We're No. 1, and It Hurts

To professional athletes -- when they are not on strike or locked out -- and their adoring fans, there is nothing so exultant, as the chant of "We're No. 1!" American business executives are getting somewhat the same feeling. Finally, finally, they are beating their Japanese, German, South Korean, Taiwanese, name-the-country rivals -- and in products like autos, machine tools and computer chips, where a few years ago they were being trounced. The U.S. firms are not only turning back an import invasion of American markets but also triumphing in so-called third-country export markets and even swiping some sales in Japan and other tormentor countries. The closest thing to an official world championship of business is top rank among the nations studied by the Swiss-based World Economic Forum, and last month the forum made the announcement: after eight years of Japanese domination, the U.S. in 1993 had the world's most competitive economy.

But many ordinary Americans, and even some corporate middle managers, might greet that news with a shrug and a "So what?" -- or a skeptical obscenity. The price of beating overseas competition has been bitterly high: wave after wave of downsizing layoffs, wage increases limited or forgone, replacement of full-time workers by part-time or temporary hired hands. Even those who have hung on to regular jobs are often too exhausted by long hours of overtime and weekend work to enjoy the extra money they are earning.

The upshot, according to TIME's Board of Economists, is this: the increases in productivity, or output per worker hour, that have helped make the U.S. No. 1 again have also laid the groundwork for an unprecedented period of steady growth in output and employment with little inflation. Says Stephen Roach, senior international economist at the investment firm of Morgan Stanley: "Ultimately, that could be translated into the long-awaited improvement in the standard of living of the American worker." But, as he and other board members note, it hasn't happened yet. Making it do so, says Roach, "is the real challenge" facing the economy.

Meanwhile, the public mood seems confused and contradictory. Among 800 people questioned last week in a TIME/CNN poll by Yankelovich Partners, 38% described the economy in general as either growing moderately or booming, versus only 9% who thought it was in recession. But in response to the question "Do you think the recession has ended in the area where you live?," 54% said it had not; only 40% thought it had. An even stranger contradiction: 81% thought their own family's finances were doing either fairly well (69%) or very well (12%). Yet when asked "Do you personally feel better off as a result of the recent improvement of the economy?," 58% answered no, 37% yes.

Even to experts, the economy displays two faces, both of which are on view in Flint, Michigan. It is the site of General Motors' Buick City works, which is central to all GM auto production because it makes parts for assembly plants throughout the country. Buick City, in turn, was the scene in late September of a strike that, says Roach, "was symbolic of an issue that is really at the core of the debate right now: do workers get to reap the benefits of the improved efficiencies that they are delivering to employers?"

Eight years ago, after the closing of GM's Fisher Body plant, Michael Moore's sarcastic film Roger & Me portrayed Flint as a dying community. But since then U.S. automakers have turned themselves from the world's highest- cost producers to those with the lowest costs: only $42 in wages for each $100 in product turned out, about a third below Toyota or Mercedes-Benz. They have won back so many motorists who once bought foreign cars that the share of the U.S. market going to imported autos has fallen from 22% in 1991 to under 14% now. Profits are booming; GM turned a record $4.9 billion loss in 1991 to a profit of $2.5 billion in 1993 and $2.8 billion for the first half of this year. Buick City is running flat out to keep up with demand.

But workers complain that for them expansion spells exhaustion. Throughout American industry, companies are using overtime to wring the most out of the U.S. labor force: the factory workweek currently is averaging a near record 42 hours, including 4.6 hours of overtime. Americans, observes Audrey Freedman, a labor economist and member of TIME's board, "are the workingest people in the world." The big-three automakers have pushed this trend to an extreme. Their workers are putting in an average of 10 hours overtime a week and laboring an average of six eight-hour Saturdays a year.

Worse still, the Buick City employees gripe, each is being asked to do what used to be several jobs. "If somebody retires, all they do is take the work and give it to other people" who already have their hands full, says one worker. That complaint is echoed by workers, blue collar and white collar, in varied industries all over the country.

