An American Manufacturing Movement
Excerpts from Make: An American Manufacturing Movement
American manufacturing is either in steep decline, doing reasonably well or poised to grow. Widely available reports and analyses support each of these conflicting views. The Council on Competitiveness strategy, excerpted here, aims to explain where U.S. manufacturing has been, what forces are shaping its future and what solutions are required for manufacturing to strengthen America's competitiveness, standard of living and national security. You can download the full report, which includes several recommendations, at www.compete.org.
Much of manufacturing in the United States centers on higher value-added activities that require highly skilled workers, unique knowledge from innovators or sophisticated infrastructure. Other U.S. manufacturers are in sectors that require proximity to end consumers due to transportation or other factors. Still other producers have unique quality assurance relationships with larger firms or support America's defense base.
Ironically, despite an ongoing recession and unemployment hovering around 8.6 percent, U.S. manufacturers face a significant talent shortage. A recent study by Deloitte and the Manufacturing Institute found that 5 percent of manufacturing jobs remain unfilled simply because people with the right skills are not available. That translates to 600,000 available U.S. jobs. David Arkless, president of corporate and government affairs for ManpowerGroup, suggests that part of the problem is, "We're producing too many graduates with the wrong kinds of degrees. We're not producing enough people with technical and vocational skills."
As manufacturing productivity soared and jobs declined, Americans transitioned into the service sector. The interdependence between manufacturing and services, however, is substantial and complex. The service sector supports product value networks, transactions in manufacturing industries and systems that integrate the innovations of producers and service developers. In addition, product-service integration is increasingly a platform for innovation.
Not only are manufacturing and services interdependent, they are distributed globally. For most of the 20th century, "Made in America" meant just that: design, development, fabrication and associated transactions were performed in U.S. factories and offices by U.S. workers. Today, many goods are no longer designed, produced and sold within a single country. Instead, the activities needed to bring a product from concept to consumption are routinely performed in different countries, as illustrated by Boeing's new 787 Dreamliner.
Many manufacturers believe that global competition has made them stronger, more productive and more competitive. Gains in productivity and output, however, are not translating into broader economic gains.
The extended economic downturn and lackluster job growth have caused many to question key factors that built America into an economic superpower - industry, capital, entrepreneurism and openness to global trade and investment. A rising rhetoric urges a turn towards global disengagement coupled with higher taxes and tighter restrictions on corporations. Doing so, however, would slow economic recovery and further limit the employment and wage prospects for America's middle class.
Furthermore, many U.S. states and localities do too little to attract manufacturing facilities, imposing complicated and time-consuming procedures on top of federal rules to site and build production facilities. The permitting process for a manufacturing facility in the United States might take months, if not years, whereas in some countries, the time required is merely a few weeks or less.
Everyone wishes to protect public safety and the environment, but America must find better ways to achieve those ends while also serving its citizens' economic interests. Product cycles are accelerating - particularly the time it takes for a product to move from a high margin innovation to a low margin commodity. For many products, the risk of waiting months or years for regulatory approval drives manufacturing and jobs offshore. Firms cannot afford to lose the enormous benefits of being first to market, especially innovative startups that have incurred development debts and need to attract venture backing.
Manufacturing also suffers from its public image. Although the majority of Americans consider manufacturing important, a Deloitte study finds that less than 20 percent of those surveyed think there is a future for manufacturing or would encourage their children to enter manufacturing-related fields. But this image of manufacturing does not match the reality. Many Americans still think about manufacturing in terms of product fabrication - humming factories for the transformation of materials into new products, basically, "bending metal" in operations that are easily sent elsewhere. However, manufacturing today is part of a much more complex, high value-added and tightly integrated global web.
Manufacturing is central to the life-cycle process that brings solutions to customers. This involves cutting-edge science and technology, design, modeling and simulation through advanced computing, systems engineering, testing and verification, and the contributions of complex supply networks. It also involves a wide range of services and transactions, transportation, maintenance and energy, plus the talent of many occupations - all of which is in addition to "bending metal." Firms that commercialize new technologies and scale production grow faster, are more profitable and create more jobs than other firms do, according to the Organization for Economic Cooperation and Development.
