Do Manufacturers Need Federal Help?
January 16 2005 by Chief Executive
BIG business needs help from the government if American manufacturing is to remain competitive, says J.T. Battenberg III, chairman and chief executive of Delphi, the auto parts and mobile electronics company. Here are excerpts from a recent conversation:
Q. What’s the biggest problem for manufacturers in the United States?
A. The cost structure. Many of the U.S. labor contracts signed over the past two decades had lifetime provisions, meaning lifetime guarantees for health care, pensions, retirement and very high wages. Health care, for example, is being paid by many U.S. manufacturing companies while competitors from other countries have their health care subsidized by their respective governments.
Q. What will happen to manufacturing in the United States?
A. It’s going to go through a major transformation. What will not survive is the model of the 70′s, 80′s and 90′s, when unions in industries such as autos were able to extract lifetime employment contracts, huge pension obligations and lifetime health care. Workers who are in their 40′s and 50′s in the auto industry are making $130,000 a year — including wages, benefits, health care and pensions — whether they work or not. That model doesn’t work any more.
Q. What is the two-tier wage system that you’ve introduced at Delphi?
A. We recently signed a contract with the United Auto Workers to go from $65 an hour for current employees to $23 an hour for new hires. That’s part of the transformation if we are to be competitive in the long term, and it is significant. The unions understand that you can’t pay $130,000 any more if you are going to grow. You’re going to have to take 65 percent less than that. Is that low enough? Probably not, to be competitive on a global basis, but it’s a big move and will allow a significant number of jobs to stay in the U.S.
Q. Chief executives traditionally want the government to stay out of their business. Do manufacturers really want more government involvement?
A. Yes, the Business Roundtable has sent a letter to President Bush. We said that unless action is taken now, future growth in spending — especially in Social Security, Medicare and Medicaid — will overwhelm the federal budget and the economy. Health care costs are of major concern and are threatening U.S. manufacturing companies. We also need tax reform to support growth-oriented policies that increase the competitiveness of U.S. companies so they can operate on a level playing field with their foreign competitors. Our letter is in the president’s hands and we’ll see where he goes with that.
Q. Are pensions a big problem for you?
A. Yes, many U.S. manufacturing companies have large pension liabilities. Federal law requires companies to pay enough money into their pension funds to keep them solvent. But the government’s formula at times has artificially increased companies’ pension payments. In early 2004, Congress provided a two-year temporary fix. We are now halfway through that and urgently need to get a permanent resolution.
Q. Even if many assembly jobs go offshore, will the United States retain high-end research and engineering jobs?
A. In Delphi, we have 17,000 engineers and about 40 percent of them are offshore now. We’ve just added 1,500 more in Shanghai and we have electronics engineers and software engineers in India, Mexico and Poland, for example. The R.&D. work is moving rapidly, in my opinion, offshore. Congress needs to make the U.S. government’s R.&D. tax credit permanent. It’s amazing, to me, that they haven’t.
Q. Why does the private sector need help from the government on R.&D.?
A. Continued uncertainty and periodic revision of tax credits prevent a lot of C.E.O.’s from making long-term critical investment plans because we just aren’t sure how much of the U.S. R.&D. investments will be offset by tax credits. Stability and predictability are very important aspects of what the government can do to help preserve manufacturing and R.&D. in this country.
Q. What will happen to the workers in the United States who lose their jobs?
A. Many workers will be retrained to fill new positions. However, looking forward, there’s a very different concern because of the retirement of the baby boomers. Baby boomers now make up 60 percent of the workers between the ages of 25 and 64. The oldest members of that 60 percent are beginning to retire, and the number of baby boomers leaving the work force will accelerate rapidly during the next decade.
Simply stated, the generation replacing retired baby boomers is too small to fill the gap. The U.S. Bureau of Labor Statistics says we will be 10 million skilled workers short in America in five years.
Q. Do you feel a personal moral or ethical commitment to keep any jobs here?
A. As an American, I want a strong American manufacturing base. I want strong American R.&D. But realistically, based on demographics and based on reality, you’ve got to think globally. It gets back to world-class quality and product technology and low-cost labor. At the end of the day, it’s a total cost situation.
I think that in the long run we can probably maintain a manufacturing base in the U.S., but I’m very, very worried about it. I’m not sure that we can implement the things that I’ve mentioned fast enough to retain a significant base.