|Intro. [Recording date: February 2, 2012.] Russ: You recently wrote a fascinating article in The Atlantic on what is happening to the U.S. manufacturing sector and what might be happening in the future, and you used a factory in Greenville, SC, as emblematic of that story. Start by talking about the factory. What do they do there? Guest: They are an auto parts manufacturer specifically. They manufacture after-market auto parts. And I specifically set out to find an aftermarket auto parts factory because auto parts are one product line that are made in the United States and in China. So the competition is rather direct. There are so many types of things that China makes and we don't make any more, like t-shirts or computer assembly, or whatever; and other things that we do that China doesn't do, like high-end medical equipment or avionics, that kind of thing. And I really wanted to find a factory on the front lines. And auto parts seemed like the right way to go. And then the aftermarket--these are the Original Equipment [OE]. The original equipment manufacturers are the ones who make products directly for Ford or GM or Toyota, for the car that comes off the assembly line when it's new. The aftermarket are the folks who make replacement parts. So, the OE world is its own universe and they are not really competing for shelf space in Autozone.com like the aftermarket is. Russ: And so this factory in SC makes fuel injectors, right? Guest: Yes. They make two major lines. Things to do with the electronic systems; and then fuel injectors. And that's what I focus on, fuel injectors. Russ: So, interesting question, and a great choice of market: Why are some things made here and some things made in China or elsewhere? Guest: Exactly. And what interested me about this particular company, Standard Motor Products, is--I came to think of them as sort of, when you think of the company overall, of course it has many thousands of employees--but it's sort of like this machine constantly scanning every car in America to figure out what makes sense to be make in the United States and what makes sense to be made in China. They also have a plant in Mexico, a plant in Poland. I should say: they don't have a plant in China, but they do source a lot in China, and from other factories. There's sort of a constant process where they are evaluating all sorts of auto parts. I think they have something like 20,000 different Stock Keeping Units [SKUs], different individual products that they sell. And about half of them they make, and about half of them they buy from other places. So, they are constantly figuring out: Hey, this weird little part, I think we could do it better than China, we can do it cheaper than China; but this other part, China's going to always going to be able to make that cheaper, so we'll just buy it from China. We won't try to make it ourselves. Russ: But as you point out, cheaper is not so straightforward all the time. There are things other than just the cost of the labor and materials. Guest: Yes, very much so. And that's something we probably can get into. But from the perspective of Standard Motor, what they are trying to do is meet the needs of--basically, their commitment to their customer. And their customer is not you and me. Their customer is the big auto parts retailers like Autozone and NAPA and then big auto parts wholesalers. And so their commitment to those folks is that whenever one of us walks in the door and we have some weird part on some weird car that nobody ever sees, Standard Motor will be able to get it to that location within 48 hours, and preferably much faster than 48 hours. And so having a part in China, even if China made it beautifully and perfectly. Russ: And cheaply. Guest: Yes. It's useless. It's a month away by ship. So that's one big issue. And the other issue is: auto parts are highly regulated. Their commitment is to make parts as reliable, if not more reliable, than the original parts. A fuel injector, for example, that's expected to run with 0 problems for at least a decade, if not longer. And so there are parts that they just find--you can get China to make them cheaper, but you can't get a Chinese factory, at least not yet, to make them reliably with the level of quality that's required. Russ: Which is surprising. Because I think what is surprising, at least to a novice like me, we have in the back of our mind this idea that all these factories are so mechanized, there's so much robotic help--a robot, that's as smart, as precise, as careful, as repeatable, replicable as you'd want. So, why is it that there are--how can there be a quality difference between what a factory stamps out here versus there? Guest: That was one of the big lessons that I learned. As the machinery that a factory uses gets more and more expensive, sophisticated, it requires more and more human intelligence to operate it. It doesn't require more people. It requires a lot fewer people. But the people that these new machines require often have to have far more skill and be able to think through problems with much greater sophistication. I have been to auto parts factories in China, and it's just much rarer. Obviously they are incredibly bright. Chinese engineers, and you could find someone in China who could do it. It's just much less likely that any given factory is going to have enough of those people, a sort of pipeline. These are skilled blue-collar workers. So, right now I am not talking about somebody with a Master's in engineering. I am talking about someone with a high school degree and two years of technical college and maybe two years' of experience. Somebody who understands metallurgy, a bit of chemistry, a bit of electronics; who understands computer programming, the very difficult and obscure computer programs that run these machines. And there are just not a lot of those people in China right now. So, the picture I have is--you picture a factory in the 1950s. My Grandfather ran factories for Cincinnati Milacron, which is a big manufacturer of machine tools. And, you just picture hundreds of guys--of course back then it was mostly guys--each one doing one particular part, using their muscle more than their brains. And maybe hundreds of those people are replaced by one or two machines that is operated by only one person. So, you've lost a lot of man-hours, a lot of workers; but that one person is more valuable, more crucial to the factory than any worker was 50-60 years ago.