"I'm doing the work of three people," says Joseph Kelterborn, 44, who works for the NYNEX telephone company in New York City. His department, which installs and maintains fiber-optic networks, has been reduced from 27 people to 20 in recent years, in part by combining what were once three separate positions -- switchman, powerman and tester -- into his job of carrier switchman. As a result, says Kelterborn, he often works up to four extra hours a day and one weekend in three. "By the time I get home," he complains, "all I have time for is a shower, dinner and a little sleep; then it's time to turn around and do it all over again."

In Chicago, Gamma, the city's largest commercial photo lab, has turned a loss into a profit within the past year partly by dismissing 25 employees and leaving the remaining 160 to carry the same workload. Says sales manager George Burns: "Everyone has to do everyone else's job in addition to their own. I sell, supervise and jump into the lab whenever that gets busy." His workdays have lengthened from eight or nine hours to 12 to 14, and "you feel it," he says. "I'm not burning out, but it's like a football player at the end of the season. You get out of bed a little slower. It gets a little tougher every day." Even those whose job it is to chart such trends tell similar stories. Allen Sinai, the chief global economist at the investment firm of Lehman Bros. and a member of TIME's board, notes that "I have many more responsibilities now. So much so I hardly have time to breathe."

For GM, and for other companies, the economics work out. Overtime is expensive, of course; many autoworkers are earning $65,000 to $70,000 a year, and electricians on plant-maintenance crews working seven-day weeks can push their take above $100,000. But the combined wage, fringe benefit and training costs of hiring new workers would be more expensive still. Consequently, GM has done no significant hiring since 1986, once more pushing to an extreme a common trend. Since the recovery from the last recession began in March 1991, the U.S. economy has created almost 6 million new jobs, but in a sense that leaves it 2 million short; had companies hired at the pace of past expansions, the increase would have been 8 million jobs or more.

Finally, when it absolutely could not avoid adding workers, GM at Buick City and elsewhere turned to temporary-help agencies, which now supply blue-collar workers as well as stenographers, computer operators and other office hands. Once more the reason is economics: "temps" draw only wages, not health insurance and other expensive fringe benefits, and they can be used and let go as needed, without drawing the supplementary unemployment benefits GM and other companies must pay to laid-off regular workers.

Again, GM's strategy is typical of the auto industry and American companies generally. At the Ford Motor plant in St. Louis, Missouri, nearly 3,400 full- time employees make around $57,000 a year thanks to overtime pay. But the plant also uses 200 temporary employees who do essentially the same jobs but make only $20,000 annually because they work only two or three days a week. Economywide, the number of temps in the labor force has more than doubled in the past decade. Says Roach: "The ((job-creating)) leader in this recovery is not IBM, not Wal-Mart, not General Motors. It's Manpower, the company that offers you a job for a week without benefits, not knowing where you're going to be next Monday." About the only way in which the Buick City situation is untypical, in fact, is that the workers finally rebelled -- and won. First, to hear them tell it, they literally worked themselves sick; by late September, more than 1,000 of the 11,500 workers were on sick leave. At that point, Local 599 of the United Auto Workers called them out, aiming to force GM to hire some permanent workers to relieve the overtime crush. Workers responded enthusiastically. ENOUGH MANPOWER FOR FIRST-AID CALLS, RESTROOM CALLS AND FAMILY NEEDS, demanded one picket sign. Said an assembly-line worker, a mother with four school-age children: "I never thought I'd see the day when I welcomed a strike for a few days off." GM settled after three days with a pledge to hire 779 more regular workers.

Whether that victory sets any kind of precedent remains to be seen. Not many other workers have been pressed as hard as those in Buick City, nor are many as strategically placed to cripple their company's nationwide production by walking out. On the other hand, says Sinai, companies counting on their workers to be loyal may be in for a surprise: "Why would there be loyalty, given the way corporations have dealt with their workers over the past four or five years? At the first chance that workers have, they'll go looking for better jobs."

