Manufacturing and America's Competitiveness

The July/August issue of Harvard Business Review has an excellent article on "Restoring American Competitiveness" by Gary Pisano and Willy Shih (pp.114-125). The authors object to the commonly held view that outsourcing low-tech manufacturing has had no impact on the American ability to compete; on the contrary, they argue that "decades of outsourcing manufacturing has left US industry without the means to invent the next generation of high-tech products that are key to rebuilding its economy."

The statistics they provide certainly give pause. For instance, the authors point out that the US trade balance in high-tech products has steadily declined, from a surplus in 1999 and 2000 to a deficit from 2002 onwards; the deficit now reaches 53.6 billion dollars. (See Figure 6-19 in the National Science Board report, "Science and Engineering Indicators 2008".) Furthermore, "average real weekly wages have essentially remained flat since 1980, meaning that the US economy has been unable to provide a rising standard of living for the majority of its people."

One of the authors' central claims is the importance to high-tech innovation of what they call "the industrial commons", i.e., "R&D know-how, advanced process development and engineering skills, and manufacturing competencies related to a specific technology." Such a commons is often rooted geographically; for instance, US biotech firms have clustered in Boston, San Diego and San Francisco, while Germany is known for its mechanical engineering commons due to its automobile and machine tool industries. This is why, in the authors' eyes, the world is not flat at all. (Sorry, Thomas Friedman.) Instead, "innovation in one business can spawn whole new industries," which makes it difficult, for companies that have outsourced the manufacturing of mature products, to compete in more cutting-edge areas based on similar technologies. (See the example of the solar panel industry p.118.)

An example p.119 also shows the erosion of the US industrial commons in the personal computer industry; I was surprised to learn that "[n]early every US brand of notebook computers, except Apple, is now designed in Asia, and the same is true for most cell phones and many other handheld electronic devices." (p.116 - italics mine)

A couple of additional quotes:

• "One [myth] is the popular belief that an advanced economy like the United States no longer needs to manufacture and can thrive exclusively as a hub for high-value-added design and innovation. In reality, there are relatively few high-tech industries where the manufacturing process is not a factor in developing new - especially, radically new - products." (p.119)
• "[The prevailing view that the migration of mature manufacturing industries away from developed countries like the United States is just part of a healthy, natural process of economic evolution] ignores the fact that new cutting-edge high-tech products often depend in some critical way on the commons of a mature industry" (p.120)

For other great insights, including (1) a sidebar on "why Amazon's Kindle 2 can't be made in the US", (2) a discussion on the role of government, especially in funding basic vs applied research ("Government funding for applied research has declined even more sharply [than for basic research]... [But] Creating the internet involved little or no new basic science. It did, however, require significant investments in applied research," p.122), and (3) words of advice to companies ("Create technology-savvy boards of directors," p.125), head for the closest newsstand while the HBR issue is in stores!

For the opposite view, check out "Innovation in America: A Gathering Storm" from the November 20, 2008 edition of the Economist, which refers heavily to Amar Bhide's "The Venturesome Economy," a 2008 Best Business Book of the Year. The book argues that the US doesn't really need more PhDs in science and engineering: innovation happening abroad will find its way to the States due to the appeal of the large American customer base (so companies will want to market their products in the US), and bringing high-tech innovation to consumers requires good business skills rather than advanced scientific skills. From the Economist: "For America to retain this sort of edge, then, what the country needs is better MBAs, not more PhDs."

Bhide "argues that the obsession with the number of doctorates and technical graduates is misplaced because the “high-level” inventions and ideas such boffins come up with travel easily across national borders." This assumes that all the inventions that aren't discovered in the US can be discovered elsewhere at about the same time. I disagree with the idea that geographic location doesn't matter. The Academic Rankings of World Universities are consistently dominated by American institutions; US-based professors have often spent decades developing cutting-edge expertise, which cannot easily be acquired in a short period of time by others. Of course, some non-US universities, such as the University of Utrecht in the Netherlands and Sapienza University of Rome in Italy, rightfully enjoy worldwide fame, but making it more difficult for US-based professors to supervise students due to the lack of funding impedes their ability to make discoveries and pass along their knowledge; it also hurts the students who are unable to realize their full potential. This, in turn, delays innovation. Hoping research is "background-independent" and will simply be performed in another country before finding its way to the States is naive, at least for now.

The comments at the bottom of the Economist article widely slam the position that the US doesn't need more PhDs. I wouldn't throw away the HBR article just yet.

Comments

[LVCI]

"decades of outsourcing manufacturing has left US industry without the means to invent the next generation of high-tech products that are key to rebuilding its economy."

For decades the hi-tech industry relied directly on blue collar jobs for their very reason for being. A few examples: In the textile industry hi-tech machinery was created to replace the labor intensive operations. For those who hand stacked pallets, computer driven auto-palletizers where created. On the auto assembly lines robo welding units where invented. In numerous warehouses throughout the country blue collar labor was replaced with automated order selectors.

Indeed while much of the manual labor was reduced by automation, the fact is many jobs were created to design, build & service these. Sadly due to short sighted "Free Trade" policies like those of NAFTA, SAFTA, CAFTA, China, etc. companies simply took these overseas to poor countries where basically slave labor exists. Places like Bangladesh, Vietnam, etc.

As a result we no longer need high skilled individuals to design, build and maintain equipment for manufacturing plants that no longer exist in this country. Thereby not only eliminating the very backbone blue collar working class, but the equipment required to support such operations. According to the 2004 census, about only 1/3 of our Americans have a college degree. So not only have we displaced jobs for the vast majority of unskilled American workers, but those with higher education who's future technological innovations depended on those very factories in which they labored.

I've been insisting for years trade policy reviews. Ones that would replace "FREE TRADE" with "FAIR TRADE". Alas after all these years we see the results of these poor polices in Flint, Mich., Bethlehem (Steel), and 100's of cities just like them. As a result of these poor policies we now find ourselves racking up huge government deficits and inconceivable trillion dollar international loans for bailouts/stimulus while manufacturing companies continue to abandon American soil.

I blogged about this very thing back in February- Is Free Trade Protectionism? There is also a link I posted to a '60 Minutes' program from Feb. 15th concerning the impact this has made on one aspect of American industry. That of NUCOR Steel (Nucor is the biggest steel maker in the United States, with 18 plants all across the country).

(CLICK on my name to read my blog on this)