Archive for May, 2011

The Importance of R&D to the Manufacturing Industry

Tuesday, May 31st, 2011

American manufacturers are responsible for more than two-thirds of all private sector R&D, which ultimately benefits other manufacturing and non-manufacturing activities.  More than 90 percent of new patents derive from the manufacturing sector and the closely integrated engineering and technology-intensive services.  The U. S. economy has been the innovator of virtually all major technologies developed since World War II.

Manufacturing R&D is conducted in a wide array of industries and businesses of all sizes.  The heaviest R&D expenditures take place in computers and electronics, transportation equipment, and chemicals (primarily pharmaceuticals.)

The competitive status of U. S. manufacturing is increasingly challenged by the state-of-the-art technologies being developed by established nations such as Japan, Germany, Korea, and Taiwan.  Emerging economies, such as China, are acquiring advanced manufacturing capability through R&D tax incentives, incentives for direct foreign investment, and theft of intellectual property.

According to the 2010 annual survey conducted by the Industrial Research Institute (IRI), 53% of the companies responding said they plan to increase R&D spending in 2011.  The managers expected this increase to be focused on new business projects while support of existing businesses and directed basic research would remain relatively flat.  This is the first increase since 2008 after a 30% drop in R&D spending during 2009-2010.  External collaborations through alliances and joint ventures continue to be an area of increased emphasis according to the managers surveyed.  The most disturbing trend is that about 70% of companies surveyed now have R&D facilities overseas.

However, federally funded R&D has declined over the past two decades, with only a slight increase during the Bush administration from 2002 – 2008.  In 1985, federal R&D funding represented 1.25% of U. S. GDP compared to only .80% of GDP in 2004.  In addition, federal R&D funding has shifted away from technology, engineering, physical sciences, and math and computer science, to life sciences.

America’s manufacturing innovation process leads to investments in equipment and people, to productivity gains, the spreading of beneficial technology to other sectors, and to new and improved products and processes.  It is an intricate process that begins with R&D for new goods and improvements in existing products.  As products are improved in speed, accuracy, ease of use, and quality, new manufacturing processes are utilized to increase productivity.  Education and training of employees is required to reap the benefits of such improvements in manufacturing processes.

Innovation is the hallmark of U. S. manufacturing, and it requires a certain mass of interconnected activities, which like a snowball rolling downhill grows in size as it proceeds towards end users.  Substantial R&D is required to keep the ball rolling to ensure more successes than failures.

Innovation and production are intertwined.  You need to know how to make a product in order to make it better.  “Most innovation does not come from some disembodied laboratory,” said Stephen S. Cohen, co-director of the Berkeley roundtable on the International Economy at the University of California, Berkeley.  “In order to innovate in what you make, you have to be pretty good at making – and we are losing that ability.

In his book Great Again, Hank Nothhaft, recently retired CEO of Tessera Technologies writes that “In our arrogance and our own naiveté, we told ourselves that so long as America did the ‘creative’ work, the inventing, we could let other nations do the ‘grunt’ work – the manufacturing.  We did not yet understand that a nation that no longer makes things will eventually forget how to invent them.”

Manufacturing is an incubator for technology and science, which require proximity to facilities where innovative ideas can be tested and worker feedback can fuel product innovation.  Without this proximity, the science and technology jobs, like customer service jobs, follow the manufacturing jobs overseas.

The ability to fund R&D comes largely from the profits that a company can invest back into its business.  Thus, the available cash flow of manufacturing companies is closely linked to their ability to conduct R&D as well as make capital investments.  The severe recession of 2008-2009 dramatically reduced corporate profits and resulted in a drop in corporate R&D.  In addition, when multinational companies keep their profits in offshore divisions in order to avoid paying  U. S. corporate income taxes, it reduces their funds for conducting R&D in the U. S. and encourages them to conduct R&D overseas.

