4 February 2010

Radical Shifts Take Hold in U.S. Manufacturing

America's industrial base is undergoing its most radical restructuring in decades as manufacturers rethink their businesses in the wake of the recession.

From Dow Chemical Co. to Intel Corp., iconic companies are telling stories of wrenching change -- both contraction and recovery -- as they report their earnings for 2009.

Dow Chemical said Tuesday it is aiming to shed some $2 billion worth of basic-chemical factories and other assets this year as it moves into more-profitable specialty chemicals. Appliance maker Whirlpool Corp. said it cut about a tenth of its capacity in 2009 as it struggled with a 9.6% drop in sales. Intel, by contrast, is investing billions of dollars in its U.S. plants as demand for computer gear recovers.
"We are emerging from one of the most challenging economic environments we've seen in decades," said Whirlpool Chief Executive Jeff Fettig, on a conference call Tuesday.

The latest moves are accelerating the U.S. manufacturing economy's longer-term shrinkage, as well as its shift away from heavy sectors, such as automobiles and basic chemicals, toward higher-tech products like super-fast computer chips. In some cases, as with auto makers, companies are stripping down to adjust to diminished U.S. demand or investing in smaller, more-efficient facilities. In other cases, as with chemical makers, they are relocating labor-intensive operations to countries where wages are cheaper.

During 2009, the nation's capacity to produce motor vehicles and chemicals fell 4.4% and 1.7%, respectively, the largest such declines since at least 1949, according to Federal Reserve estimates. Its capacity to produce semiconductors, by contrast, grew an estimated 10.4%. Overall, U.S. industrial capacity fell by an estimated 1% in 2009, the largest year-to-year decline on record, while goods-producing businesses shed more than 2.3 million jobs.

As a result, economists expect unemployment to remain high for many years as millions of American workers in the hardest-hit sectors struggle to find new jobs. And while some economists see the restructuring as necessary to make U.S. industry leaner and more profitable, others worry that the sheer scope of the cutbacks could doom companies that ought to survive.

"The earthquake that we felt was so big, and the aftershocks so strong, that we could easily destroy perfectly good manufacturers that are crucial in the supply chain," such as auto-parts makers that supply the entire industry, said Diane Swonk, chief economist at Mesirow Financial in Chicago. "That's the great danger, and it's still a risk."

The restructuring now under way offers insights into what kinds of goods the U.S. should produce, and in what volumes. In industries such as automobiles, housing and appliances, the move to shed capacity is at least partly correcting distortions that built up over many years of easy credit and profligate consumer spending. Now, companies are adjusting to lower demand.

Whirpool's Mr. Fettig, for example, said his company will "take out more" capacity in 2010, after shutting down some five million units in yearly capacity over the past 15 months -- including a factory in Evansville, Ind., that produced refrigerators and ice makers. Ford Motor Co. Chief Executive Alan Mulally forecast total U.S. auto and truck sales at between 11.5 million and 12.5 million units in 2010, far below their recent peak of 17.5 million in 2005.

For chemical makers, the recession has intensified an exodus from the U.S. that has been going on for at least a decade, amid rising energy costs, environmental concerns and growing demand in developing countries. In the past year, Dow Chemical, has closed, or announced plans to close, six plants producing ethylene-related chemicals in Louisiana and Texas.

"The chemical industry is leaving the United States, and it won't be back," said Peter Huntsman, chief executive of Texas-based chemical giant Huntsman Corp., which plans to report fourth-quarter earnings on Feb 19. "When demand picks back up, they'll build new capacity overseas -- in the Middle East, Singapore and China."

Huntsman, he said, is expanding its capacity in the Mideast and China to make chemicals used in products like insulation and high-speed railway construction. It now has about a third of its capacity in the U.S., down from more than four-fifths a decade ago. That capacity is increasingly focused on producing more-specialized chemicals, such as epoxies that can be used in building airplanes.

The situation is different for semiconductor makers, which saw U.S. demand recover sharply as computer makers scrambled to catch up with a spurt of business investment toward the end of 2009. Intel, which produces chips in Chandler, Ariz., Rio Rancho, N.M. and Hillsboro, Ore., boosted its capital investments to $1.08 billion in the fourth quarter, up 15% from the previous quarter and part of a two-year, $7 billion program to upgrade its U.S. plants.

A large chunk of semiconductor production takes place abroad, but many companies still prefer to produce in the U.S., particularly if their manufacturing entails little human labor or is highly complex. Being close to the U.S.-based design centers of major chip users like computer maker Dell Inc. and consumer-electronics maker Apple Inc. also can be an advantage.

"This is a kind of manufacturing that will make sense to do in the U.S. for a long time to come," said Tim Peddecord, chief executive of privately held memory-module producer Avant Technology, which recently opened a new 50,000-square-foot plant in Pflugerville, Texas. The new plant will boost the company's capacity to 800,000 modules a month from 500,000.

Mr. Peddecord said his company is bulking up after a shakeout that drove many rivals out of business. Manufacturing in the U.S., he said, allows Avant to turn around U.S. orders in 24 hours, an advantage in an industry where demand is volatile and clients try to keep inventories low. In addition, the reduced freight costs, compared with shipping goods from China, can offset the added cost of U.S. labor, since labor accounts for less than a hundredth of his average sales price.

-- Bob Tita contributed to this article.

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