Unfortunately, government policies and programs tend to focus almost exclusively on R&D, technology transfer and, in some ways, early stage commercialization. These phases are all critically important, but manufacturing at scale is typically not considered a part of the innovation ecosystem. In fact, it is often discounted, creating a negative ripple throughout the manufacturing value chain.
Manufacturing business models evolved where production and innovation became separate. Manufacturing was viewed as a cost to be minimized rather than optimized for competitive advantage. Conventional wisdom emerged that as long as high value-added work - e.g., engineering and design - remained in the United States, and government focused on small business, then the economy would grow and large-scale production could be left to its own devices.
This model, however, is not sustainable. A broad array of government policies both foreign and domestic have important impacts on the innovation and production process, from research funding to taxes to market access. Presently, U.S. policies are not aligned with the full life-cycle perspective of innovation that includes production at scale.
Without strong public and private support for the complete life-cycle innovation and production process, the United States cannot maximize the return on its innovation investments - a return measured in jobs, growth and tax revenue. Today, foreign investors - especially through sovereign wealth funds - acquire production of U.S.-developed technologies and innovations. Even domestic investors typically condition their investment in new technologies on a business plan that directs manufacturing abroad. Participants in the council's "Out of the Blue" dialogues expressed frustration that production so often cannot be done competitively in the United States.
The policies, programs, strategies and business models that worked in the past are inadequate to secure America's future. Government, business, labor and academic leaders must rethink and retool the nation's business environment to seize rising opportunities and address several shortcomings. The leveling effects of globalization are diminishing the lost-cost advantages offered in emerging economies and potentially opening the door to increased manufacturing in the United States.
Will Americans act so that their best ideas from research labs and drawing boards end up on factory floors in Ohio and Michigan rather than - or in addition to - Asia and Europe? Will the future dim or become brighter for American manufacturing?
Structural Changes in the Global Economy Create Opportunities and Challenges
The global migration toward free enterprise and open markets is driving growth in emerging economies. Several nations have rapidly developed into formidable manufacturing competitors. China's manufacturing output, for example, is now approaching that of the United States. As development spreads, a new consumer class is burgeoning around the world. About 1.8 billion people occupy the consumer class today. By 2030, this number could reach 5 billion, with 95 percent of the growth occurring in emerging and developing economies - creating large new demands for manufactured goods.
Global companies see significant sales and investment opportunities in emerging economies. Emerging markets' share of global foreign direct investment inflows has grown from about 20 percent in 2000 to more than half today. In the 2011 "World Investment Prospects Survey," global companies saw China, the United States, India, Brazil, Russia and the United Kingdom as top prospects for future foreign investment.
U.S.-based operations must also compete with aggressive mercantilist policies from foreign governments. Many countries have put in place policies and financial incentives to attract investment, manufacturing facilities, foreign intellectual property and talent while protecting domestic business interests.
The digital revolution and the pace of technological change also profoundly impact the way that business and production are organized. Digital technologies have made many facets of the global economy nearly borderless. In an earlier era, the location of natural resources often determined where manufacturing would take place. In today's economy, knowledge, know-how, technology, creativity and capital are the most important resources for production, and they are highly mobile.
The pace of technological change is transforming not only product life cycles and time-to-market pressure; it is also pushing firms to compete by using technology to improve their manufacturing processes and business models.
Recalculating the Total Cost of Production
Successful global firms rely on their ability to react rapidly to changes across the global marketplace. In the early stages of offshoring, inefficient manufacturing operations were often relocated from higher cost economies to low-cost labor economies to maximize returns and ensure that products were price-competitive.