The process through which R&D promotes economic prosperity is complex and multi-faceted.   First, there are direct benefits to companies from their own R&D investments.  Second, other companies derive benefits from the R&D of the innovating company in a “spillover” effect.  A “spillover” is where R&D performed by one company benefits other companies without direct compensation for the innovation. Third, the feedback from R&D and its spillovers improves other products, processes, and distribution networks.  Fourth, one industry’s investment has a beneficial effect on other industries and the U. S. economy as a whole.  “Spillover” effects are increased through sales transactions and knowledge transfers when the parties involved are interdependent and closer in geographic proximity. (Securing America’s Future:  The Case for a Strong Manufacturing Base, by Joe Popkin and Company, June 2003, prepared for the NAM Council of Manufacturing Associations)

The maintenance of an effective U. S. R&D network is essential for attracting domestic and foreign R&D funds and the subsequent manufacturing that results from the innovation process, which increases U. S. value-added resulting in economic growth.

The problem today is that with the offshoring of so much manufacturing, certain tiers in the high-tech supply chain are disappearing in the U. S.  This is the case for certain electronic components, such as capacitors and resistors.  When a tier in a supply chain has been moved offshore, domestic research and other supporting infrastructure are degraded, which can be a major problem for U. S. manufacturers transitioning to the next product life cycle.

In the past, technology would flow from the new domestic R&D-intensive industries into the remainder of the economy, boosting overall national productivity.  Today, such emerging technologies are flowing at least as rapidly to the innovators’ foreign partners or suppliers.

In a report titled, “Rationales and Mechanisms for Revitalizing U. S. Manufacturing R&D Strategies,” Gregory Tassey, Senior Economist at the National Institute of Standards and Technology, noted that the U. S. R&D intensity is the same as it was in 1960 while other counties have steadily increased their R&D spending relative to GDP.  In addition, U. S. manufacturing firms have dramatically shifted their R&D investment strategies toward an increasingly global scope and toward shorter-term objects rather than radically new technologies with greater long-term potential.  In order to reverse this trend and adopt a technology-based manufacturing strategy, Tassey recommends three major policy objectives:

  1. Increase the average R&D intensity of the domestic manufacturing sector by 30% to enable the breadth and depth of innovation to increase across the entire sector.
  2. Adjust the composition of national R&D to emphasize more long-term, breakthrough research and increase the amount sufficient to fund a diversified portfolio of emerging technologies commensurate wit the size of the U. S. economy.
  3. Improve the efficiency of R&D performance and subsequent technology by increasing the number of science parks and regional technology clusters and the use of research portfolio and stakeholder management techniques in order to facilitate person-to-person knowledge exchange critical to innovation.

Examples of policy instruments that could be utilized to achieve these objectives are:

  • Promote increased private-sector R&D through a larger and restructured R&D tax credit
  • Increase federal R&D spending on technology
  • Improve the efficiency of R&D, innovation, and technology utilization
  • Establish an innovation policy infrastructure

American consumers have benefited greatly from the large selection and quality of manufactured goods available as a result of the innovative new products resulting from R&D.  U. S. consumers now have a dizzying array of products from which to choose.  Quality improvements in manufactured goods have also reduced the frequency of repair and reduced the cost of operation.

This intricate process generates growth and higher living standards than any other economic sector.  But, it requires a critical mass to generate this wealth.  If the U. S. manufacturing base continues to shrink at its present rate, the critical mass will be lost.  The manufacturing innovation process will shift to other global centers, and a decline in U. S. living standards will be the result.

In an opinion article “How to Make an American Job Before it’s Too Late,” Andy Grove, former Intel CEO and chairman said, “… the imperative for change is real and the choice is simple.  If we want to remain a leading economy, we change on our own, or change will continue to be forced upon us.”  I recommend changing on our own before it’s too late.


