What Can America Make?

By Jyoti Thottam/Lehigh Valley

The rusting Hulks of Bethlehem Steel's blast furnaces and coke ovens cast a long shadow over the Lehigh Valley. "Bessie" once employed 30,000 people in its namesake town in northeastern Pennsylvania. The company survives elsewhere, but what's left of it here has been all but abandoned. The windows of the redbrick warehouses are cracked and clouded. A portion of train trestle stands idle, neither end connected to anything. Such sights would have been unimaginable 30 years ago, when the valley roared with the fires of open-hearth furnaces.

Does this empty shell represent the future of American manufacturing? With cheap labor in China and other developing nations producing quality products at rock-bottom prices, can America still compete? Or are we now an office nation, completely removed from the industries that built the modern U.S. economy?

Take a tour of the valley--the very one Bethlehem Steel once symbolized--and you'll find that American manufacturing hasn't disappeared; it is reinventing itself. As Bessie and many of its fellow titans have marched slowly into bankruptcy, a new breed of manufacturing company has quietly emerged in the Lehigh Valley and in cities across the U.S., even amid one of the worst manufacturing purges in recent memory. More than 2 million of the 2.5 million jobs lost over the past two years were in the manufacturing sector, and many are gone forever. But the U.S. economy is going through a major shift, one that is forcing this sector to adapt. It is a transformation similar to what agriculture experienced a generation earlier. The key: fewer people are responsible for the same or greater output.

Just what can the U.S. make? Plenty, it turns out. But America's future as a manufacturing power will look very different from its past. Thomas Duesterberg, president of the Manufacturers Alliance, an industry research group based in Washington, has a vision for the new U.S. factory. Unlike the mammoth facilities of the past that focused on large production runs, the factory that Duesterberg's group has in mind is one that makes customized, sophisticated products with technology embedded into every part and process. "We contrast that with the old, comic-book picture of manufacturing, which is making one piece of equipment a million times," he says.

The transition is already happening. The manufacturers that are succeeding aren't the type that build company towns; they are too busy churning out innovative products. They aren't the ones blaming their troubles on unions; they're working with them to make their plants run better. And they aren't clamoring for protection from cheap imports; they're competing furiously against them. They may never rise to the stature of yesterday's industrial giants, but they are redefining what it means to be Made in America.

John Jones, CEO of Air Products & Chemicals, remembers what it was like to be a young engineering graduate in the 1970s, when Bethlehem Steel was king of the valley. "When I was getting out of school, that was one of the places to go," he says. "When people asked me where I was working, and I'd say Air Products," he says, the usual response was pity. "They would go, 'Awww.'" Today Air Products, with 4,300 workers, has replaced Bessie as the valley's largest industrial employer.

Air Products' local work force has remained fairly steady over the past 30 years, even as its revenues have grown from $300 million to $6 billion and its overall work force has more than doubled, to 18,500, thanks mainly to job expansion overseas. Jones interprets this not as a sign of weakness at home but as evidence of well-planned, well-executed growth. The U.S. steel industry was once its largest customer, but as Japan, Brazil, South Korea and eventually China became major players in steel and other heavy industries, Air Products followed those markets. Industrial gases are an intensely localized business--it is difficult and expensive to ship volatile compounds over distances--so Air Products became a local company in many countries, with international units that often began as joint ventures. "The competitive weapon is speed, moving knowledge around the world as rapidly as possible," Jones says. "If you think that way, you're going to move your capability where it's suited. That's how you're going to survive. You can't just think, 'We're in the U.S., and their currency's killing us.' You're going to die with that kind of thinking." With more of the electronics industry moving to Asia, for example, Air Products is establishing an engineering group in Shanghai.

The company recognizes that its skilled labor is an asset like any other. It wasn't always that way. Duncan Meldrum, Air Products' chief economist, recalls a time when it responded to competitive pressure with across-the-board layoffs, a policy he thinks was a mistake. "It doesn't work," he says. "You may shore up your margins, but you lose an awful lot more than you gain." Now the company looks more carefully at its business during the down times, selling off parts that aren't working--such as gas delivered in cylinders for welding and metal fabrication--and retraining workers whenever possible so that they can move into growth industries. Truck drivers who used to just transport gases to industrial customers, for example, are being trained for the delicate task of administering liquid helium to the magnets in MRI scanners. "There are many manufacturing firms that are out of ideas," Meldrum says. "The easiest thing to go after is cost."

A focus on employees can help companies stay competitive. Rather than allowing themselves to be done in by the relatively high cost of labor in the U.S. as compared with Asia, some manufacturers are finding ways to maximize the worth of that skilled labor. B. Braun Medical, a medical-equipment maker in the valley, is a good example. The $750 million company makes intravenous tubing, anesthesia kits and other devices. On a tour of the company's production facilities in Allentown, CEO Caroll Neubauer proudly displays a large metal chamber where cardboard boxes packed with finished goods are sterilized. "This used to be outsourced," Neubauer says with a smile. "We brought it back in." By improving the machines and training its staff to run them, the company has reduced its error rate to the point that its sterilization process is a competitive advantage--one that, in the end, is just as important as cost. "The more innovative you are, the higher your pricing power," Neubauer says.

