THE RESURRECTION OF THE RUST BELT Deindustrialization? Economic violence? The heartland says humbug. When the going got tough, its industries shaped up. Now they're more competitive than ever.
By Myron Magnet REPORTER ASSOCIATE Mark Hamilton Mosher

(FORTUNE Magazine) – YOU EXPECT HUMBUG in a campaign. But have you ever heard humbug like what they've been saying about America's industrial heartland? As some candidates tell it, the center of the Rust Belt -- from the industrial Midwest eastward ! to the steel valleys of Pennsylvania -- is a hopeless disaster area. ''Deindustrialization'' has turned it into an eerie, almost post-nuclear wasteland. ''Economic violence,'' like some malign enchantment, has forever frozen unemployed workers in despair and drink. The reality is quite different. After global economic changes of epochal significance steamrolled the region earlier in the Eighties, the heartland has begun to rebound strongly. A few numbers provide eloquent testimony. Unemployment, a dismaying 12.6% in Indiana in the depths of the 1982 recession, now runs at 4.8%; in the same period, Ohio went from 12.5% to 5.9%. Over the past year, in almost every state in the region, not just service employment but also manufacturing employment has jumped. Iowa has 5% more manufacturing jobs than a year ago and 10% more than two years ago. Wisconsin's industrial employment is up 4% this year, Minnesota's 3.7%, Indiana's 3%. New businesses are crowding in. Last year 26,000 sprouted in Ohio. Startups produced 15% of the employment growth from 1984 to 1986 in the four-state Federal Reserve district that centers on Cleveland. Says Cleveland Fed economist Randall Eberts: ''That means you have a dynamic economy.'' The real estate boom that has already swept most of the nation is lapping at the Midwest. In the past year, median house prices have risen 9% in Detroit, 3% in Milwaukee, and 2% in Chicago. This year surging demand caused President Frank Marvin to expand employment 14% at his family-owned wood-window factory in remote Warroad, Minnesota, six miles from the Canadian border. Almost all his new business came from homebuilders in the 16 states stretching from Ohio west to Montana. The result: Warroad (pop. 2,000) is having a housing boom too, with typical prices soaring from $40,000 to $55,000 or even $60,000, and all 192 new apartment units are full. The region's rise isn't simply the product of the dollar's fall, which automatically makes U.S. goods more competitive. More important, a deep, company-by-company restructuring is making the Rust Belt's industry fundamentally stronger, more competitive, more able to withstand the next economic downturn or rise in the dollar. Says Paul Ohman, engineering vice president of Deere & Co. in Moline, Illinois: ''We're right in the middle of an industrial revolution that's probably going to be as big as the first one before it's all over.'' As revolutions do, this one began with upheaval. Because smokestack America had grown so bloated and slow, Rust Belt companies first restructured by slashing costs with Cossack ferocity. That meant not just junking tired capacity but also slashing workers' and managers' lives. As Ohio Governor Richard Celeste observes: ''You are watching in manufacturing what has happened in agriculture -- you need a much smaller work force to maintain your level of production.'' A dramatic case in point, the steel industry boasts of cutting operating costs 35% and boosting labor productivity 38% since 1982. These impressive numbers should be written in blood; it took carnage to reach them. For example, USX shut down the seven least efficient of its 12 steel mills and chopped its 75,000-person steelmaking work force to 20,000. The number of salaried employees -- from executives in the Pittsburgh headquarters to foremen in the plants -- shriveled from 30,000 to 5,000. Two rounds of contract concessions from the union, the second bitterly won after the longest strike in the company's history, extended the law of gravity to steelworkers' wages. These steps, along with the installation of continuous casters in the two mills that didn't already have them, reduced the number of man-hours needed to produce each ton of steel that USX ships from 10.8 only five years ago to 3.8 today. Now, for the first time in a quarter century, USX can export steel profitably. With domestic demand strong, it currently exports very little. But, says President Thomas Graham, boss of USX's steel business: ''It's going to be terribly important, because the domestic market won't always be as strong as it is now, and this gives us an anchor to windward that wasn't available to us heretofore.'' One company's restructuring often brings big changes to others. When world aluminum prices fell below their cost of production, the new owners of Ormet, a small, privately held aluminum producer in Beechwood, Ohio, told suppliers in late 1986 that the company needed price reductions to keep operating. Most obliged. But reducing the biggest cost, electricity, took Ormet's managers far afield. Ormet is the sole customer