What Can America Make?

The

rusting Hulks of Bethlehem Steel's blast furnaces and coke ovens cast a long shadow over the Lehigh Valley. "Bessie" once employed 30,000 people in its namesake town in northeastern Pennsylvania. The company survives elsewhere, but what's left of it here has been all but abandoned. The windows of the redbrick warehouses are cracked and clouded. A portion of train trestle stands idle, neither end connected to anything. Such sights would have been unimaginable 30 years ago, when the valley roared with the fires of open-hearth furnaces.

Does this empty shell represent the future of American manufacturing? With cheap labor in China and other developing nations producing quality products at rock-bottom prices, can America still compete? Or are we now an office nation, completely removed from the industries that built the modern U.S. economy?

Take a tour of the valley — the very one Bethlehem Steel once symbolized — and you'll find that American manufacturing hasn't disappeared; it is reinventing itself. As Bessie and many of its fellow titans have marched slowly into bankruptcy, a new breed of manufacturing company has quietly emerged in the Lehigh Valley and in cities across the U.S., even amid one of the worst manufacturing purges in recent memory. More than 2 million of the 2.5 million jobs lost over the past two years were in the manufacturing sector, and many are gone forever. But the U.S. economy is going through a major shift, one that is forcing this sector to adapt. It is a transformation similar to what agriculture experienced a generation earlier. The key: fewer people are responsible for the same or greater output.

Just what can the U.S. make? Plenty, it turns out. But America's future as a manufacturing power will look very different from its past. Thomas Duesterberg, president of the Manufacturers Alliance, an industry research group based in Washington, has a vision for the new U.S. factory. Unlike the mammoth facilities of the past that focused on large production runs, the factory that Duesterberg's group has in mind is one that makes customized, sophisticated products with technology embedded into every part and process. "We contrast that with the old, comic-book picture of manufacturing, which is making one piece of equipment a million times," he says.

The transition is already happening. The manufacturers that are succeeding aren't the type that build company towns; they are too busy churning out innovative products. They aren't the ones blaming their troubles on unions; they're working with them to make their plants run better. And they aren't clamoring for protection from cheap imports; they're competing furiously against them. They may never rise to the stature of yesterday's industrial giants, but they are redefining what it means to be Made in America.

John Jones, CEO of Air Products & Chemicals, remembers what it was like to be a young engineering graduate in the 1970s, when Bethlehem Steel was king of the valley. "When I was getting out of school, that was one of the places to go," he says. "When people asked me where I was working, and I'd say Air Products," he says, the usual response was pity. "They would go, 'Awww.'" Today Air Products, with 4,300 workers, has replaced Bessie as the valley's largest industrial employer.

Air Products' local work force has remained fairly steady over the past 30 years, even as its revenues have grown from $300 million to $6 billion and its overall work force has more than doubled, to 18,500, thanks mainly to job expansion overseas. Jones interprets this not as a sign of weakness at home but as evidence of well-planned, well-executed growth. The U.S. steel industry was once its largest customer, but as Japan, Brazil, South Korea and eventually China became major players in steel and other heavy industries, Air Products followed those markets. Industrial gases are an intensely localized business — it is difficult and expensive to ship volatile compounds over distances — so Air Products became a local company in many countries, with international units that often began as joint ventures. "The competitive weapon is speed, moving knowledge around the world as rapidly as possible," Jones says. "If you think that way, you're going to move your capability where it's suited. That's how you're going to survive. You can't just think, 'We're in the U.S., and their currency's killing us.' You're going to die with that kind of thinking." With more of the electronics industry moving to Asia, for example, Air Products is establishing an engineering group in Shanghai.

The company recognizes that its skilled labor is an asset like any other. It wasn't always that way. Duncan Meldrum, Air Products' chief economist, recalls a time when it responded to competitive pressure with across-the-board layoffs, a policy he thinks was a mistake. "It doesn't work," he says. "You may shore up your margins, but you lose an awful lot more than you gain." Now the company looks more carefully at its business during the down times, selling off parts that aren't working — such as gas delivered in cylinders for welding and metal fabrication — and retraining workers whenever possible so that they can move into growth industries. Truck drivers who used to just transport gases to industrial customers, for example, are being trained for the delicate task of administering liquid helium to the magnets in MRI scanners. "There are many manufacturing firms that are out of ideas," Meldrum says. "The easiest thing to go after is cost."