WASHINGTON (AFP) – Shuanghui International won the largest ever Chinese takeover of a US company Tuesday when shareholders of pork giant Smithfield Foods approved its $7.1 billion offer. The deal locks in for Shuanghui and the giant Chinese market a strong supply from the world’s largest pig raiser and pork processor.
One other factor — indeed, a big one — that deserves extra attention is the decline of labor costs in the U.S.
While cheaper labor has made manufacturers more likely to hire, it also means less income and spending power for workers.
Understandably many people get nostalgic whenever Washington policymakers and corporate America talk about reclaiming all that was good about U.S. manufacturing during its heyday. It takes us back to a time when the average American could buy a house and raise a family by working at the local factory until retirement. In some ways, the Obama Administration has indulged this vision of America; it has made a manufacturing recovery a top priority.
And yet, it’s hard to get that excited when we look at wages today and where they could go years from now.
A mediocre job is better than no job at all, especially at a time when so many struggle to find work. Manufacturing may create more jobs than it had in recent years, but it won’t renew America’s shrinking middle class so long as wages continue to stagnate.
The reality is U.S. factories rely more on machines than actual workers, says Jesse Rothstein, public policy and economics professor at University of California Berkeley. Machines produce more for less, and with bargaining powers of U.S. unions not being what they once were, it becomes less likely workers will earn more.
In a 2012 study, Rothstein found that hires by manufacturers of durable goods (items lasting three years or more) were paid an average of 0.3% less in 2010 and 2011 than workers newly hired in 2007 and 2008.
A similar trend plays out if we look at manufacturing overall: The average hourly earnings of production and nonsupervisory employees were $8.43 for 2012, lower than $8.70 in 2009 and $8.75 in 2003, according to data from the U.S. Bureau of Labor Statistics. To be sure, some higher-skilled manufacturing jobs, such as welding, have seen wages rise.
The Boston Consulting Group notes the U.S. is steadily becoming one of the cheapest places in the developed world to manufacture. By 2015, average labor costs will be about 16% lower in the U.S. than in the U.K., 18% lower than in Japan, 34% lower than in Germany, and 35% lower than in France and Italy.
If the firm is right, it’s likely that many more manufacturers will return jobs to the U.S., as it predicts. However, if trends in pay continue, it probably won’t rebuild the middle class.
Giesselbach returned from Germany three days later. Her flight was about to land at O’Hare when the crew announced that everyone would have to show their passports at the gate. As Giesselbach walked off the plane, federal agents pulled her aside. She, too, answered their questions about ALW’s honey shipments. After an hour, they let her leave. The agents, from the U.S. Department of Commerce and the Department of Homeland Security, had begun to uncover a plot by ALW to import millions of pounds of cheap honey from China by disguising its origins.
ALW relied on a network of brokers from China and Taiwan, who shipped honey from China to India, Malaysia, Indonesia, Russia, South Korea, Mongolia, Thailand, Taiwan, and the Philippines. The 50-gallon drums would be relabeled in these countries and sent on to the U.S. Often the honey was filtered to remove the pollen, which could help identify its origin. Some of the honey was adulterated with rice sugar, molasses, or fructose syrup.
In a few cases the honey was contaminated with the residue of antibiotics banned in the U.S. In late 2006 an ALW customer rejected part of Order 995, three container loads of “Polish Light Amber,” valued at $85,000. Testing revealed one container was contaminated with chloramphenicol, an antibiotic the U.S. bans from food. Chinese beekeepers use chloramphenicol to prevent Foulbrood disease, which is widespread and destructive. A deal was made to sell the contaminated honey at a big discount to another customer in Texas, a processor that sold honey to food companies. According to court documents, ALW executives called Honey Holding the “garbage can” for the company’s willingness to buy what others would not. Giesselbach followed up with Honey Holding, noting “quality as discussed.” The contaminated container was delivered on Dec. 14, 2006.
