[House Hearing, 113 Congress]
[From the U.S. Government Publishing Office]
MADE IN THE U.S.A.: SMALL BUSINESSES AND
A NEW DOMESTIC MANUFACTURING RENAISSANCE
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON ECONOMIC GROWTH, TAX AND
CAPITAL ACCESS
OF THE
COMMITTEE ON SMALL BUSINESS
UNITED STATES
HOUSE OF REPRESENTATIVES
ONE HUNDRED THIRTEENTH CONGRESS
SECOND SESSION
__________
HEARING HELD
MARCH 13, 2014
__________
[GRAPHIC NOT AVAILABLE IN TIFF FORMAT]
Small Business Committee Document Number 113-060
Available via the GPO Website: www.fdsys.gov
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HOUSE COMMITTEE ON SMALL BUSINESS
SAM GRAVES, Missouri, Chairman
STEVE CHABOT, Ohio
STEVE KING, Iowa
MIKE COFFMAN, Colorado
BLAINE LUETKEMER, Missouri
MICK MULVANEY, South Carolina
SCOTT TIPTON, Colorado
JAIME HERRERA BEUTLER, Washington
RICHARD HANNA, New York
TIM HUELSKAMP, Kansas
DAVID SCHWEIKERT, Arizona
KERRY BENTIVOLIO, Michigan
CHRIS COLLINS, New York
TOM RICE, South Carolina
NYDIA VELAZQUEZ, New York, Ranking Member
KURT SCHRADER, Oregon
YVETTE CLARKE, New York
JUDY CHU, California
JANICE HAHN, California
DONALD PAYNE, JR., New Jersey
GRACE MENG, New York
BRAD SCHNEIDER, Illinois
RON BARBER, Arizona
ANN McLANE KUSTER, New Hampshire
PATRICK MURPHY, Florida
Lori Salley, Staff Director
Paul Sass, Deputy Staff Director
Barry Pineles, Chief Counsel
Michael Day, Minority Staff Director
C O N T E N T S
OPENING STATEMENTS
Page
Hon. Tom Rice.................................................... 1
Hon. Judy Chu.................................................... 2
WITNESSES
Ms. Shirley Mills, Director, The Boston Company, Boston, MA...... 4
Mr. Robert M. Hitt III, Secretary, South Carolina Department of
Commerce, Columbia, SC......................................... 7
Mr. Kevin Harberts, President/CEO, Kryton Engineered Metals,
Inc., Cedar Falls, IA.......................................... 10
Ms. Mei Xu, CEO, Owner, Chesapeake Bay Candle, Bethesda, MD...... 12
APPENDIX
Prepared Statements:
Ms. Shirley Mills, Director, The Boston Company, Boston, MA.. 27
Mr. Robert M. Hitt III, Secretary, South Carolina Department
of Commerce, Columbia, SC.................................. 45
Mr. Kevin Harberts, President/CEO, Kryton Engineered Metals,
Inc., Cedar Falls, IA...................................... 49
Ms. Mei Xu, CEO, Owner, Chesapeake Bay Candle, Bethesda, MD.. 52
Questions for the Record:
None.
Answers for the Record:
None.
Additional Material for the Record:
IPC Market Research, On-Shoring in the Electronics Industry:
Trends and Outlook for North America, 2013 Update.......... 57
MADE IN THE U.S.A.: SMALL BUSINESSES AND A NEW DOMESTIC MANUFACTURING
RENAISSANCE
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THURSDAY, MARCH 13, 2014
House of Representatives,
Committee on Small Business,
Subcommittee on Economic Growth,
Tax and Capital Access,
Washington, DC.
The Subcommittee met, pursuant to call, at 1:00 p.m., in
Room 2360, Rayburn House Office Building. Hon. Tom Rice
[chairman of the subcommittee] presiding.
Present: Representatives Rice, Chu, Schneider, and McLane
Kuster.
Chairman RICE. Good afternoon. This hearing is called to
order.
I would like to thank the witnesses for appearing before
the Committee today to discuss an issue of emerging importance
to small businesses and our national economy--enhancing the
growth of manufacturing production in the United States.
Over the last few decades, the United States has witnessed
a significant decline in manufacturing jobs. While the value of
the output of the United States manufacturers has more than
doubled over the last 40 years, this growth in output value has
not translated into similar increases into manufacturing
employment. In fact, since peaking at more than 19 million jobs
in 1979, total manufacturing employment has declined to a
little over 12 million jobs today.
Many economists attribute these employment declines to
increases in manufacturing productivity as the adoption of new
technologies have permitted manufacturers to achieve higher
output with fewer workers. Another factor is the emergence of
new manufacturing opportunities overseas, many of which offer
manufacturers lower labor costs compared to those in the United
States. Over the last decade or so, this has led to a trend
some have called offshoring, where domestic firms design and
engineer products in the United States but conduct the actual
manufacturing of the products overseas. However, there are
signs that this trend is reversing as companies move production
back to the United States, a trend commonly referred to as
reshoring. In addition, the United States has begun to
experience a process known as onshoring as foreign companies
relocate some of their manufacturing from their home countries
to the United States.
The purpose of today's hearing is to examine the extent to
which manufacturing reshoring and onshoring trend is
occurring--what factors are influencing it, what policies are
necessary to help it reach its full potential, and what growth
in American manufacturing means for small businesses.
Before I introduce today's witnesses, I would like to yield
to Ranking Member Chu for her opening statement.
Ms. CHU. Thank you, Mr. Chair.
American manufacturing has been the nation's economic
engine throughout much of the 20th century. The country rose to
its place as a global economic superpower as customers clamored
for the latest American-made products from planes to cars to
television sets. Our robust manufacturing sector employed tens
of millions of Americans and helped build the middle class.
However, manufacturing's role in the U.S. economy has changed
considerably since the `60s. As the nation flourished, our
economy evolved, moving away from manufacturing and more
towards service-based industries, such as healthcare,
hospitality, and financial services. Simultaneously, countries
like China and Brazil went through their own industrial
revolutions, providing cheap labor and resources to become
manufacturing epicenters. While the U.S. remains one of the
most productive nations per manufacturing employee, offshoring
has resulted in a loss of approximately 7.8 factory jobs since
1979.
In a positive development, U.S. manufacturing has witnessed
resurgence in the past few years. In fact, the country's
exports, a key measure of manufacturing activity, has been
growing more than seven times faster than GDP since 2005 and
are now at their highest levels in 50 years. As U.S.
manufacturing output has increased, the favorable economics of
reshoring has spurred many U.S. businesses to bring factories
and jobs back to America.
A number of factors are leading to reshoring of
manufacturing to the U.S. First, the competitiveness of China's
manufacturing hub is eroding. Factory wages have been
increasing by double digits each year since 2000, bringing
those more in line with the U.S. manufacturing wages. Second,
the U.S. is in the midst of an energy production book. Cheap
domestic energy provides a significant competitive advantage
for energy-intensive industries, like steelmaking.
At the same time, overseas transportation costs have
skyrocketed, increasing more than 135 percent en route across
the Pacific. These factors have combined to make the U.S. a
very attractive option for new manufacturing opportunities.
As such, a recent Boston consulting group report indicated
a majority of the nation's largest companies, over a billion
dollars in revenue, are planning to move manufacturing back to
the U.S. This, in turn, will have such a positive impact on our
nation's small business community. Many small businesses form
relationships with larger businesses as suppliers. These supply
chain relationships inject over $1.5 trillion into our small
business economy. As more large manufacturers reshore their
operations, these figures are only going to increase.
Small businesses have also benefitted from world demand for
``Made in the USA'' goods and cheap shipping rates. According
to the census, small and medium sized businesses account for 97
percent of all exporting firms and sent $460 billion in goods
overseas in 2012, which is a $10 billion increase year over
year.
As the U.S. manufacturing revival continues to gain steam,
we must be cognizant of potential stumbling blocks. For one,
U.S. manufacturing has become sophisticated as technology has
advanced over the past 25 years. This has led to a shortage of
workers with the necessary skills to work in these factories
even when there are millions of unemployed Americans looking
for work. As the U.S. becomes an attractive destination for new
manufacturing facilities, workforce training programs must
adapt to provide the skills necessary.
We must also remember that economic growth depends on
innovation. Research and development fuels technological
advancement and is critical in fostering the high-tech
enterprises that create new jobs. Unfortunately, the federal
policy shift from domestic investment to deficit reduction
could have severe implications for U.S. competitiveness in
international markets and for manufacturing jobs. Going
forward, we must ensure federal funding for research and
development is not left on the cutting room floor.
At today's hearing, we will examine the state of U.S.
manufacturing and the outlook for future expansion and job
creation. Over the past few years, the U.S. has closed the
competitive gap with its overseas competitors; however, the
manufacturing revival still faces headwinds.
I would like to thank our witnesses in advance for taking
time to be here today. Thank you, and I yield back.
Chairman RICE. Thank you, Mrs. Chu.
If anyone has an opening statement, I ask they submit it
for the record.
I would like to take a moment to explain to you the timing
lights in front of you. You each have five minutes. The lights
will start out green. When you have one minute remaining, the
light will turn yellow. Finally, it will turn red. And I am
going to be flexible on that, but try to stay as close to the
five minutes as you can.
I would now like to yield to Congresswoman Kuster, a member
of the Full Committee so that she may introduce today's first
witness.
Ms. KUSTER. Thank you so much to Chairman Rice and Ranking
Member Chu for organizing this important hearing on reshoring
and the trend in American manufacturing.
By making smart, targeted investments and promoting
programs that help our manufacturers succeed, we can keep our
manufacturing sector growing and creating good, middle class
jobs for years to come.
New Hampshire is home to approximately 2,100 manufacturing
companies. With our skilled workforce, first-class
universities, and community colleges, successful public-private
partnerships and high-tech businesses, New Hampshire is helping
to lead an American manufacturing renaissance. During business
visits through my Congress at Your Company series, I have met
manufacturers who are committed to developing innovative
technologies and creating good American jobs, and it is so
encouraging to see evidence of companies reshoring their
operations and jobs to the United States and to see talented
people, like Shirley Mills who is with us today, advocating for
this critical movement.
Ms. Mills is a director and senior research analyst at The
Boston Company and a resident of my district, Windham, New
Hampshire. She graduated from Columbia University with a BA in
Economics and earned an MBA from Harvard Business School. Ms.
Mills started her career at Goldman Sachs, and also worked as
an analyst at Steinberg Asset Management before joining The
Boston Company in 2007. At The Boston Company, a global
investment management firm that uses quantitative research and
analysis to provide investment advice to clients, Ms. Mills
specializes in the industrial and utility sectors. Her
insightful research on the global competitiveness of American
manufacturing firms and the corresponding rise in manufacturing
employment in the U.S. is helping to develop a stronger
understanding of this important trend.
Last year, I joined her husband, Steve Papa, the vice
president of Parallel Wireless at a roundtable in Nashua, New
Hampshire, to discuss developments in our innovation economy.
Ms. Mills, thank you for testifying today on this important
issue for American manufacturing, and thank you again, Mr.
