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Don't Cry for Me: U.S. Semicon Industry Still Strong
By A. A. Imberman, PhD, Economics Dept. (Retired), University of Chicago
Recession is on the lips of all the doomsday-preachers; so calls have arisen for some sort of protective tariff on competitive imports from China, according to Professors Kenneth F. Scheve of Yale and Matthew J. Slaughter of Dartmouth in an article in the July/August issue of Foreign Affairs. But the tremendous rise in our semiconductor exports to China refutes these dire predictions of the demise of American manufacturing.

According to the Department of Commerce, Free Trade policies have increased the income of Americans by $500 billion to $1 trillion annually in the last few decades.

Take the semiconductor and related devices industry: data indicate that while there has been an increase in semiconductor imports from China, from $729 million in 2002 to $2.1 billion in 2006, our semiconductor exports to China have boomed, going from $1.5 billion in 2002 to $5.8 billion in 2006. This dollar figure covered such products as ceramic packages, single-crystal silicon wafers, glass/epoxy seal ceramic packages, pin grid arrays, molding compounds, stamped lead frames , quartz products, gold bonding wires, probing materials, packaging materials, lead frame plating chemicals, photo blanks and others.

There is every indication that American manufacturers are gaining — not losing — momentum, as the accelerated rise of American semiconductor product exports to China shows. In fact, factory activity in the U.S. Mid-Atlantic states jumped in September to its highest level in three months, according to the Philadelphia Federal Reserve Bank. North American semiconductor manufacturers are succeeding in this new era of globalization thanks to their efforts to cut costs and boost productivity gains by the application of information technologies and incentive programs for its labor.

Lean Manufacturing
How are American manufacturers accomplishing this in the face of cheap Chinese prices? There is one answer to this question: improvement in our manufacturing methods through Lean manufacturing and Total Quality Management, according to a study by the Cleveland-based research organization, Manufacturing Performance Institute (MPI), which performed a census of manufacturing companies. These two methods of improvement are best achieved by the use of incentive and bonus programs like Gainsharing and its varieties. Such programs help lean manufacturing and TQM boost productivity and eliminate errors in quality output.

For example, if 100 employees produce 1,000 units in 10,000 hours in one month, and the same 100 employees produce 1,000 units in 9,000 hours the next month, that productivity improvement of 1,000 hours of labor is a gain worth $15,000 if labor is $15/hr.

This illustrates the point that productivity improvement is not a matter of increasing production, but rather, increasing output per man/hour worked — thereby saving labor costs while increasing profit margin on sales. This sort of improvement due to incentive and other gainsharing programs, has been taking place in most of our semiconductor product industries, encouraged by the repeated exhortations to boost productivity by Alan Greenspan, former Federal Reserve Chief and now repeated by Ben Bernanke, present Federal Board Chairman. U.S. semiconductor manufacturing is the U.S. star performer, on the strength of a 17 percent annual growth rate with worldwide sales of $248 billion in 2006.

Incentive and Productivity
Several years ago, I discussed incentive and productivity-improvement methods in three lectures at Indiana University. These lectures were summarized in three popular articles: "Gainsharing: Lemon or Lemonade?" (1996), "Gainsharing, the Wave of the Future?" (1996) and, "Gainsharing Gaining Foothold in Quality Control Wars" (1997). The widespread use of incentive systems to encourage American employees to boost productivity is a major factor in meeting Chinese competition, according to the National Association of Manufacturers in its annual survey covering 2006.

The rise of Chinese exports throughout the world has been attributed not to Chinese manufacturing ingenuity but to the lower cost of labor. However, all reports indicate that this is changing. After years of gradual decline, prices for goods from China have risen 1.2 percent since February because of higher labor costs, according to the Labor department. While Chinese wages are on the rise, no reliable figures exist for their average wages, and their government's economic data are notably unreliable. As recently as 4 years ago some experts estimated that perhaps 150 million underemployed Chinese peasants would head for jobs in the cities. Instead sporadic labor shortages began to appear in 2003. Businesses are reportedly having a hard time finding skilled workers and are having to pay the workers they can find more money. A separate report by the Chinese Academy of Social Sciences has warned of coming labor shortages even in rural areas. The trend in China is rising labor rates, which will undoubtedly continue to influence Chinese prices.

Dr. Mary Gallagher, Chinese Labor specialist at the University of Michigan, reported recently (New York Times, August 29, 2007) that "Chinese factory executives across the country complained of being forced to give double-digit raises in order to find and keep young workers at all skill levels. Factories in large cities like Guangzhou advertise heavily for young workers even though employment offices find it difficult to place anybody over 40 in factory work". A recent government survey of 2,749 villages in 17 provinces and autonomous regions found that in 74 percent of villages there were no workers fit to travel to distant cities, according to the official Xinhua news agency.

Quality Not Always Up to Par
The unpleasant discovery that the quality of Chinese output is not up to par is another aspect to consider when evaluating competition with China. For example, lead content in Chinese painted toys, as well as complaints about the quality of China-produced, electronics, transistors, capacitors, pharmaceuticals, tires, have all created a backlash against Chinese imports.

A generation ago, there was great fear that Japanese output would overwhelm our markets. American manufacturers were able to rise to the challenge and meet the Japanese competition. By the same token, pessimists fear that Chinese semiconductor output will swamp the American markets and outdo American manufacturers in world markets. This has not happened and with the growth of American exports, will not happen. While pessimists are sobbing that the glory days of U.S. manufacturing are past, nothing could be further from the truth. U.S. manufacturing represents the most innovative and resilient economy in the world, and certainly faces no recession today.

For complimentary reprints of the three articles cited in the text above, address Dr.Imberman at: imbanddef@aol.com or see http://www.imbdef.com  

 

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