of a power plant run by a regulated utility obliged to set prices according to a non-negotiable, cost-plus formula. Only by cutting its own costs could the utility legally lower its price to Ormet. So Ormet's bosses went to the utility's coal supplier to point out that the power company would be buying less coal if high electricity costs forced Ormet / out of business. The utility got its cost saving, which it passed along in turn. Ormet's workers took their lumps less graciously. Though the Steelworkers International examined the books and agreed that the company needed wage concessions to survive, the union local balked at givebacks and struck for four months before accepting a 23% wage and benefits cut. Part of that will be restored as the company's fortunes mend. In the weekend before the workers returned to work, management reasserted control -- with a vengeance -- by introducing a hierarchical parking order, painting the administration building a different color, changing the company's logo and slogan, and for the first time requiring workers to wear identification badges. The message: It's a whole new company, fellas, doing business in a whole new way. MORE OFTEN than not, the spreading ripples of restructuring revitalize the companies they touch. After its markets collapsed in 1982, Peoria-based Caterpillar followed the usual cost-cutting script, shrinking employment from 89,000 in 1979 to 53,000 by 1985 and closing around a third of its plants. But managers also looked outward, and often turned up high-quality parts for less than it cost Caterpillar to make them. The suppliers of such parts are overlooked heroes of the Rust Belt's renewal. Not just lower-cost labor makes these mostly non-union companies efficient. Increasingly they collaborate closely with customers to save money, and they invent ways their behemoth customers hadn't thought of to make parts efficiently. Wrayco, a 50-person company in Stow, Ohio, is one of Caterpillar's certified suppliers, meaning that Caterpillar trusts it to assure quality and doesn't inspect its parts. Wrayco ships on a just-in-time schedule tied in to Caterpillar's computer system. It also prints bar codes on its parts, so that soon Caterpillar workers, by passing an electronic wand over them, will be able to notify the computers in the receiving and accounting departments and to order payment to Wrayco by wire transfer. On its own initiative, Wrayco found important savings by reengineering the fuel tanks it makes for Caterpillar so they could be fabricated of lighter steel. And instead of using different fixtures -- huge, expensive vises -- to hold each model of tank exactly in place while it is being made, Wrayco found that only one fixture, suitably adjustable, would do. This reduces the capital investment needed. Wrayco now makes for $950 one gas tank that used to cost Caterpillar almost $5,000 to build. Impact Forge of Columbus, Indiana, with sales of around $12 million, similarly took the initiative to save money. In offering to make forgings for Atlas Industries of Woodville, Ohio, a company that supplies finished parts to equipment manufacturers, Impact's managers noted that Atlas had to remove huge amounts of very hard metal from one model of crankshaft it was selling to compressor makers, quickly wearing out its expensive machine tools. Impact came up with a crankshaft that needed far less machining, won the contract away from the Japanese firm that had been forging the part for four years, and brought jobs back to the Rust Belt. In an almost Darwinian way, some Midwestern companies have adapted to the struggle for survival by hoisting themselves one step up the evolutionary scale. With the primal pond too crowded, they grew legs and lungs and lumbered indignantly onto land. Chief Executive Leo Ladehoff took Dayton-based Amcast, one of the nation's largest independent foundries, through one such metamorphosis. As brake calipers, steering gear, transmission housings, and the like grew lighter, he gloomily observed that three million tons of iron were getting progressively designed out of cars -- iron that companies like his cast. Worse, foreign foundries increasingly were casting what iron remained, not just for foreign cars but for domestic ones as well. Ladehoff decided there must be a better life. STARTING IN 1980, he sold a couple of his foundries to their employees -- they are still straining to keep them going -- and wrote off the rest. He then issued additional stock and leveraged his debt-free balance sheet to buy seven companies that make pipe and plumbing valves and fittings, along with four that cast aluminum and specialty steel parts for missiles, planes, and cars. These were sound, private companies whose managers were ready to retire. Says Ladehoff: ''They just couldn't handle expansion requirements.'' So not only did Amcast boost itself into vigorously growing industries, but also it boosted the competitiveness of the companies themselves by pouring in capital for modernization and expansion. ''Sales are up, earnings are up, penetration is up, new products