San Diego’s Cleantech Manufacturers Create Jobs

Tuesday, May 24th, 2011

San Diego is a natural setting for clean tech collaboration.  Meaningful partnerships with private and public sector champions has resulted in the formation of CleanTECH San Diego to promote sustainable best practices and promote the San Diego region’s high concentration of clean tech activities.  By collaborating with the multitude of stakeholders, CleanTECH leverages these assets and positions itself as a world leader.  With over 750 cleantech companies who call San Diego home, San Diego ranks 7th in the Sustainable World Capital’s list of “Top 10 Cleantech Cluster” of global cleantech leaders.

The growing web of collaborative partnerships and networks includes:  Austrade, Biocom, California Center for Sustainable Energy, Carlsbad Chamber of Commerce, Centre City Development Corporation, City of Chula Vista, City of San Diego, CONNECT, California Clean Tech Open, Global CONNECT, North County Economic Development Corporation, San Diego Center for Algae Biotechnology, San Diego Regional Chamber of Commerce, San Diego Regional Economic Development Corporation, San Diego Regional Sustainability Partnership,   San Diego Software Industry Council, San Diego State University, TechAmerica, The San Diego Foundation, Scripps Institution of Oceanography, Tijuana EDC, UCSD Environment and Sustainability Initiative, and the UCSD Energy Policy Initiatives Center

CleanTECH categorizes its members into two groups, Innovators and Facilitators.  Innovators are companies that create or invent new technologies in areas such as advanced materials, air & environment, biomass energy & biofuels, energy efficiency, energy generation, Solar, water, wind, energy infrastructure, energy storage, fuel cells & hydrogen technologies, green construction technology, recycling & waste, Smart Grid, transport technology, and wastewater.

Facilitators are companies that install or implement existing technologies in architecture, construction, design and engineering, industrial products, lighting systems, energy audit, energy transportation, energy storage systems, recycling services, solar energy systems, sustainable building supplies, water, wave, wind, and ocean energy systems, and consulting in energy, environment, and green building.

In 2010, CleanTECH led a region wide partnership to bring over $150,000,000 in Clean Renewable Energy Bonds (CREBs) to the greater San Diego region, launched a robust website and database showcasing the over 750 companies that now call San Diego home, sponsored or co-sponsored over 80 networking events, received multiple awards honoring their collaborative initiatives on behalf of the region.

At a meeting of the San Diego Venture Group in April 2010, venture capitalist Ira Ehrenpreis commented that cleantech was now garnering 25 percent of venture funding, particularly in the area of renewable energy generation and energy storage.  Enhanced water quality technologies and biofuels are also of great interest to venture capitalists.

It is the innovators that are creating the manufacturing jobs.  I had the pleasure of meeting some cleantech manufacturers at a “connect with CONNECT” meeting a couple of months ago.  I subsequently visited the facilities and interviewed the principals of two of the cleantech companies I had met at the meeting.

The first was EcoDog, formerly called Environmental Power Products.   Founded by Ronald Pitt in his garage, the company was incorporated in 2005, and occupied its first commercial space in Vista.  The company moved to the Sorrento Mesa area of San Diego in 2010.  Feeling the need to have a catchier name, the name was changed to EcoDog because all of the members of the management team have dogs that they like to have with them in their offices at work.  The principal members of the management team worked in the power and energy industries for more than two decades.   EcoDog was founded on the principle that through the use of state-of-the-art technology and innovative products, we can regain control of energy consumption.  We can stop worrying and be confident that we are doing our part to conserve easily and affordably.

EcoDog participated in CONNECT’s successful Springboard program during its infancy as a company and received angel investment.  Extensive R&D efforts led to successful beta testing in 2008, a limited release, pilot program in 2009, and full production that started in the second quarter of 2010.   EcoDog’s FIDO Home Energy Monitor provides a new level of visibility to electricity consumption that gives homeowners unprecedented power over their energy use with unique room-by-room views of where their energy dollars are spent and personalized GridSmart(TM) savings.

