Martin Hutchinson treated his readers at Prudent Bear to a dose of blue collar reality this morning, mourning the technological manufacturing future that a generation of American politicians, financiers and businessmen threw away for short-term gain.
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GE’s announcement a week ago that it would accept offers for its appliances business marked the death-knell of yet another US manufacturing business, one among so many in US manufacturing’s long and seemingly unstoppable downtrend since 1980. That decline may seem an inevitable historical trend, and Wall Street’s analysts would claim that the US economy can prosper just fine without it. Yet impartial analysts of the putrefying corpse of US manufacturing capability are forced into an inescapable question: did it die of natural causes or was it murdered?

For the last 30 years, Wall Street’s insouciant attitude appears to have made sense. US manufacturing has slowly declined, as operations have moved to lower-wage centers in the Third World. However the US economy as a whole has continued to thrive, as financial services doubled its share of Gross Domestic Product and grew to provide 40% of the earnings on the Standard and Poors 500 share index. Prosperity was heavily skewed towards the very rich, but the majority of Americans continued to enjoy a general, if halting improvement in living standards.

The collapse of the financial services bubble has however called into question three of Wall Street’s most cherished beliefs about manufacturing:

·  First, Wall Street believes that financial services and other services can take the place of manufacturing, and that the United States can remain a prosperous economy thereby.
·  Second, it believes that manufacturing tangible products is an intrinsically low-skill and uninteresting operation, so that the US would do much better to specialize in “symbol manipulation.”
·  Third, it believes that the decline in US manufacturing was and is inevitable, so that decline would have happened whatever strategies management had adopted, and whatever resources and attention it had devoted to manufacturing activities.

The inevitability of manufacturing’s decline is in some ways the most interesting question, which has not been addressed much elsewhere. Most large-scale events of this nature appear inevitable in retrospect, yet if examined in detail can be shown to have been triggered by a series of decisions that could have gone the other way.

Management decision-making like most human activities is a slave to fashion: whichever guru has captured the attention of business academics and the business press at any given time is likely to have an inordinate influence on management decisions. In the 1920s through the 1950s, the production engineering of Frederick W. Taylor was fashionable, and the United States built the first mass-production economy. In the 1960s, MBA-credentialed top management was thought able to run anything, and so both conglomeration and strategy consulting came into fashion. From the early 1980s, it became received wisdom that all organizations could usefully be “downsized” and that the traditional corporate welfare protection of employees was wasteful. All these theories had their virtues; the reality however is that they cannot all be universally true since they are largely mutually incompatible.

In the 1970s the new and very fashionable Boston Consulting Group introduced the “strategy matrix” under which businesses were divided into stars, cows, dogs and question-marks, according to their growth prospects and profitability. Stars, the businesses with the highest growth prospects and profitability, were to be nurtured and given resources, dogs, of low profitability and low growth were to be closed down and question-marks, of high growth but low profitability, were to be given modest resources to see whether they turned into stars or dogs. The whole operation was to be paid for by milking the “cows,” those businesses of low growth but high profitability. Cows, as their name suggests would be denied capital investment, since such investment should not be wasted on low-growth situations. Instead their cash flow would be milked to provide capital investment for the stars and the more favored question-marks.

There were several problems with this mechanistic, clever-clever approach to business management. One was that the businesses’ typology could not be identified accurately; which businesses were treated as “stars” was more a matter of the business cycle and doubtless of office politics than of the long term underlying reality. A second, even more fundamental problem was this: cows that are milked and not fed quickly turn into dogs. Businesses that are treated as not part of the company’s glorious growing future quickly wither on the vine, as new opportunities in those business areas are missed. Their profitability starts to decline and quickly the cash flow that was their corporate raison d’etre disappears.

When examined dispassionately in the light of posterity, it appears that far too many of these “cow” businesses were manufacturing operations which were milked for cash flow that was diverted into more fashionable businesses in the service sector, particularly in finance. Westinghouse, for example, one of the most important names in electric equipment until 1980, had split up and left manufacturing altogether by 2000. To be fair Westinghouse management had a good excuse; one of their leading and most successful businesses had been the construction of nuclear reactors, an activity that disappeared in the 1980s owing to political cowardice in the face of environmentalist harassment.