Chairman and Ms. Ranking Member, for giving me this opportunity
to welcome a fellow Granite Stater to the Small Business
Committee. Thank you.
STATEMENTS OF SHIRLEY MILLS, DIRECTOR, THE BOSTON COMPANY;
ROBERT HITT, SECRETARY, SOUTH CAROLINA DEPARTMENT OF COMMERCE;
KEVIN HARBERTS, PRESIDENT/CEO, KRYTON ENGINEERED MATERIALS,
INC.; MEI XU, CEO, OWNER, CHESAPEAKE BAY CANDLE
STATEMENT OF SHIRLEY MILLS
Ms. MILLS. Thank you, Chairman and Ms. Kuster for the
opportunity to speak with you today.
I would first like to quickly address the dynamics that
drove manufacturing activity to leave the U.S. and go abroad,
many of which have now reversed and may be encouraging
manufacturing growth in the U.S.
Several years ago I published a white paper on this topic,
citing a number of reasons for a then potential shift of
manufacturing capacity back to the U.S. The reasons that I
highlighted then remain the case today. I would like to quickly
address each.
A weaker dollar has played a role in making the U.S. more
competitive and that has continued to remain low, indicating
that this trend should continue. Wage differentials, as
mentioned by Mrs. Chu, have narrowed between the U.S. and other
key manufacturing economies, both Europe and China. Energy
costs, due in large part to U.S. innovation and
entrepreneurialism, have declined in the U.S. relative to
global levels, which supports ongoing manufacturing strength in
the United States, as well as expansion of capacity by U.S.
chemical and refining companies. And in recent years, global
supply chains and transportation costs have become slower and
more expensive, and in many ways, riskier and more volatile,
such that companies are less comfortable taking on the working
capital needs in order to send capacity abroad.
So my belief is that conditions do exist for reshoring, and
it is happening. Recent analysis by The Economist cites 100
firms that have reshored manufacturing from appliances to high-
tech devices. The Wall Street Journal recently highlighted a
number of yarn companies that are spending millions of dollars
on new capacity in North Carolina textile country and hiring
hundreds of people. None of the companies mentioned in that
article is U.S.-based, but it is an expansion that is creating
jobs in the U.S. and opportunities for U.S. companies.
Sometimes it is difficult to see significant trends in
aggregate data, so it is worth noting that manufacturing
employment is improving much more rapidly in areas of the
United States that are benefitting more directly from lower
energy prices, and in the economy as a whole, manufacturing
employment has stabilized for the first time in decades.
The cited willingness of large companies to invest in new
capital spending in the U.S. is improving, which is very
positive for the manufacturing employment outlook. According to
Consultancy ISI Group, willingness to invest in capacity in the
U.S. has been improving for the past few years.
I would like to now address some policies that I believe
can encourage this reshoring trend.
The first is policy consistency and simplicity. Constant
change in the regulatory and tax environment creates a headwind
to decisions of any sort, particularly investment decisions.
The industrial management teams I meet with very often cite
policy uncertainty as one reason they are investing so little
in the U.S. Comments about the level of policy and regulatory
uncertainty felt by management teams are so frequent that they
seem cliched to me at this point.
With regard to energy policy, this area will become
increasingly important to U.S. manufacturing in coming years.
As I am sure you are aware, the U.S. now has minimal exports of
LNG and crude oil for a variety of economic and regulatory
reasons. If exports increase, the global price differential
that I mentioned between U.S. energy and global energy prices
should narrow, which would weaken U.S. manufacturing momentum,
particularly in industries with high-input costs.
As an equity investor, I constantly observe both the
madness of crowds and the importance of compelling stories, and
so I would like to highlight the importance of attention to
success. The dominant story of the 1980s through the 2000s was
offshoring. In some cases it made economic sense for
manufacturers, but in other cases, managers simply followed the
herd. I have now heard many stories in which a narrow focus on
labor cost has backfired because of quality control
difficulties, transport costs, working capital needs,
intellectual property risks, and even eminent domain concerns.
The dominant narrative does matter because management teams
tend to follow the herd. Publicize examples of offshoring
pitfalls and reshoring success. Changing the narrative will be
an important part of changing the decisions.
A focus on likely candidates. Some products are more likely
to be reshored successfully than others, and policy should be
emphasizing these areas. Products with a higher likelihood of
successful reshoring include one or more of these
characteristics: expensive shipping costs; high demand
seasonality; significant needs for reliable, inexpensive
energy; a low proportion of costs from direct labor; and a need
for rapid product development or innovation.
Michael Porter of Harvard University has written
extensively on what he calls ``clustering.'' I believe one
implication of his work is that historically strong regional
clusters are still likely areas of opportunity. I know a small
business entrepreneur who began manufacturing mugs in Ohio
recently after importing them for two decades from China. I am
drinking from one today. He is from California. His parents
were immigrants from Germany mid-century, but he found the
existing infrastructure from Ohio's prior strength as a
ceramics manufacturing hub helpful, so strengthening and
building on existing infrastructure will make the decision to
reshore easier for companies.
Encourage expansion rather than exciting new facilities. As
great as new facilities are, the reality is it is much easier
for companies to expand existing facilities than to start
things that are new.
I recently toured a plant in my home state of New Hampshire
where a mid-sized manufacturer has expanded its capacity at a
plant that had been in operation for decades, and there they
did bring some components directly back from a plant in China
that had been manufacturing them.
Do not forget the importance of innovation. The reshoring
trend is due in part to hydraulic fracturing, automation, and
other technological innovations. That is a strong
differentiator for our economy, and the government plays a key
role in basic science research. The private sector only
emphasizes rapid commercialization at the expense of
fundamental discoveries. Also, effective immigration for the
highly skilled and educated is necessary if we are to make the
most of some of our innovative potential.
With regard to employee development, access to a flexible
skilled labor force has become a barrier to U.S. manufacturing.
More formal job training support should be a key focus, again,
building on pockets of existing expertise. And in some
depressed regions, expanded social services may be needed to
help the long-term unemployed adapt and reenter the workforce.
Incentives and tax reform are also important, particularly
with regard to small companies because smaller, more
domestically focused companies have higher effective tax rates
than global corporations. According to The Economist, in the
current tax system, the losers are smaller companies which have
less room to maneuver.
Capital access will be addressed by some other speakers
today, but it remains important, particularly for small
companies as they try to expand capacity, and the regulatory
burden for small companies is significant in the U.S. and is
more important for the smaller companies than for larger. This
is important to small business prospects because larger
companies are better equipped to navigate complex regulatory
environments and may encourage regulations that favor large
companies. For example, according to The Economist, since
lobbying is mostly confined to large established companies, the
question is whether it discriminates against small, innovative
groups.
To conclude, time does not roll backwards. For the U.S.
manufacturing economy and its workforce, the world is much more
competitive than it once was. It can be tempting to talk about
jobs coming back, but that is not quite accurate. It is rather
that incremental investment in American manufacturing may
create new and different jobs. They may be higher skilled and
higher paid than those that were lost, but there will probably
be fewer of them. The broader benefit to U.S. employment,
particularly low-skill employment, will come from associated
services, such as trucking, distribution, retail, and banking.
Efforts to recreate what once was are not the right focus.
Thank you again for the opportunity to offer my perspective
on the reshoring of manufacturing to the U.S. as it relates to
small business.
Chairman RICE. Very impressive.
Our next witness is Mr. Bobby Hitt. Mr. Hitt was appointed
by Governor Nikki Haley to serve as secretary of the South
Carolina Department of Commerce in January 2011. Mr. Hitt
brings to his position a wealth of experience and knowledge in
manufacturing. Prior to his current appointment, he served as
director of Planning and Development for a firm that helped
convince BMW to locate an auto assembly plant to South
Carolina. As commerce secretary, Mr. Hitt continues to work to
attract new manufacturing investment and business to South
Carolina, including domestic and foreign firms looking to
reshore or onshore their manufacturing. And I can tell you he
is a big reason why South Carolina has had the success it has
in competing for and attracting jobs.
Mr. Hitt, thank you for being here today. You may now
deliver your testimony.
STATEMENT OF ROBERT HITT
Mr. HITT. Thank you very much, Mr. Chairman. I am delighted
to be here with you and Ranking Member Chu, and Ms. Kuster from
the Full Committee, and my colleagues here on the panel.
I thank you for the opportunity to provide testimony today
on the subject of reshoring of manufacturing in the United
States and its broader impacts within the business community.
Many industry observers have been talking about a manufacturing
resurgence, as my colleague here on the panel has, or
renaissance, for quite some time. Research coming out of the
Boston Consulting Group and other groups in the Northeast have
confirmed this trend as you have heard this afternoon.
On a national level, between January 2011 and December
2013, the U.S. added 434,000 manufacturing jobs, a gain of 3.7
percent. This rebound follows a decade-long decline in
manufacturing as we know at the national level where nearly 5.5
million manufacturing jobs were lost, a decline of 32 percent.
Well, I am happy to tell you, speaking on behalf of South
Carolina's lead economic development agency, our state is at
the forefront of the manufacturing revival today. South
Carolina, while a small state in physical size, has had a
traditionally-strong manufacturing presence. The sector
continues to gain momentum.
South Carolina's manufacturing GDP was $28.7 billion in
2012. This is approximately 16.3 percent of the state's overall
economy, a larger share than that of the national economy where
manufacturing accounts for 12 percent.
Between the end of the recession, as we recorded in July of
2009 and December 2013, South Carolina added 15,600
manufacturing jobs, an increase of 7.4 percent, more than
double the rate of growth on the national scale over the same
timeframe.
According to a report released by the U.S. Department of
Commerce's Bureau of Economic Analysis, South Carolina is the
fastest growing manufacturing economy in the southeast.
The report also ranked South Carolina's economy as the 12th
fastest growing in the nation and tied with our northern
namesake North Carolina as the fastest growing state on the
East Coast.
We are known as a heavyweight in aerospace and automotive
sectors, with the highest per capital employment by foreign-
owned companies in the country. The highest. For these reasons,
the National Trade Press has given us a new moniker. We are now
referred to as the ``Beast of the Southeast,'' and we are very
proud of that.
Twenty years ago, it was a very different conversation.
Manufacturing was picking up and moving out of the United
States, and in South Carolina. Hardest hit in our state was the
textile industry, which shed 60,000 textile mill jobs and
12,000 apparel jobs over a 10-year period from 1998 to 2008
just in South Carolina alone.
At the same time, however, the automotive sector was taking
route in our state, anchored by German automaker BMW, where I
spent 18 years of my career and where I developed a personal
passion for manufacturing. Today, there are 45,000 South
Carolinians employed by the automobile industry in South
Carolina.
More recently, we have successfully recruited the aerospace
industry to South Carolina, including Boeing 787 assembly
operation, and our state has three of the top four global tire
producers.
There are several factors driving this reshoring and
onshoring of manufacturing today.
Logistics is a driving force as companies seek savings in
transportation costs. Companies are moving back to the U.S. to
get products to market faster and respond rapidly to customer
orders in a ``just in time'' manufacturing environment.
Workforce considerations and a desire to have influence
over the quality of the finished products are important, as are
lower energy costs and competitive costs for land.