Von Buddenbrock’s introduction to the honey-laundering scheme came months after he’d settled into Chicago. In the spring of 2007 he was getting ready to take over the U.S. operation from a university friend, Thomas Marten. They talked about the business every other
week f
or a couple of hours over dinner. One night at an Italian restaurant near their office, Marten told von Buddenbrock about ALW’s mislabeling Chinese honey to avoid the high tariffs. “The conversation started normally,” says von Buddenbrock. “Then he started talking about honey. I always took notes in all our meetings, and I tried to take notes then. He told me I shouldn’t. I was surprised and a bit shocked about what I was hearing. We were talking about something criminal, and some people imagine meeting undercover, in a shady garage.” They were out in the open, eating pasta. Marten could not be reached for comment.
Von Buddenbrock took over from Marten in August 2007. The raid on the ALW office on North Wabash Avenue occurred seven months later, after U.S. honey producers had warned Commerce and Homeland Security that companies might be smuggling in cheap Chinese honey. Low prices made them suspicious. So did the large amount of honey suddenly coming from Indonesia, Malaysia, and India—more, in total, than those countries historically produced.
Although the illicit honey never posed a public health threat, the ease with which the German company maneuvered suggests how vulnerable the food supply chain is to potential danger. “People don’t know what they’re eating,” says Karen Everstine, a research associate at the National Center for Food Protection and Defense. The honey business is only one example of an uncontrolled market. “We don’t know how it works, and we have to know how it works if we want to be able to identify hazards.”
After they were questioned in March 2008, von Buddenbrock and Giesselbach continued to work for ALW. “We didn’t know what direction this was going to go,” says von Buddenbrock. “I was considering leaving, but I thought this might actually be a good opportunity for me.” If ALW got out of the honey business, he could focus on selling the products he knew more about. The ALW executives in Hamburg, he notes, kept in touch by e-mail but for obvious reasons no longer traveled to the U.S. Giesselbach, meanwhile, arranged to return to ALW’s Hamburg office; it’s not clear if she was being sent home by the company. Her flight to Germany was on Friday, May 23.
Von Buddenbrock drove her to O’Hare, hugged her goodbye beside the curb, and got back in his car. It was late afternoon, the beginning of Memorial Day weekend, and he called his assistant to see if he needed to return to the office. While he was on the phone, an unmarked Chevy Impala drove up behind him. Officials shouted for him to pull over, arrested him, and drove him to a downtown Chicago courthouse where Immigration and Customs Enforcement (ICE) agents, federal prosecutors, and his lawyer were waiting. About 20 minutes later, Giesselbach was brought in. She had been arrested before she checked in for her flight. “We were not allowed to talk, but I could see on her face that she was shocked,” says von Buddenbrock. “We were both in complete disbelief.”
Von Buddenbrock had also booked a flight to Germany for the following week; he planned to attend a friend’s wedding and return to Chicago. “I think that made the agents nervous,” he says. “At that point they didn’t know the complexity of the scheme. They probably thought No. 1 and No. 2 are leaving the country.”
He and Giesselbach were charged with conspiring to import honey from China that was mislabeled and adulterated. They were taken next door to the Metropolitan Correctional Center, where they turned over their belongings, put on orange jumpsuits, and waited. “I was tense and nervous,” says von Buddenbrock. “But I managed to get along. I speak Spanish. I like soccer.” He played Monopoly with someone’s contraband dice. He got to know Joey Lombardo, the mafia boss. “He gave me a recommendation for an Italian restaurant.”
Back in Hamburg, Wolff told local newspaper Abendblatt: “The accusations against us are unfounded, and we will fight them with every legal means.”
On Monday, June 2, agents seized thousands more files from ALW’s office. Later that month, Giesselbach and von Buddenbrock were released after posting bond and continued to cooperate. “At first we didn’t have any clue how big it was,” says Gary Hartwig, the ICE special agent in Chicago in charge of the investigation.
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ALW soon closed its U.S. operations and cut off contact with Giesselbach and von Buddenbrock. “ALW had such a nice scheme that functioned so well for a while,” says T. Markus Funk, an internal investigations and white-collar defense partner at Perkins Coie who was a federal prosecutor in Chicago when the ALW investigation began. “They were extremely sophisticated and intelligent in some ways, but so sloppy in other ways. What do they think—no one can translate German?”
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Honey Holding.
