U.S. manufacturing can thrive but struggles for respect

BOSTON Wed Dec 14, 2011 6:54pm GMT

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BOSTON (Reuters) - On a quiet stretch of the waterfront here, about a mile from Boston's main tourist sites, a Gillette factory hums along 24 hours a day making an unlikely commodity: top-of-the-line razors.

The factory, which employs about 700 people in manufacturing as well as another 800 in design, engineering and management, is an anomaly in modern America - a manufacturing site in one of most expensive cities in the country.

But to Gillette's parent company, Procter & Gamble, Boston is an ideal base not only for making Fusion and Mach 3 razors, but to produce machines that assemble Gillette products around the world: After a century of making razors at the site, the company has a critical mass of experienced workers.

"The guys in my world see the new products three to five years before anyone else," said Ronald Calder, who runs the machine shop at the South Boston facility, which develops the equipment that produces many thousands of razors per day.

Having his crew of machine makers a short walk from the people who manufacture the razors allows them to develop and fine-tune machines quickly and cheaply.

That plays to what P&G management regards as its strength.

"Oftentimes, the basis for our competitive advantage in a category is the process or manufacturing operation that allows us to make better quality than our competitors at a lower cost," said Bruce Brown, chief technology officer with the Cincinnati-based company.

America's debate over manufacturing has escalated in the face of stubbornly high unemployment and the realization that younger workers lack some of the basic skills necessary to hold down a job in an assembly plant or a fabrication shop.

Gillette is facing that issue in part by putting interested factory workers through a technical training program at a nearby state university.

One graduate of that program is Mike DiBella, 31, who started at the factory five years ago with a high school diploma and some vocational school experience. After the additional program, today he manages 14 machines that sharpen steel for blades.

DiBella said he is never bored, enjoys the challenges of the job, and sees opportunities for growth.

AGAINST THE GRAIN

P&G runs against the grain in corporate America in believing that the company's manufacturing skill is a large part of the reason shoppers are willing to pay about $3.50 for a single Fusion razor cartridge.

The company argues that manufacturing in-house and in Boston helps it to meet exacting standards for its razors, necessary since men would be less willing to pay premium prices if they cut themselves during their morning shaves.

It is not just basic items like clothing and furniture that have migrated to offshore production. More complicated, and higher-tech products such as Apple Inc's iPads and Nike Inc running shoes are largely made overseas, often in subcontracted factories not owned by the brands whose products they are making.

Cheaper labour costs have been the main drivers of such production in China and elsewhere but with Chinese wage costs rising sharply, the yuan currency gaining against the U.S. dollar, and transport costs increasing, the advantage against the U.S. has narrowed a bit in recent years.

Also the main downside of moving production to an outside contractor in a country like China is the danger of losing some control over quality and over intellectual property.

Still, American manufacturing is now considered to be primarily the domain of makers of bigger-ticket, highly engineered products such as medical imaging devices and excavators, including General Electric Co, United Technologies Corp and Caterpillar Inc.

And it's not as if P&G hasn't weighed the options for the Boston site.

When the company bought Gillette in 2005, it considered closing the 45-acre (18 hectare) facility. After deciding to keep it open, it then pulled the company's white-collar staff out of the city's iconic Prudential Tower and consolidated Boston operations onto the factory campus.

Keeping both its manufacturing and the design of its machinery in-house makes it harder for rivals to knock off its designs, the company reasons.

Mike Chaney, Gillette's vice president of product supply, cites the line of Sensor razors, introduced in 1990 and no longer protected by patents, as an example. "Anyone could copy it, but they don't because they don't know how to make it efficiently," said Chaney.

The company has good reason to be protective of its razor business, as it is one of P&G's most profitable ventures. The company's grooming division - which includes men's razors, as well as other products including men's deodorant but not women's razors - notched a 20 percent profit margin in the fiscal year ended June 30, well above the company's five other divisions, which make products ranging from Crest toothpaste to Pampers diapers.

CUT TOO DEEP

While a weak global economy and rising costs in emerging markets have led more companies to think like Proctor & Gamble, manufacturing experts say many executives have long looked at manufacturing operations too narrowly, focusing mainly on cost.