Recent announcements reinforce that onshoring is occurring
in South Carolina. In 2013 alone, nearly $1 billion in capital
investment and 1,200 new jobs were announced by manufacturers
bringing their operations to South Carolina from overseas. The
companies range in size and scope.
Some recent examples, Silcotech, which is a maker of
silicon-based injection molding for the medical industry based
in Canada selected York County for its U.S. plant. The company
is investing $3.5 million, creating about 50 jobs.
Last year, three Walmart suppliers announced new facilities
in South Carolina as part of Walmart's U.S. manufacturing
initiative. Collectively, these three companies represent 800
new jobs and about $14 million in investment.
Importantly, these announcements are occurring in our
state's rural areas. In the past three years, under the
leadership of Governor Haley, more than 30 percent of the
projects we recruited to the state have announced in South
Carolina nearly a quarter of the jobs created have gone into
the state's rural counties.
The Walmart suppliers locating in our state include Kent
International, a bicycle manufacturer. Bicycles have not been
manufactured in the United States for a long, long time. The
second is Element Electronics, a maker of TV sets, another
product that has not been made in the United States in a long
time. And yet another one, Louis Hornick, which will produce
window coverings and home textiles, something that was a
tradition in our state in the past. Yes, textiles are returning
as well to the U.S.
Another prominent example for South Carolina, as well as
cemented in North Carolina, is the Keer Group, a Chinese
textile company which decided to build its first plant outside
of China in Lancaster County, South Carolina, where they will
produce industrial yarn. The company's $218 million investment
is expected to create over 500 jobs.
Of course, when speaking about manufacturing, by and large,
these are larger operations employing hundreds, if not
thousands of works who assemble products ranging from cars to
planes to tires.
The reason is that manufacturing facilities are becoming
much more capital-intensive. The average amount of capital
investment by companies per manufacturing job created in South
Carolina has more than doubled in just four years' time. In
2013, this figure was $424,000 of capital per job versus
$176,000 in 2009, thus, the rapid increase in the ratio between
capital and labor. This points to the fact that overall most
manufacturing requires a large amount of capital and is
difficult to grow to a meaningful scale for traditional small
businesses.
Where the small business community typically reaps benefits
from manufacturing in our state is either by providing a value-
added service in direct support of manufacturing operations
(such as machining or repair) or providing other services such
as janitorial, staffing, subcontracting on construction
projects.
For South Carolina, the jobs multiplier for automotive
manufacturing, for instance, is approximately four. There are
also examples in our state of manufacturing contract work that
has been onshored to manufacturing operations of fewer than 100
employees. This includes companies like Sargent Metal, which
contracts with Otis Elevator and ADEX Machining, which provides
value-added work for the aerospace sector.
The Department of Commerce's mission is to recruit
businesses to the state and to help existing business grow.
Commerce has positioned itself as the state's business agency
no matter the size of that business, an area we have strived to
augment over the past three years as our small business area,
which offers resources and programs specifically aimed at the
small business community.
These programs, including export assistance, which has been
the beneficiary of federal funds from the STEP program (State
Trade and Export Promotion). From 2011 through 2013, our staff
helped 59 small and medium-sized enterprises enter export
markets resulting in almost $4 million in new sales.
Additionally, we have hosted a series of events, pairing
small business owners with prospective lenders--something akin
to ``speed dating'' as we call it for acquiring a business
loan.
The Department of Commerce works to connect the dots
between small business and large industry.
One recent success is Continental Tire, which is investing
a total of $500 million and creating 1,600 jobs in Sumter,
South Carolina. The tire maker announced in January it has
awarded some $100 million in contracts to South Carolina
companies to date, an example of the ripple effect that occurs
when a company of its scale locates in our state.
There is more and more detail; I could go on and on.
In closing, South Carolina is benefitting in a large way
from the manufacturing investment, and I believe there will
continue to be opportunities for our small business community
to profit from the manufacturing renaissance. The adage, a
rising tide floats all boats, certainly fits, and I thank the
leadership and the Committee for allowing me to testify today.
Chairman RICE. Thank you, Mr. Secretary.
Our next witness is Kevin Harberts. Mr. Harberts serves as
president and CEO of Kryton Engineered Materials, a small
manufacturer of spun and fabricated medical components located
in Cedar Falls, Iowa. As a supplier to other assemblers and
original equipment manufacturers, Mr. Harberts has seen
firsthand the benefits of manufacturing reshoring for his
business and community.
Mr. Harberts, thank you for appearing today. You may now
deliver your testimony.
STATEMENT OF KEVIN HARBERTS
Mr. HARBERTS. Good afternoon. My name is Kevin Harberts,
president and CEO of Kryton Engineered Metals in Cedar Falls,
Iowa.
Founded in 1981, Kryton Metals is an industry leader in
manufacturing spun and fabricated metal parts. We service a
range of industries, including foundries, ventilation,
lighting, aerospace, and some automotive. Many of our products
contribute to enhancing the nation's energy efficiency, and
some are installed in LEED-Certified buildings across the
country.
Last year, we had 63 employees; today, we have grown to 71
and hope to hire another 8 to 10 this year. We attribute this
growth directly to reshoring--a product line which left the
U.S. a decade ago and came back to America's heartland. But to
understand our growth, you first have to understand how we got
there.
Like many others, the Great Recession hit us hard in 2008
and 2009. We had to let go 35 employees. For any family-owned
business, this is one of the most difficult things that you can
go through, but it was necessary for us to survive.
Then, about two years ago, a company sourcing from Europe
was exploring whether they could return the manufacturing to
the U.S. to serve the North American market. Location was
important, but the real test was price. In our industry, a
price differential of a fraction of one penny can mean the
difference between getting the job and missing out.
We were not in a position to hire more employees to meet
the demand, so like all manufacturers, we had to learn how to
do more with less. The company did invest in increased
automation to meet their target prices.
Our customers slowly began transferring the work to our
shop in Iowa, and now we are looking at a $5-6 million product
line. For a $10 million a year company, this changed the fate
of our business and the lives of our employees.
Prior to reshoring its business from overseas, the customer
had to wait two months to receive the product. After reshoring,
its delivery time went from two months to two weeks. They can
now develop new products for it in a matter of weeks rather
than wait for a ship to cross the Atlantic.
The decision of our customer to supply from Kryton Metals
will carry us into 2020. We are going to save our customer
money, grow our business, and most importantly, create jobs in
Iowa and throughout our entire U.S. supply chain.
These kinds of opportunities just do not happen often in
our industry. In convincing the customer to bring the work back
to the U.S., we not only created jobs at Kryton, but we created
jobs for our suppliers and vendors as well. For example, my raw
material purchases have increased fourfold due to this reshore
business. This is an important point about the manufacturing
industry. Not only do we directly employ 12 million Americans,
but our industry indirectly supports a combined 18 million
jobs.
While we are currently growing, we struggle to find
qualified employees to fill our job openings. Kryton Metals
hopes to hire another 8 to 12 more Iowans this year, a
significant expansion for a small business. These are not
minimum wage paying jobs. For some of my openings, the starting
salary is $70,000-$80,000 a year plus benefits.
In addition, the uncertainty in Washington is not helping.
While politicians argue among themselves, employers like me are
stuck in a holding pattern. We do not know whether Congress
will extend the R&D tax credit, we are unsure what new rules
OSHA and EPA will impose on us, and we cannot find qualified
workers in large part because Congress has not updated our jobs
training law in over a decade.
Kryton Metals future looks pretty sunny at the moment, but
manufacturing's future is incredibly cloudy. Although the
economy is improving, it is not doing so at the rate we need.
To improve manufacturing's forecast, we must look to overseas
opportunities and convince foreign customers that the U.S. is
the best place for manufacturing. We are doing our part to
encourage reshoring; now it is Washington's turn.
Thank you for allowing me to testify today and to highlight
the great story that is manufacturing in America.
Chairman RICE. Thank you very much, Mr. Harberts.
Mrs. Chu, if you would like to introduce our next witness.
Ms. CHU. It is my pleasure to introduce Ms. Mei Xu. She is
the CEO and cofounder of Chesapeake Bay Candle. This company
produces high-end scented candles and is one of the most
popular candle brands around the world and is sold in major
U.S. retailers, such as Target, Kohl's, and T.J.Maxx. She is a
small business that has over 100 employees in the U.S. She was
manufacturing abroad, but when the decision came to set up a
new plant, she decided to locate it in the U.S. She recently
spoke at a roundtable at the White House on insourcing American
jobs, and she talked about the factors in her decision and what
America needed to do to encourage this. She is a very
successful entrepreneur and an outstanding spokesperson.
Ms. Xu.
STATEMENT OF MEI XU
Ms. XU. Thank you for inviting me, Chairman Rice and
Congresswoman Chu, and distinguished members.
Our company, Pacific Trade International, is one of the
leading home fragrance suppliers in the U.S., with brands like
Chesapeake Bay Candle, BlissLiving Home, and Alassis. We
generate over $60 million in revenue each year and employ about
130 people in Maryland. We supply home fragrance products, from
candles, diffusers, and other accessories, to major retailers
such as Target, Kohl's, and now also Bloomingdale's.
Since 1994, our products have been produced and sourced
mainly from China and then Vietnam. We hold an ownership stake
in both of these facilities and depend on a reliable, high
equality supply chain. In the middle of the financial crisis,
like my partners have just spoken, we have seen a rapid
increase in the cost of labor, freight, and materials in Asia,
while demand has increased from our retail partners for faster
replenishment cycles as well as their need for lean inventory.
The pressure on costs and inventory led our company to become
one of the earliest proponents of the insourcing trend.
The following reasons pushed us to make the U.S. our final
destination for manufacturing operations, rather than
considering traditionally less expensive candle destinations,
such as Mexico and Poland.
The number one reason is speed to market. Our U.S. factory
can deliver replenishment orders within one week versus four to
five weeks from Asia. This makes our factory attractive for
retailers, particularly on seasonal-sensitive products, such as
your Pumpkin Spice and your Christmas Tree Scent.
The second reason is the cost of shipping and logistics, as
Mrs. Chu has mentioned. In the middle of the financial crisis,
when everything else has been in confusion, the biggest thing
that is for sure is the rising cost of transportation due to
oil price increase. This decision helped us avoid transnational
shipping and rely only on domestic shipping, and it cut
unpredictable cost variations due to oil prices and the
constant demand and supply changes that impact oceanliner
prices.
The last reason is production cost. Automation made it
possible for manufacturing in the U.S. to be comparable to that
of Asia.
Once we made the decision, we quickly decided to look at
Maryland as our destination because we wanted to make the link
Chesapeake Bay Candle to the manufacturing facility. We looked
at miles and miles of unoccupied warehouses along the 695
corridor. Many of you might have visited. It is heartbreaking
to see that so much manufacturing has left Maryland, and one
out of every four blue collar workers in the county of
Baltimore are unemployed. We decided to build our factory
there, taking advantage of the abundant warehouse space as well
as give back to the community that has given us the brand and
its reputation.
