"Structural" costs inhibit manufacturing growth, says NAM report

U.S. manufacturers face a large structural cost disadvantage—31.7 percent to be exact—as they compete with companies from the country's nine largest trading partners, according to a report from Washington-based National Association of Manufacturers (NAM). What's worse, the gap is growing rapidly: Just three years ago, it was 22.4 percent.

The Escalating Cost Crisis, which follows up on a similar 2003 study, identifies excessive taxes, employee benefits costs, litigation, and higher energy prices as the main causes.

"These trends are headed in the wrong direction for manufacturers and the U.S. economy in general," says John Engler, NAM president. "They have become an unavoidable issue, and the responsibility for addressing them is not in Brussels or Beijing, but right here in Washington—and in state capitols across the country."

The report quantifies specific cost differences between U.S. manufacturers and those in Mexico, Canada, Japan, China, Taiwan, South Korea, the U.K., France, and Germany. High corporate taxation rates account for one-third of the cost gap.

Energy is another huge concern. The report notes that natural gas costs 30 percent less in Canada, despite huge untapped reserves in the U.S.

Engler stresses that U.S. manufacturers are competing with other governments—not just companies. "Our competitors are moving aggressively to strengthen their position," says Engler. "By standing still, we will fall further behind."

There are a few bright spots. The Medicare Modernization Act of 2003, which allowed for the creation of health savings accounts, has had a marginally healthy effect, though the expected gains have yet to fully materialize. The growth of litigation costs has slowed, thanks to the Class Action Fairness Act of 2005. And gains in energy efficiency have driven productivity per BTU to new heights. But as Engler notes, "We can't conserve our way to an energy strategy."

The cost burden has grown due to "the compounding effect" of rising energy and raw materials costs, plus plant and worker subsidies paid by foreign governments, says Bob Ferrari, a program director with Cambridge, Mass.-based Manufacturing Insights. "U.S. manufacturers have done a very good job embracing automation and Lean manufacturing—something they've had to do to compete," says Ferrari. "But they can't pass on higher costs because markets are too competitive. That's why and how margins are being squeezed."

Just how competitive have things become? According to the NAM report, "In the past decade, manufacturing prices have increased by only 4 percent, while prices in construction, health care, and other nonmanufacturing industries soared by nearly 60 percent."

Engler is calling for a Manhattan Project-like national focus on energy, with more domestic drilling and offshore deep-water exploration, increased investment in alternative energies, and expansion of DOE's Energy Star program.

Here are other items found on NAM's agenda:

• Making tax cuts permanent, and repealing the "death tax";
• Reinstating the R&D tax credit;
• Strengthening consumer-driven health care;
• Putting an end to frivolous and "junk" lawsuits;
• Eliminating foreign tariffs on U.S. goods; and
• Bringing environmental compliance costs more in line with Europe.

Engler expressed disappointment that the 109th Congress could find "no room on the agenda to address energy supply and demand, or the R&D tax credit. Americans can't afford anything less than a full-bore effort on behalf of manufacturers."