Pricing power--the ability to increase profits by charging a premium for products--is something many U.S. manufacturers haven't seen in years. Most respond by slashing labor costs, often by moving all or part of the production overseas. B. Braun instead went through a massive, comprehensive automation project to improve the processes at its facilities here. Machines the size of golf carts, each producing a different device, now dominate a wing of the facility where workers used to assemble intravenous clamps and syringes by hand. These machines require constant, skilled attention. "There's still an expertise," Neubauer says. "There's more to it than just making it cheap enough."

Wilbur Ross, a financier who built his fortune turning around distressed companies, has an answer to the cost dilemma. He took over Bethlehem and another bankrupt steel company, LTV, and is fashioning them into lean operations that can compete with Asian producers. He has also set his sights on apparel, buying Burlington Industries and making a bid for Cone Mills. Ross has been successful in part because he has been able to shed such onerous legacy costs as retiree pensions and health care (and dump them on the government). But both industries, he says, need more help, including a few years of protective tariffs to allow them to retrench. "You'll end up with three or four or five really low-cost producers," says Ross, "and I think they will have a fighting chance."

But asking for trade protections, even temporary ones, is a risky political move. (President Bush revoked a controversial set of steel tariffs in December.) Ross is hoping that a coalition of big manufacturers from different industries will raise a national voice in favor of protecting struggling manufacturers against what he considers unfair trade practices, particularly on the part of China. "If we work it right, it will be politically unacceptable to let these bad trade practices go on," he says. "We have to make a policy decision: To what degree do we want to moderate the pace of free trade to protect the American standard of living?"

Not every manufacturer is waiting for a political solution. Esselte, a $1 billion office-supply company, makes the kind of low-tech, low-value products--Oxford note cards, Pendaflex folders--that are vulnerable to overseas competition. The company, acquired by private equity firm J.W. Childs Associates in 2002, struggled in the 1990s and closed seven factories in 2000. But it is moving ahead with a reorganization plan that promises to develop its strongest brands and does not include moving operations to Asia or waiting for tariff protection. In fact, even under pressure from big retailers like Wal-Mart to reduce costs, Esselte has kept its factories in Illinois, Missouri, New Jersey and Massachusetts. Instead of firing staff to reduce costs, Esselte asked for a commitment from its employees to improve efficiency. "In return, we said, 'We will not lay you off,'" says Magnus Nicolin, Esselte's CEO. The company says it reduced inventory $20 million and waste 40%. Says Nicolin: "We can compete effectively against China."

Part of Esselte's strategy involves taking full advantage of the flexibility that comes with being geographically close to customers. Because so many of the company's products are seasonal (sales spike during back-to-school and tax times), Nicolin explains, "it's very difficult to be based in China. It means big commitments. You cannot respond to fluctuations." And Esselte has not ignored the need to innovate--even in the market for what Nicolin jokingly calls "bent cardboard." Esselte is aggressively seeking patents on new products, and it has done five times as much market research this year as in the past five years combined. "That's how you avoid being marginalized," Nicolin says.

Even in the auto industry, with its notoriously high labor costs, a U.S. manufacturer can stay competitive with this combination of flexible operations based close to its customers. "It isn't just about low-cost labor," says Denise Zutz, spokeswoman for Johnson Controls, based in Milwaukee, Wis., and the world's biggest maker of auto parts, with 2003 sales of $23 billion. "It's also about quality of processes and purchasing leverage. You've got to have the attitude that every cost is variable." That attitude has allowed Johnson Controls to weather 15% increases in health-care costs and keep most of its car-battery plants in the U.S.

Ultimately, even the most ambitious overhaul will not be enough to keep some types of manufacturing in the U.S. When the semiconductor industry moved to a different type of fabrication standard, Agere Systems found itself with 6,000 employees in the Lehigh Valley and an obsolete plant. Over the past three years, the $2 billion company has shifted its manufacturing to Florida and Singapore and reduced its head count in the valley to 2,500. Although Agere has made a commitment to keep its design and testing operations in the area, recently bringing 600 of those jobs to Allentown, the factory's closure left its mark--a lingering suspicion that semiconductors would abandon the valley the same way that steel did. "There's possibly a little bit of nervousness," says Peter Kelly, Agere's executive vice president for global operations. "You can't go through the transformation that we went through and not have it."

Set aside that fear, and behind it lies at least one reason for optimism. If the Lehigh Valley never sees the rise of another Bethlehem Steel, it will also never suffer such a fall. "That world is gone," says Mary Deily, a professor of economics at Lehigh University who has studied the decline of Big Steel. Today the failure of a big manufacturer in the region "is not going to be as devastating," she says. In this new world, office-supply makers apply for patents, better processes can trump cheaper products, and the most valuable raw material is an educated worker. --With reporting by Joseph R. Szczesny/Detroit

With reporting by Joseph R. Szczesny/Detroit