Built without government incentives or support from local
agencies, PTI's new factory in Glen Burnie, Maryland, was
budgeted to cost approximately $4M in capital investments,
working capital for start-up, and inventory.
We were unable to identify any source of available
government financing that did not require a lengthy application
and approval process. The Maryland Economic Development Council
offered the possibility of low interest rate financing, but the
review process proved to be too lengthy and the funding limits
too restrictive to meet our needs. In the absence of viable
funding options, the company proceeded with the project on its
cash reserve and our own savings.
The time to completion for initial lease execution was
planned to be approximately six to eight months with completion
planned for Q4 of 2010. In reality, Maryland has not seen
manufacturing in the last 20 years. It was very confusing to
even ask where do we look for guidance for meeting the code
that is required to open a facility. We were directed to one
clerk in the County of Anne Arundel and he threw three big
books the size of your Yellow Page telephone numbers. One was
for hospitals, one was for nursery schools, and one was for
restaurants, and he made us read all of them in order to meet
the codes that maybe will meet the requirement.
Such delays and confusions end up costing us five months
and $2 million extra to finish the project. We managed to open
the business. There is a timeline here that really gives you a
clear definition of where the delay comes from but I would
eliminate all these details. Since opening in 2011, the
Chesapeake Bay Candle factory has now grown from 17 employees
to over 80, and projecting to over 100 by the end of the year,
and tripled production capacity. It is now one of the leading
new job creators in Anne Arundel County, and I heard there is
going to be a job opening for the big casinos, so we are very
concerned about that competition.
The company faces challenges in finding quality employees.
Most applicants lack sufficient skills or training. Basic
reading, writing, and arithmetic skills are often not available
and many are unable to follow instructions or function in a
modern, collaborative production environment.
To combat a 50 percent turnover rate in these jobs,
additional incentives are being considered by our company. The
local area has also suffered from a lack of qualified mid-level
supervisory talent and engineers reflecting----
Chairman RICE. Ms. Xu, I am sorry. We have got to go vote.
We have got 2:59 to get over there. We are going to stop the
hearing, just recess it. We will be back in about 30 minutes.
Okay?
Ms. XU. Okay.
Chairman RICE. So 30 to 40 minutes, and I will adjourn for
recess right now. We will be back shortly.
[Recess]
Chairman RICE. The hearing is resumed, called to order.
Ms. Xu, if you would like to continue with your opening
statement.
Ms. XU. As I concluded, as we are growing, the local area
in Anne Arundel County also suffers from a lack of qualified
mid-level supervisory talent and engineers, reflecting the
absence of relevant vocational training and a vanishing
ecosystem of other manufacturing companies.
Here are some of our recommendations to the Committee to
help create more manufacturing jobs.
One, create regional advisory offices within the U.S.
Department of Commerce or as an extension of the Small Business
Administration to help small and mid-sized businesses navigate
state, local, and other regulatory requirements. Many investors
may not know how to determine which state best fulfills their
manufacturing and business needs, and a federal level review of
each state will help speed up the selection process.
Two, through the same mechanism, guide companies to
relevant incentives for tax breaks, financing, training, and
other programs, whether sponsored by local, state, or federal
entities.
Three, provide a resource guide specific to new
manufacturing ventures to help identify local suppliers,
private developers, and other assets critical to startups. And
I also would like to recommend a state-level, one-stop
concierge service to help new investors understand compliance
issues and the procedures related to a building manufacturing
facility so that they can make more informed decisions.
Five, encourage local high schools and vocational colleges
to provide gateway programs to internships and apprenticeships
for local manufacturers to draw upon us as a resource for
qualified talent.
To close, I would like the Committee to think about helping
small business owners in particular in financing and tax breaks
since all capital investment has become increasingly
challenging because of the size and difficulty for banks to
give loans.
I want to once again thank the Committee for allowing us to
share the journey of our determination and our challenges. I
hope that we would help educate Americans that we should be a
nation that not only consumes and purchases goods, but also
manufactures them and hope that we would cultivate an
appreciation for manufacturing and for ``Made in USA.''
Thank you very much.
Chairman RICE. Thank you, Ms. Xu. Very impressive.
I now yield to the ranking member for her questions.
Ms. CHU. Thank you, Mr. Chair.
I will start with Ms. Xu. In your testimony, you listed
several reasons that led you to decide on the U.S. as the
location for your new manufacturing facility. As one of the
business leaders pioneering the reshoring of jobs to the U.S.,
how do you think the federal government can best reach out and
help other businesses who might want to consider the U.S. as
their manufacturing destination?
Ms. XU. I think one of the main challenges has been echoed
by Ms. Mills, is the complexity of different state
requirements, coding, and regulations. For federal government,
mainly I think from the Commerce Department of affiliations.
Maybe we can start looking at a one stop shop to inform
everyone in this particular area where to find the answers and
also to work with SBA for facilitating the necessary funding
that manufacturing investment needs.
Ms. CHU. I know that your business will probably continue
to grow. What would be the most important factor affecting your
decision to continue manufacturing in the U.S. and perhaps even
expand operations here?
Ms. XU. We definitely are determined to grow as our
demands, our orders, actually every month is exceeding our
capacity. The biggest challenge is now people. We do not have a
very good answer on how to have a program that can help us to
find people that is for high school or even some college degree
because the mentality of working on a factory floor is a very
different one than what we can find.
I heard in Michigan, when I was joining the White House
forum, that they set up training workshops close to big
manufacturing facilities. For four to six weeks, they have high
school kids that go to those programs and learn the ABCs of
what a manufacturing company work environment is so they
mentally are trained to enter the workforce. And I would hope
that states and the government can think about such programs.
Ms. CHU. Okay, thank you.
I would like to ask this to the entire panel and that is
there are many small manufacturers with growth potential that
may not seek assistance with operations, marketing, and finance
because they are simply unaware that it is available. However,
the SBA has many entrepreneurial development programs,
including the Small Business Development Centers and the
Women's Business Centers. What could we do to increase the
awareness amongst the entrepreneurs of the SBA's business
counseling services?
Mr. HITT. I will go first. I agree with you, Congresswoman.
When we came in we saw a number of agencies trying to provide
the same services but doing it in a way that people could not
find them. We brought all of those together. I brought a team
in. We built the website that we have so that someone can go in
and put in the name of the county they are in, they can put in
the type of business, the size of it in terms of its capital
and its program, and it is sort of a decision tree that starts
bringing you down to the programs that are applicable. It is
hard to look at the array of programs out there for an average
person and try to sort out what is applicable to them. So we in
government, at the state level and federal level, ought to do
those things together in order to make it easier for them. I
have this belief that there are people at home at night at 8
o'clock on the web trying to find a way to expand their
business and find capital and looking for people like them that
they can interact with, especially with entrepreneurs. We need
to do more of a job of being an enabler to help them find those
programs.
Mr. HARBERTS. I would just actually reiterate what he is
saying as well. We took advantage of SBA. Seventy years ago was
probably our last time that we used them, but the complexity
that we ran into in the rules and regulations, we got bogged
down in that and we just did not have anybody to help us. So we
have not used them since. But I think if they can streamline
that a little more than it is already, make it easier, it would
be a win-win.
Ms. XU. I am thinking that because most of the SBA programs
to sponsor or guarantee a commercial bank to offer loans. So
working with commercial banks and letting commercial banks be
the ambassador for those programs because a lot of the small
businesses deposit with banks, so making them be the advocate
of those programs and the informers of those programs held
special events for SBA to come to local branches where small
businesses tend to gather is a great grassroots level awareness
to raise.
Ms. MILLS. I agree with all of those. I would also
highlight that you could use word of mouth. There are
organizations that particularly small business entrepreneurs do
not have peers that they can frequently speak with about these
things, and so oftentimes they join organizations like YPO and
some others. And if that can help spread the word, then that
would be a way that they could learn.
The other thing is just I do some additional work with
financial literacy and financial capability, and one of the
things that shows up repeatedly there is that people do not
absorb things until the moment at which they need the
information. And so finding ways to insert that relevant
information into the decision point when it becomes relevant--
for example, potentially with the commercial banks--would be, I
think, the best way to do it because although people do sit at
home at 8 o'clock every night, I think you are completely
right. They probably do not necessarily notice what they might
need a month from then when it comes to that decision point. So
both of those things. I think that the decision tree is
brilliant and the website is a great idea, but I would also try
to insert it when the decision is being made and when the
regulations are being dealt with.
Ms. CHU. Yeah. Very good point.
Ms. Mills, you mentioned in your testimony that access to
capital continues to be a challenge to small businesses trying
to expand. This is one of the most critical issues particularly
for this Committee. Can you expand on specific policy
recommendations this Committee could take up to expand access
to capital to small businesses, especially those in
manufacturing?
Ms. MILLS. Yes. I think this is a complex area because
typically it is not the best idea for the capital to be coming
from the government. You are trying to incentivize banks and
commercial lenders to be willing to loan to a circumstances
that to them I think seems quite risky. So ways to mitigate
that risk, I am not sure exactly what those would be, but
receivables, financing, things like that might be helpful.
I think the others on the panel might have some additional
thoughts.
Mr. HITT. Well, we are starting to see different kind of
equity organizations be created, including business
development, corporations, and the like. For reasons, and I
have no banking experience so I cannot really speak to it, but
what we constantly are being told is that the old way, when I
was young, where you would borrow and grow, is no longer really
a viable way in the current banking system. You cannot go in
and borrow money to grow. You can only borrow money if you have
the assets and do not need them, so to speak.
But we have crowdfunding bills coming up. We have got a
whole variety of things coming in, which is an indication to me
that the system that we once had has become impenetrable, and
therefore, typical of the American way, there are many
different answers being created. Whether they will solve the
problem or do it fast enough or with the speed that we want is
another matter altogether. But there are a lot of different
avenues out there.
And when we talk about the government, I mentioned in my
testimony what we call ``speed dating.'' And what we do is we
do these in different towns and communities around the state,
and we bring all the lenders into a big room and we invite all
of the small business contacts we have had into the room and
lock the doors and make them get a loan. It works. Actually, we
make it a little more fun than I am making it sound.
Ms. CHU. Well, let me ask Mr. Harberts a question about you
talked about having trouble finding qualified workers for low
and mid-level positions. And in his budget, President Obama
recently proposed over $7.7 billion in new funding for
apprenticeship programs and job training to help eliminate the
skills gap. Do you think this would be helpful in closing that
skills gap and perhaps in getting our 10.5 million unemployed
citizens and the underemployed back to work?
Mr. HARBERTS. Absolutely. I think that will help. I have
been looking for a robotics engineer for almost two years, and
in our area, John Deere has a huge presence and Rockwell
Collins. And as a small employer, those guys get everybody that
comes out of the community colleges. They are only graduating
about 20 to 25 kids a semester and most of those kids are
spoken for in their first six months of their apprenticeship.
And I do not have a chance to get any of these guys. But I do
think that will help. Definitely will help. But it is a
challenge for a small entrepreneur versus a big corporation in
attracting these kids.