In February 2013, the Department of Justice accused Honey Holding, as well as a company called Groeb Farms and several honey brokers, of evading $180 million in tariffs. Five people pleaded guilty to fraud, including one executive at Honey Holding, who was given a six-month sentence. Honey Holding and Groeb Farms entered into deferred prosecution agreements, which require them to follow a strict code of conduct and to continue cooperating with the investigation.
When it announced the deferred prosecution agreement, Groeb Farms, which is based in Onsted, Mich., said it dismissed two executives who created fake documents and lied to the board of directors even as the company’s own audits raised concerns that honey was being illegally imported. “Everything we are doing at Groeb Farms this year has been to ensure the integrity of our supply chain,” Rolf Richter, the company’s new CEO, said via e-mail. Groeb Farms paid a $2 million fine.
In a statement on its website, Honey Holding says it accepted full responsibility and that in its settlement “there will be neither admission of guilt nor finding of guilt.” The company, now called Honey Solutions, is paying its $1 million fine in installments.
Recent examples of companies announcing plans to shift production from China to the US include K’Nex, the toy manufacturer, Trellis Earth Products, which makes bioplastic goods such as bags and utensils, and Handful, the bra manufacturer.
The Boston Consulting Group survey found 21 per cent of a sample of 200 executives of large manufacturers were either already relocating production to the US, or planning to do so within the next two years. A further 33 per cent said they were considering it, or would consider it in the near future.
Those figures are sharply increased from a similar BCG survey early last year, which found 10 per cent of respondents moving production to the US, and a further 27 per cent considering or close to considering it.
Labour costs were the factor most commonly cited by executives as determining location decisions, and China’s advantage has been slipping. Wage inflation has been running at about 15-20 per cent per year. Average hourly earnings in US manufacturing have risen just 1.6 per cent per year since 2011.
So far there has been little sign in the employment data of the improvement in the competitive position of US manufacturing. After bouncing back strongly from the trough of the recession, US manufacturing employment has stagnated for the past year at just under 12m.
However, Hal Sirkin of BCG said he expected the effect of reshoring would begin to show in the data over the next few years.
“These are leading indicators,” he said. “If you are going to have a plant up and running in 2015, you have to start planning in 2011, or 2012 at the latest.”
BCG is predicting that, by the end of the decade, reshoring and rising exports will have created 0.6m-1.2m new manufacturing jobs in the US.
The effect will vary across industries, BCG says. Prime candidates for reshoring are industries that have relatively lower labour costs, and relatively higher transport costs or other reasons to be close to their customers.
The US shale boom is also stimulating investment in industries that have high energy costs, particularly petrochemical production.
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Bayard Winthrop, the founder of the sweatshirt and clothing company American Giant, was at the mill one morning earlier this year to meet with his Parkdale sales representative. Just last year, Mr. Winthrop was buying fabric from a factory in India. Now, he says, it is cheaper to shop in the United States. Mr. Winthrop uses Parkdale yarn from one of its 25 American factories, and has that yarn spun into fabric about four miles from Parkdale’s Gaffney plant, at Carolina Cotton Works.
Mr. Winthrop says American manufacturing has several advantages over outsourcing. Transportation costs are a fraction of what they are overseas. Turnaround time is quicker. Most striking, labor costs — the reason all these companies fled in the first place — aren’t that much higher than overseas because the factories that survived the outsourcing wave have largely turned to automation and are employing far fewer workers. |
Bayard Winthrop, right, founder and chief executive of American Giant, examines fabric with Hunter Ashby, plant manager for Carolina Cotton Works in Gaffney, S.C. | Mike Belleme for The New York Times
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“This is a completely different manufacturing paradigm than what we saw 10 years ago,” said David Simchi-Levi, a professor at M.I.T. who conducted the survey.
Beyond the cost and time benefits, companies often get a boost with consumers by promoting American-made products, according to a survey conducted in January by The New York Times. |
Page Ashby, president of Carolina Cotton Works, inspects fabrics being made for American Giant at the Carolina Cotton Works plant in Gaffney, S.C. | Mike Belleme for The New York Times
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But he was frustrated with the quality, and the lengthy process. By October of last year, Mr. Winthrop had moved production to South Carolina. Now it takes just a month or so, start to finish, to get a sweatshirt to a customer.