|Russ: Let me just comment on that. A couple of things come to mind. One is: when I think of that, I always think of Charlie Chaplin in Modern Times, relentlessly turning one bolt with the same wrench. We didn't know to call it carpal tunnel syndrome then, but he's having a dreary life. And that was what we thought of as manufacturing in the old days. Now, when that machine comes along, first of all there's something really good about that because instead of a person having to do it, a machine does it. A machine doesn't get bored, and that's nice. A machine doesn't get carpal tunnel syndrome; that's nice. It's true that jobs disappear, but other jobs are going to get created somewhere else, both making the machine--designing and making that machine--and also elsewhere now that that good is going to be cheaper because you don't have to have as many workers. There are going to be resources freed up to create other stuff, new products that people can work on. That's the whole idea behind creative destruction. And then the other point I want to make is: we often forget, and your factory story brings it to light--that one worker now running this very fancy, sophisticated machine that replaces all the workers, in some dimension that one worker is unbelievably productive, in the sense that the total output divided by people-hours, the way we measure it, is very high. That person looks like he's making a lot of the good. But he's not really doing very much, often, in these factories; and you gave a delightful story that in a textile mill, which used to be very labor intensive, now very machine intensive, you said the joke in the textile world is that they only have two employees. Guest: Right, a man and a dog: the man's there to feed the dog and the dog is there to keep the man away from the machines. Russ: I just love that. Guest: It's a joke I think I heard in Alabama in a textile mill. Russ: It really captures what's happened to much of modern manufacturing, which is there are people in the plant--there aren't very many; in a sense they are very productive, what they oversee produces a lot of stuff; but most of the productivity, most of the skill is embedded in the machinery. And as a result, that person doesn't earn a big salary. Their main job is to make sure nothing breaks down, or to take care of it when it does break down. Most of the work is going on with the machinery. We had a podcast this summer about the potato chip world--very mechanized. I've been to a modern pencil factory; there's a handful of people in these plants. They do very little except keep an eye on things. But that's not what happens in that plant in SC that makes the fuel injectors. The answer is obvious that the plants that require a lot of people, many of them are gone, as you point out in the article. So explain why the fuel injector plant still has so many people in it. Guest: Sure. First, I want to respond about the skilled workers, and then we can talk about the unskilled workers. On the skilled side--I think there's no question, certainly for me, that you'd rather be a skilled worker now than an unskilled worker when there are lots of jobs. It's much more interesting. You are doing lots of different things every day, using your brain; you probably will not get carpal tunnel. Instead of physically bending or cutting metal, you are typing into a keypad, taking samples, checking to make sure that the machine is operating on spec. And the crucial thing is change-ups, setups for a new product. So, if every fuel injector for every car was exactly the same, and you needed to set the machine up January 1st and it would just run till December 31st, you would not want to invest in a highly skilled worker who commands a better wage. That's the kind of thing China can do perfectly well--you just let a machine run and throw some labor at it just in case it breaks down or restock the parts of whatever it is. Certainly in China, and in the United States as we'll get into, robotics sometimes are more expensive than people, so you keep people around instead of robots. But one area where the United States still has a very strong competitive and comparative advantage is in areas that require frequent setup changes. So, if you think of the fuel injector, Ford has a different kind of fuel injector than GM does; and then this line of Ford cars has a different set than that line. And Toyota will have its own set. So, Standard Motor Products--I forget the exact number--but there's hundreds of kinds of fuel injectors that they are supplying. Russ: And to quote Adam Smith, the division of labor is limited by the extent of the market: if that particular line of Ford was so large, that particular fuel injector, you could have a factory that just made those. But none of these are big enough to justify their own factory. So any one factory is going to have a little bit of diversity in it. Guest: Right. Now on the original equipment side, it makes a lot of sense to have a factory really focused. In that case, Ford will call Bosch or one of the other big global manufacturers and say: We're making a commitment to you for a year, or two, or three, that we are just going to buy millions of the exact same fuel injector. And those companies, it's almost like an annuity. You just set your machines up and you just churn them out. Now, because the auto industry is moving to Just In Time, and the Toyota production system, there's a lot of value to having that manufacturing done near the Ford plant in the United States. As far as I know, and I looked into this, there are no Chinese made fuel injectors sold in the United States OE or aftermarket. But for Standard, they don't know exactly who is going to walk through the door. Russ: That's part of what they are selling, right? Guest: Right. Russ: The flexibility. Guest: Exactly. So, something like the F-150 which might have tens of millions on the road, so you are pretty sure you are going to get a thousand F-150 fuel injector orders every month. But there might be some old Subaru where there are only 15,000 on the road, and you never know for the need for that injector comes up. They are able very quickly to change the machinery. Now that means physically changing the mechanics inside the machine. It means changing the program that tells the machine what to do. Whenever you do a setup change, it requires just a host of really precise measurements that really a human has to do. Computers, robots can't do that yet. The factory still has one of the really old turning machines, like basically a giant industrial size lathe from the pre-computerized world, where you actually move big chunks of metal and there are big gears that tell the lathe how fast to cut and how precise to cut. And if they want to change that old-style, the style that existed here say into the 1980s, that's over a day to change that. So, they only use that to make really standardized parts that they are going to make tons of all the time. These new computers, it's about an hour and a half to change it. And believe me, they are working hard to get that hour and a half down to a few minutes. That's the goal. But that requires paying a highly skilled person. You need someone who really, who can trouble-shoot a very complicated system as it's being changed. Now, they might not change it every day. They might not change it every week. And so the rest of the time they are going to have a highly skilled worker doing that that probably a lower skilled worker could do, just the routine maintenance and such. But it's worth it to them. These machines cost half a million dollars each; they have three of them. There's millions of profits tied up in them. So, it's worth it to pay twice as much or whatever it is for a highly skilled worker even if they are only using the fullness of that highly skilled worker's brain a few times a month.