I go into the high schools and junior highs myself and I
speak to these kids to try to get them interested in
manufacturing because a lot of times kids equate manufacturing
to what it was back in the `40s. It is not. It is not a dark,
dungy old oily factory. It is high tech. And whatever we can do
to encourage that thought is good. So I do a lot of that. But I
think what President Obama has done is definitely going to go a
long way to helping.
Ms. CHU. And Ms. Xu, I have a feeling you have an opinion
about this.
Ms. XU. Well, it goes back to letting us have some pride in
making things again because not everyone is cut to be Bill
Gates. Let us say there are still those of us who are creative
and who enjoy making the most delicious cookies or beautiful
candles.
And there should be another thing about ``Made in USA''. As
a lot of Asian countries are different in terms of the trust of
their manufacturers and in processing food and in other
products, consumer products. We have a great chance to export.
``Made in USA'' stands for authenticity and a great consistency
and quality, so there is a huge demand now. If you look at a
lot of malls, you can see a lot of foreign people with luggage.
They are buying up things--our chocolate, our coffees--because
they think there is nothing they should worry about in quality.
So I hope that the program really goes down to the level of
training high school kids, not people already having a lot of
job offers because that is a real gap that is existing.
Ms. CHU. Okay. Thank you. I yield back.
Ms. MILLS. May I share a few thoughts on that?
Ms. CHU. Oh, of course.
Ms. MILLS. If you do not mind.
So three thoughts. The first is the people I speak with run
a lot into absenteeism in addition to issues with skills, and
it is not always as simple as just providing the skills.
Sometimes there are cultural dynamics at work as well and
incentives may be necessary in order to get people to
understand that the regularity of the structure of working in a
job like this is different than what they might be used to. And
the other thing is I think what I heard in some of the comments
I would like to tie back to something I mentioned which is the
importance of the story of success here because when you put
lenders in a room with manufacturing companies and you tell
them you need to lend to these companies to grow, if they still
believe in the decline of American manufacturing it is a very
different conversation than if they understand that things are
really changing. And that also matters a lot in terms of
encouraging people to go into the types of programs that will
create those robotics employees. So it is a soft thing but some
of the things that can be done are just creating these success
stories and making them more public so that people have a
different frame of mind, but the apprenticeships are an
important part of it. But on-the-job training typically is more
successful than structured programs.
Ms. CHU. Thank you. And I yield back.
Chairman RICE. Thank you, Mrs. Chu.
Mr. Harberts, I am going to start with you because you said
something I was interested in. You were talking about the lack
of skilled labor, and it is fascinating to me to see the high
rate of unemployment of people coming out of typical four-year
colleges who have majored in areas that may not be as
employable, and yet in our area, for example, we have a
technical school called Florence-Darlington Tech, and they have
a very advanced CDM program (computerized digital machining). I
was talking to the guy. In fact, he came and testified here six
months ago. And they can take, I believe it is 80 students a
year. It is a two-year program. And first of all, they cannot
find enough people to sign up for it. And the worst problem
they have is they cannot get people to graduate. Do you know
why they do not graduate? They get the jobs before they
graduate. Because after the first year they are hired away at
high salaries and they cannot get them to finish the program.
So we absolutely have a mismatch. And the really bothersome
thing about that is that some of the neighboring counties to
this area have some of the highest unemployment in the state.
In Marion County, South Carolina, we have 15 percent
unemployment, and yet they cannot find enough students to sign
up for this program with 100 percent placement rate. So it
truly is, there is a big mismatch, and how we fill that, that
is an interesting problem.
Ms. Xu, you were talking about--do you export now or were
you talking about the prospect of exporting?
Ms. XU. We are very happy to say we are exporting from day
one. Of course, to our neighbor Canada, Australia. Now we are
also going to be in China.
Chairman RICE. What port do you use, or do you know?
Ms. XU. Port Baltimore and California.
Chairman RICE. You know, one thing that serving on this
Committee and on the Transportation and Infrastructure
Committee and learning about the need to have ports that can
accept these Panama Canal ships, post-Panamax ships.
Ms. XU. It would speed things up.
Chairman RICE. Well, it drops the cost of shipping. So it
will cost instead of $3,000 a container, it will cost $2,500 a
container. So if you are sending a container of candles to
Australia and you can do it $500 cheaper if you can take a
post-Panama Canal ship.
Ms. XU. And to Mexico.
Chairman RICE. Or if you do not have access to that ship
and the guy up the road does, who is going to have a
competitive advantage? So we need to make sure that our ports
can accept these things. And the problem is the federal
regulatory requirements are so strict on digging out of port.
Mr. Hitt, do you know how long Charleston has been working
on getting their port dug out?
Mr. HITT. Yes, sir. It has been a long time.
Chairman RICE. It has been years and years, has it not?
Mr. HITT. Yes, sir. I believe the study is going to start
this year, however.
Chairman RICE. Port Everglades has taken 15 years to get
approval. Fifteen years.
Mr. HITT. Congressman, as you remember, we funded it from
state level because we could not wait any longer.
Chairman RICE. Yes, sir. And I worked hard on getting that
language in there for you on the water bill.
Mr. HITT. Yes, sir. You did.
Chairman RICE. But, no. It is a huge problem. Everybody up
here has talked about the federal regulatory web and how it
stifles business growth and competition.
I come from a background of local government. I was
chairman of a county council and we decided we were going to
get in the economic development business and it worked. And we
decided to compete. Charleston County competes with Savannah
County and counties in Georgia and counties in North Carolina
and counties in Tennessee. The state of South Carolina is doing
a pretty effective job of competing for jobs. Not necessarily
taking jobs from other states, but where is that business
coming into this country going to locate? And this man right
here has been responsible for a lot of that competition, a lot
of that success in competition.
Mr. Hitt, what I want to know from you is, and I also want
to know this from you, Ms. Mills, do you think the United
States is doing an effective job of trying to compete for jobs?
Do you think we have an attitude like a lot of our states have
and like a lot of our local governments have of let us go and
figure out why we are not competing and let us compete? I want
to know if you think we are doing it, and if you do think we
are doing it, what entity in the United States government do
you think is doing that?
Mr. Hitt?
Mr. HITT. We are not competing as effectively as we could.
We are successful in much of our international efforts because
we have such a strong consumer market and companies want to
come here because they want to learn and be able to increase
their penetration of this market. My company, BMW, was one of
those 20 years ago. I think we lack competition because we do
not have a sense of certainty in terms of our budgets. We do
not have a sense of certainty in terms of the tax programs that
we have in the United States. One of the things that we do when
we are attracting companies to South Carolina is we sit down
and lay out to them 30 years' worth of tax issues for South
Carolina and how they are going to be managed. We tell them
this is it and then we stay with them.
So predictability is such an important thing in business.
Companies, especially companies from around the world that
might have to deal in multiple currency and capital and
treasury systems, they need to be able to predict. As you know,
as a county councilman, the predictability of local taxes which
we have a mechanism for in South Carolina, we can even equalize
them over a long period of time, even with increases in
investment a lot time and relevel them. That was more important
to my old company at BMW than the rate, was the ability to
predict what was going to happen next so they could compete on
a worldwide stage.
Companies like that come to South Carolina. We have become
the number one exporter of tires, the number one exporter of
cars, and the reason is because it is cost effective to build
material there and sell it around the world. That is because it
is predictable. And if the U.S. was more predictable it would
be good.
Also, I would mention on the issue of engineers and such,
if I walk into an engineering classroom at Clemson University,
which is our major engineering school, half the students in
that class will leave this country when they graduate because
they are not native to our country. And as a result, we have a
great drain the way we train and then do not have the
opportunity to use those folks. That is a difficult thing.
I was with an international company, and the ability to
move people around and to manage that brain trust and be able
to learn from each other across different cultures and expand
our productivity and the like is lost because we simply do not
have the swiftness with which to do that anymore.
Ms. MILLS. I would say the answer to your question is no. I
do not see that happening in the way that you implied might be
helpful. And I agree that it would. And I would highlight that
when I meet with management teams what I hear frequently is
that other countries have a much more cohesive strategy and
offer them things that seem much more transparent and much more
clear. Over time, they often learn that what they believe from
other countries would be transparent, clear, and
straightforward is not. And part of what is happening with
things beginning to come back is people are realizing that what
they believed was certainty abroad was not certainty after all
and that, in fact, there is more equality in that dynamic
between the United States and other countries than they had
thought when they initially moved things abroad.
So I agree that the inconsistency is a problem and the
constant change is a problem and that there is a lack of
strategy and a lack of focus in trying to communicate to people
the things that are worthwhile and the things that are good.
But I actually think on the margin it is getting better and if
it begins to be encouraged that it could be quite important.
But, for example, something that I am hearing about a lot
right now is this question about export of crude oil. And if
you are trying to decide whether to build a refinery or whether
to build a chemical plant, whether to add a lot of new tank
cars so that you can move crude around the country, that has an
absolutely massive impact on your investment decision and there
is very, very little uncertainty around it because the
discussion changes from day to day. And that delays investment
and growth that would be happening right now likely if that
were not the case.
Chairman RICE. Something that really comes to my mind is
something I have been working on and something that is really
bothersome to me as my history as a tax lawyer and CPA. The
Affordable Care Act is a pretty big factor to companies,
particularly those that employ over 50 people. And when we have
these things, these aspects of it changed every month, does
that affect companies' decisions? Does that uncertainty that it
creates affect hiring decisions and so on and so forth?
Ms. MILLS. It is part of the conversation. So what I have
been hearing from people recently is, for example, frustration
about the fact that they are not certain they can get people
the quality of care they need if they need to shift them, and I
do not see it affecting investment decisions as much as I see
it part of the overall culture of confusion and lack of
clarity. I think that from a tax perspective, something that is
much more significant is the complexity of managing the tax
code and the fact that that gives such an advantage to larger
companies, particularly companies with operations abroad that
can appropriately or otherwise--not passing judgment there--can
use transfer pricing to make certain that their profits are not
in a higher tax location. So I would point to tax
simplification as something that I think is much more
significant.
Chairman RICE. What about tax rate?
Ms. MILLS. Less important.
Chairman RICE. Less important. Even if we have the highest
rate in the world?
Ms. MILLS. We have the highest rate in the world only on a
statutory basis, not on an actual paid basis. And when you
actually adjust for a lot of things in other countries that are
taxed in different ways--for example, higher payroll taxes,
other things--I believe, based on the research I have done,
that our tax rate compared to many other places is not really
that out of line. Now, if companies can shift to Ireland and
pay zero percent tax rate, which is what is now being done by
some pharmaceutical companies----
Chairman RICE. Canada?
Ms. MILLS. Not as big a difference, but I am not as
informed on that. The overall global tax structure that exists
right now is about to send things I think into an unpredictable
environment because of what is happening with being able to
pull companies to locations that have extremely low tax rates.
Chairman RICE. Mr. Hitt, what do you think about that?
Mr. HITT. I think the air of confusion that Ms. Mills is
talking about, whether it be with healthcare, with tax
structures, or what have you, it creates a perception of not
great stability. Companies look for stable environments in
which to be able to predict outcomes. They have a lot of
variables. Any manufacturer is faced with new variables every
day. They are trying to have predictability. So I hear from
companies. They talk about healthcare; they talk about the
confusion. They talk about taxes; they talk about the
confusion. They talk about the differential should one of their
suppliers be in Mexico because Mexico has a tariff advantage.