are up,'' Ladehoff says. ''The prior management couldn't do it.'' During three weeks in 1982, the entire M.A. Hanna Co. of Cleveland had literally nothing to do. With steel and energy both in depression, robber baron Mark Hanna's old firm -- a major iron ore producer, with holdings in oil, gas, coal, and other natural resources -- had been forced to shut down every one of its operations, either temporarily or indefinitely. Management knew that an evolutionary leap was in order -- fast. So between 1982 and 1986, the company shed most of its natural resource businesses, taking write-offs of $400 million and watching $500 million in sales dwindle to $130 million. Like a paradigm of industrial history, Hanna no sooner stopped being an iron company than it became a plastic one. From late 1986 to late 1987, it bought five companies that sell plastics and make materials for the plastics industry. Four were fast-growing private firms that could use Hanna's access to capital to fuel uninterrupted expansion. The fifth was what remained of scandal-scarred Dayco after Armitech bought its belt and hose business as part of the consolidation now taking place in the auto parts business. With these acquisitions, Hanna expects revenues this year to approach $1 billion. Says Chief Executive Martin Walker: ''The common thread in the Midwest recovery is that you have to recognize that life in the future is not like life in the past. You have to be ready to accept change.'' To the sharp eyes of former bank president Charles Walton and retired Alco Standard CEO Tinkham Veale II, opportunity aplenty lurked in the Rust Belt's misfortunes. Solid private manufacturing companies, with ample assets to secure bank loans, were selling cheap, priced at only six to ten times their after-tax earnings. With additional capital to fix up plant and equipment, they could flourish whenever recovery came -- as it surely would. Starting with the $200,000 acquisition of bankrupt American Beef Packers in 1983 as a publicly traded vehicle for further acquisitions, Walton and Veale have turned their theory into Sudbury Inc. It is a half-billion-dollar-a-year miniconglomerate of 31 acquisitions, including a foundry, four waste-disposal equipment manufacturers, and nine auto component manufacturers. Unlike growth-hungry Sudbury, the old private owners of these companies, with a 10% or so annual profit, had little incentive to invest much for modernization. So over time, observes Chief Executive Walton, their businesses threatened to deteriorate. ''I don't care how good your machinists are,'' says Walton. ''If they don't have equipment that can hold millionth-of-an-inch tolerances, it isn't going to work.'' To take just one example of the new approach: With added investment, a Sudbury subsidiary near Chicago now makes precisely machined components for IBM computers and for Bosch antilock brake systems. As Walton says: ''They couldn't have done this with their old machinery.'' AT THE HEART of the Rust Belt's resurgence is a revolution in the way companies manage workers. ''You make labor-management cooperation a religion,'' says executive director Richard Shatten of Cleveland Tomorrow, a civic group. This precept sounds as trite as the advice of marriage counselors. Either you think you're doing it already -- or that it's silly. Nevertheless, properly understood, it is powerful stuff. With it you can revitalize a mediocre company. That's something Ralph Ketchum, the retired senior VP who ran GE's lighting business, now does as a venture capitalist acquirer of companies. ''Along the Ohio and Pennsylvania valleys, there's been a lot of union-management bitterness,'' he notes, ''so there's plenty of opportunity.'' It takes no magic to do it. Says Ketchum: ''I saw that the GE lighting plants in Ohio could be turned around using almost any method you tried, and we experimented with many different ones.'' The invariable problem is that managers and workers form two separate tribes who scarcely ever talk to each other. Says Ketchum: ''When you start talking, which is tough, you can accomplish a lot.'' From the day he bought the company, Ketchum opened up communications at Apex Corp., a small manufacturer of jet engine parts in Indianapolis; even second-shift workers didn't hesitate to call him at home for reassurance that their jobs were secure. Ketchum chairs a collaborative union-management outfit, the Work in Northeast Ohio Council, that successfully spreads the gospel of cooperation throughout the region. One of the many converts among the 60-odd companies to which Winoc has ministered is Diebold, the maker of automated teller machines, point-of-sale terminals, and bank vaults in Canton, Ohio. ''A basic adversary environment doesn't wash if you want to be a competitive global organization,'' says Chief Executive Robert Mahoney. He called in Winoc to help sweep away ingrained labor-management distrust at one plant. Winoc advised the plant to set up a committee of managers, supervisors, and hourly workers. ''They meet once a week, prioritize an agenda, solve problems