|Russ: So, that person, I think, is called a machinist. Guest: Yes. Russ: What skills? Obviously you have to be smart. You have to diligent, careful. Those are all important skills. But there are some explicit skills that person has to have. Guest: Right. And what struck me is: the successful machinists I met, there's not an endpoint. They are learning all their lives. It's kind of like you and me. You and I have chosen jobs where we can constantly be challenged by new intellectual challenges. Russ: Speak for yourself, Adam. Guest: You learned everything in grad school Russ: I'm done. Guest: You read Hayek. Russ: Just application. No, I'm with you there. Guest: So, I focused on this guy, Luke Hutchins--so here's the specific skills he has. He had a lot of math ability, which I did in high school; I was very good at math. I was thinking: Can I be this person? And I'll tell you why I decided I cannot. There's no way I could be as successful as him in this field. So he had a lot of math ability. He said calculus is particularly helpful. Russ: That's so wild, though. I've got to stop there. Because I read that sentence, and part of me wanted the entire article to be about that. My wife teaches high school math. And we talk all the time about the value of various skills and who can use them. And is it just good for your brain to learn these skills in math or does it actually come in handy? Certainly if you are going to be an engineer then it's good to know math. But a machinist needs to know calculus? Why? Guest: I was really surprised, too. And this is where it gets beyond me. I've got to be honest. And I'm pretty good with computers; I'm a certified Mac tech--but please don't call me for Mac support. I know a tiny bit of programming. And I've tried to learn this CNC, computer numeric programming language, and it's very confusing. It's all about x axes, y axes, z axes; and this is not a graphical user interface. You are controlling a physical process in three dimensions, but you are doing it through what looks like a DOS screen, just x,y,z and then the rotation of the motor. And on these more complicated machines, they are called multi-access. This is sort of the latest breakthrough. They are operating on several different axes, so it almost feels like string theory--there are like 9 dimensions you'd have to keep in mind. And the screen you are looking at is just numbers. Russ: So, for those of you listening at home or out in your car who are under the age of 30, DOS was a primitive computer interface of the previous century. Is that what you are referring to, the green and gold, green and black screen? Guest: Right. Now, I've got to say, it's weird, because they are more modern computer screens, so it's like you bought a modern computer screen and just used it for numbers and letters and no 3-dimensional imagery. Russ: But there's calculus in there. Guest: Yes. When you are trying to compute--and I'm way out of my depth--but there's one spinning surface and another spinning surface comes in contact with it and you want it to end up creating a particular shape. I think it's algebra and calculus that you need. But that's not all. Then there's metallurgy. Just any one fuel injector, which might cost you $5 at an auto center, is made up of many different alloys, many different types of metal. Different types of aluminum, and others. There are parts of the fuel injector you want to be highly magnetic, because the way a fuel injector injects fuel is a little magnet opens and closes and forces the valves to open and close. But there are other parts you don't want to be magnetic at all. There are parts that you want to be able to conduct electricity and parts you don't. Parts that are going to have huge force on them for a decade, and parts that aren't going to have much force. There's parts where friction is a huge concern. So, there's many different kinds of aluminum. Russ: But does the machinist need to understand all that? Doesn't he just open the book and say--it's a recipe? You'd think. But it's not. Guest: I think if you were doing one then you could just set it up; you could have an engineer kind of create that book. But since they are doing so many, at so many different times; since they are doing it at such precise levels, there's just a level of chaos that you want the person doing it to have insight. It's not diamond, it's a certain kind of carbide, the cutting tool that cuts the metal. Everything is done to enormous precision, but what the machinist told me is inevitably, every time, it just doesn't quite work right. It's just not quite on spec. And when I say on spec, for a fuel injector there are parts that are machined to a half a micron. A human hair is 70 microns. Russ: Ouch. Guest: Half a micron is smaller than a virus. And if you are off by half a micron, that fuel injector will be useless. It will either stay open permanently and fuel will spill out or it will stay closed and you won't get any fuel at all. A fuel injector is basically like a high tech syringe, where it plunges back and forth, squirting a very precise amount of fuel into your engine block to spark and cause the explosion that moves your crank shaft that moves your car forward. The entire movement is 70 microns. That's the opening and closing of the syringe.
|Russ: I think you need to stop here because if you keep going I'm going to be anxious about getting home. I always sort of take it for granted that the car works; but maybe I'm overconfident. Let me ask you a different question, though. How does the machinist decide if something is on or off spec? How does that measurement get made of half a micron? Does he eyeball it? Guest: No. More of the machinist's job is at this table that looks more like a high school science lab. There are microscopes, calipers, incredibly precise scales; different things have to be measured in different ways. And then for the really tight stuff there are these amazing roundness testers, which are these massive machines. What's that spiral writing thing--kids have them? Spirograph? Russ: Yes. It's like a Ouija Board. I know what you mean. Guest: So the roundness tester kind of works like that. You put the round thing in this giant metal mesh thing and it spins around and somehow that figures out whether it's the right roundness, the right degree of perfect roundness. And so, when you make a changeup to a new product, basically you run the machine, you put the net metal in, you put the new cutting tool in, you put the new program in; you run it; you take a part out and it's wrong. It just always is wrong. So you bring it to your little science desk and you look at it through microscopes and you use the caliper and you weigh it. And then you do this really important thing--you make judgments; you use your brain to problem-solve. You figure out: is this problem because the cutting tool is coming in too close; or is this because this particular type of cutting tool reacts with this particular type of metal in a way that's different from how we programmed the machine; or is there not enough of the lubricating fluid that's coming through; or is there a microscopic tear in the cutting tool that the human eye and the finger can't pick up but is wreaking havoc on the machine? And that right there, that moment, a human brain with the proper knowledge, the proper experience, to look at a part that isn't quite right and figure out how to tell the machine how to make it right. Russ: That's an art. Guest: And that's a big part of U.S. competitiveness. That's a much, much more difficult process than China. For a whole host of reasons. It's not just you don't have Luke Hutchins with years of calculus training and metallurgy training, etc. It's because you don't have an entire system that supports that one person making that one decision. You have much cruder oversight, much cruder quality assurance; and it just doesn't allow you to react anywhere near as quickly or as reliably. Russ: For some reason, I think of my Grandfather, who had a set of false teeth, and if they weren't comfortable, he would take them out of his mouth and take a pocket knife and adjust them. It's something like that. It's kind of a remarkable thing. What I love about these kind of stories is it's a whole world you don't know anything about until you discover it. Guest: So, I was talking to this guy, Luke Hutchins, so he starts telling me about the cutting tools. Which is its own world of advanced ceramics, incredibly complex. And he's going on and on about these cutting tools and their properties and how they are made. And then he just points at this other guy and says: "Well, Ralph is really our cutting tool expert. I really want to take some courses on cutting tools. And I want to learn about cutting tool properties." And then we start talking about electronics. He knows everything about electronics as far as I can tell; certainly more than anyone I know. And he says: "Yeah, I've got to learn more about electronics. I just don't know enough about it." It was exciting to see. Here's a guy who many snobby college people in New York would just look at in his blue overalls and his thick southern twang, and he works in an auto parts factory, and not realize he's on an intellectual journey that is for him very thrilling and exciting. Russ: That's really beautiful.
