BOOK REVIEW

FACTORY MAN

By BETH MACY

Little, Brown and Company, NY, 2014, 213 pages
ISBN: 978-0-316-23143-5 (Hardcover)
ISBN 978-0-316-23156-5 (eBook)

Reviewer: Michelle Baker
President, Baker Inventions LLC

In June the US Congress passed one of the most fiercely contested bills of the decade, relinquishing its right to amend the final terms negotiated by the President for the Trans-Pacific Partnership (TPP) trade agreement. The vote split the Democratic Party. Senators allied with labor and environmental groups refused to back President Obama’s appeal for “Fast Track” authority. They were
defeated. Now that negotiators have settled on terms, the TPP will come before legislative bodies of the signatory nations for approval. In the US Congress the choice will be “yes” or “no”; there will be no tinkering with provisions. The contents of the bill, widely proclaimed as the most important trade agreement since GATT in 1947, still have not been released to the public. In the US an informed electorate was once considered the keystone of democracy. But let’s not weep nostalgic, at least we have WikiLeaks.

Beth Macy’s book, “Factory Man: How One Furniture Maker Battled Offshoring, Stayed Local – And Helped Save an American Town,” published in 2014, offers a puzzling prelude to the trade agreement. To what end could this new agreement be aimed? Macy shows trade between the US and Pacific Rim countries had already been accelerating since the mid-1980s. The only apparent obstacle to trade in furniture was imposed by the United States itself, and then only as a limited, ineffectual curb on trade with China. And why did China, the sole nation to have furniture industry duties imposed on it by the US, choose not to be included in the TPP?

Scores of interviews and original source material went into the making of “Factory Man.” Academics and professionals in technology policy might find Beth Macy’s narration long-winded and short on theoretical perspective but few would criticize her research. Her journalistic treatment of globalization’s rout of US furniture manufacturing in southern Virginia and North Carolina over the last fifteen years is thorough and wide-ranging. And this book, directed to a general audience, provides a rich trove of descriptive material in a fast-moving, deceptively easy-to-read style. I say “deceptively” because important details, of which there are many, are easily overlooked when anecdotes about hunting dogs and family squabbles occupy long stretches. Some will find these interludes entertaining. For the rest, keep watch for the meat scattered throughout this stew.

THA readers will find a chronology detailing the reaction of business and government when a well-established, mature industry was challenged by global competition. It includes a regional cluster and global mega-corps that create their own “value-chains.” And, if you want a case study on how to manipulate a baroque and poorly designed government trade policy, look no further. The final third of the book describes how law firms were enriched in a battle between firms that benefited from inexpensive imports and those fighting to maintain US-based factories. When the US government ruled to assess anti-dumping duties on Chinese manufacturers in 2004, those duties were distributed to US firms despite the fact that the World Trade Organization (WTO) had, in 2002, ruled the practice illegal and those businesses closed their US factories. Was it simply an oversight that led the industry to lay the charge of “dumping” only on Chinese manufacturers while leaving an open field for the rapidly expanding, lower-cost furniture manufacturing based in Vietnam and Malaysia? Was US trade policy intended to protect domestic manufacturing or to transition the industry to retail operations reliant on foreign manufacturing? Were there any clear goals for US trade policy or was it a captain less ship ruthlessly plundered by pirates?

Between 2000 and 2015 more than 250,000, nearly half, of the jobs in US furniture factories disappeared as a result of hundreds of factory closings. Most of these jobs were in a region, approximately 200 miles square, containing the oft-studied, century-old industrial cluster centered on the High Point Furniture Market in north- central North Carolina. The region experienced lasting double-digit unemployment and all the human misfortune that accompanies joblessness: increases in drug abuse, crime, family breakups, declines in mental and physical health, and the deterioration of property and infrastructure

The most important catalysts to globalization of the furniture industry were advances in containerization. Huge standardized shipping containers could be moved directly from ships to trains to trucks. These freight transport efficiencies, developed after World War II, greatly improved during the Vietnam War, and enhanced recently with investments in port infrastructure and computerized logistics meant that even bulky goods could, by the 1990’s, be shipped great distances economically. Today it is estimated that a single sofa can be reliably shipped from China to the northeastern US for approximately $130.

…. the number one export at the Virginia Port Authority was logs and lumber. The number one import? That very same wood making its way back across the ocean to Virginia as dressers, tables, and chairs …. (p. 393)

Between 2002 and 2012 the share of furniture production by middle/low income countries grew from 25% to 59%. In low income countries such as Poland, China, and Vietnam, huge new factories with state-of-the-art plant and equipment have been financed by investments from US, Taiwan, Germany, and Sweden. The scale and advanced technology of these operations add productivity advantages to the already low labor costs. And, the same processes transforming the industry in the US are affecting high-wage EU countries such as Italy, Germany, and Sweden. China has displaced the US with the largest share of worldwide furniture production. Poland has risen to seventh place behind Germany, Italy, India, and Japan (1).