together,'' Mahoney says. In other words, they talk. Adds Mahoney: ''These employees really know what we need to do to improve product quality, reduce scrap, become more efficient. But they were never really given an opportunity to express themselves.'' Now quality is up, and so are profit margins -- significantly. John Psarouthakis is one of those Rust Belt entrepreneurs who prosper by buying underperforming companies and making them hum. His J.P. Industries -- an Ann Arbor-based conglomeration of 14 companies and cast-off divisions acquired over ten years, making such durable goods as engine parts and plumbing products -- now takes in over $500 million a year in revenues. Like other managers of the Rust Belt resurgence, he upgrades his operations not just by listening to his workers but also by training them and reorganizing the way they work. ''We have high-tech manufacturing processes to make low- tech products,'' he says. But the worker in such an environment needs to know what he is doing. ''You don't bring in a computerized, numerically controlled milling machine without training the operator, because you waste the money for the machine and frustrate the operator.'' If you do train him, you can get spectacular results. One day Psarouthakis walked into a gasket plant and saw a man in a tie and jacket running a new milling machine. The vendor checking out his product? Psarouthakis thought so, but no. It was the regular operator, who used to run the manual machine. I love it, he told Psarouthakis. You just push the buttons and program it. Do you like my necktie? ''A tremendous change of attitude,'' says Psarouthakis. In the same factory, Psarouthakis replaced the assembly line, where each worker does only a single operation, with manufacturing cells, where each worker completes a whole product. Adam Smith himself, and the 19th-century critics of industrialization after him, had worried that the division of labor characteristic of the new factories would make each worker miraculously dextrous -- and almost brutishly stupid. It would require no thought and would overdevelop the tiniest slice of his talents at the expense of the rest of them. But in cellular organization, says Psarouthakis, ''the person is doing more than one operation, so is really using his or her brains. Because the production process changed, people got upgraded. They learned. So we use brainpower along with technology.'' No company could be more enthusiastic about cellular manufacture with computerized machinery than Deere & Co., which responded to the manifold catastrophes that blighted its farm customers by cutting its breakeven point in half and by trying to become more efficient on every front. Deere managers join Psarouthakis in liking what such an organization of manufacturing does for their workers. Says James Lardner, vice president for tractors and components: ''It takes the least valuable part of man's mind that we've been renting, and lets the computer do that, and frees people to do the things that people's minds do well.'' A proprietary stake in their output gives workers a new outlook on quality. When a piece of sheet metal gets cut in one department, punched in another, bent in another, and spot-welded in yet another on its way to becoming a finished subassembly, no one person has -- or feels -- any accountability for its goodness. But it's different when one man does the grinding, both rough and smooth, on the raw casting for a wheel hub, then mills it and installs the bearings that make it a complete subassembly. Says Lardner: ''There's no way to blame Charlie, or the first operation, or the tenth operation. There's no way to say, 'It wasn't right when I got it,' because you did it.'' Deere managers found that simply juxtaposing formerly separate operations boosted quality and productivity. For instance, when a worker was far from the assembly area welding accumulators for the oil in a hydraulic system, a quarter of them always leaked and had to be sent back for rework. That changed when he welded them as needed right by the assembly bench. The assembler, when the first one failed and sprayed him with hydraulic fluid, turned to the welder with a wrench in his hand and said, ''The next time you do that, you son of a bitch, I'm gonna bend this over your head.'' The problem stopped. ''Here were two guys working together,'' says Lardner, ''and to the guy that did the welding, the other person was until then a disembodied experience. There was no feeling of responsibility.'' All the changes have let Deere do away with many separate inspections and put the worker himself in charge of measuring and checking his part. Says Lardner: ''If you know there is somebody to catch your mistakes, you're not nearly as concerned as if you're the only one, and nothing is going to affect the quality downstream except you.'' For inventories, too, cellular manufacture has worked wonders. In the old order, each worker had a pile of parts awaiting his attention, and the parts waited in storage between steps for up to 90% of the time they were in the factory. Consequently, inventories