Fortunately for America, neither the marketplace nor corporate decision making is static. Many firms are recalculating their total cost of production to take into account changing conditions and new factors. The wage gap, for example, between the United States and key competitors is narrowing. "All over China, wages are climbing at 15 to 20 percent a year because of the supply-and-demand imbalance for skilled labor," said Harold L. Sirkin, a Boston Consulting Group senior partner. "As a result of the changing economics, you're going to see a lot more products ‘Made in the USA' in the next five years."
Many factors influence where companies invest in new manufacturing capacity, including labor costs, supply networks, financial, tax, legal and regulatory systems, access to skills and resources, speed to market, intellectual property protection and market access. Dan DiMicco, CEO of Nucor Steel, agrees, "Today's multinational companies are more and more seeing the benefit of domestic production because of energy costs, because of intellectual property issues, because of transportation costs."
The factors that might incentivize a return to or a departure from U.S.-based manufacturing will vary by firm and industry. Industries that rely on intellectual property are drawn to the strong protection offered by the United States after experiencing the challenge of piracy elsewhere. Other firms have found that long supply lines in Asia add cost and reduce flexibility to serve customers in North America and Europe. Still others seek access to cutting-edge U.S. automation and robotic technology.
Global Trade and Growing Integration of Affiliate and Domestic Operations
Cross-border trade continues to be critical for increasing manufacturing productivity, growing exports and creating jobs. Trade allows producers to specialize in goods where there is a comparative advantage and allows consumers to buy goods at lower prices. The United States exported $1.8 trillion in 2010 - $1.2 trillion in goods and $600 billion in services - supporting 9.2 million jobs. U.S. industries that produce high technology products are among the largest goods exporters, including transportation equipment, chemicals, computer and electronic products, machinery and electrical equipment. While the United States has maintained a balance of trade in services, it has continued to run the world's largest trade deficit in goods, $646 billion in 2010. The European Union remains the leading destination for U.S. exports, while China is the leading source of U.S. imports in 2009.
There remain significant barriers to trade, such as industrial policies that limit market access to other countries' markets, lax enforcement of intellectual property rights, restrictive licensing systems, government procurement restrictions, foreign equity limitations, tariffs, government subsidies to industry, domestic and foreign export controls, lack of transparency in laws and regulations, local content requirements, standards that favor domestic producers, technical regulations that favor domestic firms, in-country testing requirements and more. It is estimated that the elimination of remaining global trade barriers could increase the gain America already enjoys from trade by another 50 percent.
While important, trade is no longer the main vehicle for delivering products and services globally. In 2009, sales from foreign affiliates of U.S.-based companies ($4.88 trillion) were three times greater than U.S. exports ($1.57 trillion). The United States must develop policies to take advantage of the growing interdependencies between trade and affiliate sales.
Even if the United States attracts more investment to expand U.S.-based manufacturing as firms recalculate their total cost of production, many of those firms will continue to distribute production globally. In many sectors, the most profitable way to serve a market is to have final assembly in that market rather than pursuing a pure export strategy. Toyota, for example, has prospered by manufacturing in the United States. The value of sales globally by overseas affiliates far outpaces the value of export sales.
"What a lot of people do not appreciate with globalization, population growth and GDP [gross domestic product] growth - specifically in Asia and in Africa - is that if you want to compete, you have to be there. You're not going to play in the largest market in the world, China, by importing everything into that market. It isn't going to work; you can't get a competitive cost structure," explained Sam Allen, chairman and CEO of Deere & Company.
There is an increasing co-dependence between domestic and foreign-based production capabilities. A U.S.-owned firm producing overseas, for example, might assemble a final product for sale in that market that is sourced from around the world, possibly including high-end components produced in America. Unfortunately, sales revenue generated by U.S. affiliates overseas are subject to high levels of double taxation, once by the host country and again by the United States if that revenue is brought back (repatriated) to America. This tax policy is a powerful incentive to hold or invest large capital reserves (over $1 trillion) overseas that might otherwise be brought home to invest in plants, employees or share value.