A homeowner is able to measure circuit-by-circuit, room-by-room of their electricity usage to save 15 to 25% or more every month.  The system sends out a message weekly via text message or email of the usage, and if there is unusually high usage that occurs on a circuit, the homeowner will be notified immediately via text or email.

As the utilities roll out their new generation of Smart Meters with complex time-of-use billing schemes, the savings that result from EcoDog’s comprehensive FIDO real-time home energy monitor will be even more dramatic.

Because EcoDog’s FIDO system is also compatible with alternative energy generation including solar and wind, users with these configurations will, for the first time, have access to real-time monitoring of power input as well as power consumption with detailed net metering showing both dollars and KW hours.

President Ron Pitt said, “At EcoDog we are taking full advantage of the San Diego manufacturing sector.  By building our sub-assemblies at local contract manufacturers and performing final testing and assembly at our San Diego facility we are able to be more responsive to our customers and maintain higher quality standards while carrying lower inventory levels than we would be possible manufacturing overseas.”

EcoDog was a “greatest gadget” winner in the CommNexus Gadget Fest of 2009.  And, BUILDING PRODUCTS magazine selected EcoDog’s FIDO Home Energy Watchdog as one of only 16 award recipients in its third annual Green Product Awards contest in 2010, with the winners representing some of the best new eco-friendly products for the home.

The second company, Hadronex, was formed in 2005 to solve problems in the water and wastewater industry through contemporary innovative accessible technology.  Hadronex is dedicated to providing solutions that the industry desires and needs, using state-of-the-art and proven technologies for effective, low cost, robust products and services.

Hadronex, Inc. was founded by two technologists, David Drake and Greg Quist, who are also well-known industry policy makers that have been actively involved in the water and wastewater industry for more than two decades.  David and Greg met while they were on different water boards and started their company to address the major problem of the wastewater industry – preventing sewer spills.  As a result, the company’s mission is:  Defending the environment…Saving energy and money…Protecting Public Health.

Hadronex’ award-winning SmartCover® monitoring system is a completely self-contained, turnkey solution developed specifically for the water and wastewater industry.  Developed in close collaboration with industry leaders, the SmartCover® system was built to solve industry problems at high value and low burden.   It is basically a high-tech manhole cover to prevent sewage spills by monitoring the level of sewer water in the system and providing an alarm when the sewer water is in danger of overflowing or spilling. To date, the SmartCover® has prevented over 2500 sewage spills.

Providing complete reliable two way wireless communications, the patented SmartCover® system provides real-time continuous remote sensing, providing alarms to devices of the customer’s choice, an easy-to-use web based interface, and long and short term data collection and analysis.  Built to operate at sites that are environmentally difficult, have no power or communications, the SmartCover® provides “instant infrastructure” – it can operate virtually anywhere in the world, installs in minutes and is on-line and ready to use immediately.

Backed by a team dedicated to uncompromising customer service, the SmartCover® system is the solution to monitoring water and wastewater sites, providing remote security, or monitoring environmental or critical locations.

The SmartCover® system has emerged as the industry leader in widely deployable sanitary sewer collection system management.   Working closely with its customers, Hadronex and the SmartCover® solution continue to evolve to serve more diverse applications and industries.

The SmartCover®-G is a wireless gas monitoring system utilizing the SmartCover® wireless monitoring system with gas sensors instead of an ultrasonic sensor. The SmartCover®-G continuously logs gas concentrations, and is designed to provide an alarm based on a “High Level” condition. The configuration and applications vary depending upon customer requirements. The SmartCover®-G is the ideal solution for ambient air quality monitoring.

Greg Quist said, “One of the important factors in our success here in San Diego is the confluence of environment and opportunity.  Hadronex reflects the concern for the environment and the technological experience to do something about it.  Our ideas and designs were catalyzed and supported by the water industry, and our products and business have been supported by the cluster of local manufacturers and technology companies.”

