U.S. 'Birthrate' For New Factories Is Steadily Falling

Decline Prompts Concern About Long-Term Health Of Nation's Manufacturing

TIMOTHY AEPPEL / Wall Street Journal 15mar2006

The U.S. manufacturing sector is being reshaped by a low birthrate — among factories.

The number of factories in the U.S. shrank last year to 336,000, down 10% from its 1997 peak, part of a steady decline that shows no sign of reversing. Yet it isn't the shuttering of old plants that is the problem. It is the lack of new ones.

"The death rate in manufacturing isn't any higher than it has ever been," says Daniel Meckstroth, chief economist at the Manufacturers Alliance/MAPI, an Arlington, Va., policy-research group that represents large manufacturers. "What's really changed is that the creation of new factories has dropped so dramatically."

The rate of factory openings was 3.8% in the third quarter of 1992 and stayed above 3% for much of the rest of that decade. But in 1998, the rate began falling and hit 2.4% in the first quarter of 2005. Closings, meanwhile, have hovered around 3.5% for much of that period.

This shift in industrial demographics is stirring concern about the long-term health of U.S. manufacturing. New factories not only create jobs, they also use cutting-edge technology, making them crucial to the nation's competitiveness. They are also vital to U.S. defense industries, with many of the most-advanced components and electronics made at newer facilities.

Economists point to growing import competition and an exodus of U.S. production work to low-cost countries as reasons for the birthrate slump. One indication is the ballooning U.S. trade deficit, which hit another record in January.

La-Z-Boy Inc., Monroe, Mich., a maker of recliners and other furniture, felt the imports' bite in 2001, when inexpensive wooden furniture from China began pouring into the U.S. market. In response, the company closed 20 U.S. factories and outsourced most of its own wood-furniture production to China.

To be sure, some manufacturers are adding bricks and mortar. Last year, computer maker Dell Inc. of Round Rock, Texas, opened a $100 million assembly plant in North Carolina, while Owens-Illinois Inc. of Toledo, Ohio, poured $120 million into a Colorado factory that now churns out one billion beer bottles a year.

But most of this growth is concentrated in a relatively narrow array of sectors, such as food, rail equipment and building materials, according to Commerce Department data. The cement industry, for instance, is planning to add 18 new plants at a total cost of $3.6 billion over the next four years.

One measure of new factory construction — investment in industrial structures — rose last year to $18.7 billion, up more than 15% from 2004. "But this spending is still just a shadow of what it used to be," says Tom Runiewicz, an industrial economist at Global Insight, a Lexington, Mass., economic consulting firm. In 1998, this type of investment was about $43.7 billion, he said. It has become far more common for companies to pour money into upgrading existing plants to make them more productive. This helps explain how, although U.S. industrial production has recovered, the urge to build big new factories remains relatively weak, he says. "Our existing plants are just far more efficient."

USG Corp., for instance, is rebuilding one plant in Virginia and putting up a new one in Pennsylvania. The Chicago maker of wallboard says the new plants will use machinery that allows them to make wallboard far faster. "What we make is big, heavy, and relatively inexpensive," says Robert Williams, a USG spokesman, "so usually, you make it close to where you want to sell it." Indeed, USG has 40 plants scattered around the U.S. and has no plans to reduce its manufacturing footprint.

One factor that gets lost is the size of individual plants. Mr. Meckstroth believes many of the operations that are dying off are smaller companies that have had trouble adapting to the rise of import competition and other competitive forces. "But the bigger companies are surviving, because they have the size and scale," he says. "They can afford to put in the new lines or move operations overseas themselves if necessary."

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