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America's Heartland


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AMERICA'S HEARTLAND

Foreign insurers such as Toyota Motor Insurance Co. and Australian Mutual Provident Society have set up shop in Iowa. State Insurance Commissioner David J. Lyons travels regularly overseas, searching for more prospects, and insurance training programs have been arranged at community colleges. The result: Des Moines is now home to 200 insurance companies employing some 21,000 people.

Cleveland is no longer a nationwide joke. New entertainment, shopping, and office developments have altered its skyline. City officials from around the country now visit Cleveland for guidance on urban revival.

Wabash National Corp., a truck-trailer manufacturer was born from the rubble of the Rust Belt. Founder Donald J. Ehrlich bought some of his equipment used from bankrupt Midwest companies in 1985 and moved into a vacant factory in Lafayette, Ind. He parlayed a highly trained workforce and just-in-time manufacturing into industry leadership and $15.5 million in earnings on sales of $360 million last year.

Welcome to the new Midwest. Hammered by foreign competition during the 1980s, and left for dead only five years ago, America's heartland is booming.

The region's revival is not just a brief upturn from the depths of disaster or a temporary boon from a declining dollar. The Midwest economy--stretching from Ohio to Iowa--has transformed itself. Its manufacturers, typified by Detroit's Big Three auto makers, have turned the tables on foreign rivals with world-beating products. More and more companies are tapping into the global economy. Today, most Midwest states can trace one in six manufacturing jobs to export-related work, up significantly from the early 1980s.

The region now owes as much to computer chips, health care, and financial services as it does to the smokestack. High-tech entrepreneurship is on the rise, too. Small software and biotechnology outfits have set up shop around state universities in Ann Arbor, Mich., Urbana, Ill., and Madison, Wis. Towns such as Kenosha, Wis., and Flint, Mich., devastated during the 1980s when auto plants scaled back and laid off thousands, are growing again. Says Alan G. McNally, a Canadian and chief executive of Harris Bankcorp Inc. in Chicago: "The Midwest represents the greatest region for economic growth and vitality into the 21st century."

It's not just the private sector that is undergoing dramatic change. The Midwest is at the forefront in battling sclerotic bureaucracies to create more entrepreneurial, responsive governments. Mayors such as Indianapolis' Stephen Goldsmith and Milwaukee's John O. Norquist or governors such as Michigan's John Engler and Wisconsin's Tommy G. Thompson are experimenting with such corporate concepts as total quality management, reengineering, customer service, and injecting competition into public services. "The transformation of the private sector has spread to the public sector," says Norquist, a disciple of management guru Peter Drucker.

SWELLING POPULATION. Indeed, having experienced the slaughter of the early 1980s, worries about future jobs are behind most of the government reform efforts. The era of revenue sharing with the federal government is mostly over, and the middle class is fed up with high taxes. More important, business in the high-tech age is more mobile than ever. Thus, key to sustaining the long-term strength of the region is government that is efficient and attuned to the needs of the local economy. "States are still the important engines in domestic policy," says Peter K. Eisinger, director of the University of Wisconsin's Robert M. LaFollette Institute of Public Affairs. "Everyone is closely watching the Midwest experiments."

Right now, the Midwest economy is outpacing the rest of the country. In 1993, the Midwest grew at a 4.9% annual rate vs. 3% for the nation as a whole. For 1994, the figures could be 4.3% and 3.3%. What's more, Midwest exports are rising twice as fast as those from the rest of the U.S. Manufacturing employment has been far stronger than in the nation as a whole. And the region's population should swell by 103,000 this year, compared with a net loss of 134,000 in 1989 (charts).

These gains put the Midwest in the same league as other high-flying parts of the country. Along the I-85 corridor in the Southeast, manufacturing industries are expanding at an impressive rate. Out west, the Mountain states are enjoying a boom largely fueled by thriving high-tech companies and an influx of people fleeing California's recession and deteriorating quality of life.