David Drake said, “The key for our fabrications process to locate that very small sweet spot in contract manufacturing between capability, flexibility, and cost.  We found the right partners who took responsible steps to improve the pro and who would allow direct engineering relationships to speed up closure.  We also chose companies that were not too large or small in comparison with our own size.  This has proven successful.”

These companies are just two examples of companies that are providing solutions to real problems while creating the higher paying manufacturing jobs our region needs.  With long-term limitations on natural resource consumption, our nation needs sustainable economic development that provides the higher paying manufacturing and professional service jobs.  Cleantech manufacturing companies using innovative technologies such as EcoDog and Hadronex provide a way to achieve both goals simultaneously.

What Effect is “Going Green” Having on Manufacturing?

Tuesday, May 17th, 2011

Anyone who has shopped at their local grocery store, drug store, or hardware store has seen the variety of “green” products on the market.  Are these “green” products creating new manufacturing jobs?  For the most part, the answer is “no” because they are just more eco-friendly versions of existing products.

Global companies like General Electric, Dupont, Alcoa, and Procter & Gamble are beginning to respond to the simultaneous increases in shipping and environmental costs with “green” policies meant to reduce both fuel consumption and carbon emissions. That pressure is likely to increase as both manufacturers and retailers seek ways to tighten the global supply chain as fuel prices and transportation costs continue to rise.

“Being green is in their best interests not so much in making money as saving money,” said Gary Yohe, an environmental economist at Wesleyan University.  “Green companies are likely to be a permanent trend, as these vulnerabilities continue, but it’s going to take a long time for all this to settle down.” (August 2, 2008, The New York Times)

Pamela Gordon dispels the myth that environmental practices are bad for business in her book “Lean and Green: Profit for Your Workplace and the Environment.”  She presents evidence gathered from organizations around the world that environment protection and a profitable business can go together. Her book outlines four basic steps to creating a lean and green organization and presents stories of how 20 companies have enjoyed greater efficiencies and cost savings by utilizing these steps to pursue environmental leadership.  Many of these companies are leaders in their field – IBM Corporation, Agilent Technologies, ITT Cannon, Intel Corporation, and Apple Computer.  The stories show how companies saved money and increased profitability by utilizing “green” technology and practices.

Since her book was written in 2001, everything related to “green” has become more important because of concerns about “global warning” and acid rain.  “Green” has moved from the fringe to the mainstream of American life.  More and more consumers are choosing to buy “green” products, even when it means paying more for them.  Major corporations are featuring their “green” technology and practices in their advertising campaigns.  Some of the largest and most successful companies are now “greening” how they do business:  Coca-Cola, DuPont, General Electric, Ford, and General Motors.

For example, in August 2008, General Motors announced that it would add a 1.2-megawatt solar power installation to the roof of its transmission assembly plant in White Marsh, Maryland.  The installation generates about 1.4 million kWh of clean renewable solar energy, which is enough to serve the electricity needs of about 145 households.  In addition, the White Marsh plant reached landfill-free status in 2007, because it no longer sends any production waste to local landfills.  All the waste generated at the facility is entirely recycled or reused.

San Diego business consultant and author, Glenn Croston, advises companies small and large on green business strategy and best practices for becoming eco-friendly.  He said, “When people hear the word ‘green,’ they often think this means that something is expensive, hard to do, a luxury, impractical, and only for tree-huggers…In fact, going green often saves money, whether by cutting down on costly gasoline use or by wasting less paper.”  His book, “Greening Your Business on a Budget” presents many low cost ways to go “green.”

At a time when consumer confidence in “made in China” goods is at an all-time low, the opportunity is ripe for American manufacturers to feature how their products are made utilizing “green” manufacturing technologies.  After the debacle of tainted and defective Chinese products, people are willing to pay more for products that are safe and made in an environmentally responsible manner.