If we are going to export from the United States, our advantage
is less than Mexico's advantage. The view is that no one is
paying attention to our advantages.
Chairman RICE. Ms. Mills, you mentioned Michael Porter, and
I am a Michael Porter disciple. And he has written a menu of
things. He is a specialist in national competitiveness. And his
menu includes sustainable federal budget, high-skilled
immigration reform, corporate tax reform, international tax
system rather than taxing global earnings, Internet trade,
reform of the trade system, streamlined regulation, which I
think everybody up there, every one of you guys mentioned
regulation is a problem, infrastructure improvement, and
reasonable, responsible development of shale and oil gas
reserves. So in my opinion, if we get the cost down here, maybe
we do not have the lowest wages in the world, but maybe some of
these other costs being lower can help. I do not want to
compete for low wage jobs. I mean, I do not want to compete for
minimum wage jobs. I want good, high-paying jobs.
Ms. MILLS. I think one of the things we are all saying is
that good, high-paying jobs also create more minimum wage jobs.
Mr. HITT. Correct.
Chairman RICE. Right.
Ms. MILLS. And that those are an important thing to have as
well.
Chairman RICE. So if you look at this list, how do you
think--I am going to go to you, Mr. Hitt, because you are doing
it in South Carolina right now. How do we start working towards
these things at a national level? It seems to me that we need
somebody focused on this, on competing. Do you have any
suggestions for us? How do you do it in South Carolina? How do
you pull all these entities together and say we need to do
these things to compete?
Mr. HITT. Of course, in most of the states we have balanced
budgets. We have predictability on many of these things. We are
much smaller. We have the ability to pull together the
regulatory structures. We house the Small Business Regulatory
Commission inside our agency where we go in and we start
striking through the things that are a problem, bring them up
and bring them to the legislature or the appropriate agency.
There needs to be some kind of clearinghouse.
Porter's position is, I think, pretty similar to what you
are hearing from this panel, and that is we need stability,
predictability. In order to do that, someone has to be
watching. Someone has to be measuring. I mean, in the
manufacturing world where Mr. Harberts comes from and I come
from, you measure everything. And we need to measure what is
having an ill effect on our competitiveness. We can be more
competitive as a country. I will tell you, we do not seem to
have the attitude to be as competitive to the rest of the world
as parts of the rest of the world have to be competitive with
us, which is why we hear about Brazil and why we hear about
what is going on in China and Indonesia and India and other
places. And when we go and look at the secrets there, what you
find very quickly is you have predictability in those markets
that had been created by having--whether it is through a
commerce function or other function, the one-stop Ms. Xu asked
about where someone can come and find out how do I do business
here? Almost half of our new investment in South Carolina each
year is foreign. We are talking with people from all over the
world. They want to know how do you do it here. I have had them
ask me, ``Can you tell me what is going on in your federal
government?'' I have literally had them ask me that. And I will
tell them, ``Well, we will take care of you here in this
state.'' Because there is such a perception that there is not
stable, predictable environment. So it is heard, whether it is
healthcare, whether it is regulatory issues, not funding
infrastructure and the like, all of these things.
I had a very wealthy couple that I met with and had
breakfast with this morning that employ 80,000 people worldwide
and are looking to make their first manufacturing investment in
the United States, and they asked me what kind of investments
were we making for the future in South Carolina. And I was
happy to be able to tell them we were investing about $2
billion in our port and logistics system, railway system that
is under our operation in the Commerce Department, because we
are preparing to be even better and faster at logistics for our
manufacturers in the future. So companies are asking us what we
are doing to enable and prepare them to be competitive in the
future. I think the states that do the best job at that will
win. I hope mine is one of them.
Chairman RICE. Well, see, you just heard that attitude of
competitiveness right there. Did you hear that?
Ms. MILLS. I would like to hear more of it.
Chairman RICE. My question to you is can you give me any
suggestions on how we create that attitude of competitiveness
at the national level? Any suggestion? I know that is an
oddball question that you did not see coming.
Ms. MILLS. So you talked about measuring. Manufacturers
measure things. We are all sitting here talking about whether
this is happening. Right? We are pointing. We are like a blind
person trying to describe an elephant by touch. We are saying
this is happening in South Carolina. This was announced in this
place. If we had a better reporting structure where we could
say this is what we have gained that we had been losing--I
think one of the things that is not emphasized enough in all of
this discussion is we were losing. We were bleeding. We are
stabilized and we are improving. To an equity investor that is
huge. That is not the way most of the world things but that is
an absolutely wonderful, massive, fantastic change. Talking
about that, publicizing it, creating a website, having a place
where everything gets listed. Where when someone starts to talk
about an improvement in manufacturing in the United States you
say, yeah, you know, go to ``itisactuallyhappening.gov'' and
start to show things. And then start to have that also create
mentors so that when people have an opportunity and they are
trying to figure out how to navigate it they can maybe find the
examples of where it has been done.
I do think South Carolina has done this incredibly well,
and it does come down to the attitude and the organization. It
is, I think, going to be much more difficult at a federal level
because the states do also play such a big role. So things are
not apples to apples in every different place and it is not
going to be that simple. But I hesitate to say create an office
or come up with a person or any of those things. I just think
that lots of little efforts in a lot of different places can
all start to add up.
Chairman RICE. In my opinion, there is nothing more
important than this. This is our way out of the malaise. This
is our way out of our unemployment problems. This is our way
out of our entitlement problems. This is our way out of a lot
of crime problems. This is our way out of many of the biggest
issues that face us right now. And I wish I knew how to create
that attitude of competitiveness that you have, Mr. Secretary,
at the national level. And any suggestions you all can give, I
sure want to hear.
Mr. HITT. Well, again, I earnestly believe that greater
predictability is what drives manufacturing. What this man is
saying is if I can control this, this, these things around me,
I can make a profit. And if I can make a profit, I can sell
more, whether it is candles or machined parts for a variety of
industries. Everyone who makes something wants to make more.
They want to have more people working and they want to have
more production. There is a strong competitive spirit in this
country. We are seeing it going on right now at the innovation
levels. I think with what we are seeing with high-tech business
creation down the lower level. I see young people that say they
do not want to wear a coat and tie and go to work like the rest
of us. They want to do something different, and you are seeing
this whole code world grow up now with the applications and the
like. I believe there is a lot of activity. Government has not
figured out how to enable it.
I was recently given some money by the legislature to try
to go and see how we could help foster this. I put out a
program. I got 37 applications within six weeks from programs
that want to work in the area of innovation. Innovation is
something that is classically American. It is what we do that
gives us the competitive edge and the productivity edge, but
right now we are all sort of just watching it. We are not
necessarily feeding it. And I do not know the exact way to feed
it, Congressman. What I know is we right now have so many
unpredictable pieces that what I hear from people is they do
not want to take the risk. Again, the group I met with this
morning for breakfast before I flew here making their first
effort, it is a very scary thing to come from another part of
the world and set up huge capital investment into hundreds of
millions of dollars, and they are looking for predictability.
We have done quite a few in the last few years and they are
starting to trust us, but I think it goes back to we need to
communicate more and people see that trust. I hear from
innovation people if you just tell the story about what we are
doing it would be much better. So we are not telling the story,
and we are not giving predictable outcomes. And that is what
Porter is saying with sustainable budgets. All of that is
predictable. Give people the ability to predict their business
atmosphere so they can be successful.
Chairman RICE. Okay. Let me ask you one more question and I
am going to turn it back over. I am enjoying this.
If there was one thing that worries you, one thing that
really needs to be fixed, okay, one thing that is costing you
bringing jobs in, what is it?
Ms. MILLS. I would have to say the public education system,
which I think is at the root of a lot of the problems that
people are having with finding employees. And I do not think it
is always as complicated as creating new programs. I think that
we need to get back to focusing on basic blocking and tackling
and making certain that every child has the opportunity to
thrive and have all the skills necessary to work in one of
these new, more complicated, more quantitative manufacturing
jobs. It does not sound fast or easy, but I think it is one of
the most important things.
Mr. HITT. I have to agree. Workforce development. When you
are trying to locate a company, the first thing they want is a
site. Once you get past the site, you are now in the
competition for that. The next question is people, and are
there qualified people that we can hire? So you have to throw
everything at it. And you have to have customized training. You
have to have apprenticeships. We have done all of these things
to give people confidence in it. And let us remember, a
generation ago when I was a young person, way back in the `50s
and the `60s, our parents told us to get an education. Do not
work in the mill. Well, it is a new day. Now, we are trying to
get people to go back in the mill because, as Mr. Harberts
said, it is a different mill. And we right now are working sort
of against ourselves. I think we need to have innovation in
education like manufacturing high schools or medical high
schools or different sort of categories to create some
excitement.
In South Carolina, we had a problem at my old employer
trying to find people who could maintain all of our equipment.
Very high-tech equipment in the plant. And we were spending
enormous amounts of money training people to be equipment
services people. We took a page out of the Germans. We even
stole a word they made up called mechatronics and created a
mechatronics program and it just took off. Why? Mechatronics
sounded cool. Well, that is part of it. It is a marketing. We
all want to be what we feel. We want to enjoy what we do. Our
work is so much a part of what we do every day. So we need to
attract people to this again, and that means we need to talk
positively about it and what the success is to the children,
but also to the parents who sometimes say, no, I do not want
you doing that.
Ms. MILLS. And also sometimes to the school districts. I
have heard companies that have gone to school districts and
tried to create programs like this and been told, ``No. Every
child from this school is going to go on to college.'' Now, a
lot of those students then went on to expensive, not very good
colleges and have college debt that they cannot repay and are
much worse off on every level than they would have been if they
had just been permitted to get really good skills and training
in this area that this company wanted to train them in. But the
attitude was that that was not acceptable.
Chairman RICE. Thank you. I yield. I yield to the ranking
member.
Ms. CHU. I asked my questions and so, yeah.
Chairman RICE. All right. I have truly enjoyed this. I
really have. Thank you very, very much. I have learned a lot.
And I appreciate it.
Once again, I would like to thank you, thank the witnesses
for appearing today. You have all provided important insight
into how policy decisions in Washington impact small
manufacturers operating in the real economy. I ask unanimous
consent that the members and the public have five legislative
days to insert statements and extraneous materials into the
hearing record.
Hearing no objection, so ordered.
The Committee is now adjourned.
[Whereupon, at 3:12 p.m., the Subcommittee was adjourned.]
A P P E N D I X
[GRAPHICS NOT AVAILABLE IN TIFF FORMAT]
U.S. House Small Business Committee
Subcommittee on Economic Growth, Tax and Capital Access
``Made in the U.S.A.: Small Businesses and
a New Domestic Manufacturing Renaissance''
Secretary of Commerce Bobby Hitt,
South Carolina Department of Commerce
Good afternoon, Chairman Rice, Ranking Member Chu and
members of the Subcommittee. Thank you for the opportunity to
provide testimony on today's subject: the re-shoring of
manufacturing in the United States and its broader impacts
within the business community.
