Detroit disaster an anomaly for U.S. manufacturing

CHICAGO (Reuters) - If there is any good news in this week's bankruptcy of General Motors Corp GMGMQ.PK, and of Chrysler's on April 30, it is this: the problems of carmakers say little about the health of the broader manufacturing sector.

In fact, U.S.-based goods producers are in better shape than ever before, analysts say, though they have not escaped unscathed from the current global economic downturn.

Indeed, a survey of the U.S. industrial landscape not only provides a reassuring portrait of the nation's manufacturers but says a lot about what is in store for the trimmed-down U.S. carmakers if their court-supervised restructurings work out.

"There is a lot of dynamism in U.S. manufacturing," says Sunil Chopra at the Kellogg School of Management at Northwestern University.

"One can look at the mistakes of GM and Chrysler -- or you can look at the companies that have done it well."

Tom Murphy, the head of the manufacturing practice at the consulting firm RSM McGladrey, agrees.

"The U.S. still manufacturers more than any other country in the world," Murphy says. "We're just making different things than we made in the past and we're making them differently. That's not going away just because of what's happened in the automotive industry."

SMALLER, LEANER

To be sure, manufacturing is no longer as important to the U.S. economy as it once was. Last year, it accounted for just 11.5 percent of gross domestic product, according to the Bureau of Economic Analysis.

That was down from 11.7 percent in 2007 and the all-time high of 28.3 percent in 1953.

Employment in the sector, which peaked at 19.5 million in 1979, has fallen steadily ever since and was just 11.5 million last year.

But many economists believe that shrinking is a good thing: a sign of the increasing sophistication of the U.S. economy on the one hand and the productivity gains the industry has racked up in recent years.

"That contraction is progress," says James Schrager, a professor at the University of Chicago Booth School of Business. "We have a larger output of goods and services than ever and we have a smaller number of workers doing it."

The manufacturers that remain, companies like Caterpillar Inc (CAT.N), Deere & Co (DE.N) and Cummins Inc (CMI.N) to name a few, are ferocious, feared global competitors -- the Toyota Motor Corp (7202.T) of their respective businesses.

They got there by doing what GM and Chrysler failed to do: They recognized, decades ago, the stark realities that came with growing globalization and made the organizational and operational changes needed to survive. They also embraced innovation and developed game-changing products -- the equivalent of Toyota's Prius hybrid -- before their rivals.

The evolution was not easy. In the case of Caterpillar, it involved a bitter confrontation with the United Auto Workers union throughout much of the 1990s.

In the end, Caterpillar prevailed, wresting concessions from the union that significantly lowered its labor costs and increased its flexibility. Before the showdown, Japanese competitors were able to sell some products for significantly less than Caterpillar. After the showdown, those cost advantages narrowed dramatically.

Companies like Caterpillar also reorganized their white-collar ranks, shaking up rigid hierarchies and creating decentralized business units where executives were held responsible for the profits or losses their units booked.

That was something GM, in particular, never did. In a famous 1988 memo to the carmaker's executive committee, Elmer Johnson, a GM board member, warned that few of the company's top 500 executives "have been groomed for bottom line responsibility and accountability."

Under a series of CEOs raised in the GM culture, including Rick Wagoner, the CEO ousted by the Obama administration this spring, things never really changed. The company's managers, in Johnson's words, "tended to develop, like the rest of its work force, notions of entitlement: cradle-to-grave security, regular raises -- in short the club mentality."

FROM PUSH TO PULL

The U.S. manufacturers outside Detroit were also relentless in squeezing inefficiencies out of their operations -- and the operations of their suppliers.

Instead of making components in big batches and pushing them into the factory, where they sat until needed, manufacturers adopted a pull-oriented "lean" approach, producing components only as they were needed. It sounds like common sense. In fact, it was revolutionary.

That was something the U.S. carmakers, with their mass-production mindset, were never able to do. In part, of course, this was because of their agreements with the UAW. The most notorious of these was the so-called job bank program, which essentially guaranteed laid-off assembly workers as much as 95 percent of their normal pay and benefits.

As Japanese rivals and others stole market share from the automakers, the U.S. carmakers found themselves with more capacity than they needed.

But if they did the logical thing and idled production to bring output in line with reduced demand, they still had to pay the workers to do nothing.

So the carmakers often chose to keep workers on the assembly line, making cars that no one wanted and that could be sold only with deep discounts -- often to rental fleets. A vicious cycle was set in motion that was only partially confronted during union negotiations in 2007 -- too late, it turned out, to save GM and Chrysler from bankruptcy.

"There's no reason on earth why GM and Ford and Chrysler can't be as efficient and cost-competitive as Toyota," says Alex Blanton, an analyst at Ingalls & Snyder who has been covering manufacturers since the 1970s.

"All they have to do is run their plants the way Toyota does. But you can't do that if you have these union work rules and costs -- like pension and healthcare costs -- that are not in line with the competition."

(Reporting by James Kelleher, editing by Matthew Lewis)