SJR 64: Joint Subcommittee Studying Manufacturing Needs and the Future
of Manufacturing in Virginia
August 17, 2004
The SJR 64 joint
subcommittee was established to consider the needs of the Common-wealths
manufacturing sector by assessing its current state and to determine how
its needs may be best addressed.
Status of Manufacturing Sector
Though the relative
size of the manufacturing sector in Virginias economy has been in
decline for several years, it remains vitally important to the Commonwealths
economy. Since peaking at 432,500 in 1989, Virginias manufacturing
employment has fallen to 296,600 in June 2004. More than 67,000 manufacturing
jobs in the state have been lost in the past four years alone. Manufac-turings
share of nonagricultural employment, which was 28.6 percent in 1949, currently
stands at 8.7 percent. The number of manufacturing establishments has
declined from 6,908 in 2001 to 6,086 in the fourth quarter of 2003.
of the health of the Commonwealths manufacturing sector are not
as bleak. Virginias average weekly earnings for production workers
have risen from $435 in 1992 (which was 93 percent of the national average)
to $622 in 2002, which exceeded the national average by $3. Average annual
wages for Virginias manufacturing sector, at $39,089, exceed the
average of $36,750 for all private employment sectors in this state. Since
1989, manufacturers have been producing more with fewer employees. The
amount of value added by Virginia manufacturing increased from $43.6 billion
in 1997 to $53 billion in 2001.
Despite the declining
numbers of manufacturing establishments and employees in the Commonwealth,
the sector remains important. The aggregated personal income in the manufacturing
sector exceeded $16 billion in 2002. Manufac-turings share of the
states economy was 12 percent in 2001, and its contribution to the
states economy topped $32 billion.
Cost Pressures on Manufacturers
The president of
Manufacturers Alliance/MAPI advised the joint subcommittee that while
the nations manufacturing sector is in a recovery phase, many challenges
remain. The purpose of manufacturing is evolving from making products
to providing solutions that incorporate such services as product
design, engineering, marketing, and organization. Technological improvements
are critical to maintaining competitiveness and productivity growth. The
manufacturing sector is leading in innovation and productivity, as 70
percent of business sector research and development (R&D) comes from
the manufacturing sector.
foreign manufacturers has limited the ability of U.S. manufacturers to
pass on increasing costs to consumers. Manufacturers Alliance/MAPI has
quantified the effect of policies with respect to corporate taxation,
employee benefits, tort costs, natural gas costs, and pollution abatement
costs on manufacturings raw costs for firms in the U.S. and its
nine largest trading partners. In 2002, the effect of these overhead
costs produced an effective cost index of $24.20 per hour for the U.S.,
which is $8.28 more than the $16.02 per hour average for the nine trading
partners. The U.S. effective cost index is exceeded only by Germany ($29.27)
and France ($25.77). The leading trade partners with the lowest effective
cost indices are China ($3.50) and Mexico ($6.19).
In addition, the
strong dollar imposed a 0.8 percent burden on U.S. manufacturings
raw cost competitiveness relative to its nine largest trading partners
from 19902003. Recommendations include:
- Allowing currencies
to seek optimal values,
- Reducing regulatory
and tort litigation costs,
- Increasing oil
and gas exploration in North America,
- Reducing the
corporate tax burden,
- Attacking increasing
health care costs,
- Increasing access
to foreign markets, and
- Improving the
climate for innovation and technology development.
Alliance/MAPI presidents ranking of Virginias business tax
climate as the 21st best state prompted substantial interest. Virginias
tax system ranked below average with respect to its individual income
tax component and the conformity of its tax base to the federal base.
The vice president
of purchasing at Philip Morris USA reported that a strong manufacturing
sector benefits many other economic sectors. In the case of Philip Morris,
its supply chain includes 1,100 suppliers of products and services and
more than 1,600 tobacco growers in Virginia. In 2003, Philip Morris spent
$850 million on goods and services from firms with establishments in Virginia
and $300 million on tobacco-related purchases in Virginia. In 2002, the
corporation exported $1 billion in goods, primarily through Virginia ports,
while importing $320 million of supplies through Virginia ports.
