To say that we are living in interesting times is quite an understatement. This is especially true for American manufacturers listening to Donald Trump promise a resurgence of their trade in America, which he asserts will happen through a combination of carrots and sticks – the carrots consisting of reductions in regulatory burdens and taxes, and sticks made of stiff import duties on goods brought in from low labor cost countries.
It seems prudent to assume he will do what he says – at least some version of it - as he gone to work fulfilling his campaign promises at a pace that has Washington, D.C. in a lather. Already he has killed the Trans-Pacific Partnership, which was aimed primarily at greasing the skids for low cost goods from Vietnam to come into the United States (Rest assured that all of the other ‘benefits’ were secondary, at best. This was the biggie, as production costs in China have steadily increased and even the Chinese are moving quite a bit into Vietnam.) And he has attacked regulations, the biggest being those that would have resulted from the Paris Agreement on climate change.
Of course, the usual suspects from Wall Street and academia are already crying ‘protectionism’, as if it were an indisputable fact that protectionism is in and of itself bad, a fact that is by no means certain. It matters little, however, as this is the course Trump is taking. What matters is what this course will mean to American manufacturers, particularly those pursuing Lean manufacturing in its fullest form.
How this will play out depends largely upon whether a company is large or small, Lean or old school, publicly traded or privately held.
The big, publicly traded companies will pull out all the stops to fight Trump at every turn. They tend to be financial and marketing driven companies with a very low level of manufacturing management competence. They are producing in low labor cost countries because they do not understand manufacturing economics beyond direct labor. They are slaves to GAAP (read: Wall Street) accounting, which effectively blinds them to the significant cost drivers of manufacturing. So they focus on direct labor even though it has not really mattered much in at least forty years They are also an incredibly uncreative bunch, all following the same buzzword thinking – innovation/globalism/big data – that is repeated ad nausea in their annual reports and in the classrooms of the elite MBA programs to the exclusion of any other ideas. Eliminating cheap labor knocks the props out from under the only manufacturing strategy they know so they will not take it lightly.
Impact on the Big Boys
The Fortune 500 will find plenty of allies in D.C. on both sides of the aisle in part because some of the politicians still think that the old ‘what’s good for GM is good for the country’ adage holds merit, but mostly because another adage – ‘money talks’ – is never outdated and there will be no limit to the amount the financial folks will spend to maintain the status quo.
Trump will prevail, however, simply because of his populist support. He knows who elected him and it is not Wall Street. It was Main Street America who could care less about the fortunes of the companies that closed the factories. They also put little stock in the economic theories that decry protectionism for the simple reason that they are living proof that the economic theories that sent their manufacturing jobs to China and Bangladesh with the promise of great opportunity in the resulting service economy were pure hogwash. They will not allow Trump to backslide on his promise even if he were inclined to do so.
So the big companies that produce smaller consumer products will see no alternative other than investing heavily in automation. With their tunnel vision focused on the small portion of costs made up of direct labor they will see robots as their only recourse. This is virtually certain, as ‘automation’ and ‘robots’ are quickly becoming the most frequently heard terms among the MBA’s and Wall Street manufacturing ‘experts’. This is a risky path because it will make them highly leveraged, adding to both their debt and fixed cost base. Expect some successes, but quite a few spectacular failures as well – note that this is the path pursued by GM in the Roger Smith era in response to Toyota that played a huge part in their eventual bankruptcy. He spent $35 billion, plus or minus, on robots that actually increased GM’s cost structure, and would have come in very handy when GM ran out of cash not long afterwards. The big companies live and die by innovation – hot new products – and those investments in automation will leave them little or no wiggle room for products that do not take off in the marketplace.
Those that make big items – cars, appliances, furniture – are likely to fare better because many of them already do much of their final assembly in the United States, importing the components from low labor cost countries. They will argue (correctly) that many of the bits and pieces they need are simply not made in the USA, and importing is their only option. Assuming this argument fails and the import duties prevail they will probably not vertically integrate to make the components themselves – recall that the numbers oriented MBA wisdom that drove the automakers and others to spin off their parts plants still prevails. They still believe in silly, core functional competence theories, and don’t get the idea of core end to end process excellence.
Rather, they will demand that their foreign suppliers invest in plants in the United States. This will create jobs – and considerable competition for labor – but whether it sustains depends largely on the management capabilities of those suppliers and their ability to diversify their customer base beyond the big customer who convinced them to come here. If they are ‘one trick ponies’, making parts for only one big customer they will not last long.
It is worth noting that many of the Fortune 500 consumer products companies are also wedded to Walmart and the other big box retailers who are under siege from Amazon and ecommerce rapidly spreading beyond Amazon. Their brick and mortar model is doomed and they are struggling to embrace ecommerce, but are unwilling to abandon their old big store retail model. They put enormous price pressure on their suppliers, which will create considerable friction between the big manufacturers who can’t see how to manufacture in the USA without increasing their costs while selling to places like Walmart and others who are demanding lower prices.