|Russ: What kind of salary and benefits do people like that make in that world, for that level of skill? Guest: Here's a puzzle; and this is what I want to look into next. I do want to talk about unskilled workers. Russ: We're going to get to that next. Guest: Unskilled is a loaded term. Russ: Less skilled than this person. Guest: The way Standard Motor defines unskilled is someone who can learn everything they need to know at their job in a day. And skilled is someone who needs a lot of knowledge before you'll hire them, and then needs a lot of training on the job. So, you can think of an unskilled worker as they are basically replaceable by any other unskilled worker. Whereas a skilled worker, that's a special person. The wages for an unskilled worker at this plant are around $13.00 an hour. Russ: Any benefits? Guest: And benefits. Decent health benefits; I forget how many vacation days. Russ: That's roughly $25,000-$26,000 a year plus some benefits. Guest: And Greenville, SC is not that bad. From a New York perspective it's horrifying. Russ: What does an unskilled person at that factory do? We've just heard a very sophisticated, subtle ongoing learning, etc. What gets done in the factory that you can learn in a day and do that job? Guest: And by the way, most of the jobs, it's not a day. It's literally five minutes. I watched a new worker get trained on one machine; I was recording it for the radio so I had an exact time; and it took 2 minutes to train this person. This is the other side of computers and robotics--it is that computers are able to tell highly sophisticated machines how to do other tasks that require no judgment, no discretion on behalf of the worker. So, generally these are assembly jobs. So, the really precision stuff on a fuel injector is happening on the inner workings of the fuel injector. But then the fuel injector has to be put into a housing, and the housing has to be sealed and attached to another housing. Russ: And then put into a box. Guest: Or however it's packed. And all the outside stuff that isn't where the action is, it's still done to precision but it requires nowhere near the half-a-micron, virus-sized precision that the inner workings need. So there you have workers who are basically there to set up automatic machines that will do that, that will assemble and seal the outer housing. One machine I looked at is called a laser welder. But the laser is so tiny it emits this flame that's like a really out-of-gas cigarette lighter. It's a very cute little laser, not some big dramatic thing. And so you put one part of the fuel injector outer housing in one place, in one clamp, and you put the other part in another clamp, and then you press a button and they come together and the laser welder seals them together; and then you grab them; you run a very rudimentary trouble-check. And then you send them on their way to the next stage of assembly, where someone shoves them into a rubber hose kind of thing that attaches to the fuel assembly system. And the workers at those plants, they do have to have a high school degree, but that's almost more the signaling function. Russ: Reliability, that they are going to show up and be diligent. Guest: Right. And they can ask for a high school degree, so they do. But you don't really need to know anything. I focused on one young woman who was clearly really bright, clearly really capable of a lot; by her own admission made some bad choices in high school, ended up as a single mother, with a high school degree but no further education and sort of stuck needing to work to support her two young kids without a lot of support from her family--emotionally supportive but they don't have money to support her more than that. And she knows nothing. She doesn't know what metals are being used; she doesn't know much about how a fuel injector works; she doesn't know what a micron is, what tolerance is. She thought I was talking about racial tolerance. She didn't understand that tolerance is a word that's used in factories. Russ: But she's smart, and she has the potential to do other things, but for a variety of reasons she didn't get on a path that would let her do that. Guest: Right. Exactly. Russ: And as a result, she's making $25,000 a year; she's not starving; she has probably some decent material things in her life; but her future is limited both by the fact that it's not going to get a lot better. And there's a possibility her job is going to disappear. Guest: I would say there is a guarantee that her current position will disappear. Russ: It's just a question of time. Guest: Yes. There's a chance that she'll stay; I will say that Standard Motor Products, it's a publicly-traded firm but still run by the family that founded it 92 years ago. I deliberately set out to find--I didn't want a cutting edge. Russ: Good choice of words there. Guest: Right. I wanted a firm that wasn't trying to squeeze every penny of profit out, just because I thought it would make for a more interesting, compelling story. All the stuff about Bain Capital and Mitt Romney--I didn't want to get into that debate. I wanted a company almost anyone would look at and say those are decent people, they would love to hire more people, they would love to justify keeping everyone on and never laying everyone off--but they can't. Because the market won't let them. To do that would mean just going bankrupt. And this is not a company that's making--a great year, an amazing year for them is a 5% margin, making a 5% profit. Russ: That's true of everyone in the business, I suspect, even who is trying to squeeze every penny out of it. It's a competitive business. It's tough. Guest: And 5% is a rare year; usually it's 2%, 3%. Russ: The amazing thing about it is they can't stand still, even if they wanted. They're going to go out of business if they stand still. They've got to get the switch over down to an hour and a half, down to an hour and 17 minutes; price points that their suppliers expect are going to get tougher because their competitors are going to beat them to it if they don't match them. And they are going to replace that employee with a machine if they can. Because they'll have to. Otherwise they won't exist. They'll go out of business. No matter how nice they are, they are going to go out of business; they are not going to be able to cover their costs with their revenues if they don't stay on the cutting edge. Guest: And the big moment, Larry Sills, CEO, he's 72, he grew up in the company, his grandfather founded it, his dad ran it, with his uncle; his son is now positioned to run it when Larry retires. The company came close to bankruptcy a few years ago in large part because he was still manufacturing in Queens, NY, where nobody manufactures globally competitive products. You can imagine the costs, the hassle. The rent, everything. He just waited way too long to make the shift away from Queens and to do some layoffs, and so they came pretty close to disappearing. And so he says he wakes up every morning and says: I'm not going to lose this company. I'm not going to let it go bankrupt. But lose this company, to him, in part, one of the big threats is private equity, and he felt like. Russ: A set of investors might make him an offer that other stockholders won't refuse. Guest: Exactly. His family runs the company, but they only own 10% of it, and so, he felt for a while there that he was really vulnerable; he was running the operation pretty fat, and some private equity person could make a pretty compelling case--hey, I can come in here, I can make products as well or better; and I can get rid of a lot of dead weight. And increase earnings.