Many industry observers have been talking about a
manufacturing resurgence or `renaissance' happening in the
United States for the past few years. Research from the Boston
Consulting Group confirms the trend, as you have heard this
afternoon.
On the national level, between January 2011 and December
2013, the U.S. added 434,000 manufacturing jobs, a gain of 3.7
percent. This rebound follows a decade-long decline in
manufacturing employment at the national level, where nearly
five and half million manufacturing jobs were lost, a decline
of 32 percent.
Speaking on behalf of South Carolina's lead economic
development agency, our state is at the forefront of the
manufacturing revival today. South Carolina, while a small
state in physical size, has had a traditionally strong
manufacturing presence. This sector continues to gain momentum.
South Carolina's manufacturing GDP was $28.7 billion in
2012. This is approximately 16.3 percent of the state's overall
economy, a larger share than on the national level, where
manufacturing accounts for 12 percent of the U.S. economy.
Between the end of the recession (July 2009) and December
of 2013, South Carolina added 15,600 manufacturing jobs, an
increase of 7.4 percent--more than double the rate of growth on
the national scale over the same time frame.
According to a report released by the U.S. Department of
Commerce's Bureau of Economic Analysis, South Carolina is the
fastest-growing manufacturing economy in the Southeast.
The report also ranked South Carolina's economy as the 12th
fastest growing in the nation, and tied with North Carolina as
the fastest growing state on the East Coast.
We are known as a heavy weight in the aerospace and
automotive sectors, with the highest per capita employment by
foreign-owned companies. For these reasons, the national trade
press has given us the moniker ``Beast of the Southeast,''
which we wear with great pride.
Twenty years ago, it was a very different conversation.
Manufacturing was picking up and moving out of the United
States and South Carolina. Hardest hit in the state was the
textile industry, which shed some 60,000 textile mill jobs and
12,000 apparel jobs over a 10-year period (from 1998-2008) in
South Carolina alone.
At the same time, however, the automotive sector was taking
root in our state, anchored by German automaker BMW, where I
spent 18 years of my career and where I developed a personal
passion for manufacturing. Today, there are more than 45,000
South Carolinians employed by the automotive industry in the
state.
More recently, we have successfully recruited the aerospace
industry to South Carolina, including Boeing's 787 assembly
operation, and our state has three of the top four global tire
makers.
There are several forces driving this re-shoring and on-
shoring of manufacturing to the U.S. today.
Logistics is a driving force, as companies are seeking
savings in transportation costs. Companies are moving back to
the U.S. to get products to market faster and respond rapidly
to customer orders in a just-in-time manufacturing environment.
Workforce considerations and the desire to have influence
over the quality of the finished product are of importance, as
are lower energy costs and competitive costs for land.
Recent announcements reinforce that on-shoring is occurring
in South Carolina. In 2013 alone, nearly $981 million in
capital investment and 1,200 new jobs were announced by
manufacturers bringing their operations to South Carolina from
overseas. The companies range in size and scope.
Some recent examples of on-shoring in South Carolina
include:
Silcotech, a maker of silicone-based injection molding for
the medical industry based in Canada, selected York County for
its U.S. plant. The company is investing $3.5 million and
creating around 50 new jobs.
Last year, three Walmart suppliers announced new facilities
in South Carolina as part of Walmart's U.S. manufacturing
initiative. Collectively, these three companies represent 800
new jobs and more than $14 million n investment.
Importantly, these announcements are occurring in our
state's rural areas. In the past three years, more than 30
percent of the projects we've announced in South Carolina and
nearly a quarter of the jobs created have gone into the state's
rural counties.
The Walmart suppliers locating in our state include Kent
International, a bicycle company; Element Electronics, a maker
of televisions; and Louis Hornick and Company, which produces
window coverings and home textiles.
Yes, textiles are returning to the U.S. Another prominent
example for South Carolina is The Keer Group, a Chinese textile
company, which decided to build its first plant outside of
China in Lancaster County, South Carolina, where they will
produce industrial yarn. The company's $218 million investment
is expected to create 501 jobs.
Of course, when speaking about manufacturing, by and large,
these are larger operations employing hundreds, if not
thousands, of workers, who assemble products ranging from cars,
to planes to tires.
The reason is that manufacturing facilities are becoming
much more capital intensive. The average amount of capital
invested by companies per manufacturing job created in South
Carolina has more than doubled in just four years' time. In
2013, this figure was $424,000 of capital per job created
versus $176,000 in 2009. This points to the fact that, overall,
most manufacturing requires a large amount of capital and is
difficult to grow to a meaningful scale for traditional small
businesses.
Where the small business community typically reaps benefits
from manufacturing in our state is either by providing a value-
added service in direct support of the manufacturing operation
(such as machining or repair) or by providing other services
like janitorial, staffing or subcontracting on construction
projects.
For South Carolina, the jobs multiplier for automotive
manufacturing, for instance, is approximately four, meaning
that for every automotive manufacturing job created in the
state, three additional jobs in a variety of service and
support functions are created. Most of these jobs are in small
businesses. Other industries like aerospace, food products and
machinery manufacturing have similarly high jobs multipliers.
There are also examples in our state of manufacturing
contract work that has been on-shored to manufacturing
operations of fewer than 100 employees. This includes Sargent
Metal, which contracts with Otis Elevator and ADEX Machining,
which provides value-added work for the aerospace sector. In
these cases, being Made in the U.S.A. offers a highly skilled
workforce, lean manufacturing processes, as well as cutting-
edge technological advances and world-class infrastructure.
The Department of Commerce's mission is to recruit business
to the state and to help existing businesses grow. Commerce has
positioned itself as being the state's business agency--no
matter the size of that business. An area we have strived to
augment over the past three years is our small business area,
which offers resources and programs specifically aimed at the
small business community.
These programs include exporting assistance, which has been
the beneficiary of federal funds through the STEP program
(State Trade and Export Promotion). From 2011 to 2013, our
staff has helped 59 small-and-medium-sized enterprises enter 24
export markets, resulting in $3.7 million in sales.
Additionally, we have hosted a series of events pairing
small business owners with prospective lenders--something akin
to ``speed dating'' for acquiring a business loan.
The Department of Commerce works to connect the dots
between small business and large industry. To accomplish this,
we host supplier outreach events and have a ``Buy South
Carolina'' program to bring together industry's needs with
businesses in the state that can fulfill them.
One recent success is Continental Tire, which is investing
a total of $500 million and creating 1,600 jobs in Sumter,
South Carolina. The tire maker announced in January that it has
awarded some $100 million in contracts to South Carolina
companies to date, an example of the ripple effect that occurs
when a company of its scale locates in our state.
With this positive momentum, how can we encourage this
growth curve to continue?
Success hinges on many factors, but I see three things as
being the most crucial to our recruitment efforts: sites,
infrastructure and workforce.
We continue to place emphasis on building our statewide
inventory of suitable sites and buildings to show prospects. As
a state, we are offering financial assistance to counties for
site development and encouraging collaboration among regions
for multi-county parks.
Certainly infrastructure is critical. This ranges from our
transportation infrastructure, including our seaport assets,
roadways and rail network; to utility infrastructure like water
and sewer. The federal Community Development Block Grant
program as well as our state's Rural Infrastructure Authority
are helping to address the infrastructure needs in South
Carolina's lesser developed areas. Bringing this crucial
infrastructure online helps ``set the table'' for economic
development to happen.
And finally, workforce development is vitally important.
South Carolina has invested in training programs that provide
company-specific training and apprenticeship opportunities.
These programs, readySC and Apprenticeship Carolina, are rated
among the best in the nation.
Overall, the industry points to a need to encourage more
young people to explore manufacturing as a career in order to
get them into the pipeline. Today, the biggest deficiencies are
in trained technical positions with a two-year technical
degree, such as industrial maintenance and precision
manufacturing, as well as four-year STEM fields such as
engineering and information technology.
In closing, South Carolina is benefiting in a large way
from manufacturing investment, and I believe there will
continue to be opportunities for our small business community
to profit from the manufacturing renaissance. The adage ``a
rising tide floats all boats'' certainly fits.
Again, thank you to the leadership and members of the
Subcommittee for the invitation to address you today.
Manufacturing is a personal passion of mine, and I appreciate
the opportunity to share the South Carolina story.
# # #
Written Testimony of Kevin Harberts
President/CEO
of
Kryton Engineered Metals, Inc.
Before the
House Committee on Small Business
Subcommittee on Economic Growth, Tax, and Capital Access
``Made in the U.S.A.: Small Businesses and a New Domestic Manufacturing
Renaissance''
March 13, 2014
Thank you for the opportunity to testify before you today.
My name is Kevin Harberts, President and CEO of Kryton
Engineered Metals in Cedar Falls, Iowa. I think this hearing is
a great opportunity to showcase manufacturing in America and
shed light on an issue which crosses political lines and
international borders.
Since our founding in 1981, Kryton Metals has become an
industry leader in manufacturing spun and fabricated metal
products. We service a range of industries including foundries,
ventilation, lighting, aerospace and automotive. Many of our
products contribute to enhancing the nation's energy efficiency
and are installed in LEED-Certified buildings around the
country.
This time a year ago we had 63 employees; today we have
grown to 71 and hope to hire another 8-12 this year. We
attribute this growth directly to reshoring--a product line
which left the U.S. a decade ago and came back to America's
heartland. But to understand our growth, you have to first
understand how we got here.
Like many other companies in our industry, the Great
Recession hit us especially hard. In 2008 and 2009, we had to
lay off 35 employees due to the downturn. For any family-owned
business, this is one of the most difficult things to do, but
it was necessary for us to survive.
Then, about two years ago, we became aware of a life
changing opportunity. A company sourcing from Europe was
exploring whether they could return the manufacturing to the
U.S. and find a supplier with competitive pricing to serve the
North American market. We made some prototypes to demonstrate
we had the capabilities but the real test was the price. In our
industry, a price differential of a fraction of one penny can
mean the difference between getting the job and missing out.
At the time, we were not in a position to hire more
employees to meet the demand so, like all manufacturers; we
learned to do more with less. The company invested heavily in a
laser machine specifically so we would service the customer and
increase automation to meet their target price and we were able
to convince this company to reshore the work. We made these
investments despite the significant risks and the environment
of the Great Recession.
Our customer slowly began transferring the work to our shop
in Iowa and we are now looking at a $5-6 million product line.
For a $10 million a year company, this changed the fate of our
business and the lives of our employees.
Foreign manufacturers choose to reshore and source from
U.S. suppliers for several reasons such as price, quality,
availability of raw materials such as steel, and location. In
our case, the customer wanted to source from a U.S. supplier so
that it can ship products both to Illinois and Monterey,
Mexico. We not only convinced the customer that our prices are
competitive but demonstrated the obvious--Iowa is much closer
to Illinois and Mexico than the customer's supplier in Europe.
Prior to reshoring its business, the customer had to wait
two months from the time it placed its order with Europe to
receive the products in North America. After reshoring, its
delivery time went from two months to two weeks.
