May 24, 2010 – 3:45 pm
In the United States and Europe, the manufacturing industry was created due to technology innovation. For example, railways came into existence because of the invention of the steam engine and automobiles were created because of technology breakthroughs in automobile engines.
In China, the manufacturing industry is being created in response to global demand. Chinese manufacturers take orders from Western companies that have designed products for their home markets. They have no involvement with product development, innovation, market research and even packaging. Chinese manufacturers have no experience in bringing their own products to overseas markets.
The latest data show that the United States is still the largest manufacturer in the world. In 2008, U.S. manufacturing output was $1.8 trillion, compared to $1.4 trillion in China.
I agree that we installed too much capacity but we have liquidated much of the large capital equipment and will need to recapitalize thw worlds production.
The Case for Economic Doom and Gloom
Why we’re not out of trouble yet–not even close.
John B. Judis
“Brenner traces this problem of global overcapacity to the early 1970s when the countries decimated by World War II had rebuilt their industrial base and were capable of competing equally with the United States, and when newly industrializing countries in Asia and Latin America were beginning their ascent. At that point, global overcapacity manifested itself in declining rates of profit. In the United States, for instance, average profit rates in manufacturing fell from 24.5 percent in the 1960s to 13.4 percent in the 1970s and 11.8 percent in the 1980s. As profit rates declined, firms were less inclined to invest and expand, leading to a decline in overall growth in the economy and to higher average unemployment over a decade.”
I remain optimistic about the future of our industry. Making a component by casting it is the most efficient process and allows the highest performance and most elegant design. Much of our research is developing the manufacturing, design and inspection technologies we need to exploit the potential of our products. Steel castings can experience a breakout with new and challenging products undreamt of today.
I am also optimistic because steel casting will be in strong demand as we invest in capital equipment needed for the expanding global economy. The inserted graph shows the year to year change in the producer price index PPI in red and the consumer price index CPI in blue.
In the inflationary late 1970s, the PPI outpaced the CPI and steel foundries were able to raise prices and operate profitably. Much of the capital investment that we have today in infrastructure and manufacturing capacity was made in the 1960s and 70s. From 1980 onward, PPI was often negative, we were reducing our prices while CPI was modestly positive. Our excess investment in infrastructure and capacity was being liquidated by inadequate price realization.
Eventually, the growth in global economies and the liquidation of capacity led to a shortfall in supply. After the recession starting in 2001, the obsolete capacity overhang from the 70s was liquidated and with global demand increasing commodity prices rose sharply. This led to steel foundries operating at near capacity. Price rose to reflect this new imbalance between supply and demand.
The mismanagement of the financial system provided money to fuel the sharp price rises in commodities. This financial mismanagement was compounded by the shift from a capital infrastructure with excess capacity to one that was limited in supply. The breakdown of the financial system dumped the economy into a hole that saw a sharp decrease in demand for all commodities. This is a temporary downturn and has the perverse effect of liquidating additional capacity that will be needed to meet future requirements.
So, as soon as the credit system stabilizes so that large capital projects can be released, Steel casting demand will push us back to operating at capacity, likely to happen by the middle of 2011 if not sooner. The ability to invest in new or expanded capacity will be limited by the 30 years of mostly excess capacity, the memory of this economic downturn, and the lack of willing lenders or capital. We have not needed the large capital investments in infrastructure and capital since the 1970s and public policy is a disincentive to make these critical investments.
Existing plants will be able to reap the strong returns because of the lack of capacity and should be able to recapitalize and modernize their plants.
the great quote attributed to Keynes that
“The market can stay irrational longer than the investor
can stay solvent,” comes to mind here.