“We just avoid so many big and small stumbles that invariably happen when you try to do things from far away,” he said. “We would never be where we are today if we were overseas. Nowhere close.” |
Bryan Ashby of Carolina Cotton Works tries on an American Giant sweatshirt in a meeting with executives from the apparel company. | Mike Belleme for The New York Times
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There were also communication issues. Mr. Winthrop would send the Indian factory so-called tech packs that detailed exactly what kind of fabric he wanted and what variations he would allow. But even with photos and drawings, the roll-to-roll variance was big. And he couldn’t afford to fly to India regularly, or hire someone to monitor production there.
He also found that suppliers deferred to his wishes, rather than being frank about some of his choices, which weren’t, he conceded, always good ones.
“I’m a supporter of outsourcing when it makes sense,” he said. But it had stopped making sense.
Now that production has shifted to the United States, Mr. Winthrop says those problems have disappeared. Mr. Winthrop and his team visit Carolina Cotton Works and Parkdale whenever they want, check on quality and toss ideas around with the managers. And, he says, the cost is less than in India.
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Back From the Dead
All that automation has made working in the mill — which once meant mostly dead-end jobs for people with no other options — desirable for many people.
Howard Taggert, 86, got his first mill job in 1948 after high school. “By being a color, yeah, you’ve got the worst jobs there was in textile,” said Mr. Taggert, who is African-American. “It was rough, but it was a living. We made a living.”
He started by opening cotton bales, which involved striking an ax onto a metal tie around the bales — a dangerous job, given that a spark from metal striking metal could ignite a room full of cotton. The dust was so thick that he couldn’t see to the next aisle, he said. He was paid 87 cents an hour.
“I had to. I didn’t have no other choice,” he said of working in the mills.
The work was so bad that Mr. Taggert refused to let his children go into mill work. He might be surprised to hear about Donna McKoy, who went back to work in a mill even after earning an associate degree in criminal justice.
Ms. McKoy, 47, lost her job at Continental Fabrics in North Carolina in the early 2000s, “when everything was downsizing and going over to China.” In 2001 alone, textile plants in the Carolinas eliminated 15,000 jobs. The sense of desperation was palpable, Ms. McKoy said.
“Now what?” she remembers asking herself before she decided to go to college.
After a headhunter contacted her in 2007, she became a supervisor at Parkdale, overseeing a night shift of 11 workers. The work — and the workplace — are barely recognizable compared with her job a decade ago. A couple of things struck her right away. First, the mill was clean. “Most open-end spinning plants that have the older model spinning frames in them are really dirty and dusty and not fun to be around,” she said. Thanks to the new technology, “my plant is always clean.”
Second, Ms. McKoy got training. For her first eight months, Parkdale paid for hotels, food, dry-cleaning and gas for trips home as she rotated around different factories and learned all of the jobs. And there were fewer people. Ms. McKoy now works at a plant in Walnut Cove, N.C., which she described as a smaller version of the Gaffney plant. On a typical 12-hour shift, Ms. McKoy said, two of the 11 people on her team fix the spinning machines about 4,000 times, with robots’ help.
She earns $47,000 a year and says the perks are good, like health care, an in-house nurse and monthly management classes for supervisors. She recently bought a three-bedroom house and owns a car.
“I have a comfortable life,” she said. “With this recession that we just had, I didn’t feel it.”
Scott Symmonds, 40, of Galax, Va., works as a technician for two plants in the area. He never planned on manufacturing work, but after time in the National Guard in Iraq, his home went into foreclosure and he had trouble getting work because of his low credit score and lack of a college degree. As a teenager in rural Iowa, he knew people who worked in manufacturing and watched two plants go out of business.
“I saw how they would come home dirty, smelly and often injured,” he said. “I didn’t want that.”
But he needed a job, and Parkdale was hiring. Mr. Symmonds started as a spinner, then got a job on the packing line, and then snagged a technician’s job after a technical-aptitude test. He earns $15 an hour, which he says is better than what competitors pay. He fears, though, that his higher pay could become a liability.
“We are making far more money than our counterparts in China or other nations,” he said. “We can’t afford to take a big enough cut in pay to be on an even level with those places.”
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