Special Report on Global Competition

By Stephen Koepp

Should an economic power as large as the U.S. get excited about the sale of a few thousand autos or tons of steel to a foreign country? Yes, indeed. For America in the 1980s, a modest export can represent a major industrial breakthrough. Cases in point: Chrysler Chairman Lee Iacocca announced in September that for the first time in nearly ten years, the automaker would begin selling U.S.-made autos in six West European countries -- and at prices lower than those of competitive models. Earlier this year the largest U.S. steelmaker, USX, sold 20,000 tons of hot-rolled bands to an Osaka tube company at a price some 12% below what Japanese producers were offering.

Such successes might have been unthinkable only a few years ago, when the world tended to view many American products as singularly unattractive in quality and price. In retrospect it was no wonder, since U.S. industries were saddled with an overvalued dollar, vast payrolls, clanky factories and an overstuffed management. Yet in a relatively short span, the attitude and substance of much of American industry have changed. Competitiveness has become a top economic priority, and an overworked buzzword, from Main Street to Capitol Hill. American companies have slimmed down and smartened up, while at the same time the 35% fall in the value of the dollar during the past two years has made U.S. products more affordable overseas.

In the nick of time too, because a bruising global battle has really just begun. As more countries become industrial powerhouses and their companies seek larger marketplaces, the U.S. will meet more and stronger competitors. Japan, the most potent of them all, is pushing into such American strongholds as biotechnology and supercomputers. Western Europe is coming up fast in aeronautics and office equipment. The newly industrialized countries are staking out their turf as low-cost producers of everything from steel to TV sets. And the U.S. may face a fresh competitive breeze from Canada as a result of the free-trade agreement the two countries reached on Oct. 4.

U.S. export performance in the 1980s has been discouraging. Its share of world exports slipped from 12% in 1980 to 11% last year, while most other industrial countries made gains. The share held by the least developed countries fell sharply, generally because of plunging world prices for commodities ranging from oil to rubber to tin.

America's leadership in some industries is probably gone for good. The U.S. may never be able to make a significant comeback in mass-manufactured commodities, among them textiles, shoes, consumer electronics and machine tools. But the more complex the product, the more likely America can hold its edge. The U.S. is still strong in such products as semiconductors (world market share: 40%), personal computers (68%) and jet engines (90%). Moreover, the U.S. remains the leading force in health care, entertainment and financial services.

As a barometer of America's competitive position, the U.S. trade deficit has become the era's most closely watched economic statistic. And that gap, which reached $156 billion last year, is starting to show subtle signs of improvement. The weaker dollar has fostered an export surge, starting with such price-sensitive goods as paper, lumber and chemicals. During the first half of the year, U.S. exports of manufactured products rose 17% over the same period in 1986. But on the other half of the trade equation, the flood of imports to the U.S. remains strong. Though the volume of goods coming in has declined, the reduced buying power of the dollar has increased their total cost.

Besides help from a cheaper dollar, corporate America is enjoying lower costs, thanks to its drive to restructure and streamline. "For the first time in 30 years," declares USX Chairman David Roderick, "we have lower costs of producing steel for our customers in the U.S. than the Japanese industry has in providing steel to their customers in Japan." At Xerox, management chopped manufacturing costs 20% during the period from 1982 through 1986, even though overall inflation totaled 16.6% during those five years.

Of course, competitiveness comes at a price for U.S. workers. Some 2 million manufacturing jobs have been slashed during the 1980s out of a total industrial work force of 20.3 million. Fortunately, a robust economy helped ease this transition by creating 13.4 million new U.S. jobs in that period. One company alone, Exxon, has cut 48,000 workers, or nearly one-third of its employees. Such vast layoffs have enabled management to negotiate more flexible work rules and smaller raises. For many Americans, the downward pull of low foreign wages will result in a stagnating or even declining standard of living.

Companies are boosting efficiency by scrapping their oldest plants and equipment. In one sweeping program, General Electric shut down 30 aged plants and opened 20 new ones between 1981 and 1986. As a result, a prime yardstick of U.S. competitiveness, manufacturing productivity (output per worker hour), increased by 3.5% last year. That figure, the best since the 1960s, is better than the improvement in Japan (2.8%) and West Germany (1.9%). But some economists fear that the benefits of America's corporate streamlining are a one-time deal. "To what degree is this improved productivity record sustainable? If it is due to closures of old plants, it can only go on for so long," says Robert Lawrence, a senior fellow at the Brookings Institution.

