Opinions on where the majority of rubber products will be made in the next 50 years are as diverse as the industry itself.
One person says the shift of rubber manufacturing overseas is the biggest exodus since Moses hoofed it out of Egypt. Another will say the resources in the U.S. are too rich to abandon and there's no better place from which to serve their customers. Many thoughts fall somewhere in between.
But most players in the rubber game will agree that labor and its costs are one of the key factors-if not the most important-in determining how they do business.
That doesn't mean everyone is looking for the cheapest workers and processes. Naturally it's not that simple, and each company, product and market has its own needs driven by customer demands.
But every rubber manufacturer is looking for ways to reduce and refine its labor costs to be competitive and profitable. Some find ways to do it successfully in the U.S., while others consider the $1 per hour-or less-wage rates in China and other markets just too low to ignore.
Scott Peters, vice president of sales and marketing with custom extruder and molder Lauren Manufacturing Co., in New Philadelphia, Ohio, puts the conundrum this way: "We have seen a lot of manufacturers in the developed world run from low-cost country to low-cost country. That may be right for some types of companies and completely wrong and unnecessary for others.
"Most people find it interesting, for example, that while some auto makers in North America are frantically driving their supply base offshore, others are frantically building domestic supply partnerships and struggling to increase manufacturing plants in the U.S. fast enough.''
The trends
There's no doubt the trade winds have shifted to markets abroad in the U.S. rubber product sector. The trade deficit for all rubber goods grew to more than $7.6 billion in 2006, according to U.S. Commerce Department data; in 2000, the deficit was slightly more than $3 billion.
Imports in the category exceeded $13.8 billion last year, while in 2000 the figure was $8.3 billion.
The trade deficit within the largest rubber product category-tires-more than doubled during the same span to nearly $5.3 billion. Imports ballooned to more than $8.6 billion from $4.8 billion in 2000.
Dick Wilkerson, executive vice president at Michelin North America Inc., said the labor component is significant for the tire maker, especially in North America and Western Europe.
Bill Hyde, director of C4 olefins and elastomers for Chemical Market Associates Inc. in Houston, said tire imports nearly doubled in North America over the past five years and more than 50 percent over the same period in Western Europe. Meanwhile, exports from China during the period have risen nearly 150 percent and two-fold in Central Europe.
The driver of those shifts? Labor costs, Hyde said. Average wages within the tire industry in the U.S. are higher than the average wages in Poland and China by factors of more than 5 and 17, respectively, he said.
According to the U.S. Department of Labor's Bureau of Labor Statistics, the median hourly earnings in mid-2004 for machine setters, operators and tenders within the rubber, plastics and metal industries ranged from $11.63 per hour up to $21.28. That's a lot or not much depending upon one's perspective, but compared to what they're offering for the same work in other locales, there's no need to compare.
Becky Blust, associate professor of engineering technology at the University of Dayton, said some skilled workers in the U.S. are making $25 to $45 an hour with benefits and the overall labor component-including salaried employees-can make up 40 to 60 percent of a company's cost structure.
"That makes it very hard to compete with $1 an hour and little to no benefits in China,'' she said.
David Meyer, associate professor of management at the University of Akron, said labor costs really get interesting when you start adding a company's large executive salaries, health care and other legacy costs for active employees and retirees. That total package-buoyed by little to no government subsidies-makes the competition even tougher.
Hyde said when a manufacturer decides where to build a facility, it does need to look at the total cost of labor-not just the wages-but also must consider the political stability of the country, the long-term performance and availability of the work force, and the labor intensiveness of the job.
That's where tire production, especially on the commodity end, can be at a disadvantage due to the relatively high labor-intensive process. "The direct labor costs make up about 20 percent of the cost of a tire,'' he said. "Chinese labor has the same production expectations, but it might be available at a factor of 30 less.''
A challenge: low-cost markets
Cost-cutting as a priority in a competitive global economy is neither new nor surprising. In the company's 2006 financial results released in mid-February-where it revealed its net earnings fell more than 35 percent from the year before-Michelin CEO Michel Rollier emphasized the need to bring the firm's entire cost structure down and to push sales volume via "increasingly competitive product offerings.''
When Goodyear opened up its collective bargaining talks with the United Steelworkers union nearly a year ago-long before the 86-day strike that ended just after Christmas-Jon Rich, president of the company's North American Tire unit, emphasized a lower cost structure and improved productivity in North America.
Those tire companies-and Bridgestone/Firestone-all took steps in the past year or so to cut costs by reducing capacity in commodity or mass-market tire production. Demand has been on a downward spiral in North America in those segments, but the costs involved and relatively low return have focused the tire makers squarely on the high end of their product lines.
Goodyear is choosing to compete at the high end of the market because it believes its opportunity for growth and profitability is in value-added products, a company spokesman said. The tire maker's "signature technologies offer a distinct value'' that consumers are willing to buy, he said.
USW President Leo Gerard, whose union represents the bulk of the hourly rubber workers in the U.S., said he believes "rotten trade deals'' have driven companies out of the country. A lot of the facilities that have closed in the U.S. in recent years "didn't close because the companies weren't making good, quality tires or because they weren't serving the market or they weren't able to make tires at a decent price.
"They closed because they wanted to go somewhere they could do it cheaper.''
Custom rubber molder South Bend Modern Molding Inc. can't compete on a cost basis with rubber manufacturers in low-cost countries, nor can many of its remaining competitors, according to company President Chuck Zimmerman. The combination of higher labor costs and government-imposed regulatory costs make it unlikely that Mishawaka, Ind.-based South Bend will ever be a low-cost manufacturer again, he said.
The company has chosen instead to compete as a "low-cost supplier,'' forming business relationships with good rubber manufacturing sources in several low-cost countries. "If a widget can be made for a penny in China, why would anyone pay six cents to do it here?'' Zimmerman asked. "Why not do it in the most efficient place?''
Lauren's Peters said total labor costs-including tooling, capital equipment, direct labor and overhead-have heavily impacted value chain competitiveness in the U.S. "We do see products and situations where purchasing abroad makes sense for our customers,'' he said. "Lauren has an active extended supply capability we offer those customers. However, logistics and other aspects related to timing and responsiveness must be effectively managed to make this a success.''
While the wage rates abroad are the trump cards in many situations, the typical vision of how an overseas manufacturing plant operates is not necessarily the reality. Blust, who has been to see numerous plants in China, said she's seen some beautiful new facilities with lots of workers. "They can throw labor at anything,'' she said.
Maybe even more importantly, the "quality gap'' is narrowing, aided by the knowledge of many expatriates living in China, she said.
The Goodyear spokesman agreed, saying that in China, companies have great equipment, make good products and the work force has the attitude "reflecting the American attitude of the post World War II era. They have pride in getting work in the manufacturing sector, an incentive to make great products and make inroads in the U.S.''