The length and breadth
of the supply chain benefits many economic sectors, including transportation,
finance and insurance, and retail and wholesale trade. Strengthening the
manufacturing sector would raise the overall economic tide in Virginia.
Strategies, Inc. (RTS) prepared a 2001 report on the performance of Virginias
technology-intensive manufacturing community. The report, prepared for
Virginias Center for Innovative Technology, also identified public
policy directions and actions that would advance the competitiveness and
growth of Virginias existing technology-intensive manufacturing
community and make Virginia more attractive to such firms.
RTS found that much of the decline in manufacturing employment is due
to increased productivity, as manufacturers need fewer employees to produce
a given increase in output. Similarly, manufacturings share of the
gross domestic product is declining as a result of increasing efficiency
in production, which allows manufactured goods to be sold at increasingly
lower costs, which results in lower expenditures on manufactured goods
relative to the amounts spent on services.
Research and development
is the single strongest predictor of GDP growth, and manufacturing counts
for 80 percent of all industrial R&D and 60 percent of total R&D.
Manufacturing innovation drives innovation and growth in other sectors
of the economy. The services sector benefits from R&D performed by
Virginias manufacturing industries. The benefits of R&D are
spread through technology diffusion, through which firms acquire, adapt,
and apply the technological advances created in other firms and other
industries. Manufacturing innovations are particularly conducive to technology
diffusion because of the close supply linkage among many manufacturing
The clustering of
technology-intensive manufacturing firms in geographic locations fosters
technology diffusion and knowledge spillovers, thereby benefiting
the entire region. In making location decisions, manufacturers with significant
R&D activity tend to locate at sites that are adequate for the manufacturing
processes while simultaneously attracting and retaining the necessary
scientists, engineers, and technicians. Virginias technology-intensive
manufacturing industries have made significant gains in output and productivity.
However, Virginia has a smaller percentage of its workforce engaged in
technology-intensive manufacturing than the national average.
RTS identified four
policy recommendations. First, Virginia should craft and implement a separate
statewide development strategy to advance the technology-intensive manufacturing
community. Second, private sector R&D should be encouraged through
tax credits customized to motivate and support R&D expansions for
technology-intensive manufacturers and by the establishment of a single
gateway for information and access to government resources. Third, the
state should focus on recruiting and retaining technology-intensive manufacturers
in order to boost R&D activities. Finally, strategic partnerships
or alliances, including research relationships between technology-intensive
manufacturers and state universities, should be encouraged.
Strategy for Growth and Renewal
The Virginia Manufacturing
Association (VMA) developed the Virginia Strategy for Growth and Manufacturing
Renewal, which identifies 12 priority areas of concern to manufacturers.
VMAs president presented the strategy to the joint subcommittee
and urged Virginia to focus on developing rules and legislation to aid
the growth of technology-intensive manufacturing. From the 12 points identified
in the strategy, he asked the joint subcommittee to focus on six threats
to manufacturing competitiveness: taxation, health care costs, research
and development, regulation, education, and transportation.
The joint subcommittee
indicated that it would examine four of these issues: taxation, research
and development, regulation, and health care costs. The joint subcommittees
second meeting will be held in November in the Lynchburg area. At that
time, members are expected to receive the results of a study by Ernst
& Young that compares the burden of Virginias state and local
taxation of the manufacturing sector with other economic sectors in Virginia,
as well as with the burdens on such sectors in several other states.
The joint subcommittee will examine the issue of ownership by Virginias
public universities of intellectual property developed at the institutions
through research sponsored by private entities. Other issues to be addressed
include energy costs and federal and state requirements for analyses of
the impact of proposed regulations on small businesses. Finally, the manufacturing
sector was asked to come forth with ideas to curtail increases in the
health care costs for their employees.
The Hon. Frank W. Wagner
Division of Legislative Services
of Legislative Services > Legislative
Record > 2004
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