US dilemma: to build or not to build new factories?
American manufacturing is walking a tightrope - trying to balance the need for new factories against the possibility those factories won't be needed if the economy takes a dive. In the face of fierce competition from imports, United States companies have shuttered older plants, sold less profitable subsidiaries, and redoubled efforts to make good in their core businesses. But in the process of becoming lean and mean, many companies simply have less production capacity.Skip to next paragraph
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Now, with the dollar falling in value and exports rising, US factories that were just bumping along are running at full throttle - but only barely able to meet demand for paper, steel, aluminum, chemicals, rubber, and plastics. Thus, management's dilemma: to build or not to build a new factory?
``Corporations haven't been putting their dollars into new plants,'' says Jerry Jasinowski, chief economist at the National Association of Manufacturers. ``They're finding ways to increase capacity in existing facilities.''
Mr. Jasinowski says even companies in industries that are running at 90 percent of capacity or higher are worried that building a new plant could mean getting stuck with a serious overcapacity problem if the economy enters a recession.
Such is the case in the pulp, paper, and lumber industry. At Boise Cascade Corporation, one of the nation's largest suppliers of paper and building materials, no new factories are planned, even though the company is running at 98 percent of capacity.
Typical of the restructuring that has reshaped the paper and pulp industry, Boise has in the last seven years sold or shut nearly a dozen plants (including three pulp and paper mills) and sold its manufactured housing, cabinet, and consumer packaging divisions. The bottom line is that even though it could use another plant, it is not about to open one.
``We are doing a lot of quick-payback, efficiency, and quality moves that are discretionary,'' says Vicki Wheeler, a spokeswoman for the company, based in Boise, Idaho. ``We could stop these projects if economic conditions change.''
Such projects, Ms. Wheeler says, include installing new automatic conveyers that move, weigh, and wrap huge rolls of paper, then label them with a bar code. Other improvements include computerizing process controls to make higher-quality paper and lumber and computerizing boilers in plants to extend their life and increase efficiency.
These moves mean Boise Cascade will increase capital spending from $290 million in fiscal 1987 to $385 million in 1988, she says.
Since about August, American manufacturers have opened the sluice gate to pour billions of dollars into purchases of modern machinery for existing factories. The rationale used by Boise Cascade management, economists say, is echoed by other companies that have decided to enhance existing production capabilities.
``The third quarter saw a very big increase in spending for orders for non-defense capital goods,'' says Nigel Gault, an economist at Data Resources Inc., a Lexington, Mass., research firm. Mr. Gault says the heavy spending is a result of an uptick in overall plant capacity utilization among US manufacturers, which hovers now at 81.4 percent.
``It is not a giant fluctuation upward,'' Gault says, ``but it is certainly big enough to spark off a big increase in spending. It indicates a need for higher capacity, especially for industries benefiting from the dollar's decline.''
Some specific industries have seen strong gains. Companies that produce primary metals, which include aluminum and steel, are running at 84 percent of capacity; chemicals, 84 percent, rubber and plastics, 87 percent; textiles, 95 percent; paper and pulp, 96 to 97 percent. Gault looks for 3 percent real growth in capital spending next year.
``The outlook for manufacturing is fairly bright because of the export situation,'' says Geoffrey Moore, director of the center for International Business Cycle Research at Columbia University.
As consumer spending slows, capital spending growth becomes even more important to the economy, Mr. Moore says, because ``the movements of capital investment are usually bigger'' than the movements of consumer spending, which are more stable and sluggish.
The economy may be depending largely on business spending to support GNP growth in 1988, since ```Black Monday' has taken some steam out of consumer spending,'' according to Gault.
To E.I. du Pont de Nemours & Co., the nation's largest chemical manufacturer, a new spurt of capital spending is aimed primarily at adding ``a lot of new capacity outside the US in the Far East and Europe,'' says Clinton Archer, a spokesman for the Wilmington, Del., company.
Inland Steel Company, one of the nation's largest steel companies, closed several mills last year, cutting production capacity from 9.3 million tons to just 6.5 million. But by reducing capacity, it uses what it has more efficiently. Inland's mills operated at 72.1 percent of capacity last year, but were perking along at 84.4 percent in the first nine months of this year.
With that healthier flow, Chicago-based Inland raised capital spending from $124.8 million last year to $200 million this year - aiming to boost efficiency and quality - not production capacity.
``We're not expanding capacity in terms of the amount of steel produced,'' says Robert Lefley, a company spokesman. ``Much of our investment is to improve quality.'' He cites the company's new state-of-the-art, continuous cold mill being built in Chicago, a joint venture with Japan's Nippon Steel, the world's largest steelmaker.
The importance of increased capital spending to the US economy, says DRI's Gault, is that if the US doesn't invest now, then there will be a much more severe backlash later.
``Over the long term,'' he says, ``the US can't keep running a trade deficit forever. The US must be able to produce the goods it needs for exports.''