Nonetheless, Sinai notes, "the world is better than it was." The unemployment rate has dropped to a four-year low of 5.9%, and new claims for unemployment insurance -- a measure of how many jobs are being lost -- fell to an average of just over 300,000 for the most recent four weeks; that is a five-year low.

Sinai figures "we are generating this year 278,000 jobs a month." He concedes that "the character of those jobs really is questionable"; besides temps they include many low-paying service positions and not a little moonlighting. Freedman calculates that people holding two or more jobs constitute 6.1% of the labor force -- more than the unemployment rate. Still, says Sinai, "some jobs are better than no jobs. Some income is better than no income."

Contrast even that lukewarm description with some of the doomsday prophecies of two years ago, when the loss of markets to foreign rivals seemed to haunt the presidential campaign. Paul Tsongas' basic campaign document in his run for the 1992 Democratic nomination foresaw "great economic peril ((from)) Europe and the Pacific Rim . . . cataclysmic erosion of our standards of living . . . a diminished economy of decline and defeat." Bill Clinton, in his acceptance speech to the Democratic Convention, intoned, "Our country is falling behind . . . we have an unpleasant economy stuck somewhere between Germany and Sri Lanka." That was calamity-howling, of course, but not too far out of touch with the popular mood.

In fact, though, by 1992 a number of American companies were already well into an aggressive counterattack on foreign competitors that has been reaping more and more success. Their methods vary, and in some cases seem contradictory. But they have some common elements: emphasis on high-tech prowess; ruthless concentration on marketing the products and techniques in which a company has a competitive advantage -- plus the ubiquitous downsizing of plants and work force to get costs into line. Some examples:

( -- Compaq Computer Corp., with headquarters in Houston, was losing sales and profits so rapidly three years ago that directors fired founder Joseph ("Rod") Canion as chief executive and replaced him with Eckhard Pfeiffer. Under the new boss, sales have roughly tripled, to an expected $10 billion or so this year, and profits have increased even more, from $131 million in 1991 to $462 million last year and $423 million in just the first half of 1994 -- during which, several industry sources think, Compaq became the world's biggest maker of computers. Its strategy: shift from making a variety of high- end personal computers to mass-producing PCs, sold through extensive dealer networks in the U.S. and abroad, and cut, cut, cut -- costs and especially prices. The company has slashed prices an average of almost 30% a year. Compaq is one of the few companies to fulfill the promise that downsizing would cut costs enough to expand business so rapidly as to produce more jobs in the end. Pfeiffer laid off 20% of the staff between 1991 and 1992, leaving around 9,000 workers, but then began selective hiring that has now boosted employment to more than 14,000.

-- Intel in the past eight years has turned a $203 million loss into a $2 billion-plus profit and become, since 1992, the world's top producer of semiconductors, knocking Japan's NEC out of the No. 1 spot. Primarily it did so by picking out and pushing one product line: microprocessors, the tiny chips that serve as the brains of computers. It was a gutsy move, since microprocessors are harder to make and require far more research and development than the mass-produced memory chips that Japanese firms have been turning out at prices Intel could not match. But the timing was spectacular and the results self-evident. CEO Andrew Grove's advice to companies eager to emulate that success: "You have to understand what it is that you are better at than anybody else and mercilessly focus your efforts on it."

-- Electronic Data Systems, the company Ross Perot founded and later sold to General Motors, last November bagged a glittering international prize: a $1.5 billion, 10-year contract to overhaul and then manage the computer network of Inland Revenue, the British government's main tax-collecting agency. Again it was a case of American firms' specializing in a particular high-tech field. Other countries' firms may provide tough competition in making computer hardware and software, but nobody matches the Americans at the fine art of tying computers together into networks that do everything from running automated factories to sending out medical bills. On the Inland Revenue contract, for example, EDS' competition was all American. Only it and another U.S. company made it to the final bidding.