Leveraging Supply Networks and Small and Medium Size Enterprises
In a world characterized by rapid innovation across products and supply chains, few large firms compete through vertical integration. Instead, most large firms rely on integrated supply networks with smaller companies. Michael R. Splinter, chairman, president and CEO of Applied Materials Inc., put it this way: "Big companies need small companies and small companies need big ones."
America needs to better leverage the relationship between small companies and large companies to drive innovation and increase exports. 75 percent of U.S. manufacturers have fewer than 20 employees; 94 percent have fewer than 100 employees. In 2009, exporting SMEs had more than twice the total revenues of nonexporting counterparts.
The relationship extends beyond supply chains and into the innovation realm. Big firms often focus on improving existing product lines while smaller firms are more likely to generate radical, disruptive innovation. Consider pharmaceutical giants Pfizer and Merck. Despite R&D budgets in the billions and laboratories spread throughout the world, they still rely on hundreds of research partnerships with smaller firms. Increasingly, global firms look to small biotechnology companies to conduct early R&D on pharmaceutical products, and then license the technology or buy the company.
Small companies often have deep expertise in niche skills but little skill or experience in entering new markets, working in large teams or managing complex projects. Large companies often have very broad technology portfolios but insufficient depth in specific technical areas. They are experts in managing complex projects and can coordinate teams with disparate cultures, languages, skills and business processes. Small companies may be able to respond more quickly to customer needs or rapid market changes, while large firms offer broad supplier and customer networks. As a result, deep collaboration and integration between large and small companies creates a competitive advantage and strength that is difficult to emulate.
America's technology and innovation capacity remains among the greatest in the world. In crucial fields like biotechnology, biomimicry, nanotechnology, materials science and computing, U.S. researchers and entrepreneurs define the leading edge. American universities and research laboratories are unparalleled, pushing the boundaries of knowledge in life, physical and social sciences. Despite the nation's budget woes, the U.S. Congress has thus far been reluctant to impose drastic cuts to scientific research funding that is viewed correctly as an engine of economic growth. America remains the world's largest investor in R&D and is among the upper ranks in R&D investment as a share of GDP.
At the same time, other nations are making rapid progress relative to the United States in the talent, investment and infrastructure needed to foster innovation. On several education performance metrics, the United States trails its global competitors. Furthermore, a number of policies and practices limit American innovation today. Licensing practices, export controls and immigration policy, for example, were designed for a different era. Removing those impediments could generate greater levels of innovation and commercialization from today's assets and investments. In addition, the United States had the most generous R&D credit of any nation in the 1980s, but today, 16 other nations have a more generous tax break for R&D, which means many U.S. firms are sending R&D overseas.
In 1960, the United States accounted for more than two-thirds of global R&D. Today, two-thirds of global R&D is performed somewhere other than the United States. Although a more prosperous and innovative world is a welcome trend, the shift has significant implications for U.S. manufacturing and security interests. America has long been the global leader in creating new, high value-added goods and services. That lead will undoubtedly narrow and the greater issue will become whether Americans continue to develop and produce sufficient numbers of high margin products to sustain and improve living standards.
The potential for manufacturing process innovation is enormous. Smart manufacturing is an ongoing effort to integrate many of the trends described in this strategy - such as high performance computing, cloud computing, data mining and user-driven customization - across global production enterprises and supply networks. By marrying these technological capabilities with human insight, smart manufacturing promises to revolutionize the way production is organized and delivered. As manufacturing intelligence of this kind grows, it will inspire innovations in processes and products that will unleash new, disruptive capabilities - such as a $3,000 automobile or a $300 personal computer.
Smart manufacturing enables a coordinated and performance-oriented enterprise that responds quickly to the customer, minimizes energy and material use, maximizes health and safety, and generates innovation. Today, smart tools and systems that generate and analyze greater amounts of data are being used to plan, design, build, operate and manage industrial facilities and networks.