Those with a truly global perspective might laud trade that brings new prosperity to low-wage countries. In China, manufacturing wage increases of 12% per year since at least 2001 have created a new consumer class and encouraged producers to move to elsewhere in East Asia. In 2002 a typical Chinese manufacturing worker received $4.80 for eight hours of work. Today a factory worker makes an average of $27.50 a day in China, $8.60 in Indonesia and $6.80 in Vietnam. Increases in the standard of living in these countries creates large and desirable “emerging markets”, to be stoked and fed by global corporations that move production to the least cost locale and tailor products to sell anywhere there is consumer spending power. Such corporations often consist only of executive offices with logistical expertise, design teams, and regional marketing operations. Ethnic and cultural particularities are no longer obstacles where today’s science of marketing is concerned.

Not every nation has opened its doors to trade. In Brazil and India growing domestic markets create rich opportunities for local furniture manufacturers. Unlike the typical expansion of furniture manufacturing in low-wage countries that is based on exports to Europe and the US, in these two nations it is the strength of their own “emerging markets” that drives industry growth. Both countries protect their local furniture industry with high import tariffs. As a result, without significant exports, they have doubled furniture production in the period from 2002 to 2012 to become fifth and ninth worldwide. (1) And though Macy’s book focuses entirely on the US furniture industry, one cannot help but notice how tariffs have succeeded in enabling rapid growth in Brazil and India whereas mismanaged tariff policy in the US has been completely ineffective to slow the closing of factories and decimation of domestic manufacturing.

Macy’s book follows two firms – Bassett Furniture and Vaughan- Bassett – both founded as entrepreneurial ventures of J D Bassett at the turn of the century. J D grew his businesses by creating cheap copies of other furniture maker’s designs and acquiring nearby manufacturers. By 1938, with sales in the millions, J D took his furniture enterprises public as Bassett Furniture, Inc. Jump to 1983.

J D Bassett has been dead for seventeen years. The furniture empire he built is now more than forty factories strong with sales of over $300 million a year. JB’s grandson, John Bassett III (JBIII), the hero of Macy’s book, has been pushed aside by his sister’s husband, Robert Spilman, the same Spilman who also is busy expanding ports as Chairman of the Virginia Port Authority.

Tired of working for Spilman, JBIII quit his job at Bassett Furniture and bought a troubled company that had been founded by his wife’s grandfather and former J D partner, Bunyan Vaughan. Yes, it’s a tangled web of business and family, family and business. THA readers may find the family saga trite and overly detailed but it sets the stage for a fascinating comparison of two alternative responses to the competition from Asia. Thus Macy casts off to follow her second firm, Vaughan-Bassett, and, half way through the book, launches the real beginning of her story. One tantalizing tangle left unexamined: presumably JBIII inherited a large chuck of Bassett Furniture stock from his father and/or grandfather; did he sell it all when he left to purchase Vaughan-Bassett or does the story play out while Macy’s dragon-slayer quietly pockets rich dividends from his offshoring, so-called rival run by Spilman?

When JBIII bought it, Vaughan-Bassett consisted of two factories – one in Galax, Virginia and one in Elkin, North Carolina – and 1500 workers. By 1988, five years later, after acquiring a third factory in South Carolina, sales had more than tripled to $79 million. In 1998 he added a fourth in Atkins, Virginia. Then pressure from low cost competitors buying from China began to impact business. Worse, large retailers, formerly clients, began to order directly from Chinese manufacturers.

The fact that retailers were beginning to cut out US wholesalers didn’t escape brother-in-law Spilman. In 1999 Bassett Furniture Inc sold furniture through J C Penny with a retail value of $1 billion. Over the next three years, despite re-engineering to reduce costs, J C Penny phased out nearly the entire Bassett line of furniture, replacing it with products bought directly from Chinese manufacturers. Spilman had already been busily closing down its manufacturing operations in the US. Now he put Bassett in direct competition with the retailers, purchasing retail outlets to create a chain of Bassett Furniture Stores that would sell furniture made by Asian manufacturers. In 1985 Bassett had fifty-seven factories in fifteen states. By 2000 it only had fourteen factories left. Today it has two.

JBIII, determined to keep his US factories in operation, tried every variety of fix as his business slipped. He hit up suppliers for cost reductions; he cut rates for sales commissions; he came up with prizes and contests to motivate workers; he instituted new processes for faster delivery; he launched an ad campaign emphasizing service and delivery times; he started new lines of furniture and made “knock-offs” of higher-end furniture; he lobbied the Virginia governor and the Environmental Protection Agency to roll-back regulations; and he bought a non-union, particle board furniture plant in South Carolina where wages were lower. He also invested in the most advanced technology. Between 2006 and 2012, JBIII “spent nearly $40 million on high-tech German and Italian routers and state-of-the-art kilns – a capital investment rate that was double his competitors”. Nothing worked. After closing down one of his four plants in 2002, JBIII decided to go to the US government for help. He organized a coalition and, in 2003, petitioned the US International Trade Commission (ITC) and Department of Commerce to impose tariff duties on Chinese furniture manufacturers that were, they declared, “dumping products” into the US market at prices below the cost of production.