Quick reductions to the cost of making a product, whether by moving production to a lower-cost region or handing it off entirely to another company, can provide a quick boost to profit margins but make it vulnerable to quality problems or theft of technology and designs.

"They call it a cost center. It costs money rather than adds revenue," said Jung-Hoon Chun, the director of the Massachusetts Institute of Technology's Laboratory for Manufacturing and Productivity. "Because it's a cost center, if you become a manager of the unit, if you get rid of that then from day one you get rid of costs."

That attitude has contributed to a slow decline in U.S. manufacturing employment. The sector currently employs about 12 million people in the United States, down from a peak of near 20 million around 1980.

While many companies have reduced headcount due to productivity initiatives, cutting manufacturing too deeply can take its toll.

The world's largest cereal maker, Kellogg Co, for instance, in November cut its profit forecast for the year, saying that it had cut too many jobs at its factories and would need to boost spending to fix problems related to food safety. U.S. regulators in June found listeria at one of the company's plants in Georgia that produces Keebler and Famous Amos cookies, and in 2010 Kellogg had to recall millions of boxes of cereal due to an unusual smell.

"We did cut too many people in our facilities in the U.S. network," acknowledged Chief Executive John Bryant in a conference call with investors.

On a similar note, an executive from Schlumberger, the world's largest oilfield services company, has concluded that trying to manufacture equipment far from its main centers in the United States and France was not the right move.

"Some of our manufacturing has been seen as something that's easily commoditized and exported to the low end," said David Rowatt, Schlumberger's research director for mechanical and materials science, at a recent MIT conference. "We have had in place an approach of being able to design in one place and produce anywhere in the world and what we have seen internally is that is a model that has not worked for us."

Schlumberger officials did not respond to request for comment on the specific problems it faced.

DIM VIEW WIDENS SKILLS GAP

Even if executives warm more to the idea of American manufacturing, a combination of factors - the perception that U.S. factories cannot compete with lower-cost rivals in emerging markets and the notion that manufacturing plants are simply cost centers - has soured the American public's view of the sector. As a result, manufacturing executives say, they have a hard time finding young people with the skills needed to work in today's highly automated plants.

"Manufacturing has a negative perception and it's a negative perception because of many years of saying, 'It's OK to be a service economy and manufacturing is all about brawn and not about brains,'" said Keith Nosbusch, CEO of Rockwell Automation Inc, a Milwaukee-based manufacturer of factory automation equipment, in an interview last month. "Obviously it's something we worry about a lot."

Jason Miller, assistant to President Barack Obama on manufacturing policy, recently addressed an MIT summit about the U.S. government's new plan to work with major manufacturers and top universities to educate young people on advanced manufacturing.

"It's not about some desire to return to a romantic notion of the past, of what manufacturing was," Miller said. "It is about a fundamental recognition that without a robust and vibrant manufacturing sector, it's going to be difficult for us to sustain a robust and innovative economy."

Proponents of manufacturing often point to the so-called multiplier effect of the jobs the sector employs. Each new manufacturing job created in the United States on average creates three more nonmanufacturing jobs - ranging from supplier jobs to restaurants and shops where factory workers spend their pay, according to a Boston Consulting Group study.

Many U.S. manufacturing executives complain that U.S. high schools are not providing students with the technical and scientific training they need to work in modern factories.

"We're having a challenge increasingly finding capable people coming out of our secondary schools, with high school educations that have the capability to work in some of our operations," Caterpillar group president Stuart Levenick said at the Reuters Global Manufacturing and Transportation Summit this week. "You think about manufacturing and a lot of people in this country think of it as an old, dirty, unsafe environment. And this is becoming a very high tech, world-class, highly paid job."

That view was echoed by Rolf Meyer, CEO of Harting USA, a privately held maker of electronic connectors. "Kids don't have any kind of relationship to manufacturing anymore, so why should they become an engineer?"

Meyer recalled hiring an engineer who was handy with computer-aided design but hopeless at building things. Meyer once had to take a screwdriver out of the worker's hands.

"I was afraid he'd kill himself," he said. "The screwdriver had a very sharp tip. He had never used it."

(Reporting by Scott Malone in Boston, additional reporting by Nick Zieminski in New York. Editing by Martin Howell in New York.

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