Thank you for inviting me to this event. I’m impressed that we have such a group of people who are actively involved in international business, an increasingly crucial and dynamic area. And, of course, it’s great to see John Creighton, a man with some very strong ties to Weyerhaeuser and a person who understands the importance of international trade.
The name of organization I lead at Weyerhaeuser — Containerboard, Packaging and Recycling — basically speaks for itself. We manufacture boxes at more than 100 packaging plants in the United States and Mexico and two joint venture plants in China. We make containerboard — the material boxes are made out of — at 10 mills, and we make paper bags and other specialty products. The next time you’re in the grocery store — and, of course, you selected paper — look at the bottom of the bag. It was probably made by Weyerhaeuser since we are a leading producer of paper bags in the United States.
We’re also one of North America’s largest paper recyclers and we use the recycled material in our products. Our organization’s annual sales account for about 23 percent of Weyerhaeuser’s total sales, and about 25 percent of all Weyerhaeuser employees work in this organization.
For my responsibilities our “world trade” position includes our two JV plants in China, we also are a major exporter of products. We annually export $250-250mm worth of containerboard and recovered (recycled) fiber.
Today, I chose to speak to you about the topic of the state of manufacturing in the United States and how this is impacted by World Trade. Manufacturing is at the heart of Weyerhaeuser and we’re working hard to remain competitive in the global marketplace.
These are not easy times for American manufacturing, and, like others, we’re forced to make some difficult decisions every day. Unfortunately, much of the news you read about Weyerhaeuser today involves a decision to close a facility. But, we’re not alone. In the last three years, U.S. manufacturing lost nearly three million jobs. While it’s true that the manufacturing sector has been in decline for the last 50 years, the most dramatic drop has been in the last three.
That’s the bad news, and something that pains me because those decisions affect men and women who have worked hard and tried their best. But there’s a good-news story here as well. At Weyerhaeuser, we’re seeing increased productivity out of our workers, and their efforts are creating a stronger company — a company that will go toe-to-toe with foreign manufacturers and win. I’ve already seen that in my business, so I know it can be done.
But that doesn’t mean we’re out of the woods. Between 2000 and 2002, domestic manufacturing suffered its second longest recession in history and is currently undergoing its slowest recovery.
There are several reasons for this. As you probably know, in the last five years, the United States’ trade deficit has shot up from under 90 billion dollars to about 420 billion dollars. That’s a 364 percent increase and is a direct result of the buying power of the strong dollar, which has its pros and cons.
When the dollar rises in value relative to other currencies, goods produced in the United States become more expensive and conversely, imports compete with U.S. products. This is good for consumers, whose spending rate has remained somewhat constant, but not so good for business.
It wasn’t lost on the business world recently that Warren Buffet, famous for his keen-eyed investment strategies, is buying foreign currencies. He said it was the first time he had ever done that. He’s worried about America’s “net worth.” However, over the last two quarters the dollar has weakened, and last quarter, U.S. exports increased by nine percent.
On another front, America is experiencing the most intense global competition in our history. This means manufactured goods requiring a high degree of labor are increasingly sourced in low labor-cost countries such as China. This global competition makes it impossible to raise prices in our country, where production costs remain high. When costs rise but prices can’t, something’s got to give and in the past few years we’ve felt it in our manufacturing base and profit margins have suffered.
What’s telling about this is that more people are losing jobs in industries affected by structural shifts than cyclical shifts, meaning jobs aren’t coming back by the natural working of the business cycle.
In my business, the movement of manufacturing outside the United States has resulted in negative growth rates in U.S. box shipments for 4 consecutive years. This is in spite of projections that containerboard production worldwide is likely to grow at the same or greater pace as world GDP grows.
From 1999 to 2003, U.S. box shipments declined by eight percent. And according to data from the trade associations we belong to, consumer consumption has continued at its historical rates, but domestic production has declined due to increased imports of cheaper manufactured goods.
To describe the situation, we need to understand what goes into boxes - goods, food and produce. Produce production is located mainly in the South, East and Southwest where climate, soil, water and labor are easily available. However, the accompanying costs for land, water, power and labor have caused production to move to cheaper locations to serve the U.S. market. Mexico for instance, has both the low-cost attributes and logistics. Consequently, the box business in this area has grown two to four percent in Mexico and has shrunk two percent in the United States.
China, on the other hand, focuses on commodities — items made over and over — where they can take advantage of assembly production and large runs. Much of the seasonal work, such as Christmas, demands high labor. China’s advantage?, labor availability at a low cost. You see the result — the U.S. imports nearly 100 percent of its shoes, toys, games and sporting equipment from countries like China. A financial analyst from New York who I spent time with this week quoted that Wal-Mart now accounts for 10 percent of all goods imported from China to the U.S.
Just to make the picture more poignant, globalization is also changing the dynamic of engineering, information technology, outsourcing and software development services. In a recent issue of the Puget Sound Business Journal, the current chair of the American Association of Engineering Societies “Paul Kostek” chillingly observes that globalization is forcing many of these jobs outside of the United States. He says, “It is hard to beat hiring skilled engineers for $800 a month, which is the same amount paid to many new grads per week in the U.S.” He also points out that where someone is physically located is becoming irrelevant. In this context, the world is indeed shrinking.
Wow! Sounds kind of bleak doesn’t it? I believe we can’t give up on manufacturing. It remains crucial for our prosperity. Economists say the average production sector job creates three times as many additional employment opportunities as the average service job. I don’t believe we can afford to become a de-industrialized society, although we’ve witnessed this very trend here in the Northwest in recent decades.
I’m an optimist. There are components of America manufacturing that off-shore providers can’t deliver. American manufacturers have the ability to establish their products as superior in comparison to imports, thus they’re worth a premium. For customers who need complex, small-scale, specialized products, we have high-value systems in place to provide that. We have tremendous logistics for those who need just-in time delivery and high-tech information systems to support it.
We are now more efficient than ever in producing our products safely and at low cost. Low inflation in the price of manufactured goods continues to help our ability to compete. And we’re the most environmentally conscious producers in the world.
At Weyerhaeuser, my business is one of the most competitive in the industry and we benefit from strong customer relationships and by having plants located in proximity to our markets. By being a competitive, low-cost provider we are attractive to both domestic and international customers.
But we can use some help. Just to mention one, America needs to control costs in several areas in order for businesses to operate as effectively as possible. For instance, we must control soaring health and drug costs in general, and in manufacturing we need to address the high costs related to workers’ compensation — which is taking a toll both on our ability to operate and on our ability to provide good, well-paying jobs for employees.
Our government must also do its part in fostering favorable conditions for the United States to remain effective and profitable in manufacturing. Trade barriers aren’t the answer. We need stability and predictability in prices, tax structures and trade policies to maintain the conditions necessary to sustain a global state-of-the art, competitive market. And we must encourage and support our high standards of education in order to provide the leadership and innovation necessary to compete. We won’t survive with an economy of purely nondurable and intangible products, as valuable as they may be.
In closing, I want to thank you for inviting me to speak with you tonight. I hope I’ve provided you with some food for thought and now I’d like to hear your questions.