General Electric, however from 1981 to 2001 run by ultra-fashionable “Neutron Jack” Welch, epitomized the failings of the era. It under-invested in many of its manufacturing businesses, entered into a blizzard of divestitures designed to boost its short term earnings, played games with its pension accruals and built a gigantic financial services empire of low quality businesses in which it could never be a leader. It also ruthlessly eliminated its middle management and overpaid its top management, winners in the corporate office political game. GE was a much admired operation in Welch’s later years; it is less so now, and if the bloated global financial services business returns to a historically normal size may finally be seen to have been a disaster.

GE Appliances, GE’s home appliance business dating back to 1907, the early years of electrification, was long dominant in the home appliance field. GE Chairman Jeff Immelt has now put GE Appliances on the sale block so that GE could focus on higher margin businesses. The business has attracted interest from China’s Haier Group, but is expected to be less interesting to Korea’s LG, because LG manufactures appliances of a higher price and quality. A commoditized and fairly uninteresting business, in other words, currently worth around $6.3-6.5 billion, little more than 2% of GE’s $290 billion market capital.

However if you look back even to 1994, a medium year that was already well into GE’s Welch-inspired transformation, appliances represented 10% of GE’s sales and 8% of operating profit. In other words, the business has been steadily starved relative to GE’s other businesses, and has turned itself from a “cow” into a “dog”.

To see how this happened, think back to the 1950s. Electric appliances were the major growth business of that decade, symbolizing the decade’s new affluence. Forecasters confidently predicted that by 2000 robot appliances would be in every household, removing the drudgery of housework once and for all. As a youthful reader of Isaac Asimov’s robot stories I shared that confidence – after all the computerization necessary for robot control systems, which had not existed in 1940, when Asimov wrote the first of his “I Robot” short stories, was already revolutionizing business management by the late 1950s.

Now it’s not just 2000 but 2008. So where the hell are the robots? GE Appliances has no such offering; if you buy a GE vacuum cleaner you will still have do all the work yourself. Can it be that the technological optimism of the 1950s was misplaced, and that home robots will never exist, or will be invented only in the far distant future? You’d certainly think so from looking at GE’s catalog of products.

However it turns out that GE is simply behind the curve. The iRobot Corporation of Bedford Massachusetts, founded by keen Asimov readers from MIT in 1990, manufactures fully robotized vacuum cleaners as well as some pretty neat robotized mine-clearing equipment for the military. iRobot’s standard model runs around $300, less in real terms than an ordinary vacuum cleaner would have cost you in 1980. iRobot’s total sales are only $250 million, which GE would no doubt class as a rounding error, but dammit the company doesn’t have GE’s brand name or distribution network.

Had GE had the sense and innovative skill to develop robot vacuum cleaners, can anybody doubt that that product group’s sales would today be several billion dollars, with appropriately high margins?  It is thus clear that by starving GE Appliances of investment and, more important, of research dollars, and devoting the company’s efforts to financial services, “Neutron Jack” and his cohorts have deprived the United States of a major new business and deprived us overworked consumers of a major labor-saving technology (unless we are lucky enough to find out about iRobot or its few small-company competitors). GE has commoditized its appliance business, forcing down prices by manufacturing in ever cheaper-labor parts of the world. Instead it should have been enriching that business, opening up new opportunities for products that could be sold at higher prices and higher margins and provide more value to the consumer.

The sad story of GE Appliances is a paradigm of what has gone wrong in the US economy since 1980. No, manufacturing did not need to leave the United States; US manufacturing was killed by a multitude of foolish short-term-profit motivated decisions by inept and overpaid US management. The other questions can also be answered. Manufacturing is not intrinsically a low-skill and uninteresting operation, it involves skills at the highest possible level and can readily employ high-wage workers – after all LG’s workforce in South Korea are these days very far from being subsistence-level Third World proletariat. Finally, the US cannot survive through financial services and tech startups alone; it needs to reinvest in manufacturing or it will find itself unable to support an advanced-economy living standard for the mass of its population.

Yes, Virginia, you could have had both robots and the Internet. The 1950s dream of an infinitely prosperous United States full of household robots and other high-tech wonders was not a fantasy, it was there for the taking. Only political and business incompetence prevented us from achieving it.

Martin Hutchinson is the author of Great Conservatives