|Russ: And that's happened all over the manufacturing sector in the last 25 years. Often what's going on is that somebody who has got modern inventory control techniques and other ways of running a business comes into a business like this--who has not kept up with technique, because if they hadn't had to, they could get by with just a smaller margin. Now, all of a sudden, that risk of being destroyed; and the outside investor can come in, apply some of those techniques, downsize perhaps, substitute machines for people, and make it a viable concern again. And that's been happening all over the Mid-West in the 1980s and 1990s. Guest: Larry is that guy. What he told me is the world he grew up in, the auto parts world--fascinating to learn about it--when his grandfather founded the company, I think in 1919, the 1920s, it was a time when you were just beginning to have this expanded mass production of cars; but there was this hole where the auto companies were not creating replacement parts. So you just had mechanics kind of making their own kind of replacement parts when people would bring their Model T or whatever it was. Russ: It's like Havana. That's what they do now. They've got these old American cars and creative people are keeping them going by fiddling. Guest: Exactly. And the aftermarket busy was sort of this shady world. And it was a lot of immigrant families, Jewish immigrant families, Italian immigrant families, Irish immigrant families--they came to America and were looking for a shot and found this as a great opportunity. Now you think--Standard, who would name a company Standard? It's the most boring name in the world. But in 1919 it was the most exciting thing you could possibly be as an auto parts company. Russ: Comforting. Guest: And right through to the 1970s it was hundreds of hundreds of small family-run manufacturers selling to hundreds and thousands of small family-run distributors and repair shops. In the 1970s and then increasingly, the customer side, which for them is the big retailers, Autozone, sort of like the Walmart effect--these big people creating retail economies of scale and big wholesalers doing the same thing. What he said was in the early 1970s his biggest customer was 1% of his business. Now he has like four customers that are like 60% of his business. And if Autozone or NAPA calls him and says someone else is offering us that exact same fuel injector for 4 cents less, he's got to get $.04 out of that fuel injector or he loses one of those accounts. You are talking about closing down factories, laying off thousands of people. On the cost side, his main cost is metal. That's a bigger cost for him than labor, and metal is a globally traded commodity; he's not big enough to strike some deal with Alcoa to get preferential pricing. So, labor isn't the only cost he can cut, but it's one of the main costs he can cut. Russ: If he can find a way to substitute machines. So, as you mention in the article, you don't replace all workers with machines because sometimes workers are cheaper. Same issue of China versus the United States--sometimes you are going to have coexisting workers with the machines; but you are going to be looking for ways, when it's possible, to do it cheaper, and whichever way that is, which tends to be as labor gets more expensive over time, machinery is going to sometimes dominate. Guest: Right. In the case of Maddie, the young woman that I focused on, so she makes $26,000; with benefits and everything let's call it $30,000 a year. And they did the math, and a robotic arm could do what she does more quickly and more precisely. But it would cost $100,000. And their metric is: Any capital investment needs to pay for itself within two years. And so Maddie makes $30,000; over two years $60,000, the net present value of which would be less; so an upfront expense of $100,000, it's clear Maddie gets to keep her job. Russ: But as the price of the machine comes down. Guest: Or if there is more demand for fuel injectors and they add a second or a third shift, the mathematics change. Quickly. And there certainly are robotics manufacturers out there trying to cut their costs. And Maddie isn't in a position to cut her costs very much. This is a non-union plant by the way, but $13 seems to be about the floor for a manufacturer like this. Russ: It's double the minimum wage but it's still not a lot of money. But she knows this, right? She knows she might not keep her job for the next 25 years. Guest: She really knows--I think what she thinks is: This is the highest I'll get, be stuck here. I don't think she fully understands: No, no, this is the highest you'll get and it's higher than you might be for the rest of your life. Russ: You might be stuck somewhere else. If you are lucky.