Even when businesses are fighting for their survival in the tougher economic times, they are choosing to move forward by going green.  “Indeed, companies would be foolish to abandon their green credentials at the first sign of difficulty,” said Solitaire Townsend, chief executive of Futera Sustainability Communications, which advises companies on their green strategies.  “What is more, companies have much to gain from taking steps to improve their environmental performance. The guiding principles behind behaving in an environmentally sound manner are the same as the principles of thrift and economy.  Using fewer resources is at the core of environmental sustainability, and leads to cost savings. Thrift and being green go hand in hand,” she said.

More than 260,000 workers in California currently work in the green economy, according to the Employment Development Department.  The Redwood empire north of San Francisco leads by percentage with 5.1% of it workforce employed in green jobs, but Southern California leads in actual number of jobs at 106,350 for 1.6% of its workforce.  The border regions of San Diego and Imperial counties have slightly more than 21,000 jobs for 1.8% of their workforce.

Traditional blue-collar occupations, such as carpenters, electricians, and heating and air-conditioning technicians comprise the largest number of workers in the green economy. provides an online database of environment-related job postings, showing a growing demand for workers with “green” skills.

While it good that that “going green” is saving money for manufacturers, benefiting some traditional blue-collar occupations, and providing “green” products for consumers, the question is whether it is creating any new manufacturing jobs.  While campaigning for president, Barrack Obama, proclaimed the goal of creating five million so-called “green collar” jobs   by restoring America’s manufacturing base through clean energy technologies, innovation and less reliance on foreign oil.  He said, “My presidency will mark a new chapter in America’s leadership on climate change that will strengthen our security and create millions of new jobs in the process.”

Three years later, it appears that America is missing the boat in creating green manufacturing jobs. China’s cheap labor, combined with free trade policies that afford companies with international portability, have propelled China to the top of the mountain in terms of clean energy investment.

One example is the manufacture of light bulbs.  In July 2010, General Electric permanently shuttered its last major factory producing incandescent light bulbs.  The closure cost 200 employees their jobs.  These jobs were transferred to China, where the much more energy efficient bulbs known as compact fluorescents, or CFLs, are produced at a much lower cost.  The incandescent light bulb was born in America and now has died in America, taking plenty of well-paying manufacturing jobs with it.

Despite the fact that CFL’s were invented in America in the 1970’s, virtually none are made in America. Because they require much more hand labor than your typical incandescent bulb and labor costs are much higher in the      U. S., many companies set up manufacturing in China to take advantage of its massive low-cost pool of available labor.

The same thing has happened with solar panels.  China tops the world in solar panel manufacturing.  “Five of the top 10 solar panel makers in the world are from China, a trend that took hold last year {2009} according to a report by Massachusetts-based greentech analysts GTM Research.”

Jenny Chase, a lead solar analyst for the Long-based research firm New Energy Finance, says it’s unrealistic for the United States to count on long-term manufacturing jobs in the solar industry, at least where a global oversupply is pressing solar-panel prices through the floor.”

Plenty of others disagree.  Several thin-film solar startups, such as PrimeStar Solar, Applied Quantum Technology and SoloPower are planning new factories now in the hope of catching a market upturn in the next couple of years.  In April 2011, G.E. announced plans to build the nation’s largest solar panel plant.  “The plant, whose location has not been determined, will employ 400 workers and create 600 related jobs, according to G.E.”  The factory would annually produce solar panels that would generate 400 megawatts of energy, the company said, and would begin manufacturing thin-film, photovoltaic panels made of a material called cadmium telluride in 2013.”

In 2009, China became the world’s leader in private investment in renewable energy, according to a report by the Pew Charitable Trusts. Even in the midst of the worst recession since the Great Depression, China invested $34.6 billion in green technologies.

America, meanwhile, has leaked clean energy investment and jobs like a sieve. According to the report, the U.S. has invested just over half the amount of China in clean energy technologies. For all of 2009, private investment in the U.S. totaled just $18.6 billion, down 48 percent from 2008.

