I remember you pointing out this little problem many moons ago.
Glut check: Overcapacity is making recovery more difficult
By William Neikirk
Chicago Tribune
DURHAM, N.C. - It's called overcapacity:
• The world's auto industry can now produce 20 million more cars than consumers can buy.
• Will Daland, a 55-year-old computer programmer, worked for some of the world's premier telecommunications companies before that overbuilt industry hit a slump two years ago and he was laid off. Now, Daland says, he may start driving a truck if he can't find a job in his field.
• Cisco Systems built six new buildings to expand its presence at the high-tech Research Triangle Park in North Carolina when the dot-com business was sizzling. All six buildings now are empty.
Each of these instances reflects a powerful wave sweeping the economy -- overcapacity.
In the factory and in the office, it has a more concrete dimension: Businesses can produce far more than we need. Supply has simply outstripped demand. When that happens, production slows, equipment sits idle, costs go up, workers are laid off, and investments are postponed.
The capacity glut exists on a scale that this country and many others haven't seen for decades, and it at least partially explains why it is so difficult for the American economy to shake off a recession that by all measures seemed mild.
U.S. companies overbuilt in the 1990s, believing that the good times would never end. But the ``bubble'' popped with the turn of a new century and with the economy tipping into recession in March 2001 and then stumbling more after the Sept. 11 terrorist attacks.
As a result, the human toll of what economists call a ``jobless recovery'' is still mounting. The national unemployment rate, only 3.9 percent in September 2000, hit 6 percent in November, and many analysts doubt it will fall in the foreseeable future. Since September 2000, 3 million jobs were lost, almost 2 million of them in manufacturing.
In Silicon Valley, the unemployment rate in September 2000 was 1.7 percent, a record low. It has soared to 7.8 percent in November.
And despite 12 interest rate reductions by the Federal Reserve since January 2001 -- and President Bush's $1.3 trillion tax cut -- the economy is limping along. And there are concerns about deflation, or falling prices, which the country hasn't seen since the Great Depression.
A look at various industries around the country -- airline, auto, machine tool, steel, textile, high-tech -- suggests that working off excess capacity in factories and creating more jobs won't be as easy as it was in the past. Indeed, business leaders appear to be thinking differently about how and when they might add jobs as the economy improves, with some questioning whether they will add them in the United States at all.
Better productivity
• Fewer are needed for new technology
Joel Goldberg, vice president for operations at Chicago's Atlas Material Testing Technology, said his firm doesn't plan to hire new workers. New technology it has installed in recent years has boosted the company's productivity by 5 percent to 10 percent a year, he said, and ``the reality is, we need fewer and fewer people.''
At the same time, U.S. companies are rapidly expanding their operations to low-wage countries such as China and India. There, Goldberg said, ``People have become a commodity, so to speak, and you go where the supply is.''
Now, U.S. technology is increasingly a commodity too. The glut in manufacturing capacity extends to products that once were at the cutting edge but have turned into mere commodities in an amazingly short time. Cellular phones, televisions, computers and many other electronic goods can now be made so cheaply around the globe that companies are forced to cut prices to sell them.
The nation's own efficient system of production has contributed to the excess of supply over demand, said Wallace Hopp, a professor of industrial engineering and management sciences at Northwestern University.
Consumers are benefiting from lower prices, enabling them to stretch their dollars, but that comes at a cost that could hurt the economy in the long run. Because businesses are able to make more than customers can buy, they aren't doing much investing in plants and equipment, and they are shaving workers to become more efficient.
The problem has spilled over to many other areas of the economy not directly related to manufacturing. Vacancy rates of commercial space are rising across the country -- nowhere more sharply than Silicon Valley. Hotel rooms added in the '90s are hard to fill.
According to David Rizzo, president and chief executive of MCNC, a research and consulting firm in Durham, it may be five years before all the high-speed fiber-optic cable laid by the telecommunications industry is used. Today, that cable is an enormous investment that sits mostly idle with the fading of the dot-com boom.
Further, the expansion of the wireless revolution, such as the use of more cell phones for Internet connections, may even make some of this investment obsolete, some analysts say.
No one is sure how difficult it will be to work off the glut in capacity through economic growth. But one thing is clear: Businesses have idled more of their capacity in the past two years than they have in a long time. The Federal Reserve said manufacturers are using only 73.5 percent of capacity, well below the average of 80.9 percent in 1967-2001. Even during the 1990-91 recession, factories used nearly 77 percent of capacity to produce goods.
``There needs to be consolidation in some of these industries,'' said Paul Kasriel, an economist at Chicago's Northern Trust. ``That's one of the ways you take capacity out. Either firms go out of business, they merge or they mothball. And that's what needs to happen.''
Nowhere is the glut of supply more vivid than in the desert, where more than 800 airliners, including many jumbo jets designed for transcontinental flight, sit parked in long rows. The planes have been grounded by the downturn that marked the end of the 1990s boom and also by the reduction in flights caused by the Sept. 11 attacks.
``Some of them will never fly again,'' said Aaron Gellman, a professor and transportation expert at Northwestern University.
During the giddy 1990s, many airlines went on a buying spree as the economy boomed and the demand for flights appeared to be expanding rapidly. Competition with domestic and foreign carriers fueled the race to build more airliners and fly more flights, and no one seemed overly concerned that a big problem was brewing.
Now the problem is clear, and the victims are increasing. Like several other airlines before it, United -- the country's second-largest -- filed for bankruptcy after a federal board refused to approve a loan guarantee.
Airlines hurt
• Severe competition from overcapacity
Jim Corridore, airline analyst for Standard & Poor's, said that despite the cutbacks, ``There still is airline overcapacity. It has led to destructive competition in the industry where fares are now at five-year lows.''
The problem is equally daunting in the U.S. automobile industry, which also is struggling with labor costs. Foreign manufacturers are planning to build more plants in the United States to take market share away from the Big Three.
Currently, the automobile industry in North America has an excess capacity of about 2 million vehicles, said Sean McAlinden, director of economics at the Center for Automotive Research in Ann Arbor, Mich., and that gap is growing. For every two plants in the United States being closed, three are being built by foreign manufacturers, he said.
Led by General Motors, Detroit dealt with the immediate glut in supply this year by offering zero percent financing to spur sales, in effect offering a steep price cut to keep its factories going. GM's reason: It had to pay its workers under the United Auto Workers contract whether they were working or not.
But the capacity problem will come to a head this year when the auto companies and the UAW negotiate a new contract. McAlinden and other analysts predict that more Big Three plants, perhaps as many as seven, will have to be shuttered to reduce overcapacity.
In textiles and steel, the United States has suffered from chronic overcapacity for decades as global competitors have sprung up. As a result, the United States has erected protective tariffs and established import quotas. Both industries are severely challenged by global competition.
When will it end?
No one is sure when or how the global glut in production capacity will work itself out. To economist Stephen Roach of Morgan Stanley, soaking up all this worldwide surplus would require ``three years of aggressive economic growth'' in a global economy now rising anemically -- only about 2.5 percent a year.
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