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Bye Bye USA! Hello China 5/21/2001

By George Adamson

President and chief operating officer Richard Maddox of Lionel LLC announced Feb. 1 that the icon of American industry would cease manufacturing at its Michigan plant and move all production overseas to China by August.

Just a few years ago 80% of Lionel products were American made, but even Large Scale items came from China in 1995. Last year the ratio was reported to be down to 50% with its scale equipment shipped in from Korea.

In mid-January the company had given its 350 employees an ulitmatum to either suggest drastic cost—cutting measures or face plant closure. Subsequently, the plant was shut down one day because of a bomb scare. While management and the union negotiated, critics charged that the final decision had already been made. Lionel claimed, “No viable options were identified,” and the Lionel Board of Directors acted swiftly to approve the termination of manufacturing operations at the Chesterfield, Mich., plant.

Lionel’s distribution center (shipping and receiving), the Visitors Center, and corporate headquarters will remain, however. “To maintain its leadership position in the industry,” consumer services, quality control, research and development, design, sales and marketing, engineering, and all current administrative functions would remain there. The distribution centers, Maddox said, “will provide employment opportunities for at least some of the employees displaced from our manufacturing operations.” The UAW union will continue to represent some employees.

Although this may do little to sooth irate workers, Maddox announced:

“The company has hired Modern Human Resource Systems, a company with a national reputation for helping employees displaced as a result of downsizings and closings. The company will assist displaced employees to find new work and will make a variety of career transition services available to all associates through a series of specialized workshops, small group meetings, and individual counseling systems. MHRS will also be enlisting the help and support of various federal, state, and local agencies to insure that the employees receive all of the assistance needed to find employment.”

Those promises may have been ill-timed and sound hollow, however, as media reported 142,000 total job cuts by big companies such as Chrysler (16K worldwide), Lucent Technologies, J.C.Penney, Sara Lee, Xerox, Motorola, AOL Time Warner, Gateway, etc. Internet companies were drastically cutting payrolls or folding their tents. (Pittsburgh area emplqyer Kennametal cut 500 jobs, leading the local list.)

According to Maddox, “the decision was based on increased costs of domestic manufacturing, increased competition and changes in the marketplace [perhaps a veiled reference to K—Line and MTH already being made in Asia], and was not a reflection of the fine men and women of the Chesterfield manufacturing operation.”

Something Maddox said is ominous for all American workers in manufacturing plants, however. “What would cost a half million dollars to manufacture here will cost $50,000 to $75,000 overseas.” [If all American companies follow this lead, then who will buy those cheap Chinese imported products? This is scarey! Also, if Lionel will save 90% of their production costs, will they cut their retail prices by 90%?-- editor] “Wellspring (parent company) has spent $20 million over the past three years to keep Lionel competitive in the toy train market. Twelve to 15 percent of yearly sales goes back into tooling, said Maddox. Those molds may be transported overseas.

[One may be reminded of Lionel’s 1983 fiasco in Mexico when some crates of tooling were rumored to have been damaged in transit and left behind in the exodus rather than pay Mexican taxes on them.]

Some outsiders had miscalculated that the threat of the shutdown was a just a power struggle between Lionel and the union. UAW Local 417 president Dan McCarthy had different ideas. “This has probably been in place, I imagine, since they hired Maddox to take this very course of action. They’ve transformed Lionel from a badly run American company to a badly run oriental company.” The new manufacturing facility will reportedly be Chinese—owned and operated.

McCarthy said the union had given Lionel possible options which would have saved them “millions of dollars, but it wasn’t good enough for them.” He argued that the company is “top—heavy in management” so that was a place to cut payroll. The union would have agreed to a cut in the workforce but wanted a “core operation” to remain. He believed that Lionel’s decision had already been made before Maddox announced the “possible closing.”

During the “negotiations” the UAW sent an appeal to Lionel dealers (which was published on the Internet).

We hope you will join us in opposition to this move. Part of what attracts the customer to Lionel products is its rich history as an American icon. It is a feature that Lionel itself has featured in its marketing. Many collectors and customers have toured Lionel facilities including the manufacturing plant. [In fact. Ft. Pitt Division has been considering a bus trip there-— editor] Customers have willingly paid a little more for the quality of Lionel’s American made product. Lionel employees currently spend much of their time reworking deficient parts shipped from China.

This profitable company projects that by moving the operation to Asia, they can triple (plus) their profits. This money grab can only hurt them in the market. This move is an affront, not only to employees, but to the customers, and the network of dealers as well.

Lionel did not learn from its failed move to Mexico in 1983. Please tell them not to make the same mistake again.”

The company must have been concerned about public backlash to the move because Maddox reportedly solicited a few opinions from prominent train collectors before the first press release.

Reaction by collectors on the Internet has been mixed. Some are irate and vow to collect only previously made products. Some are concerned about the decline of the American economy, even to the point of suggesting that the USA could never fight a war with China because it would be powerless without their products. Others accept the new world economy and feel they will benefit from cheaper prices. Will Lionel lose some more sales to MTH and K—Line? Possibly! Once the issue of loyalty to American—made production is totally removed, all three will be o1i a level playing field, and whoever can sell the cheapest may make the most profit. Yet. Williams has been undercutting all of them. (Who else can market a GG-1 for $100?) Lionel’s handicap is that it must show a hefty return for Wellsprings’ investments. (Remember the S20 million tooling expenditure mentioned by Maddox and the union’s claim that Lionel is projecting a tripling of profits.)

Meanwhile K-Line has fired the next shot in the train wars, adding two former Lionel key personnel to its payroll including Bob Grubba as director of engineering. “Within two years K-Line expects to be the second largest in the industry. In five years the plan is to be number one.” So who slides to number three??

This is probably the biggest story of the year for Lionel collectors, but it isn’t over. The most news will occur in August and thererafter. Stay tuned.

Meanwhile, Bob Grubba, who was responsible for revitalizing the engineering at Lionel, jumped ship to become director of engineering at MDK (K-Line).

Former Lionel owner and still stockholder Richard Kughn called the move a “no—brainer.” Even though employees made only $8-9 hourly, he said that Lionel could not compete against competitors supplied by offshore manufacturers. He believes that customers will still support Lionel as long as it ships quality products.

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