US confidently strides ahead

But after lagging for two decades, have American companies learned their lesson?

WHEN the chill winds of foreign competition began to blow in the 1960s, the United States didn't notice. The oil shocks of the '70s jolted Detroit awake. But it wasn't until the '80s that the full plight of US industry became clear.

This was no gentle breeze of economic catch-up. American companies were caught in a full-blown storm. And they were getting flattened.

Roused by the threat, US companies reacted. They streamlined, refocused, and re-engineered themselves. Some industries woke up too late to save themselves. Others boosted quality and productivity and hung on. Then, the remarkable happened. American industry came roaring back in everything from cars to computer chips.

``American industry is a heck of a lot more competitive than it was,'' says Craig Barrett, chief operating officer of Santa Clara, Calif.-based Intel Corporation, America's premier chipmaker.

``We should all be proud of this performance,'' the nonprofit Council on Competitiveness in Washington concludes, citing gains in the US standard of living, exports, productivity, and investment. ``It is easy to see why some have said that America's competitiveness crisis is over.''

So is the crisis over? Has the storm passed?

Hardly. International economic trends, which made the last decade look worse than it was, have reversed course. The picture is too rosy, many economists and business leaders agree. This cycle can't last.

``We're kind of in the eye of a hurricane,'' says Jack Grayson, chairman of the American Productivity and Quality Center in Houston. ``There's much more attention to quality than there ever was in American manufacturing. I don't want to discourage that. But I also want to tell people: `Keep alert. You don't have it made forever.' ''

Focusing on foreign competition risks missing the bigger picture. As Paul Krugman, economist at the Massachusetts Institute of Technology in Cambridge, Mass., points out, the US economy is largely self-contained. Exports only account for about 10 percent of America's gross national product. Nevertheless, competition from abroad has had an unusually large impact, forcing many US industries to make sweeping changes. For example:

* US automakers have narrowed the quality gap with Japan and have begun to take back market share. A gain of a few percentage points may seem paltry in view of the dramatic rise in the value of the Japanese yen, which makes it easier for the Big Three to compete on price. Still, the days of Detroit's free fall seem to be over.

* US computer-chip companies have made an important turnaround. In 1986, the Japanese became the world's leading chip manufacturer, replacing the Americans. In 1993, the US took back the No. 1 ranking from Japan. The rebound has been even more dramatic in chipmaking equipment, where the US once again leads Japan in world market share after relinquishing it briefly in the late 1980s.

* After a steady 15-year decline, the share of US patents awarded to American inventors has begun to rise again. Last year, 54.1 percent of the patents went to Americans, up from a low of 52 percent in 1988.

* The turnaround in certain industries has also had an effect on trade. The US became the world's leading exporter of manufactured goods last year, displacing Germany. In total exports, the US is widening its lead over the other major industrial powers. The trade deficit continues to rise, however, because America's appetite for imports is growing even faster.

* US productivity growth is up after years of lagging its competitors. The US has posted strong gains in the last two years, although economists are divided on whether the spurt can continue.

* In living standards - the prime measure of a nation's economic success - America continues to lead its major competitors. In the past two years, in fact, the US has widened the gap, but it is not clear that the trend will continue as Japan and Europe move out of recession.

For all the good news coming in, US business leaders and economists are cautious.

``We're in a much better state,'' says Paul Allaire, head of Xerox Corporation and chairman of the Council on Competitiveness. ``We have stood up to our foreign, and particularly Asian, competitors.... [But] there's a danger of being overly rosy.''

``I think we've made some progress,'' says Paul Sommers, director of the University of Washington's Northwest Policy Center. But he says the reason is as much the fall in the dollar's value as corporate efforts.

One reason for the caution is uncertainty about the service industries. These industries represent a paradox in US competitiveness. On the one hand, their measured productivity has been anemic until very recently, suggesting weakness. On the other hand, service industries have generated a growing trade surplus for the US, suggesting strength. Thus, when competition kicks up, will America's service industries wilt like its manufacturers or walk away with the prize?

Dollar's weakness a boon

Several economists and analysts say America's service industries are more competitive than the export and productivity numbers indicate. But that boast may be tested if the US dollar strengthens against other currencies.

``The competitiveness issue will emerge in the services industry,'' says Xerox's Mr. Allaire. ``Hopefully, US services will understand that in advance. I believe they will improve.''