-- Caterpillar took a more conventional, and controversial, lean-and-mean approach. In the early 1980s, says Glen Barton, group president for construction and mining machinery, Caterpillar's "costs were out of line with what overseas markets were willing to pay for our products"; the company lost $1.5 billion cutting prices below cost to meet the competition of Japan's Komatsu and other rivals. But Caterpillar has slashed its work force 31% in the past dozen years, and that has lowered costs and raised productivity: from sales of $886,000 per employee to $2.3 million. Losses have turned to profits, and more than half its nearly $12 billion annual sales are made to overseas customers. The company has had to ride out a strike by about 28% of its employees that is now in its 16th week. It has kept production up partly by making supervisors work at line jobs, partly by luring some United Auto Workers members into crossing the picket lines, partly by turning out more machinery in overseas plants and by using 1,100 replacement workers.

There is another side to the overseas-success story. For all the triumphs of Compaq, Intel and other companies, Japan still dominates many high-tech fields. Its companies, for example, control 95% of the flat-screen-display market, a key area of computer technology, and Asian companies have pushed the U.S. out of the disk-drive business. At the same time, U.S. competitiveness has been vastly enhanced by a trend that could be reversed at a moment's notice -- the cheapening of the exchange value of the dollar, which lowers the price of American goods to foreign buyers. Says General Electric's chief executive Jack Welch: "If the Japanese are prepared to compete at 90 yen to the dollar, the U.S. must be prepared to compete at 130 yen to the dollar. Until we are, we delude ourselves if we think we are in control of our own fate."

Also, though exports are now among the fastest-growing items in the U.S. economy, they are still running well behind imports, resulting in a gargantuan and growing trade deficit. That, however, comes about in part because the country must import such huge quantities of raw products, from coffee and bananas to crude oil, that it either cannot produce at all or not in the quantities it needs. The great fear of a few years ago was that foreign rivals would also take over manufacturing businesses, particularly high-tech firms, and reduce the U.S. work force to hamburger flipping. That fear is pretty much gone.

But, it might be asked, what's the difference? Corporate downsizing is wiping out high-paying manufacturing jobs almost as effectively as losses of sales to foreign rivals might. For example, in 1993 the top 100 U.S. electronics companies eliminated 480,000 jobs. Says John Stern, a vice president for the American Electronics Association: "The American life-style is supported by manufacturing jobs. They are the entry point into the middle class for women and minorities and anyone else climbing the ladder who doesn't have the contacts or education to become a software engineer. These people can't lead a middle-class life in the service jobs that are left over."

There is much evidence, in fact, that the U.S. is developing something of a two-tiered society. While corporate profits and executive salaries are rising rapidly, real wages (that is, discounted for inflation) are not growing at all. Indeed, the government has reported that last year real median household income in the U.S. fell by $312, while a million more people slipped into poverty; those officially defined as poor were 15.1% of the U.S. population vs. 14.8% in 1992. Those were astonishing developments for the fourth year of a business recovery that is steadily gaining strength.

The intense drive for productivity is raising the rewards for training and education higher than ever. Between 1979 and 1989, calculates labor economist Freedman, median real income for year-round, full-time workers age 25 or more did not change significantly, but within that enormous group there were some dramatic shifts. College-educated women increased their earnings 16%, college- educated men slightly. Earnings of women with a high school education or less held about even. The big losers were men who never got past high school. Their inflation-adjusted earnings fell 14%.

Freedman's analysis of the reasons for these wide disparities indicates that they may have widened further since 1989. Says she: "It's the blue-collar, production-worker jobs that were high-paying and secure and unionized that are much less available" to men with a high school education or less -- a trend that corporate downsizing has accentuated still more. At the same time, "the jobs that are being created are computer-using jobs. They're service, white- collar types of work, and they are more likely to go to women. I think that's one of the reasons why women with a high school education or less haven't lost income while the men have."

