Sad America Story Time

How the status quo can kill: the example of free trade

I have a friend who has been helping “liquidate” the actual machinery of America’s industrial base for the past three decades. A factory shuts down, and what happens to all the lathes, milling machines, planers, shapers, power presses, and other equipment that sits on that factory floor?

He can, and has, told stories about cavernous, vacated building in Brooklyn and the Bronx, and in the industrial zone stretching from Patterson, New Jersey, to Reading, Pennyslvania, containing dozens or even hundreds of machine tools and other equipment so huge that no one wanted to buy it. Not even for scrap. It would cost more to rig it and move it than the scrap value of the metal in the machine.

Just a few months ago, he was down south, where an elderly gentlemen – let’s call him Russ - had decided to shut down his company. It was the largest manufacturer in the world of shaped cardboard boxes. You know – the boxes shaped like hearts holding a pound of Valentine’s Day candy, or the boxes shaped like a big fat guy with the big Santa Claus chocolate inside. As corporate America goes, it was not a huge operation – it employed around 150 people, including all the people on the production line, all the managers, all the sales people. It wasn’t high tech, but there was always a good demand for these shaped boxes, and it provided a good living and benefits for its workers, by far the best in the private sector in the area where this company was located. It was a large, but not giant, facility, and there was some interesting machinery in there. My friend walked around inside, studied the machines on the production line, and concluded that most of the machines were just too specialized; designed and built for precision cutting and shaping of cardboard, not plastics, or composites, or metals. How many other people were there in the U.S that had use for these types of machines?

Russ was truthful, and in answering that question and a few others, provided my friend a pretty good picture of what the shaped cardboard box industry in the U.S. looks like (this one company was pretty much it, at least for big production runs of 1,000 to 1,000,000 boxes) how it was doing (not well), and what had happened to it (read on for the details).

The boxes this company made were, as you can imagine, sold mostly to candy companies that used them to package candy according to seasonal themes, or sometimes topical themes, like a box shaped like a NASCAR racecar stuffed full of what are claimed to be Richard Petty’s favorite pralines. Over the past twenty years, Russ explained, there had been a noticeable shift in the buyers of the candy in these specially shaped candy boxes. This shift had accelerated the past few years, and now one large national retail chain, notorious for the pressure it puts on vendors and suppliers to sell to the chain cheaper, cheaper, and ever cheaper, was the largest seller, and hence buyer, of candy packaged in specially shaped boxes.

Back sometime in the summer, representatives of one of Russ’s largest customers, a candy manufacturer, visited to place its order for the boxes it needed to package its Christmas candies. An annual tradition. Russ gave them a quote, and the candy maker representatives frowned. The price had to come down; the large national retail chain, notorious for the pressure it puts on vendors and suppliers to sell to the chain cheaper, cheaper, and ever cheaper, had demanded that it buy its packaged candies a few cents cheaper than last year, and was not budging. In fact, Russ’s customer had even signed the contract, and now were looking to suppliers, such as the maker of shaped cardboard boxes, to also knock down their prices a bit.

Russ picked up his pencil, and ran through the numbers again. This kind of pressure was not new; he had held down his prices for many years, even while the costs of manufacturing inputs, especially fuel and electricity, had soared. In fact, he had not really given himself any pay the past two years, and had deferred a lot of maintenance on the factory and its equipment. Sighing resignedly, he said he would try to work up some new numbers, and get back to them. No, sorry, he would not sign a contract right now. He really needed to work on the numbers. Yes, he knew he had signed during this visit for the past twenty-something years, but now they were asking him to sell at a price he was not sure he could. So, sorry, no, he was not signing anything right now.

A few days later, the representatives of another large candy maker arrived, also with contracts in hand. And with the same demand for lower prices. And for the same reason: the large national retail chain, notorious for the pressure it puts on vendors and suppliers to sell to the chain cheaper, cheaper, and ever cheaper, was putting the squeeze on them to. Russ told them the same thing he had told the others a few days before: sorry, he would not sign a contract right now, but would get back to them.

The next day, representatives from another large candy maker arrived, and the scene repeated itself. In between these increasingly painful meeting, the Russ had walked the floor of the factory he had built and run for nearly three decades. He looked at each machine, and considered. This line of cutters were losing their tolerances, and should have had their shaft bearings replaced a year or more ago. He had saved $3,500 by not doing that. This gluing machine had become very variable in the thickness of the bead of glue it applied; the entire hydraulic pressure system needed to be checked and parts of it probably replaced. It would cost $150 just to get a good technician to walk in the door, then $100 an hour in billable time, plus whatever the parts would cost. A thousand dollars, easily. Same with this gluing machine. And that folding machine. And that label applicating machine.

There really was no where else Russ was willing to cut costs. He had worked hard, like many owners, putting in 60 or 70 hours a week. He had enough to retire on now, but that nest egg would rapidly dwindle if Russ tried to keep the company going at the prices his customers were demanding. His kids, thank god, had no interest in manufacturing – who wants to get their hands dirty in this day and age? Sadly, Russ concluded his life's run had reached the finish line. Either he would sell the company, or liquidate it.

There were no buyers for the business, so Russ called my friend. After my friend visited, and told Russ there basically was no market for these box making machines in the United States of America, Russ was pretty much forced to sell everything for its scrap value.

Here’s the kicker. My friend told me this story a few weeks after he had visited Russ’s plant. Since he had left, the riggers had come in, ripped out all the electrical, hydraulic, and water connection, put all the machines on flatbeds, and hauled it away. A few days after that, a large candy maker called Russ in a panic. The large national retail chain, notorious for the pressure it puts on vendors and suppliers to sell to the chain cheaper, cheaper, and ever cheaper, had helped them find a maker of shaped cardboard boxes in China. The candy maker had placed a rush order for a half million boxes, and were delighted when the order arrived in time.

How fast can you make us 500,000 boxes? They asked Russ. You name the price. Even last year’s price.

What’s wrong? I thought you were getting your boxes from China.

We did. But all the boxes smell. Of solvent, or glue, or something. We can’t use them.

Russ explained that he couldn’t help. His factory was shut down, and literally, the machines had been pulled out of it and sent to a scrap dealer.

Of course, my friend wanted to know what the candy company did with its smelly boxes. According to Russ, they unpacked them all, separated them all, then spread them all over the candy factory to air out, while candy piled up in standard cardboard boxes. When the shaped boxes only smelled so bad that you had to hold them close to your nose to notice, then they paid the workers overtime to fill all the shaped boxes, still smelling slightly of solvent or glue or whatever, and finish the production run and ship them to the large national retail chain, notorious for the pressure it puts on vendors and suppliers to sell to the chain cheaper, cheaper, and ever cheaper.