|Guest: So, the mystery that I want to look into: It strikes me the low skill, if you are talking about people who truly are replaceable--and Maddie really does nothing that you couldn't easily get Chinese or Mexican workers to do; it's very simple. I could not learn how to do what Luke does. I could learn how to do what Maddie does in 2 minutes. Russ: What does a machinist make? Guest: Machinists don't make as much more as I would think they would. So, they make about 50% more. Now, making $42,000, maybe one experience, maybe $50,000--in Greenbelt that's pretty good. Russ: Nice lifestyle. Guest: You have a home, a car, can go on vacations. Russ: Your spouse might work. Guest: Water in the area; you can get a boat. That's one of the markers of true middle class life. So, you are doing well. Russ: And if a machinist is married to an unskilled worker, they are making $75,000. And they might be able to save some money, have their own house. That's an above-median lifestyle, I assume, in Greenville, SC. Guest: Absolutely. Greenville County is a very inexpensive place to live. If Maddie marries a skilled machinist, and you are bringing in $75,000-$80,000 a year, that's great. And there are, at the BMW plant, at some of the higher end plants in town, someone like Luke could make considerably more--$30 an hour. Russ: So that's $70,000 or so, with benefits. That's a good lifestyle. Guest: Exactly. You are starting to talk about having a reasonable retirement at 65 if you put away for your 401K and everything. But every manufacturer I talked to says: There's not enough skilled workers. We can't fill all the skilled slots we have. And the National Association of Manufacturers, which is the big lobbying arm of American manufacturing, they have this big program trying to get community colleges to issue certificates and to promote this learning; and they are working I believe with the Department of Labor; and they say: Oh, this is because it's snobbery, and high school guidance counselors tell people that manufacturing is dead and nobody understands. But to me--I mean, labor markets are obviously far from efficient and frictionless. But if there really were a shortage, wouldn't wages just rise to fill that shortage? If they started paying $40 an hour, $45-$50 an hour, then wouldn't you start seeing high school kids start saying: I am interested in that career? Russ: Are you asking me? Guest: Yes. Russ: I think there are two things going on there. One is: Talk is cheap. When they say "we can't find enough of these folks," I always wonder what that means. The obvious question, well you ask: Why don't you pay a little bit more? And I don't know what they would answer to that. It could be that it's not as easy as they'd like to find those people. So, I'm not sure what it means that there are not enough to go around in manufacturing of that semi-skilled, highly skilled, whatever you want to call it, specialized set of skills. The other part is the fact that there's a reason that the cost of living is not so much in South Carolina--not as many people want to live there as want to live in Queens and Brooklyn and Manhattan. Guest: Although I've got to say, sometimes I wonder. It's really beautiful. Russ: Yes. That's a whole separate issue. I always make the joke, it's a little farther to a Broadway show if you live in Greenville. But it's not that much farther, because you get touring companies. It's not like it's a wasteland culturally. But there obviously are a whole set of cultural amenities and social opportunities and interactions that take place in American cities that are less active in smaller towns. And fundamentally that is the reason that land is cheaper and housing is cheaper in Greenville and so many other things are less expensive--it's just not in such high demand. So you don't really have to speculate what the reason is; that's a fact. Not as many people want to live there at the prices as people want to live in New York at that price. So, it pushes up the price in NYC of all those things, whatever access is, and it's not the same for every person. The other question is, like you say: How much would you have to raise wages to get people to move there? You wouldn't think it would be to $100 an hour, or $75. You would think if it's $40, if it's $30-something you'd think $40-something would get you there. And part of it probably--I wouldn't call it snobbery. Some of it's ignorance, a lack of knowledge that those jobs are out there. And some of it is literally cultural, that people don't necessarily want to live in those cities. But to have it in Queens, as you said, is out of the question. Then it's way too expensive. Having said that, I think there are a lot of changes going on in the American labor force that are brought on by this recession, where people are opening their eyes to all kinds of things. Especially in what they study in school, and where they study it. If we could make our education market a little more flexible--which I think is coming--I think there are going to be a lot of changes in how these worlds work. I'm extremely excited about my job getting destroyed by technology. I think there's a tremendous opportunity for the American college experience, the American high school experience, to be replaced by something that's different. I'm not exactly sure yet what that will be, but it's going to involve technology and online learning. And different ways of learning.
|Russ: I want to turn at some point--now is not a bad time--to whether we have a policy crisis in this area of not. I think it's going to be a big issue in the coming political debate in the election season. But I think we have a crisis in education. A lot of people look at foreign countries and say they do it differently and better. And rather than us trying to figure out from the top down what we ought to be doing, I think we ought to get a little more chaos in the education industry. I think we ought to get government out of it and let private entrepreneurs come up with things that would make the Maddies of the world better prepared for the future. She clearly is not well-prepared for the future. And she's not alone. There are a lot of lousy high school, and some bad college experiences that people choose for themselves and make mistakes and get stuck in. Flexibility is really the key here. Guest: And Maddie is really to my mind the low-hanging fruit of educational opportunity. Russ: Because she's smart! Guest: She's smart, she's eager, she's disciplined. She's ready to go. She's just in a situation, which I'm fairly sure millions of Americans are in, where she has the ability, she has the eagerness; but she has family obligations that require her to work a fulltime job. And for me, that was one of the big learnings. The reason I chose Greenville specifically is I wanted a place where this shift from lots and lots of jobs for low-skilled workers, to jobs for low-skilled workers but better jobs for high-skilled workers. And Greenville is a great place to look, because right through the 1990s it had a textile economy, where anybody who wanted to could go and get a job at a textile plant. You didn't need a high school degree. I mean, earlier in the century, you didn't need to be age 7 yet. The child labor went away. And what I learned, and it didn't get into the article but it was a fascinating process, is the kind of bad side of textile mills--the company store, you are completely in hock to this evil textile manager--that has largely disappeared by the 1920s. The labor market was competitive enough and textile workers were able to leave en masse from one plant to work at another plant--I'm not saying it was the greatest life in the world, but you made, certainly by the standards of the day, a decent living and you had some bargaining power with your employer, because even without unions, they were able to create group dynamics that allowed them to pressure their wages for better wages or better conditions, whatever that might be. And that world is completely gone. And one of the things that is lost is on-the-job training. I don't mean completely lost, but is less available. If you think of a textile plant in the 1980s or 1950s or 1920s, there are people who don't know much; they have a pretty rote job. And then there are people who know a lot; they know how to set up every machine in the place. But nobody went to college for it. Nobody went to technical school for it. Everyone learned on the job. And so you never faced this moment where you needed to decide: Do I need to remove myself from the workforce for a period of years to invest in education so that I can have opportunity down the road? It came to you. It just came to you on the job. And I think that's a real loss for someone like Maddie. Standard Motor is not in a position--it's a huge investment to take someone like Maddie, who has promise, but as the factory manager told me: there's nothing she does in her current job that tells me she'd be good in the other job, other than the most basic stuff. I know she'll show up on time; I know she's a pleasant person; I know she's willing to work hard. Russ: Those are important. Guest: I have no information about her math skills, her mechanical thinking, her ability to solve difficult problems under pressure. I just don't know. And the only way I am going to find out is to pay for her to go to school for two years or three years and then put her on the machine. Russ: And then she's very competitive at other places. And you'd lose her. Guest: Right. You spend all that money and time, and if it's bad, she's gone; and if it's good, she's going to want to bid up her wages and her opportunities are broader. And he told me he did, a previous job, they did try worker training programs; about half the people don't make it. And that's what I realize. I feel like I'm pretty bright, I'm pretty well-educated, I'm pretty