As old companies are shaping up, many newer firms have flourished that feature both minimum manpower and ultramodern processes. One such firm is Nucor, a steel company (1986 sales: $755 million) based in Charlotte, N.C., that employs a headquarters staff of just 17. Called a minimill because it makes steel products from molten scrap metal rather than smelting the raw material from iron ore, Nucor manages to undercut the prices of both foreign and domestic steel companies. Result: Nucor's profits have quadrupled during the past decade, reaching $46.4 million last year.

Just as important as efficiency for American industry is quality. The most obvious improvement has been in Detroit, where automakers were shamed in the 1970s by their products' poor performance. Today in the Hewlett Packard parking lot in California's Silicon Valley, where not long ago a U.S.-made car was a rare find, the sun shimmers off the sleek bodies of hundreds of Ford Taurus sedans. The electronics company was so impressed with the style and solidness of the autos that it bought a fleet of 8,000 for staffers to drive.

As countries with extremely low wage rates and local costs take over the production of simple commodities, U.S. manufacturers are increasingly turning to market niches in which products are more complex and specialized. This is especially true in the semiconductor industry, where Japanese companies have taken over the market for mass-produced memory chips. Thus Silicon Valley chipmakers like Cypress Semiconductor (1986 sales: $51 million) thrive on diversity. Cypress makes 80 different types of chips in a factory that can accommodate several tooling changes every day. Says T.J. Rodgers, the company president: "You can be very competitive with the Japanese if you understand what they're good at and don't bash into them head on."

Despite many inspiring advances, however, corporate America still suffers from handicaps that will impair its ability to keep up with the rapid evolution of products. An oft cited complaint is the lengthy lead times between the moment an idea is conceived and the time it finally rolls off an assembly line. In U.S. auto plants, that process takes as long as five years, twice as long as in Japan.

Another structural flaw that tends to undermine competitiveness is the U.S. Government's heavy borrowing. Though Congress has finally put the federal deficit on a downward path, from a record $221 billion in fiscal 1986 to an estimated $157 billion this year, the shortfall is still large enough to keep U.S. interest rates high in comparison with those of other industrial countries. The steep cost of loans, in turn, tends to discourage corporations from borrowing to make long-term improvements in plants and equipment.

Lately, business leaders have been warning about an even more deep-seated problem: a lack of basic skills among workers. While America's colleges and universities are second to none, its high schools are failing to give students the verbal and math basics they need for increasingly technical jobs. When New York Telephone recently administered a test of fundamental skills to 22,880 job applicants, 84% failed. Better job-training programs are key parts of major competitiveness-boosting trade bills now being considered in Congress.

Business leaders are bullish on their competitive ability. According to a poll conducted this year for the Coopers & Lybrand accounting firm, 88% of the 300 top manufacturing executives surveyed said they thought the U.S. could regain its edge in the auto industry, while 71% felt that way about the steel business. But what alarmed the accounting firm's top manufacturing expert, Henry Johansson, was that the majority of the U.S. executives (55%) still see their main competition as domestic rather than foreign. Too many business leaders fail to recognize the global marketplace. For those Americans, said one electronics executive, "it's wake-up time."

CHART: TEXT NOT AVAILABLE

CREDIT: TIME Charts by Cynthia Davis

CAPTION: WORLD EXPORT MARKET 1980 . . .

DESCRIPTION: Color illustration: Uncle Sam holds pie graph

showing percentage of world export market held by United States, Japan, Western Europe, Canada, Newly Industrialized Countries and other countries in 1980.

CHART: TEXT NOT AVAILABLE

CREDIT: TIME Charts by Cynthia Davis

CAPTION: ...AND 1986

DESCRIPTION: Color illustration: Uncle Sam holds pie graph showing percentage of world exportmarket held by United States, Japan, Western Europe, Canada, Newly Industrialized Countries and other countries in 1986.

With reporting by Richard Hornik/Washington and Frederick Ungeheuer/New York