Another reason for caution is that the job of re-engineering American corporations is unfinished. Five years ago, a group of economists from MIT laid out a vision of where US industry needed to go. Their book, ``Made in America: Regaining the Productive Edge,'' sounded a number of the themes that have become bywords in many US businesses:

* Continuous improvement of quality, cost, and delivery.

* Close touch with customers.

* Close relationships with suppliers.

* Flatter, less-compartmentalized organizational charts.

* Innovative human-resource policies, such as working in teams, profit-sharing, and constant training.

US corporations have made progress on the first four items, especially in terms of quality and leanness. Employment at Fortune 500 companies has fallen from 16.2 million in 1979 to 11.5 million last year. And companies continue to cut.

But that strategy goes only so far. ``We've gotten a pretty good kick from laying people off,'' says Mr. Grayson of the productivity center. ``We've probably gotten near the end of getting that kick from restructuring the work force.'' The more impressive strategy would be to increase employment and continue boosting productivity.

Moreover, cutting employees is no substitute for creating a more innovative work force. In some ways, the cuts merely sap employee motivation to change.

``Most of American industry is far too traditional,'' says Lynn Williams, retired president of the United Steelworkers union. The remaking of corporate culture at giant companies requires both unions and management to lay aside old rivalries. Among big industrial economies, ``we're the only country where this kind of warfare goes on,'' he says.

But too many firms are ``stuck in a low-wage strategy'' of global competition, Mr. Williams says, not a promising tack for improving living standards, which have been stagnating for two decades.

``It isn't jobs; it's good jobs'' that are needed, adds Charles Schultze, former chairman of the Council of Economic Advisers and now a senior fellow at the Brookings Institution in Washington. ``The biggest problem is that with productivity growing slowly, average family income and average real wages are growing even more slowly.''

Who's bearing the brunt of this pressure? The bottom 40 percent of the labor force, which is now making substantially less than it did in 1970.

This decline is worrying from a competitiveness standpoint, says Robert Gordon, an economics professor at Northwestern University in Evanston, Ill. If American companies continue to employ legions of low-wage, low-skill workers whose productivity grows slowly if at all, then the nation's productivity will suffer.

To Williams and other labor advocates, a crucial first step would be to level the playing field that has become skewed against unions. Williams cites the current legality of permanently replacing striking workers and company intimidation of union organizers (highlighted in the recent Dunlop Commission report to President Clinton).

Another tack is to improve worker training and education.

``The elementary and secondary and training institutions are not keeping up with the skill requirements that modern technology demands,'' Mr. Schultze says. Improvement means ``training people who can read graphs, understand diagrams. It's just the basic quality of education.''

When the Council on Competitiveness surveyed its members, it dubbed elementary and secondary education and worker training as two of the nation's top three priorities. The third priority, it said, is to boost the nation's savings rate, which, at 1.8 percent of gross domestic product last year, seriously lagged all six of America's major industrial competitors.

Beyond business's control

Interestingly, these measures are not under US business's control. Many analysts say education reform and a higher national savings rate are key to continued improvement in American competitiveness.

The real secret, says management guru Peter Drucker, is to stop treating foreign trade as a poor relation of US economic policy.

``What is needed is a deliberate and active - indeed, aggressive - policy that gives the demands, opportunities, and dynamics of the external economy priority over domestic policy demands and problems,'' Mr. Drucker wrote recently in the quarterly journal Foreign Affairs. ``We usually do not ask whether domestic decisions will hurt American competitiveness, participation, and standing in the world economy. The reverse must become the rule: Will a proposed domestic move advance American competitiveness and participation in the world economy?''

The US cannot afford to cut itself off from the world economy, analysts agree. Though US companies individually must compete with rivals worldwide, many of whom have much lower labor costs, the rise of developing nations should be viewed as a winning situation for the US, says economist Paul Romer of the University of California at Berkeley. A growing global economy means more export opportunities. Technological innovation could lead to continued rapid growth in more mature economies such as the US, he says, although it could hurt low-skilled Americans if their companies don't take the lead in training them.

``What I see is the emergence of transnational economies,'' says Richard McKenzie, an economist at the University of California, Irvine. Products are made ``everywhere,'' with falling communications and transportation costs leading to global production and sourcing of parts. ``Economies look more like marbles, with the colors kind of flowing across the surface and intermingling.''

In this kind of world, the winds of competition don't just knock down rickety industries. They sweep out cobwebs, fill the sails of economic opportunity, and are pointing America to a brighter, not a gloomier, horizon.

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