were huge and required voluminous paperwork. Now, once materials are out of inventory, they get worked on until they're incorporated in the finished product. Says Lardner: ''If you could double the velocity of throughput -- double the percent of time that raw material is actually being transformed into your product instead of sitting in storage -- you could produce the same amount of goods with half the capital investment.'' ENLIGHTENED management is becoming so firmly rooted in Rust Belt industry that startup companies often open their doors already complete with highly sophisticated ways of organizing and managing labor. Consider three illustrations: Since even the tiniest companies can teem with managerial wisdom, start with Castite. This eight-year-old firm, just reaching for its first million in annual sales, employs 17 people, nearly half of them blacks from inner-city Cleveland, where the company is located. Castite's business is filling with an epoxylike resin the tiny holes that gas bubbles make in molten metal as it is cast. Thus treated, transmission housings won't leak oil, and outdoor cable TV junction boxes won't let water through to the wires. President Joan Lamson founded the company after her previous employer fired her for proposing adoption of the new technology Castite now uses. Says Lamson: ''You'd think it doesn't have to be said, but the key to getting good quality parts to the customer is to have a plan for doing that.'' Accordingly, every time a new kind of part comes in from one of her customers, which include the Big Three automakers, she has a salesman, a quality assurance person, and a production worker sit down together. They figure out what exactly the customer wants, how to do the job in the best possible way, and how and when to inspect to keep up quality. Lamson has even set up a simple statistical process control system, charting such variables as resin gel time and viscosity, so that her workers can readily see what variations harm quality. William Willoughby, who heads another inner-city Cleveland startup, organizes his work force like a troop of commandos. His four-year-old Cleveland Track Material Co. will have about $7 million in revenues this year, thanks to an irrationality of the American railroad system. Because rails originally were made for many different companies and were laid down over many years, they aren't uniform. Instead, a rail may have one of about 30 different cross sections. When, as often happens, worn-out track is renewed with a mixed ) bag of used rail, unlike rails have to be connected with ''compromise joints,'' which Willoughby makes, along with normal rail joints. His is a labor-intensive business whose product specifications continuously vary, and he has made it grow rapidly by managing his workers to do it right, fast, and cheap. Says West Pointer Willoughby: ''I liken what is going on in business today to changes in land warfare. In World War I, you had relatively static lines in two dimensions. Since then the battlefield has become highly mobile, three dimensional, and oriented toward guerrilla warfare. We in the small companies can react to what is becoming a very fast-moving marketplace, where the big companies haven't been able to respond.'' He organizes his 103 guerrillas in a way that, he says, ''strikes at the heart of the union philosophy, which is a high degree of specialization.'' The non-union workers, mostly hot-metal veterans, have to be flexible enough to switch from their primary jobs to a secondary one if need be. To produce a part that a customer needed the next day, for instance, Willoughby set his painter and shotblaster to do welding, while two forgers, who didn't know how to weld, took over the painting and the shotblasting. You might think that Willoughby gets his $7- to $9-an-hour enlisted men to do this by order-barking discipline. Not so. He succeeds by talking with them continually, at their machines or in meetings of the elected advisory committee. He speaks about how the business is doing, where it is going, what the successes or failures have been, how theirs is a little business that can succeed only if every worker pulls his weight in both his primary and secondary jobs, how he trusts them, knows they are responsible, and welcomes their suggestions. ''If I learned anything from the Army,'' he says, ''it was that any group of privates in the back rank can defeat any lieutenant.'' Then there is two-year-old American Steel & Wire in Cuyahoga Heights, Ohio. It is a steel company run like a high-tech Silicon Valley computer outfit, and it takes modern management about as far as it will go. Composed of three plants acquired from USX in a leveraged buyout -- including the famous Cuyahoga works, then shut down for two years by a labor dispute -- the company produces high-quality rod and wire for makers of such can't-fail products as bolts for wheels and seat belts. Quality is the key to this niche; if management can't motivate workers to produce it, the business won't last. CEO Thomas Tyrrell makes new hires plunk down at