good at math and computers; and I'm fairly sure I could never develop that 3-dimensional thinking that you need, or 9-dimensional thinking that you need to be able to troubleshoot an incredibly dynamic physical process, just looking at numbers on a screen. I just feel pretty confident that with 10 years of schooling I still would not get it. Russ: In other words, you are grossly overpaid. Let's move along. Guest: So that last mile of training is a real problem. And this is all stuff that I didn't get into in the article, but we have this really weird system in America, the government policy. We have something called Workforce Development Offices, and I would guess every county and many towns have a Workforce Development Office, which often is funded by the Department of Labor, which is out there trying to train the workforce for jobs. Then we separately have an economic development process--is that out of the Department of Commerce, I forget, or it will be the local Chamber of Commerce or something--which is out there trying to recruit new factories and new businesses. And the workforce development folks are not really in touch as much as you'd like--I'm sure there are exceptions, but as a general rule--with the Human Resource (HR) managers of manufacturers. They are not deeply in touch with what are the in-demand market needs right now. Russ: Well, the incentives aren't really there. That whole strategy for preparing the workforce of tomorrow is not likely to bear a lot of fruit. Guest: I saw a very depressing version of this in Rochester, NY. I did some reporting on this. The Department of Labor has this program, Pathways Out of Poverty. And I sort of joke that the acronym, or someone told me that the acronym was POOP. It's a little indicative of their success. And I don't know the whole program. But what I saw--you had a training program that cost several million dollars to train people to retrofit homes; but the homes were only being retrofitted with another government short-term Stimulus spending program. Russ: The Weatherizing. Guest: The Weatherizing. So, you had all these people go through training programs. This was targeting not the Maddies of the world, but people who dropped out of high school, often had a prison record--really the least employable people in our society. People who had never had a job, people where basic hygiene and just showing up on time were real issues. And they had a huge attrition rate. I forget the exact number, but a tiny fraction of the people who went through the training would graduate. And then the people who graduated--and I met some of them--were so excited. These are people who never had a job, and suddenly they have a paying job. And even a decent paying job. Russ: And a skill. Guest: A skill. Well, they would get a job, because they would have this government Weatherizing contract. Russ: Didn't last for very long. Guest: It was a fake demand. It disappeared a year later. There isn't a natural demand for those skills, and then they are back to nothing. And when I met a lot of those people, many of them, especially the older ones--I mean, this was the ninth, tenth government training program they had been through--and this the first one that actually offered them any job, so at least they got a job, if only a short-term stimulus-based job. So, training--we have lots of training programs. But it's somehow not training people for the jobs that they might actually want to have.
|Russ: So, let's think creatively for a minute. Let's be imaginative. As you are talking about this, it makes me think of the following. And maybe we are wasting our time here. But let's talk briefly; I'm going to have a little thought experiment, and then we'll close with some other policy issues. Let's talk about the factory. We are at the Standard factory, they are making the fuel injectors; and if you haven't been listening carefully, Standard is the name of the company, not a description of what it produces. So you've got these people in the company who are bright, but either through choices they've made, or bad luck, or unawareness of what's going on outside--because you talked about the fact that she's kind of stuck there, but it could be she just doesn't know about some opportunities for enrichment or training. You'd think there would be an opportunity to do the following: You'd think the factory could bring in some training into the factory that the workers would pay for. Not the factory. The workers might pay for it not out of pocket, but in the form of lower wages. So, if you offer $10/hour or $11/hour, you don't get those workers to do your job. But you might if you said: Look, I'm only paying $10/hour; my competitor I know is offering you $13/hour or $12; but if you come to work for me for $10 your life is going to be tough for a while but I've got this program where you are going to take this break for an hour or two or maybe you stay late a couple of hours, and your kid stays a little longer in daycare. And we're going to help you get the skills that you might be able to use elsewhere in our factory--because we decided a few minutes ago that they may be scarce in the marketplace generally. And I realize that maybe many of the workers who would like to have those skills aren't going to have the capability of acquiring them, and I am uneasy about bearing that risk, so I'll let the worker bear the risk, in the form of lower wages; and we'll have an in-house training program as one of our fringe benefits. We'll bring in a local community college to teach a class on site, or we'll partner with them to make it easy for you to get off work at certain times. You'd think those kind of things, or maybe they are happening, would be desperately helpful to folks who are either eager to get ahead or worried about the fact that they are not going to stay where they are--they are going to fall behind. Do you see anything like that going on? What would Larry, the CEO of this company say about that? Guest: So, I actually had dinner with him the other night. And he said that one big outcome of the article is he wants to begin the process of really taking training much more seriously. I wasn't interviewing him. I think like he was being very honest. So my first blush, I like what you are saying. I think Maddie would like that herself. It's kind of a self-selection process. There are a bunch of German companies in Greenville, like BMW, and they have this tradition of apprenticeship that they brought over from Germany. And I was talking to Maddie's sister's boyfriend, who works at one of them, and he said the first few years he learned really valuable workplace skills. But now, it's more fun to spend a couple of hours in a class than at work. So, maybe just learning stuff to get out of work. Russ: But it may be helping him in other ways. You don't know. That's the way he describes it. But who knows? It's not as practical; I understand. Guest: You've got to say to some degree it shows an advantage to the employer. It shows, probably creates a feeling of comfort and commitment, allows them to pay a little less, compensate them in other ways. I will say, Greenville Tech, local community college--it's not exactly that. But they'll work with the bigger multinationals, like the BMW or Bosch or Michelin, who will say: Okay, we need 50 people who can do "blank"--this skill. And the school will take care of teaching those people. And the school is guaranteed, the students, if you finish this course, you will get a job at Michelin. Which sounds great. And I'm sure Greenville Tech would love to do what you just described as well. A criticism of that I heard is that it's in the company's interest to train people more narrowly than it might be in their interest. Russ: Obviously. But that's then again a question of how to you get the people to--who is going to pay for it? Can you find a way to either implicitly or explicitly have the employee pay for it? When I was talking about a class for the lower-skilled workers, I'm thinking: Maybe you'd have a class in calculus. You know? It might take a while to get people up to speed. The main value isn't to be a machinist. It's got other applications, obviously. But maybe that would be cool. But maybe you are too tired at the end of the day, too. Because you've got to do homework. It's not an easy thing. Training and education are not easy; you can't take a pill. So it's a little complicated. Guest: I also--Larry wants to do it, and I hope he does do it--but if we think of a corporation just as a profit-maximizing entity, I mean don't you just have a host of free rider problems? Russ: Not if you pay lower wages. Right? One of the advantages of paying lower wages and offering that "free training"--it wouldn't literally be free; you'd be paying in form of lower wages--is you would attract the intellectually curious people who see that as a benefit rather than as a waste. If you don't have any interest in education--which would be other people--or maybe you have two tracks. You'd get the education track and other people who don't. The education track pays lower wages but you get the class. I don't know. I'm just thinking out loud. Guest: I like it; the only thing that makes me nervous is would those classes be broad-based, highly portable skills like calculus or broad machining technology or metallurgy, or would they be very narrow, less portable skills that are, that more kind of marry you to that employer. Russ: That's a good question. Guest: But what I really like is the creative thinking. Thinking that the only way to advance does not need to be you have to leave the workforce or you have to go to night school and go to a two-year technical college and spend money while you are not earning money. I do like that proposal, to think more creatively. Russ: And I think people will. And I'm sure there are a thousand problems with what I suggested.