Still, the Midwest holds much of the economy's firepower, and its fortunes have a disproportionate impact on the U.S. economy. For one thing, the heartland accounts for 44% of the nation's output in cars, 28% of trucks, and 33% of steel, according to the Federal Reserve Bank of Chicago. For another, the region's 54 million people is 50% more than the population of the Mountain states and I-85 states combined. An export juggernaut, the Midwest shipped abroad $28 billion worth of goods, vs. $21 billion that the Southeast and Mountain states together exported in the first quarter of this year. And the Midwest should grow at a 4% annual rate over the next two years, roughly comparable to the pace in the Southeast and Mountain states, calculates Mark Zandi, chief economist at Regional Financial Associates Inc., consultants based in West Chester, Pa. "The Midwest economy has made enormous strides in world competitiveness," says Zandi.

The region has become a powerful magnet for job seekers. Last year, more companies transferred employees to the Midwest than any other region, according to Runzheimer International Corp., a corporate relocation adviser. New York marketing consultant Marian Salzman, who studies the twentysomething generation, says cities such as Chicago, Indianapolis, and Columbus, Ohio, are now desirable destinations for college graduates looking for well-paid jobs and low-cost housing. Midwesterners made up only 16% of the graduating class at Northwestern University's Kellogg Graduate School of Management, but 50% of the class opted for jobs in the region. Says William T. Kerr, a transplant from New York City and president of Meredith Corp., a Des Moines publisher: "As people look for good schools and a good quality of life, certain parts of the country benefit. The Midwest is one of them."

AN OVERHAUL. To be sure, the Midwest revival isn't everywhere and isn't shared by everybody. Detroit struggles with crime and inner-city poverty, even as new Mayor Dennis Archer tries to engineer business reinvestment in the city. In Chicago, the region's biggest city, Mayor Richard M. Daley is trying to overhaul an abysmal public school system and stem a job drain by stepping up public safety and upgrading public services. In several Midwest states, such as Illinois and Minnesota, taxes are still high relative to the rest of the country. The recent rise in interest rates is slowing auto sales, which will moderate growth in the region.

Moreover, for many of those who land new jobs, pay is often half the $15 an hour that many Midwest companies

paid a decade ago. Despite strong job growth, income inequality is widening, and the ranks of the working poor are swelling. And labor relations can still explode into an atmosphere of mutual mistrust and recrimination. Caterpillar Inc.'s embittered workers walked off the job on June 21--the second major strike in two and a half years.

Yet to imagine the Midwest, even a few years ago, as a hub of industrial competitiveness, entrepreneurial verve, or policy innovation would have been unthinkable. The domestic auto makers were still losing market share to foreign rivals--and Chrysler Corp. was flirting with disaster. Antiquated management and labor practices continued to spell grave trouble for the machinery, transportation, and metalworking industries that account for two-thirds of the region's manufacturing output. But the troubles "made the whole Midwest look inward," recalls Wisconsin Governor Thompson, who was elected in 1986. "We were down so low, we had to pull ourselves up."

The Midwest resurgence can be partly explained by the coincidence of timing: The Midwest surged ahead even as the two coasts sank. The region largely dodged the real estate boom and bust and the defense-related woes that have laid low California and much of the Northeast. The Midwest also skirted much of the legal and illegal immigrant turmoil that has roiled California, New York, and other coastal states during the past several years.

NEW LIFE. At the same time, the dramatic fall in the dollar from the lofty levels reached during the early and middle 1980s breathed new life into

Midwest manufacturing. Henry B. Schacht, chief executive of Cummins Engine Co. in Columbus, Ind., figures U.S. industry now has a 35% cost advantage over German rivals and can maintain an edge over Japan as long as the dollar stays below 115 yen. It is currently hovering below 100.

But much of the region's rebound has to do with simple, straight-ahead hard slogging--born of what local partisans cite as the region's can-do pragmatism. During the 1981-82 recession, industrial companies such as Deere, Chrysler, and Dow Chemical slashed 1.5 million jobs to cut costs. Then, manufacturers transformed labor relations, often burying years of infighting to tap the knowledge of factory workers to help boost efficiency. Midwest companies also raised productivity by pouring into capital equipment 9% more than did American industry as a whole during the late 1980s. Now, a decade after flirting with bankruptcy, Harley-Davidson Inc., the Milwaukee motorcycle maker, has cut short its traditional summer shutdown to meet roaring worldwide demand.