Of course, there will be lots of exceptions to this as not all big, publicly traded manufacturers are in the same markets. Defense contractors and others that supply publicly funded markets will thrive due simply to the fact that a ‘Buy American’ mandate will enable them to pass their inefficiencies onto the government. Whoever makes the steel and the pipe, for instance, will reap the benefits of a Trump mandate that all pipelines must be made with American pipe and American steel.
Impact on Lean Manufacturers
For the American manufacturers that have fully embraced Lean and are thriving in the United States already (and there are quite a few of them, although Wall Street and academia are either unaware of them, or dismiss them as irrelevant, niche players), the changing landscape will create enormous growth opportunities. They already know how to produce in the United States in a cost competitive manner, else they would not be here. These companies are hallmarked by:
- An excellent, holistic culture that embraces, appreciates and respects all of the stakeholders, especially the employees
- Decision making based on strategy, common sense and Lean Accounting, rather than primarily on standard costs and GAAP
- Intense focus on creating genuine customer value, and a comparable focus on eliminating resources and activities that do not create that value
- A clear understanding that Lean is a growth strategy, rather than a cost reduction strategy
For those companies, though the opportunity to grow may be boundless, that opportunity is fraught with danger. They will find that potential, big customers that used to pay them scant attention unless they could meet the ‘China price’ will now beat a path to their door. Be very wary, as nothing will have changed with these folks, except that the China price is now 20-30% higher. They will still be the same price-only customers with little regard for the value of cycle times, service, responsiveness, flexibility and commitment that your current customers have. Successful Lean companies select their customers judiciously, doing business only with those that are committed to customer value, and are managed for the long haul. The siren song of potentially huge, immediate revenue growth that will ultimately destroy your culture may be hard to resist.
The Lean companies should double down on people and culture. As the pool of potential employees shrinks it will be more important than ever to hire for work ethic, native intelligence and cultural fit – sharing your values. TWI – the methodology that enabled us to convert legions of housewives into skilled builders of planes and tanks during WWII – will be critical to your ability to handle growth while maintaining the culture that is critical to your success.
While the big guys invest in automation to replace people, the Lean companies will selectively invest in what Toyota calls ‘autonomation’ – automation that extends and enhances direct labor, but does not replace it. It is equipment that makes it easier to do the work, to maintain excellent quality, and to quickly change from one product to another. It is lower cost, easier to maintain and less complex than full automation, enabling you to improve process cost and flow without having to hire a team of highly specialized experts to keep it running.
Most important, the Lean companies will enter this Age of Trump with a long term strategy for growth. For better or worse, Trump will be in office for at least four years, perhaps even eight. If the economy booms as early indications appear, his policies will not drastically change after he is gone. It will be vitally important to have a clearly defined True North and a future state vision to guide the company through what will surely be tumultuous times. Slow and steady wins the race, and enables the Lean company to keep its values and culture strong.
Impact on the Lean Lite Manufacturers
There is a huge swath of manufacturers in the United States that profess to be Lean, but have really done little more than deploy a few Lean looking techniques on the factory floor. These companies are liable to be under the most pressure in the Trump Economy. These companies do quite a few Lean looking things, but still:
- Are organized in functional silos
- Manage by GAAP accounting and fixate on direct labor
- Have forecast driven supply chains
- Are driven from the top down
In short, these are companies that try to run the factory as if it were 2017, while managing by the same methods and principles that were common in 1977. For them, labor will be a serious problem as they rely heavily on the technical skills of the people they hire, rather than well-developed production processes. The often heard cry over the shortage of skilled machinists, electricians, welders and other tradespeople will be particularly acute for them, and they will have to pay dearly for labor.
These companies will also be unable to resist the siren song of becoming suppliers to the big boys, and they will soon find that these companies often destroy smaller suppliers, then cast them aside, easily replacing them. Their top down, cost control and reduction management style of the past is ill-suited to manage growth and they will struggle to keep their processes and businesses under control as they chase every new sales opportunity.
We are heading into new, uncharted territory in American manufacturing. In manufacturing we talk a lot about the value of flexibility as it relates to the production processes. Flexibility will be critical in management, as well. The management systems and models that may have worked in different circumstances are likely to be completely wrong in the new circumstances. The discipline to limit growth to the rate at which they will not disrupt processes and culture will be the key. Those companies that disconnect sales from operations, believe any increase in sales is inherently good no matter what the impact on capacity and people, and manage by the numbers rather than their processes are very likely to struggle. Those that take a long term view, grow by building onto their processes and culture will be the big winners.