U.S. Manufacturing in the Coming Year

Stephen DeAngelis

January 3, 2012

Back in 2008, former U.S. Senator and presidential aspirant Gary Hart called on his party’s presidential candidate, Barack Obama, to transform the U.S. “from a consumer economy to a producing one.” [“America’s Next Chapter,” New York Times, 25 June 2008]. Hart was more interested in the jobs that would be created than the specific products that would be manufactured. That same year, Pete Engardio, writing in BusinessWeek, wondered if the U.S. could actually recapture its manufacturing base? [“Can the U.S. Bring Jobs Back from China?” 30 June 2008 print edition]. His answer was “maybe.” But he warned, “American industry may not be ready to seize the opportunity” even if it presents itself. Some three and a half years on, Hart’s hope is unrealized and Engardio’s caution appears justified.

 

Last August, Jon Gertner, an editor at Fast Company, claimed that “by almost any account, the White House has fallen woefully short on job creation during the past two and a half years.” [“Does America Need Manufacturing?New York Times Magazine, 28 August 2011] Of course, if you want to point fingers, Congress hasn’t done any better than the White House when it comes to job creation. Gertner claims that this lack of action with regards to manufacturing started decades ago as companies started to move offshore. He wrote, “Even now, as unemployment ravages the country, so-called industrial policy remains politically toxic. Legislators will not debate it; most will not even speak its name.”

 

Gertner begins his article focusing on one small industry sector that has attracted political attention and support — manufacturers of lithium-ion battery cells for hybrid and electric cars. He notes, “The federal government has doled out nearly $2.5 billion in stimulus dollars to roughly 30 companies involved in advanced battery technology.” He then asks, “Could this manufacturing revival be part of the answer to the jobs crisis? Or is it merely an expensive government bet on a lost cause?” Over the past several years, there has been a lot more attention given to the importance of manufacturing even in advanced so-called post-industrial economies like the United States. To get a better idea about what has been written on the subject, read my posts entitled Can Developed Countries Increase Manufacturing?, Manufacturing and the Supply Chain, and To Innovate the U.S. Must Manufacture.

 

Because a lot of expertise was lost when manufacturing moved overseas, Gertner noted that “repatriating a high-tech manufacturing plant to the United States is not simply a matter of hiring the local talent. It requires good-old foreign know-how.” Jason Forcier, the head of the automotive division at A123 Systems, told Gertner, “We call it ‘copy exact.’ We bought a company in Korea that had the technology around this type of battery and had developed the manufacturing process there. We basically brought that here, copied it exactly and scaled it up.’ Gertner reports that “A123 also brought a team of six Korean engineers to help transfer the technology to the U.S. and sent a team of Americans to Korea to learn.” Gertner continues:

“On both sides of the world, the fundamental appeal of expanding manufacturing is jobs. It is a curiosity of modern life that information companies can create extraordinary social disruptions and vast shareholder wealth but relatively few jobs. Facebook has about 2,000 employees worldwide. Google has about 29,000. Even in its new, slimmed-down state, General Motors, a decidedly less valuable company, has about 200,000 employees. What’s more, that number represents only a fraction of the people behind the production of a G.M. car. ‘When you’re manufacturing anything, even if the work is done by robots and machines, there’s an incredible value chain involved,’ Susan Hockfield, the president of M.I.T., says. ‘Manufacturing is simply this huge engine of job creation.’ … By some estimates, manufacturing employs about 65 percent of America’s scientists and engineers.”

The scientists and engineers mentioned by Gertner are part of the direct manufacturing workforce (i.e., the “teeth” of manufacturing). As Hockfield notes, there is also a long tail associated with manufacturing. It has been estimated that for every manufacturing job that is created, eight jobs in the supply chain sector are also created. Gertner continues:

“Hockfield … assembled a commission at M.I.T. to investigate the state of American manufacturing and to offer a plan for its future. ‘It has been estimated that we need to create 17 to 20 million jobs in the coming decade to recover from the current downturn and meet upcoming job needs,’ she said at a conference [in March 2011]. ‘It’s very hard to imagine where those jobs are going to come from unless we seriously get busy reinventing manufacturing.’ This logic has been endorsed by Jeffrey Immelt, General Electric’s C.E.O.; Andy Grove, the former chairman of Intel; and Andrew Liveris, Dow Chemical’s C.E.O.”

Hockfield’s logic is also a turnaround from the theory that moving from a manufacturing-based economy to one based on service and information is a natural and welcomed evolution. It turns out that making things is important for all sorts of reasons. Gertner continues:

“A widely circulated 2009 Harvard Business Review article — ‘Restoring American Competitiveness,’ by two Harvard professors, Gary Pisano and Willy Shih — has become one of the touchstones of the manufacturing debate. In the article, Pisano and Shih maintain that U.S. corporations, by offshoring so much manufacturing work over the past few decades, have eroded our ability to raise living standards and curtailed the development of new high-technology industries. When I spoke with Pisano, he noted that industries like semiconductor chips — the heart of computers and consumer electronics — require the establishment of ‘an industrial commons,’ the skills shared by a large, interlocking group of workers at universities and corporations and in government. The commons loses its vitality if crucial parts of it, like factories or materials suppliers, move abroad, as they mostly have in the case of semiconductors. At first the factories leave; the researchers and development engineers soon follow. The most punishing effect, however, may be the one that can’t be measured — the technologies and jobs that aren’t created because the industrial ecosystem is degraded.”