Of course, corporations all across the country have been restructuring and reengineering, stressing total quality management, and investing heavily in new technologies. But Midwestern heavy industry was first to be battered by international competition, especially from the Japanese juggernaut. The Midwest responded by becoming far less insular. The search for customers sent scores of domestic companies overseas, even as foreign companies invested heavily in the area. Chicago became more than ever an international entrepot for financial innovation and influence in the expanding universe of futures and options centered at the Chicago Board of Trade and Chicago Mercantile Exchange. On these exchanges, more than one top firm in five comes from abroad.

State and local governments played an important role in the region's rebirth. The Midwest has been in the forefront of worker training programs. Almost every state established manufacturing extension services to diffuse to small and midsize companies the latest techniques and organizational ideas. Many states in the region used public funds to seed startups. State officials traveled often to Europe and Asia promoting exports and soliciting investment. "The efforts born out of desperation in the 1980s--the experiments with public and private partnerships--were very important to the economic turnaround," says Ann Markusen, economist at Rutgers University.

A NEW ATTITUDE. Deere has used $1.4 million in Illinois state grants over the past two years in a campaign to train suppliers to the farm-equipment company. Some $5.1 million in training grants from Indiana were crucial in persuading Cummins Engine to reopen a shuttered diesel plant two years ago. Sue Krukonis, an ebullient native of Dubuque, Iowa, combined $200,000 in state venture funds with $1.8 million in private capital to realize a dream: returning to the Midwest after a 15-year career selling hair-care products on the East Coast and starting her own company. On July 4, Krukonis celebrates the first anniversary of her homecoming and the beginning of Anasazia Exclusive Salon Products Inc. "In the '70s and '80s, I didn't see any opportunity to grow in the Midwest," she says. "The whole attitude has changed."

This pro-business approach, although not unique to the Midwest, is nonetheless a departure from the sometimes rocky relations that came before. In 1985, a bedrock Wisconsin company, Kimberly-Clark Corp., infuriated by the tax and labor climate, closed its headquarters in Neenah and moved to Irving, Tex. Yet today, the consumer-products giant has 1,800 more workers in Wisconsin than the day it shuttered its headquarters and a brand-new $100 million plant making feminine-care items. What happened? Hard selling and tax-cutting led by Governor Thompson, explains Kimberly CEO Wayne R. Sanders. Compared with the rest of the country, the Midwest is far more advanced in its methodical, strategic approach to planning, says the University of Wisconsin's Eisinger.

Still, all the public support in the world might have come to naught if the auto industry hadn't gotten its act together. Chrysler cut $4 billion from its cost structure in three years, and it now has lower costs than its U.S. and Japanese rivals, according to a recent study by Harbour & Associates Inc., a Troy (Mich.) consultant. All three domestic carmakers have improved their quality and are regaining market share. And at Goodyear Tire & Rubber Co., which once was forced to cut its dividend and watch its debt be downgraded to junk status, Chairman Stanley C. Gault now boasts that the company made more money last year than all the world's other major tiremakers combined.

Other outfits and industries are thriving. In 1989, minimill giant Nucor Corp. took an experimental technology and built the world's most productive steel mill in Crawfordsville, Ind., a half-hour drive from Indianapolis. Telecommunications pioneer Motorola Inc. has just broken ground on a 3,000-employee cellular-phone facility outside of Chicago. More than 300 medical-device makers in Minneapolis are conquering markets with exports of their high-tech wares to the Far East and Europe. Cleveland's Health-Mor Inc., a $100 million maker of high-priced Filter Queen vacuum cleaners and metal components for a variety of products, sells its vacuums in 42 countries, including Japan.

BIG PAYOFF. Typical is Allen-Bradley Co. In the late 1980s, the 91-year-old manufacturer, a unit of Rockwell International, was being pounded by more nimble Japanese and European producers of solid-state circuitry. To fight back, the Milwaukee-based company built several new assembly lines for solid-state circuit boards. The payoff: Over the last two years, sales have been growing at a 43% compounded rate. This turnaround is one of the key reasons why Allen-Bradley finds 30% of its $1.3 billion in total sales overseas, compared with just 5% in the mid-1980s. "When the major economies of the world improve, I am extremely enthusiastic about the Midwest," says Silas Keehn, president of the Federal Reserve Bank of Chicago.