Tariffs would force up prices and, under the 1971 Byrd Amendment, monies raised by the tariffs would be distributed to firms that claimed harm from dumping. Brother-in-law Spilman’s firm signed on to JBIII’s group. So did other large firms that were ramping up imports as they closed down US factories by the score. Strangely, China was the only country cited in JBIII’s petition to the US government. This left plenty of cheap sources in Vietnam, Malaysia, and Russia. Even so, not everyone in the industry wanted to see tariffs imposed on China. Large retailers like JC Penny formed their own organization and hired scores of lawyers to fight China tariffs. The middle third of Macy’s book describes the battle that split the industry.

The ITC ended up ruling for JBIII’s group and assessed tariff duties that ranged up to 216% on individual Chinese manufacturers. No matter that by distributing duties it would be rewarding the very companies that were shifting production offshore. In the years 2004-2011 there were hundreds of millions of dollars in duties. Vaughan-Bassett received more than $21 million. At the same time it closed two of its remaining three plants. Bassett Industries and Stanley Furniture received $7 million and $80 million as they closed nearly all of their US plants. The number of people making bedroom furniture in 2010 was less than half of what it was pre- tariffs. Imports from Malaysia and Vietnam were tripling and then doubling again.

The story gets sordid in the last quarter of the book. The way individual manufacturer’s duties were assessed launched an annual fete of payoffs to Washington, DC law firm, King and Spaulding. King and Spalding, working for JBIII’s coalition, compiled the list of Chinese firms presented each year to the Department of Commerce for investigation. Manufacturers who were not on the list might not have duties assessed at all. Every manufacturer wanted to stay off that list and they were willing to pay to be removed. The exact amount of each “settlement fee” was negotiated with King and Spaulding attorney, Joseph Dorn. Dorn’s list-keeping amounted to a form of extortion. It was only exposed in 2010 after the Guang-Dong Furniture Association filed a brief with the ITC.

The Byrd Amendment was repealed in 2005 by the US Congress after the EU, then Canada, and finally, Japan, announced that they would begin collecting duties on selected goods imported from the US. These retaliatory actions were authorized by the WTO in a 2002 ruling that the more than $1.25 billion of tariff duties that had been distributed to US companies was illegal.

Beth Macy’s sympathies are with the unemployed workers and communities brought down by factory closures. And yet, the antithetical case of Bassett Furniture Inc might be seen as an object lesson for how to adapt a business to opportunities created by globalization. Today the company is run by Spilman’s son, Robert Spilman, Jr. The two factories that remain create custom upholstered furniture for thirty-day guaranteed delivery.

Customers enter one of Bassett’s ninety-four retail outlets to work with designers to create furniture from patterns. Bassett Furniture has managed to compete with retailers like JC Penny, stay profitable, and steadily grow sales from 2010 through 2014.

By making JBIII into a hero, Macy’s story gains dramatic urgency. It’s possible that the man had a pure heart and a courageous spirit. But as a hero he’s no Atlas. Even granting him the best intentions – and the murky status of his stock holdings in Bassett Furniture give one pause – his campaign has done little to save factory worker jobs. The $21 million Vaughan-Bassett received from tariffs didn’t keep JBIII from firing more than half of the 1600 workers in his three factories. Macy cites estimates that each factory job saved cost $800,000 in duty money. The law firms received over $60 million in fees. But as for Vaughan-Bassett’s hometown, Galax, Virginia, in 2014 over 40% qualified for food stamps and more than 25% lived in poverty.

Some of the questions raised by Macy’s book are well known but take on new force as natural barriers to both trade and the scale of firms fall away. How much support should be given to displaced workers, bankrupted investors, and impoverished communities? Should government help a selected handful of firms and aid their transformation into titans capable of competing with like-sized behemoths from other nations? Is there any meaning to national affiliations for a firm like IKEA that employs 13,000 people in ten nations and operates 353 retail stores in 46 more? What is the role of tariffs? What about protecting competitive advantages from intellectual property? Can local environmental and safety regulations be enforced on foreign producers or are they always a one-sided crimp on the competitive position of domestic businesses?

About those health and safety regulations: a sinister provision of the TPP allows corporations to sue in secretive international courts for damages from actions that threaten profits. Naomi Klein has already documented how WTO rules were used to shut down a program for solar energy in Ontario, Canada. (2) Given what Macy has described of the less-than-admirable workings of the legal establishment in the US, one shudders at the vision of a closed-door fledgling tribunal that will bypass national judiciaries and beat down local laws with TPP-like trade bill provisions. Will “free trade” be a harbinger of world government or a veil beneath which avaricious forces lurk?

Citations

1. Renda, Andrea, et al. The EU Furniture Market Situation and A Possible Furniture Products Initiative. Brussels: European Commission, DG Enterprise and Industry, 2014.

2. Klein, Naomi. The price of free trade is unchecked climate change. Globe and Mail. September 12, 2014, currently available online: http://theleap.thischangeseverything.org/the- price-of-free-trade-is-unchecked-climate-change/.