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June 19, 2005

Germany's Revealed Comparative Advantage in High-End Front-Loading Washing Machines

Louis Uchitelle reports:

Globalization: It's Not Just Wages - New York Times: Who is the biggest exporter of German-made washing machines to the United States?.... Whirlpool... pays high-wage workers to produce expensive front-loading washing machines.... Never mind the higher labor cost - $32 an hour, including benefits, versus $23 in the United States. The necessary technology existed in Germany when Whirlpool decided to sell front-loading washers to Americans. So did a trained work force and a Whirlpool factory already making a European version of the front loader. 'We were able to expand the capacity in Germany at a very incremental investment,' said Jeff M. Fettig, Whirlpool's chairman and chief executive. 'It was the fastest way to the American market.'

Globalization is often viewed as a rootless process of constantly moving jobs to low-wage countries. But the issue is more complex... a relatively new form of globalization that emphasizes first-rate centers of production and design in various countries - including the United States. Whirlpool's global network... microwave ovens engineered in Sweden and made in China for American consumers; stoves designed in America and made in Tulsa, Okla., for American consumers; refrigerators assembled in Brazil and exported to Europe; and top-loading washers made at a sprawling factory in Clyde, Ohio, for American consumers, although some are sold in Mexico....

At the moment, the job growth and the expansion are mainly abroad. As its turns out, more than 40 percent of the nation's imports are from the overseas subsidiaries of American companies.... The 'global production footprints,' as Ms. Farrell calls them, draw on a growing network of first-rate suppliers in Mexico, China and elsewhere that allow manufacturers to go beyond mere assembly overseas into complex production. And the investment, once made, becomes an ancho... its factory in Schorndorf, Germany, which Whirlpool acquired in 1991 with the purchase of the appliance operations of Philips N.V. for more than $1 billion. Almost two million of the front loaders have been sold in the United States since 2001, at $1,200 apiece....

Whirlpool's executives take issue with analysts who declare that low foreign wages... will keep the global production networks mobile.... [T]he manpower required to make its appliances is declining.... One hour of labor, for example, goes into each of the 20,000 top-loaders coming off the line daily at Clyde, down from 2.5 hours five years ago.'We may pay $23 an hour in Clyde, including benefits, versus $3 in Mexico versus $1 in China,' Mr. Fettig said. 'But for one hour of labor, the difference won't begin to cover the shipping costs, let alone the investment it would take to build a new factory in Mexico or a new factory in China.'

The Clyde factory, which employs 2,000 people, is billed as a jewel in Whirlpool's production network - an efficient, partly automated operation whose experienced workers possess a 'tribal knowledge' of their product that pays off in quality and cost saving. But if the Clyde factory did not already exist, Mr. Fettig would not put it there. 'I'd probably put it in Mexico,' he said....

In the last 15 years, suppliers have set up shop in growing numbers near the new production centers in China, India, Southeast Asia and Latin America. Without their presence, Whirlpool says, it would not have been able to concentrate the manufacture of microwave ovens in southern China. 'It is much more difficult to operate outside of an industrial country without that supplier base,' said Mark Brown, senior vice president at Whirlpool for global sourcing. The concentration of suppliers in northern Mexico helps explain why Whirlpool has decided to produce a less-costly front-loading washing machine at its existing manufacturing complex in Monterrey. The high-end, $1,200 model will continue to come from Schorndorf. The smaller Mexican front loaders, on the other hand, will be for the majority of American consumers and will be priced several hundred dollars less, too low to absorb the $50 in freight to cross the Atlantic, the company says.... Because of the shipping cost, we knew we had to make them in Mexico or America, and since the suppliers were already in Mexico, we thought we might as well go there.... Mexican engineers, foremen and supervisors have gone to the German plant for 18 months of training....

Whirlpool differentiate[s] between skills that can be taught in a few weeks or months, and those that take longer to acquire. The harder-to-acquire skills anchor the one last Whirlpool factory in Benton Harbor, where the company got its start in 1911 and still has its headquarters... kept open a parts factory that makes the steel gears that are the heart of the washing machine's agitation mechanism. The machining to make the gears, and the nickel plating to prevent corrosion require a skill level not easily duplicated. 'You can find lots of machine shops and some plating operations, but you rarely find the two together,' Jim F. Spicer, the plant manager, said. 'And when you do find them together, you almost never find the volumes that we require.'...

Posted by DeLong at June 19, 2005 10:22 PM