Overseas companies from Japan, Germany, and elsewhere have invested heavily in the area, attracted by its skilled labor force and proximity to key customers and suppliers. The Midwest is the television capital of North America: Japanese companies make TVs there, sourcing from a vast network of American suppliers in the region. Two years ago, forklift manufacturer Toyota Industrial Equipment Manufacturing Inc. relocated its assembly for U.S. sales to Columbus, Ind., from Japan. Why tiny Columbus? It sits near two interstate highways and is close to Toyota's suppliers and its mostly Midwest dealer network. Plus, "people show up to work and they work hard," says TIE President Takashi Katoh. Today, the unit employs 285 workers and pays around $8.50 an hour.

The renewed confidence of the Midwest is generating a wave of entrepreneurship. The area has seen venture-capital financing increase by 28% since 1990, to $204 million. For the most part, the venture money is going to high-tech businesses with reasonable payoff periods and is steering clear of the more speculative bets. "We're more interested in the application of existing technology and in building businesses than in trying to verify science," says Rodney L. Goldstein, general partner of Chicago's Frontenac & Co., one of the Midwest's largest venture-capital houses, with $500 million under management.

To maintain the momentum in today's brutal global economy, state and local governments are struggling to overhaul themselves with a zeal not seen since the Progressive movement around the turn of the century. Drawing on a history of civic activism and borrowing heavily from the private sector's own restructuring experience, Midwest politicians are pushing "competition" and "consumer choice" to improve government services.

A PIONEER. In Indianapolis, Mayor Goldsmith has put up for bid--to private contractors and city workers--public services from garbage disposal to pothole filling. Altogether, these initiatives are projected by the city to save at least $100 million over the next several years. Winona, Minn., a town of 25,000, has forged a townwide Quality Council of private and public officials to upgrade schools, hospitals, and other city services.

The Midwestern states are also serving as national laboratories for reforms in education, welfare, and health care. For example, the Minneapolis-St. Paul area has become a pioneer in unifying corporate purchasing power to control health-care costs.

On the educational front, Michigan Governor Engler sent a rocket through the nation when he scrapped property taxes as the key funding source for public schools. As a substitute, voters in March approved a hike in sales and cigarette taxes, which should help equalize school funding throughout the state. In Milwaukee, vouchers are being used by 1,000 kids to attend private schools at public expense. And Minnesota is at the forefront of the Charter School movement, which allows public schools to emulate private schools by focusing on particular programs, such as combining school with work experience.

In welfare reform, Midwest officials are also charging ahead. In Wisconsin, Governor Thompson has unveiled a flurry of plans, such as Work Fare and Learn Fare, which penalize welfare recipients if they fail to look for a job or if their children fail to stay in school. In 1995, the state will implement two-year limits on welfare and, in 1999, cut its ties to federal welfare funding.

In Milwaukee, Project New Hope is a trial welfare reform scheme backed by public and private interests. This fall, the pilot program--which guarantees welfare recipients an above-poverty-level job, plus health- and child-care benefits, as a carrot for abandoning welfare--will expand from 52 participants to 1,200. For Diane Suggs, a 35-year-old single mother who found a job as a claims approver at Metropolitan Life Insurance Co., New Hope has been a ticket off the welfare rolls and into her first full-time employment. It's also providing her with a sense of self-worth and enough money this summer to take her 11-year-old son on his very first vacation. "I'm pretty proud of myself," she says.

Of course, some of the Midwest public policy innovations will fail, as one would expect with experiments. But in the final analysis, the future of America's heartland depends on the region's willingness to innovate. Certainly, the corporate sector is not taking its gains lightly. Says Deere Chief Executive Hans W. Becherer: "We've made a lot of progress, but if [people think] we can rest, they're wrong." More than any economic indicator, it's that kind of fighting attitude that should build optimism about the Midwest's outlook.Richard A. Melcher and Kevin Kelly, with Ann Therese Palmer, in Chicago, James B. Treece in Detroit, Zachary Schiller in Cleveland, and bureau reports


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