace, and tax compliance at $850 billion — with $160 billion heaped on manufacturers alone. This figure is equivalent to a 12% excise tax on manufacturing production.

The cost of compliance is hardest on small to midsized companies says Drew Greenblat, owner of Marlin Steel Wire Products LLC, Baltimore. " Regulations impact small manufacturers in terms of cost per employee more than twice as much as larger manufacturers — nearly $17,000 for firms with fewer than 20 employees versus $7,000 for firms with more than 500 employees," he remarks.

Many manufacturers and industry associations are calling for a common-sense approach to regulatory reform. They want government officials to require "sound science" and cost-benefit assessments of all regulations, new and old. In addition, they ask for regulations to be expressed in terms of results, rather than ways of achieving them. This, contends Dr. Thomas Duesterberg, president and CEO of the Manufacturers Alliance/MAPI, leaves manufacturers the flexibility to develop more cost-effective solutions.

Congress should also consider the impact of the enhanced regulation of corporate governance called for by the Sarbanes-Oxley Act (SOX). This law, enacted in the wake of corporate misdeeds at Enron, MCI, and other companies, is aimed at medium to large businesses.

Duesterberg calls SOX "a disheartening example of overregulation that puts American companies at an international competitive disadvantage." He points to the average cost of compliance — a whopping 5.9% of net income before taxes.

Trimming the tax burden
One way to give American manufacturing a shot in the arm is by lowering federal, state, and local tax burdens that inhibit future investment in American manufacturing. Again, different manufacturers, trade associations, and legislators have different priorities, but four key areas crop up again and again.

The first calls for lowering the cost of innovating and investing by making the R&D tax credit permanent. "The R&D tax credit will promote investment in manufacturing and encourage a demand for American-made products," claims NTMA's Akers. "It also lets manufacturers attract capital and invest for the future."

In addition to R&D tax credits, manufacturers are demanding that the Administration strengthen the Manufacturing Extension Partnership (MEP) program. NTMA, NAM, and other trade associations have fought attempts to slash the MEP budget in 2006. And manufacturers like RB Royal Industries Inc., Fond du Lac, Wis., are supporting their efforts with letter-writing campaigns. "We work closely with our MEP here in Wisconsin," says company president Jim Neumann. "It's disconcerting that the MEP program in the U.S. only get about $100 million in funding, while agriculture gets somewhere in the neighborhood of $1 billion. If you compare jobs within the two industries, manufacturing employs many more people. Yet we have to fight to get the money for MEP."

The second area for government action, say manufacturers, is in simplifying the tax code. "Small and mediumsized firms are burdened with high expenses to fill out federal paperwork and file taxes," explains Greenblat. "For example, my company has to pay over $17,000 per year to payroll services and accountants to figure out my payroll, 401(k), and income tax properly, plus $30,000 in internal bookkeeping costs. That money could be redeployed to more productive purposes."

The third area requiring government support involves the permanent repeal of estate taxes, often called the Death Tax. This tax once subjected estates larger than $675,000 to a 55% tax when an owner died and the estate transferred to one of his or her heirs. "The Death Tax hurt family-owned businesses because it discouraged business owners from passing their companies to their children," claims Akers.

The fourth area of concern relates to taxes on equipment, machinery, and inventories by federal, state, and local governments. One way the federal government can help U.S. manufacturers is by permanently extending the $100,000 annual expensing of capitalequipment investment. "This would be a shot in the arm for small U.S. factories and every worker they employ," says Greenblat. The feds could also help by accelerating capital-depreciation schedules.

Tort reform
Tort reform is probably the one issue that raises the hackles of most manufacturers. In a 2004 study, the U.S. Chamber of Commerce Institute for Legal Reform estimated that the cost of the tort system for small business alone has reached an estimated $88 billion per year.

"The proliferation of litigation in America has spiraled out of control and resulted in excessive financial settlements for plaintiffs and trial lawyers," reports Akers. According to NTMA numbers, one small business spends about $100,000 when a lawsuit goes to trial. This money could otherwise be used on employee raises, healthcare, and new machinery.

In February, President Bush signed the Class Action Fairness Act (CAFA), which moves large, multi-state class-action lawsuits from state courts into federal courts. This law is designed to prevent "venue shopping," in which lawyers seek the most favorable state to file a class-action suit.

Other reforms are needed. "Legislators need to put caps on non-economic damages and punitive damages," says Akers. "They also need to set limits on how long a manufacturer can be held responsible for product performance."

Currently, groups like AMT — The Association For Manufacturing Technology, are asking the feds to enact an 18-yr statute-of-repose for workplace products. As for NTMA, Akers says, "We would be behind legislation that would ensure machine shops doing work for larger companies aren't held responsible for product performance. Our members shouldn't be liable for a product failure if they meet their customers' specifications."

One caution about product liability from Miles Free, director of technology services for the Precision Machined Products Association: "Many leading shops are ISO 9000, 2000, or QS 9000. Their certificate limits their scope. Unless the scope says design, the company is only covered by its quality system for manufacturing. Now say someone wants to be aggressively helpful with a customer and recommends a material change. If the company doesn't have design scope, it could find itself in a boatload of trouble if a court determines it's the engineer of record because of that material recommendation. You can give customers alternativematerials to consider and describe the advantages and disadvantages. But it has to be the customer's call — warrant to the workmanship and to the spec and be able to demonstrate that you've worked to your scope and spec. That minimizes your liability."

Escalating energy costs
American manufacturers are pushing for the government to set a comprehensive energy strategy focused on increasing energy supplies, providing incentives to improve energy infrastructure, and promoting efficiency and conservation without harmful mandates. They also want to reduce energy costs.

The U.S. economy's largest user of energy resources, the manufacturing sector has been particularly hard-hit by a huge spike in energy costs. "Since 1998, average natural gas prices have risen over 300%," says MAPI's Duesterberg. In fact, U.S. prices are significantly higher than those of major competitors — nearly 25% greater than Europe, for instance. According to the Industrial Consumers of America, high natural gas prices have played a major role in the loss of nearly 3 million U.S. manufacturing jobs since 2000. The NAM recently released a study that says more than 2 million more jobs could be lost in the next decade if new policies promoting increased supply and production are not adopted.

"Energy is the lifeblood of our economy," says Ron Bullock, president of Bison Gear and Engineering Corp., St. Charles, Ill. He's pushing for the energy bill currently winding its way through Congress. And he backs up his words with deeds: Bullock delivered copies of the NAM study to both of his Senators as well as a petition signed by 170 Bison Gear employees. The petition was also sent to 9,000 manufacturers by the Illinois Manufacturers Association, which is spearheading the Illinois campaign for the bill.