Freedman identifies some other profound changes in job markets that tend to hold back wage growth. Full-time, full-year workers are no longer as dominant as they were. There is more self-employment, more part-time employment and the beginnings of what might be called task employment. Says Freedman: "I know one manufacturer who is opening a new location and is offering workers two years' employment and saying, 'After two years, you're not going to be employed any more.' "

Rigid wage structures have been broken up. Gone, for example, are the days when a raise for truck drivers would quickly be translated into raises for supervisors, warehousemen and trucking-company office employees to maintain standard differentials. Career-long service with a particular company, involving year-after-year raises for doing essentially the same work, is becoming a thing of the past too. The result: "You don't any longer have these internal spirals where a secretary at IBM will be making $75,000 a year with benefits, because spitting that secretary out onto the competitive labor market recalibrates the wage to maybe $25,000 or $30,000."

Fine for the companies. But in this environment, can gains in productivity and competitiveness be translated into enough wage hikes and additional employment to raise the average citizen's standard of living? There are some signs that such a turn might be coming. True, downsizing seems to have become a way of life. Among 713 companies polled by the American Management Association, 25% plan staff reductions in the next year -- the largest proportion in the eight-year history of this survey. But two-thirds of the companies reporting cutbacks are adding jobs. Roach predicts that "there will come a time" when downsizing companies will have increased productivity so much that they can "make the transition from cutting to rebuilding, and when market share is expanding, and the companies will have absolutely no choice but to reward their workers more equitably" because they will need a growing and contented labor force to realize those expansionary possibilities.

Perhaps, but there are tendencies that will have to be curbed for these happy possibilities to be reached. At some companies, at least, downsizing & shows signs of turning into a fixation, an almost pathological urge to cut whatever the circumstances. While some cost-conscious companies like Compaq have avoided this so-called corporate anorexia and increased hiring after getting their costs down and their market share up, others are acting more like American Express. It is about to start another round of staff cuts, despite having turned a loss into a profit. Why? "Because we're doing so well," chairman Harvey Golub told the Wall Street Journal. "You can either cut costs when there is a clear and present danger, or you can do it when people feel good about the way things are going. But it's much harder when you're in trouble: the world is looking at you, and you don't have much time."

In the long run, continually cutting back is obviously no way to grow. Even in the short run, downsizing carried to an extreme can reduce the very productivity it first enhances. While Ford Motor Co. is working heavy overtime, chairman Alexander Trotman is worried about it. Says he: "You don't get real productivity by simply ramping up the line speed . . . In the beginning everyone enjoys the extra pay, but we all get tired, pressures build up, people get edgy and tensions break out." On the other hand, he says, hiring enough extra people to work everybody straight time "wouldn't make economic sense. The challenge to managements is to find the right balance."

Downsizing can also anger customers who find workers too busy to pay attention to them. U S West, a Baby Bell telephone company with headquarters in Englewood, Colorado, has announced a phasing out of 9,000 jobs, about one- seventh of its work force. Already, Lynn Schimmelfeder and Ben Rubin, two service representatives, have so few support staff members working under them that they are unable to chase down customer queries such as, "Why didn't the repair man get to my house today?" Phone operators like Carla West increasingly are having to listen to the gripes of irate callers who cannot reach the business office: the lines are always busy. West and other operators can't get through to repair people either. Customer complaints have been pouring in to public-utility commissions in U S West's 14-state operating area so heavily that several PUCS have scheduled a meeting in Seattle this week to discuss the problem.

Even professionals and middle managers, coping with the pervasive insecurity generated by wave after wave of cutbacks, may respond not by working harder but by adopting a to-hell-with-this-company attitude. A geologist for a Houston-based oil company relates how she lost all her onetime great enthusiasm for her job after successive waves of layoffs. The worry became so great, she says, that "I would come home and go to bed earlier and earlier just not to think about my job." She was briefly promoted to a manager's position, then returned to being a geologist again while still drawing a manager's salary, which she fears has increased her vulnerability. Currently, she says, she wants only to avoid attracting attention, and so she will not let her name be used: "I keep my head down so it doesn't get chopped off."

Such tension and turmoil do not have to continue. Year-to-year fluctuations aside, economists and executives generally agree that the U.S. has built the best-balanced, leanest, most efficient base for steady growth that it has had in decades. Workers can only add the fervent wish: after all the pain it has cost us to get here, don't blow it now.