Smart manufacturing is a growth engine for jobs and a sustainable economy. A $50 billion investment in retooling factories would generate up to $120 billion in revenue resulting from increased demand for products, according to a study by the Apollo Alliance, a business-labor coalition. Manufacturers would achieve higher levels of business performance, turn resources into assets and discover unique opportunities for competitiveness.
Though industry is adopting components of smart manufacturing, the infrastructure, capabilities and investments needed to deliver the full potential of this knowledge-based environment have yet to be developed. U.S. private and public sector leaders will need to partner in order to seize this potential advantage. "The European Union has already approved 1.2 billion euros for a new Factories of the Future research program as part of their economic recovery plan," according to Rockwell Automation. Building and linking emerging advanced manufacturing clusters and centers of excellence across the country is a needed step to cultivate the advantages offered by smart manufacturing. The European Union is ahead of the United States in the race to re-industrialize their manufacturing base with smart, safe and sustainable manufacturing.
Advanced materials will play an increasingly critical role in driving and supporting the transition to smart manufacturing. These materials provide the critical coatings, composites and catalysts for industries from aerospace to oil and gas to electronics. Ongoing research in fields ranging from polymer science to nanotechnology generates new materials for new markets and applications, creating attractive opportunities for business and investors. Collaboration through national initiatives would accelerate material-based research and innovation. Open source laboratories, open source technology and open source foundries would provide access to the materials and equipment needed to conduct advanced R&D. Developing advanced materials requires upstream discovery and continues into downstream effective ways to recycle, reuse and remanufacture these materials. As alloys and other advanced properties, such as rare earth minerals and lithium, become more essential for manufacturing, the recycling process also becomes a greater imperative.
Standards Lead to Improved Competitiveness
From design and manufacturing to distribution and marketing, all products and services are affected at some point by standardization. Standards and conformance underpin global commerce, inform the direction of innovation and impact the strength of the American work force. In short, standards have the power to turbo-charge innovation and fuel competitiveness in the global marketplace.
The U.S. standardization system is private sector led and driven by marketplace and societal needs. It relies on the involvement and cooperation of diverse stakeholders - from industry, government and consumer groups - that may come to the standards-setting table with very different points of view. This diversity - and the consensus-based solutions that arise from it - are what gives the U.S. system its strength. And a strong standards system is absolutely linked to success in the global economy.
Companies that participate actively in standards development activities reduce costs, increase efficiencies, assure quality, facilitate and maintain market access, and gain a more competitive advantage than those who do not participate. And demonstrating compliance with standards helps products, services and personnel to cross borders, ensuring that products manufactured in one country can be sold and used in another.
Participating in standards development activities - both in the United States and internationally - is of critical importance. Decisions made about the national standardization system and priorities for action reach far beyond one country's borders, especially when it comes to the continued success of products, services and work force on the global stage. Particularly in high-tech manufacturing industries like electric vehicles - and alternative energy sources such as nuclear, wind and solar technologies; smart grid; nanotechnology and cybersecurity - standardization can help U.S. business shape enormous growth and reap the rewards from that influence. But if U.S. stakeholders do not take an active role in setting the globally relevant standards that will drive their industry sector, the competition will be setting the rules of the game.
By actively participating in the standards-setting process and relying upon private sector led, consensus-based standards and conformance solutions, U.S. stakeholders can forge a path for sustainable economic growth for the nation, spearhead the next generation of high-tech manufacturing, create jobs of the future and open global markets for American exports.
About the Council on Competitiveness
The Council on Competitiveness, a nonpartisan and nongovernmental organization, consists of chief executive officers, university presidents and labor leaders who work to ensure U.S. prosperity. The council:
- Convenes top private and public sector leaders to address America's long-term competitiveness challenges.
- Generates innovative public policy solutions, galvanizing our unique coalition to translate ideas into action.
- Measures U.S. performance in the global marketplace to identify key obstacles and opportunities.
Current initiatives under way by the council address manufacturing, energy, technology, global innovation and national/regional innovation. For more, go to www.compete.org.