These time savings are a significant advantage we provide
to our customer over its competitors. We can develop new
products for it in a matter of weeks rather than wait for a
ship to cross the Atlantic. This is especially important
because, while I work in a ``just-in-time'' industry, we all
live in a ``just-in time'' world where the consumer wants the
latest technology and wants it today.
The decision of our customer to supply from Kryton Metals
will carry us into 2020. We are currently running 50 SKUs for
them and plan to grow to 300-400 by the end of 2015. We are
going to save our customer money, grow our business, and--most
importantly--create jobs in Iowa and throughout our entire U.S.
supply chain.
These kinds of opportunities just don't happen often in our
industry and are directly related to reshoring. In convincing
the customer to bring the work back to the U.S. from overseas,
we not only created jobs at Kryton Metals, but created jobs for
our suppliers and vendors as well. For example, my raw material
purchases have increased fourfold due to this reshored business
which created the need for suppliers to also hire new employees
to meet the demand. This is an important point about the
manufacturing industry--not only do we directly employee 12
million Americans, but our industry indirectly supports a
combined 18 million jobs.
Although we are currently experiencing tremendous growth,
it hasn't come easily and it's not guaranteed to continue. We
are now in danger of becoming a victim of our own success. We
expanded our operations at such a rapid rate that I cannot find
enough qualified employees to fill my job openings. While we
succeeded in convincing a company to bring overseas work to the
U.S., I can't expand our business without qualified employees.
Earlier I mentioned that Kryton Metals hopes to hire 8-12
more Iowans this year. This may not seem like much but, for a
70-person company, it amounts to a significant expansion.
Furthermore, the positions manufacturers create are solid
careers, not mere minimum wage jobs. For some of my openings,
the starting salary is $70,000-80,000 a year plus benefits.
Additionally, the uncertainty in Washington has the
potential to hinder manufacturers' future growth and reshoring
successes. While politicians argue among themselves, employers
like me are stuck in a holding pattern. We don't know whether
Congress will extend the R&D Tax Credit, we're unsure what new
rules OSHA and the EPA will impose on us, and we can't find
qualified workers in large part because Congress has not
updated our job training laws in over a decade.
The federal government needs to help foster an environment
in which businesses from around the world want to reshore work
to the United States. Domestic manufacturers can only lower
their prices so far we're not changing our location. Which
leaves federal government policy and instability.
Kryton Metal's future looks pretty sunny at the moment but
manufacturing's future is incredibly cloudy. Although the
economy is improving, it isn't doing so at the rate we need to
grow American manufacturing. To improve manufacturing's
forecast, we must look to overseas opportunities and convince
foreign customers that the U.S. is THE place for manufacturing.
Manufacturers are dong our part to encourage reshoring--now its
Washington's turn.
Thank you for allowing me to testify today and to highlight
the great story that is manufacturing in America.
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Thank you for inviting me Chairman Rice, Congresswoman Chu,
and distinguished members:
Pacific Trade International (PTI) is one of the leading
home fragrance suppliers in the U.S., with 130 employees and
nearly $60M in sales. Marketed under the Chesapeake Bay Candle,
BlissLiving Home and Alassis brands, PTI fragranced candles,
diffusers and accessories are sold in major U.S. retailers such
as Target, Kohl's, TJ Maxx, Marshall's and Home Goods.
Since 1994, PTI's products were produced and sourced from
factories in China and Vietnam. PTI held an ownership stake in
these factories and could depend on a reliable, high-quality
supply chain. Beginning in 2008, we saw a rapid increase in the
costs of labor, freight and materials in Asia, and also an
increased demand for faster replenishment cycles from our U.S.
customers due to the financial crisis and the need for lean
inventory. The pressures on cost and inventory led PTI to
become one the earliest proponents of ``in-sourcing''. The
following reasons pushed us to make the U.S. our final
destination for manufacturing operations, rather than
considering traditionally less expensive countries such as
Mexico and Poland:
1) Speed to Market
Our U.S. factory can deliver replenishment
orders with one week, vs. 4 to 5 weeks from
Asia. This makes our factory attractive for
retailers particularly on seasonally sensitive
products.
2) Cost of Shipping and Logistics
Avoiding transnational shipping and relying
only on domestic shipping cut unpredictable
cost variations due to oil price fluctuations
and the constant demand-supply changes that
impact ocean line prices.
3) Production costs
Automated equipment used in the U.S. makes
per unit production costs close to that of
labor costs in Asia and delivers consistent,
higher quality.
For these reasons, we decided to settle in Maryland where
the brand was initially launched and where we are
headquartered.
We found a number of unoccupied warehouses along the I-695
corridor near Baltimore. The number was staggering. 1 out of
every 4 blue-collar workers was unemployed. We decided to build
our factory there, taking advantage of the abundant warehouse
space. We also wanted to give back to the community by
employing local staff.
Built without government incentives or support from local
agencies, PTI's new factory in Glen Burnie, MD, was budgeted to
cost approximately $4M in capital investments, working capital
for start-up, and inventory.
We were unable to identify any source of available
government financing that did not require a lengthy application
and approval process. The Maryland Economic Develop Council
offered the possibility of low-interest rate financing, but the
review process proved to be too lengthy and the funding limits
too restrictive to meet our needs. In the absence of viable
funding options, the company proceeded with the project from
its cash reserves, hurting its cash flow and liquidity.
The time to completion from initial lease execution was
planned to be approximately 6-8 months with completion planned
for Q4 2010.
In reality, the project took 5 months longer and ran $2M
over budget due to complications arising from the need for us
to make the new facility compliant with all relevant codes for
permitting. The state had not opened a factory for almost two
decades. As a result, codes for manufacturing facilities were
outdated. The lack of guidance from local and state agencies
made the process more time-consuming and costly as we had to
hire an architect, three engineering firms, and a general
contractor to help sort through the design issues related to
code compliance and permitting. Although we started to occupy
the warehouse and pay for key staff as planned, the planned
production start date was delayed from late 2010 to mid-2011.
This delay resulted in losses from operating expenses carried
before production could begin.
In the timeline below, the actual permit delay was two
months due to redesign for compliance issues. Prior to that,
there was a delay of at least one month due to confusion of
code-related design issues. There was also another one-month
delay related to construction of HAZMAT storage, ADA bathrooms,
and sprinkler/alarm upgrades. Due to the local government's
lack of understanding of what is applicable to a manufacturing
facility, we were asked to study codes applicable to hospitals,
schools, and restaurants, resulted in further delays. The
following is a timeline of the process:
December 2009: First strategic discussion
with key customers regarding prospects of building a
factory in the U.S.
January-March 2010:
Business planning and site selection.
Chairman David Wang and COO Dale Williams
reviewed potential sites in Ontario, CA, which
were convenient to the Port of Los Angeles and
major distribution partners. I reviewed sites
in central and coastal Maryland. A comparison
of initial costs, recurring lease expenses,
labor markets and ongoing overhead costs were
conducted.
March 2010:
Initial orders for production equipment
placed with German vendors.
Consulted fluid systems engineers to
design and specify wax storage and mixing
systems.
April 2010:
Lease was signed for Glen Burnie facility,
a 120,000 ft \2\ warehouse in Bay Meadow
Industrial Park. The site chosen was a former
warehouse for Reliable Liquors, which moved to
a larger facility nearby. The facility was
built in 1980 and permitted for use as
warehouse/office space only. The facility
encompasses 20,000 ft \2\ of finished office
space and 100,000 ft \2\ of warehouse space.
Met with local Chamber of Commerce
officials and County Economic Development
officials to identify possible incentives and
financial aid resources.
Met with Anne Arundel County Department of
Inspections, Licenses and Permits (AAC DILP) to
discuss permitting process and applicable
codes. AAC DILP provided little guidance; they
simply referred PTI to consult the 2003
International Building Code, the ADA code
applicable for change of use, and NFPA 101 Life
Safety Code F1 for manufacturers. We were
advised the county would require ``upgrades to
the fire safety systems including smoke
curtains for the office area, sprinkler
coverage and alarms'' to reflect change of
building use from manufacturing/warehouse to
mixed use with manufacturing.
-- May 2010:
PTI commissioned a commercial architect to
begin the design and layout processes for
tenant improvements on the proposed Glen Burnie
site.
Hired electrical, structural and
mechanical engineers from the same firm to work
with the architect on required upgrades.
June 2010: Hired a General Contractor to
coordinate architectural and engineering work and
assist with code and permit issues.
July 2010: Completed the first design for
tenant improvements.
August 2010:
Filed first permit application on August
8.
August 19 - first comment letter received,
consisting of five pages and 30 action points.
Key items included hazmat storage, fire safety
plans, and HVAC for air exchange requirements
First contractor quotes received at costs
50% above PTI initial estimates.
PTI initiates a redesign with contractor
to reduce costs and address hazmat storage and
fire safety issues raised by AAC DILP.
August 20 - Retained independent fire
safety engineers and began investigation of
fire safety and HAZMAT storage solution for
redesign.
September 2010:
September 13 - Received feedback on fire
code issues from fire engineers, began redesign
of HAZMAT storage and HVAC system to address
code compliance in the most cost-effective
manner.
September 28 - New permit application
filed with revised plans for hazmat, fire
safety, and HVAC.
October 2010:
October 18 - Permit received.
October 25 - Construction begins.
May 2011:
May 17 - Certificate of occupancy received
from AAC inspector.
May 24 - First production begins.
June 2011: Grand Opening
Since opening, the Chesapeake Bay Candle factory has gone
from 17 employees to 80, and tripled production capacity. It is
now one of the leading new job creators in Anne Arundel County,
MD.
The company faces challenges in finding qualified
employees. Most applicants lack sufficient skills or training.
Basic reading, writing and arithmetic skills are often
deficient and many are unable to follow instructions or
function in a modern, collaborative production environment. To
combat a 50% turnover rate in these jobs, additional incentives
are being considered.
The local area also suffers from a lack of qualified mid-
level supervisory talent, reflecting the absence of relevant
vocational training and a vanishing ecosystem of other
manufacturing companies.
Our recommendations to the Committee are as follows:
1. Create regional advisory offices within U.S.
Department of Commerce or as an extension of the Small
Business Administration to help small and mid-sized
businesses navigate state, local and other regulatory
requirements. Many investors may not know how to
determine which states best fulfill their manufacturing
and business needs, and a federal level review of each
state will help speed up the selection process.
2. Through the same mechanism, guide companies to
relevant incentives for tax breaks, financing, training
and other programs whether sponsored by local, state or
federal entities.
3. Provide a resource guide specific to new
manufacturing ventures to help identify local
suppliers, private developers, and other assets
critical to start-ups.
4. At the state level, provide a one-stop concierge
service to help new investors understand compliance
issues and the procedures related to building a
manufacturing facility so they can make more informed
decisions.
5. Encourage local high schools and vocational
colleges to provide gateway programs to internships and
apprenticeships for local manufacturers to draw upon as
sources for qualified talent.
6. Help educate Americans that we need to be a
national that produces goods, rather than a nation that
just purchases them. People should take pride in making
things and the government should strive to eliminate
the stigma associated with manufacturing jobs.
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