http://www.washingtonpost.com/wp-dyn/content/article/2009/02/16/AR2009021601391.html
Economy Strains Under Weight of Unsold Items
By Annys Shin
Washington Post Staff Writer
Tuesday, February 17, 2009; A01
The unsold cars and trucks piling up at dealerships and assembly lines
as consumers cut back and auto companies scramble for federal aid are
just one sign of a major problem hurting the economy and only likely to
get worse.
The world is suddenly awash in almost everything: flat-panel
televisions, bulldozers, Barbie dolls, strip malls, Burberry stores.
Japan yesterday said its economy shrank at an 12.7 percent annual pace
in the last three months of 2008 as global demand evaporated for
Japanese cars and electronics. Business everywhere are scrambling to
bring supply in line with demand.
Downsizing can be tricky, though. No one knows how much worse the
economy will get, and while everyone waits for the recession to peter
out, businesses are grappling with how to cut costs and survive without
sabotaging their ability to grow when the economy picks up.
And there is a lot to cut.
"There is over-capacity in everything," from "retail to manufacturing to
housing," said Richard Yamarone, chief economist at Argus Research. "If
capacity is too large, you don't need that many people employed, which
is another reason we're seeing such high job losses."
As long as capacity far outstrips demand, businesses have little reason
to expand, buy new equipment or hire workers. Even if the government
funds bridge repairs and banks step up lending, many industries still
have to go through massive restructuring before growth can resume. But
executives say they have to tread carefully. If they put off critical
investments in technology or research for too long, they could hobble
their recovery and even the economy's.
Few industries have been as stung as severely by excess capacity as the
U.S. auto industry, which produces millions more vehicles than it can
sell. In 2008, there were enough automotive assembly plants in North
America to churn out 18.3 million vehicles a year, according to the
Center for Automotive Research. Analysts estimate that consumers this
year will buy about 11 million. At current sales levels, it would take
116 days to sell all the cars and trucks clogging lots.
Automakers are scheduled to submit plans today outlining how they hope
to restructure their operations to deal with a smaller marketplace,
while still developing the new fuel-efficient cars that may be key to
their future.
Auto suppliers are also trying to figure out how to survive in the face
of massive excess capacity globally.
At its plant in Strasburg, Va., International Automotive Components, a
Michigan-based supplier, secured wage and benefit concessions from
workers in 2007 in hopes of staying competitive. But when Ford closed a
factory in Norfolk, IAC had to lay off more than 200 workers, a third of
the workforce in Strasburg. Since then, IAC has been able to line up
more work for the plant.
"The unfortunate thing is we know . . . it comes at the cost of other
workers whose plants were unable to survive," said Karen Foster,
president of United Auto Workers Local 2999, which represents the IAC
employees at the affected plant.
There are echoes of the automakers' plight throughout the economy.
Sandra Berg, chief executive of Ellis Paint in Los Angeles, an
industrial paint and coating manufacturer, recently found herself
confronting over-capacity head on. Her company had been growing steadily
since 2000 and was able to hand out bonuses for 2008. The downturn
started to affect business toward the end of last year. Then came
January, and "we just slammed into a brick wall," Berg said.
Since the new year, as sales have plummeted, Ellis Paint has announced
two rounds of layoffs, imposed a hiring freeze and cut pay for
management by 5 percent. The company has cut everywhere but sales,
marketing, and research and development. "Our goal is to keep our
expenses at the level of sales. I don't need to make a lot of money. I
just need to break even . . . and look for the opportunities," Berg said.
Non-manufacturing sectors are trying to get rid of excess capacity as
well. Retail chains such as Ann Taylor and Gap are closing stores after
years of expansion, and others, such as Mervyns, are closing for good.
"We've tremendously expanded the square feet of stores but not the
number of yuppies occupying them," said Standard & Poor's economist
David Wyss.
Some analysts say over-capacity is so rampant that it will stymie
government efforts to unfreeze credit markets. Banks have little reason
to lend not only because they still have bad debt on their books but
also because businesses don't have a pressing need to expand, said Mike
Shedlock, an investment analyst with Seattle-based Sitka Pacific who
writes the popular blog Mish's Global Economic Trend Analysis.
"What is it that we need more of?" Shedlock said. "Do we need more
Wal-Marts, more Pizza Huts, more nail salons?"
Strip malls and stores proliferated alongside housing developments, but
many of those houses are empty; there were never enough people to fill
them in the first place, and there won't be anytime soon.
Harvard economist Edward Glaeser estimates that from 2002 to 2007, the
country's housing stock increased by 8.65 million units, outpacing the
number of new households, which increased only by 6.7 million over the
same period. Taking into account a rise in the number of vacation homes,
Glaeser estimates an overhang of about 1.3 million vacant units.
Absorbing that excess, he said, could take an additional two years.
Over-capacity in the housing industry has spilled over into countless
other peripheral industries -- forcing cuts at chemical companies, home
improvement stores and furniture manufacturers. The slump has prompted
layoffs at PPG Industries, a leading paint company; Owens Corning, which
makes roof shingles; and Therma-Tru, a door-manufacturing company.
Therma-Tru recently moved up plans to close its plant in Fredericksburg
later this year, citing "weaker-than-expected business forecasts."
Some businesses that were careful to manage inventories during the boom
are facing a hard adjustment.
Ben Anderson-Ray, who runs Hubbardton Forge, a small maker of high-end
lighting fixtures in Vermont, said he's had to lay off 26 employees
after initially cutting hours, even though he expanded the business
steadily and his customers aren't stuck with massive quantities of
unsold goods.
For now, Anderson-Ray said, he has not scaled back work on new products;
he simply cannot afford to do so. As one of the last lighting companies
that manufactures its goods in the United States, Hubbardton Forge has
survived in part because of its original designs and constant
innovation. It cannot compete with overseas producers on price.
"If our order rates improve, we have the capacity in place to come
back," Anderson-Ray said. But if order levels fall further over the next
few months, he may have to consider further cuts. "We are watching our
orders every day," he said.
Some analysts see ending the credit crunch as soon as possible as
critical to preventing lasting damage. Harvard economist Diego A. Comin,
in his research on Japan's decade-long bout of economic stagnation in
the 1990s, found that demand stayed low long enough that businesses
didn't make necessary investments. Computer adoption rates, for example,
slowed, as did productivity growth. Businesses lost ground to
competitors in countries such as South Korea, which made it harder for
Japan to emerge from its slump.
Investing in new products and processes matters even more in highly
competitive global industries plagued by over-capacity.
"In China, during the boom, there was huge over-capacity in various
lines of activity ranging from shoes and clothing, light manufacturing
-- all of that stuff. So that is why from the perspective of U.S.
companies, we have found it so important to be on the innovative edge,"
said Harvard business professor Joseph L. Bower. "The only way to create
value is to be on the innovative, high-tech, fashion-forward side."
If the credit crunch in the United States persists, "companies will find
it difficult to invest in technology for a while, and then once the
financial markets are back on track and demand recovers, companies will
find themselves in a difficult position," Comin said. "Productivity
growth will be declining for a while. They will have a hard time
catching up."
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