|Russ: Let me close with a very open-ended challenge and get your reaction. A lot of people say in America, in 1950, if you didn't finish high school, you still could get a good job in a manufacturing plant. And as you detail very clearly in your article, what's happened since 1950 is that manufacturing has been tremendously healthy. Unbelievable increases in manufacturing output. It's manufacturing employment that is a crisis, if anything. It's not manufacturing that's in crisis. It's employment. Now, my reaction to those stories has always been in 1920 or 1925, if you look back on the recent past of 20 years before or 40 years before, people would say: You know, used to be you could graduate with a third grade education, get a good job as a blacksmith. And those jobs are gone. And the answer isn't to bring back the blacksmith. That's a good thing that a good education doesn't prepare you for the workforce in 1925 the way it did in 1885, say. That was great. And we are in that same world today, where 60, 70 years ago, 50 years ago, even 40 years ago, you only had to go to high school. And you'd get a good "middle class job," with a chance for improving your life as you went forward. That's not true any more. In general. There are exceptions, of course. But if just graduate from high school, life is a lot harder than it used to be. Now, part of that is just that a lot more people go to college, and the people who are left who don't go to college differ from the people who go to college. And their lives are more challenging. But it seems to me--here's the challenge--two things we have to do about that. Rather than say put up barriers to Chinese manufacturing imports or special training programs, what we need to do is let people educate themselves in ways that are more connected to the workplace they are about to have. In the standard K-12 model that we've imposed on the government for the last 100 years or so is not very good. And it's not very good for certain people. Then, the other part of it is, and this is the mystery to me--my challenge--you've got people who, yes, they go on to college, but they study things that are totally impractical. Yes, that is fine; I love liberal arts education; I think it makes you more interesting a person, a parent, and all that. But somebody who goes on to high school and studies, say, art history or French or psychology even, compared to somebody who studies, say, engineering, has a very different set of prospects. But even that person who studies psychology or something that's less practical, does a lot better than the people who drop out, who don't finish high school--at least historically. So, it seems to me that that may not last. Both of those worlds may need to change. Are going to change, through market forces. Guest: Yes. I had a talk with David Autor, the labor economist at MIT. What he said is everyone in America--I forget the exact words he used, but they are going to have to compete based on what they know how to do. The signaling properties of just having a Bachelor of Arts (BA) are weakened. Even the signaling properties of having a high school degree are weakened. I will say, unfortunately, the signaling properties of being a high school dropout are very strong. Russ: Yes. Very strong. It's horrible. Very tough. Guest: And I do think this is a challenge. I do not have much fear for the long-term growth of the United States. I think GDP growth will eventually get on a healthy growth path; there will be plenty of Americans whose lives will continue to be richer and richer. I do think we have a potential compositional crisis that we've never faced before, which is that some large segment of Americans seem poorly positioned to take advantage of that growth. Clearly getting as many of those people as possible to acquire the skills and education that's needed is the first best solution. I'm pretty much lost myself about that. I ask everyone I can. I had a very good talk with Jeffrey Immelt who runs Obama's job strategy, and he basically said: I've got nothing; what have you got? Russ: An honest man. I think he spends a lot of time--that's his day job. Doesn't he moonlight as the head of GE? Guest: Yes, they make some kind of product as well. I forget. Russ: So he probably didn't spend so much time on that. Kind of a masthead figure more than anything else. But at least he's honest, though. Guest: I think--how do we create an educational system that allows people to pursue the skills that they both want, that are marketable. That's crucial. Another thing David Autor told me, not the exact words and don't get mad at me for not quoting me, so I'll say it: Having a BA from any school in 1972 meant you were going to have a middle class life. Having a poetry degree from a second-tier school today, I don't know who hires you. There are only so many jobs in publishing. Russ: They are not going to hire you for your poetry. Although it's nice. I love poetry. I have nothing against it. Guest: Yes; I have a degree in history of religion. Russ: Well, I think that's the point. You are bright. You don't use the "skills"--I'm putting skills in quotes--you learned in college, although you used some of them. They are intangible. They are things about how to write well and how to think analytically, perhaps. Those are useful in your job, obviously. But there aren't an infinite number of those kinds of jobs going around. There are people who struggle to apply those intangible skills. And they'd like some tangible ones. And rather than trying to create that educational system, I'd like to let it emerge. We need a lot more creativity in how we let that system run. But that's another topic. Guest: Absolutely.