least $100 cash on their first day of work to buy company stock, even though some of them are steelmakers who have been unemployed for up to a year. Says Tyrrell: ''We wanted people to have a vested interest in running this business.'' Inspired by a practice of John D. Rockefeller's, Tyrrell has every employee up to his office for a get-acquainted chat. He visits each plant for one day a month to tell workers in small groups how the business is doing, with tips on how employees can save the company money. Each quarter he shuts down the plants for a companywide stockholders' meeting. His profit-sharing plan will add around 15% to each worker's base pay this year and probably 25% next year. AS IN PALO ALTO or Cupertino, it's all first names at American Steel & Wire, and of course no one punches a time clock. You park where you want in the lot, and all employees have identical vacations and benefit plans. Last year, thinking it unfair that he or his secretary should get paid for days missed due to sickness while workers on the shop floor don't, Tyrrell put all his hourly workers on salary. Absenteeism went from 1.2% to 0.8%. Teams of workers often suggest major ways to cut costs or gain efficiencies, which management regularly adopts. The team chairmen meet monthly with top management to review all aspects of the business and to discuss policy. Management evangelists talk about how difficult it is to persuade old-school executives to swing to the enlightened modern beat, but veteran Rust Belt workers don't have such an easy time either. Says Tyrrell: ''The hardest part is breaking down old taboos. We're building a new culture. Shift managers have to draw our people out to do things they used to be disciplined for. Maybe the shift leader says, 'This is what we ought to do,' and the production guy doesn't like it -- or can't. Then the production guy has got to stand up and say, 'Why? Tell me why we have to do this.' '' The revivifying industrial culture of the Rust Belt includes an awakened repect for up-to-date technology. Some of the new technology yields new products, like a polymer that speeds healing when put into bandages or a chemical sterilizing machine suitable for proctoscopes and other intrusive doodads made of plastics that melt in conventional heat sterilizers. Funded by a state of Ohio technology development program, along with one of the many new Rust Belt venture capital funds, a Painesville, Ohio, startup company, Steris, + is making these sterilizers for a potential $1 billion market. In parts of the Rust Belt, entrepreneurs are planting new high-tech businesses in the ruins of yesterday's industry. Like English country house builders who cannibalized nearby ruined abbeys for their beautiful materials, these entrepreneurs incorporate valuable human resources left behind by the old industrial order. Around 650 companies of this kind -- 300 of them software outfits -- employ almost 77,000 people in the Pittsburgh area. Here they can draw on the expertise of the big law and accounting firms that grew up to serve the region's now shrinking heavy industries. Most important, because of the big computer installations at the old industrial companies, entrepreneurs can tap the skilled technical community that has long flourished in Pittsburgh. BUT THE TECHNOLOGY that counts most in the Rust Belt is grittier stuff, the refinement that improves old processes. Says management consultant Richard Hervey of Southfield, Michigan: ''There's a lot of leverage in basic manufacturing that gives you competitive strength. The Japanese have done plenty in sexy areas -- but more in unsexy ones. We're just beginning to recognize the power of that.'' The foundry industry, for instance, has cut its reject rate from 2.5% to under 1% with such improvements as laser-controlled pouring cups that make sure the molten metal flows evenly and the mold doesn't get overburdened. State-supported efforts like Ohio's Thomas Edison Project or Pennsylvania's Ben Franklin Partnership promote joint industry and university research into bringing magic to the ordinary. Along with companies like Ford and McDonnell Douglas, the state of Ohio helps support a welding institute that does research on such dull-sounding but essential areas as laser welding and the joining of composites for the aircraft industry. The Edison Polymer Innovation Corp. run by the University of Akron and Case Western Reserve is developing a technique to make compounds for plastic injection molding more malleable by jiggling their molecules with ultrasound. The result: Machines can squeeze out hoses, window frames, or tire treads in half the normal time. The renewal is unquestionably under way. But, cautions Governor Celeste: ''Every day some young businessperson in Singapore or India, in Brazil or Italy or Germany, is writing a business plan in which he is determined to export one-third and probably one-half his product to the U.S. marketplace. Nobody is going to lay down because we are rediscovering what it takes to be productive.'' The challenge will be to keep the resurgence surging.