Louis Uchitelle agrees with Pisano and Shih. He argues that the American century started to ebb when its factories started to close. He insists that a lot of innovation disappeared when the factories went away. [“When Factories Vanish, So Can Innovators,” New York Times, 12 February 2011] Pisano told Gertner, “When one industry moves, there can be other industries in the future that follow it that you couldn’t even anticipate.” Gertner asserts that even though the Obama administration has a poor record of job creation, it should be given credit for reawakening “the conversation about industrial policy.” He continues:

“To a large extent, this is an old war among Washington politicians. In the 1970s, it was fought over the federal bailouts of Lockheed and Chrysler — and a few years later during debates over whether the country needed to assist domestic companies in their efforts to gain ground on the Japanese in the semiconductor industry. By the time George H. W. Bush ascended to the presidency, the move away from industrial policy was clear. ‘All you had to do in the 1980s was say, “That’s industrial policy,” and it killed anything it was hurled at,’ says Senator [Carl] Levin, who along with Senator Sherrod Brown of Ohio is now among the most vocal advocates of such a policy. ‘It was the kiss of death. And it set us back 10 to 20 years in terms of manufacturing in America.’ What is different now, Levin argues, is that ‘our companies are not competing with those companies in Korea and Japan. They’re competing with those governments that are supporting them. It’s naïve to believe that we just have to let the markets work and we’ll have a strong manufacturing base in America.”

Although Gertner argues that America must adopt a forward-thinking industrial policy, he doesn’t provide any real specifics of what that policy should include. He implies, however, that any such policy should include strong support for research and development. Suzanne Berger, chairwoman of M.I.T.’s panel on the future of American manufacturing, told Gertner, “All of the great new American companies of the past few decades have focused on research and development and product definition — Apple, Qualcomm, Cisco.” Gertner continues:

“These were technology companies that could take full advantage of what she calls the ‘modularity’ of the global economy. Their genius resided in the design of their gadgets and information systems; offshoring the industrial work did not leave them at a disadvantage. It did the opposite, greatly reducing costs and raising profits. ‘Now I think we’re at a really different moment,’ Berger says. ‘We’re seeing a wave of new technologies, in energy, biotechnology, batteries, where there has to be a closer integration between research, development, design, product definition and production.'”

Fortunately for the U.S., this “different moment” comes at a time when the so-called “China price” is increasing and a wave of disruptions have occurred as the result of natural disasters that impacted geographically-stretched supply chains. As a result, many companies are likely to consider bringing some manufacturing back to America. Gertner concludes:

“One challenge to moving in this direction may be that our banks, hedge funds and venture capitalists are geared toward investing in financial instruments and software companies. In such endeavors, even modest investments can yield extraordinarily quick and large returns. Financing brick-and-mortar factories, by contrast, is expensive and painstaking and offers far less potential for speedy returns. Berger maintains that for the economy to get ‘full value’ from our laboratories’ ideas in energy or biotech — not just new company headquarters but industrial jobs too — we must aspire to a different business model than the one we have come to admire [–] a business that looks less like Google and more like Ford.”

The U.S. must also train a workforce capable of working in high tech factories. Perry Sainati, founder and president, Belden Inc., writes, “I take a backseat to no one when it comes to appreciating the role that manufacturing plays in this country’s economy. But then again, anyone who believes that a pronounced uptick in this country’s manufacturing output will immediately translate into a full-scale spike in job growth just doesn’t understand the fundamentals of manufacturing.” [“Your Grandfather’s Manufacturing Jobs ‘Ain’t Comin’ Back’,” Industry Week, 7 July 2011] Concerning the manufacturing jobs that will return, he writes:

“[The types of manufacturing jobs that once defined the American workforce] are gone. What’s more, as Bruce Springsteen once sang, ‘they ain’t comin’ back.’ That’s not to say, of course, that manufacturing growth will not continue to translate into meaningful job growth — and meaningful careers — in this country. Because it will. It’s just that it won’t translate into the massive quantities of jobs people still want to believe are possible. Nor will it translate into the kind of low-skilled jobs that once defined the assembly line dynamic. In this day and age, companies like mine simply cannot afford to pay top dollar for workers whose skill sets do not extend beyond the ability to spot weld a piece of metal or maybe torque down a bolt or two.”

Whatever the coming year holds in store for manufacturing in the U.S., one thing is certain: It will take the combined efforts of all stakeholders (i.e., employers, employees, investors, and public officials) to re-establish a manufacturing base that can serve as solid foundation for future economic growth.