What are you holding right now—besides this newspaper? A pen? A mug? Take a closer look at whatever you’ve wrapped your fingers around, and you might find these familiar words stamped into the bottom: Made in China.
Sometimes those three little words—or variations on them—are a great thing: Cheap materials and cheap labor add up to affordable products for many people. But for local furniture storeowner Wil Schock, imports have been very bad for business.
“My manufacturing business was completely wiped out by imports,” he said.
A lot of attention has been focused on China recently, and rightly so. We’re not just talking about the Olympics, either. With 1.3 billion people, China is easily the largest nation in the world, with the potential to become the richest. It’s also the manufacturing birthplace of a lot of things that Americans use every day.
With such convenience, however, comes a cost, and the United States has been feeling the sting of outsourcing of late. Factories have closed, and manufacturing has moved on to China, India, or Mexico. Even customer service—or lack thereof—sometimes sets up shop overseas. That’s the old news.
As for the new news, well, it’s hard to pin down. The world is always changing. In today’s global market, nothing is simple. There’s no black and white. Outsourcing is bad, and outsourcing is good—it all depends on the situation. But there’s no question that what happens around the world affects Central Coast residents, sometimes in a big, big way. It’s a global economy, and Santa Maria—though just a speck—is still a speck on that globe.
What that means for local companies is that they’re no longer competing with the guy down the street, or even the guy in another state. They’re competing with the guy (or company, or factory, or whatever) from the countries you find listed on the bottoms of your mugs: China, India, even Europe, and the competition is affecting everyone a little bit differently. Some locals are adapting, some are foundering, and others are doing just fine.
For Schock, who custom built desks, cabinets, and more at Schock’s Furniture Crafters, the cheap prices of goods manufactured in India and China were too much for his business to take. That reality, coupled with Internet commerce directed everywhere but here, marked the death of his furniture store in mid-July, he said.
“By the time I realized it was imports that were killing us, it wasn’t just imports that were killing us,” Schock said. “It was also the Internet.”
Schock made his own furniture, until he didn’t. In business for about 20 years, Schock said that he jumped on the import bandwagon two years ago just to stay in business. He bought furniture manufactured overseas to sell in his own store, but the move didn’t work.
Customers were buying those same imports—but for less online, he said. Without the overhead required to run a store, online businesses could sell the same goods he did, but even more cheaply.
Unfortunately for Schock, manufactured goods such as furniture have been affected most by imports. The reason is labor. The cost of labor in other countries is so much lower than in the United States, it’s more cost effective to make a couch in India and ship it here than to build it here in the first place.
The U.S. hourly compensation rate—which includes direct pay, employer insurance, and other taxes—for workers in manufacturing is $23.82, according to the United States Department of Labor. Sound like a lot? It isn’t. Most European countries, Canada, and Australia actually dole out higher compensation rates, while some countries, such as Mexico, China, India, and Taiwan, pay much less. The highest in the world is Poland, with an hourly compensation rate of $41.05. In terms of pay, the United States is right in the middle of the pack.
Being in the middle means that there’s still some specialized manufacturing being done in the United States, but the majority of large factories are located elsewhere. It also means that what pummels someone on one end of the spectrum doesn’t make so much as a ripple at the other.
Darrell Bussard, general manager of C&D Zodiac, Inc.—a company that designs and manufactures airplane interiors in Santa Maria and employs about 500 people—is one local benefiting from that middle seat.
Bussard said that C&D can afford to keep its manufacturing in the United States because of the nature of its product. C&D makes ceiling panels, interiors, and window panels for airplanes, and it only makes a few hundred at a time. Not enough to justify a move.
“When it really makes sense to go overseas is when you have a high production rate,” Bussard said.
The cost of shipping and tooling a new plant would outweigh any benefits for C&D—especially with the high cost of petroleum driving up the price of imports 2.6 percent in June, according to the Department of Labor. But Bussard said that they do outsource some small plastic parts. It’s cheaper to have these small parts made in Taiwan, he said, then have them shipped to the C&D factory for use in their finished products.
C&D also benefits from the weak dollar, Bussard explained. Only one of their clients, Boeing, is located in the United States. Their other main clients are in Germany, Canada, and Brazil. With the exchange rate the way it is now, foreign companies are getting an even better deal buying from an American manufacturer, especially with the high manufacturing costs in Europe and Canada, Bussard said.
That doesn’t mean that the United States will be getting any manufacturing gigs back from Asia anytime soon, though.
“I don’t see us ever competing against that,” Bussard said.
Even with the weak dollar and the higher cost of shipping due to gas prices, it’s still more cost effective to make high quantity goods elsewhere.
Because of the nature of his business, low quantity, and highly detailed work, Bussard is the first to admit that companies like C&D might be immune to the negative effects of outsourcing.
In fact, where the United States is most competitive is in highly specialized areas, like visual effects. That brings this story to an arena of business that’s more grounded in technology and intellectual property than manufacturing. CafeFX, one of the great Santa Maria success stories, is located in the same physical neighborhood as C&D, but their offices are much different. Instead of machinery, they have computers. Lots and lots of computers.
Because it’s a different business, it’s more susceptible to outsourcing and lower Third World labor rates, which has directly hurt their business, according to CafeFX CEO Jeff Barnes.
Most recently, he said, the company lost what would have been a major contract—for the summer blockbuster Hellboy II—to a visual effects company in London.
“We couldn’t match their tax incentives,” Barnes explained.
And outsourcing is hitting CafeFX on two fronts. On one side, there are companies in other in other parts of the world capable of producing complicated effects. These are countries like Canada, England, and Australia. On the other side are companies in countries like China and India with lower labor costs, moving in on some of the more routine effects. Either way, a company like CafeFX stands to lose money.
To adapt, the visual effects powerhouse is fighting virtual fire with virtual fire. They’ve started to outsource some elements to India and China and are continuing to handle the more specialized work here in the United States. That move lets them cut costs without losing business, Barnes explained. They’re also helped along by the weak dollar, which is making it easier to compete against a country like the U.K.
And while it’s getting harder to match foreign companies on price alone, Barnes said that in the entertainment industry, at least, they have an advantage.
“What they don’t tend to have a grasp on overseas is American pop culture,” he said. “As long as the U.S. continues to be the driving force in entertainment, we’ll always have the creative edge.”
The lesson seems to be: Play to your strengths. In fact, that seems to be the new business motto in the age of outsourcing. Countries that can produce goods cheaply do so, and countries that can’t have to find another niche, whether it’s manufacturing limited quantities or concentrating on ideas and designs instead of a finished product.
Schock, the man who had to close his furniture store in Santa Maria, knows this developing maxim better than most. He’s no longer a business owner and plans to never become involved in either manufacturing or retail ever again.
“I just took it for granted that my industry would be there if I just kept making a good product at a good price,” he said.
Contact Sports Editor Sarah E. Thien at sthien@santamariasun.com.
This article appears in Aug 7-14, 2008.