A report by the Investigative Reporting Workshop and ABC News, found that $8 of every $10 spent on wind energy projects through the stimulus package went to a foreign company. Total recovery funds spent on wind energy projects total nearly $2 billion.  The report estimates stimulus funding for wind projects created roughly 6,000 manufacturing jobs overseas and just hundreds in America.  Thus far, the Recovery Act has paid to create 1,807 wind turbines to fuel American homes, businesses, schools and other buildings.  Just 588 of those were manufactured domestically, according to the report.

“The United States’ competitive position is at risk in the emerging clean energy economy,” Phyllis Cuttino, director of the Pew Environment Group’s Global Warming Campaign, said in a statement attached to the group‘s report.

In an opinion article for Industry Week, consultant, John Madigan of Madigan Associates, presents “real solutions” to create the $20-per-hour jobs needed to sustain a strong middle class.  With more than 25 years experience in operations management at Continental Can and Storagetek, among other companies, Madigan said in 2008, “’Green’ manufacturing technology offers more than a way to slow environmental destruction; it could be a powerful antidote for America’s economic crises, mass job losses, and diminished international status.” (Viewpoint, July 2, 2008,

In the last couple of years, the term “green technology” has evolved into the more encompassing term of “cleantech.”  The new “cleantech” industry could be a powerful antidote for America’s economic crisis and massive job losses in manufacturing.  “Cleantech” manufacturing and the technologies that support it could create the higher paying jobs needed to sustain a strong middle class while helping to solve air, energy, water and food crises.  Next week’s article will take a look at how some “cleantech” companies are creating new manufacturing jobs in the San Diego region.

The Future of American Manufacturing – Part Two What is the future Outlook?

Tuesday, May 10th, 2011

In order to stay competitive in the global economy during the past 20 years, manufacturers have extended manufacturing and supply operations to low-cost sources globally, embraced innovations in automation and cost management, begun transforming themselves into lean enterprises, and served customers in emerging markets.  Now, customer demands are changing.  They want more flexibility, more emphasis on unique, customer-specific products or variations, more rapid delivery/response, proximity to vendors, and consistent high quality.  These changing demands are fostering several major trends that are creating a brighter outlook for American manufacturers.  They include:

Reshoring Initiative

The Reshoring Initiative is a way to return manufacturing jobs to the U. S.  Harry Moser, Chairman Emeritus off Agie Charmilles in 2010, founded initiative.  The Association for Manufacturing Technology, Association for Manufacturing Excellence, National Tooling & Machining Association, Precision Metalforming Association, and the Swiss Machine Tool Society support the Initiative.

In June 2008, a survey by SAP and Industry Week Customer Research published showed that the top objectives of conducting business overseas were:

  • Increase overall market share
  • Increase profitability
  • Reduce Costs
  • Provide a superior customer experience
  • Increase overall revenue

The survey showed that companies with >$1billion revenue met 58-75% of their objectives while companies with <$1 billion revenue only met 37-47% of their objectives

However, a survey of North American manufacturing executives released in early April by Accenture entitled “Manufacturing’s Secret Shift” found:

  • 61% are considering shifting from offshore to closer to centers of demand
  • 59% intend to pursue new supply options
  • 67% proximity to customers markets top factor
  • 57% noted increased cost of logistics & transportation costs

The authors noted that software, electronics and telecom are lagging this trend.  Software doesn’t seem to be rebalancing its supply chain.  India is the most attractive relocation due to large number of highly skilled workers at lower wage rates who speak fluent English.  China is forecast as the hub for the Asian market for the telecom industry.  Electronic equipment will continue to be outsourced to China.  This is compatible with number 5 of the 2011 Top 10 Supply Chain Predictions — “In the context of taking a broader view of total cost, supply chain organizations will gain a new appreciation for shortening lead times through profitable proximity sourcing strategies.”  The reasons are:

  • Improve overall service levels
  • Retain key customers
  • Focus on the “costs” of long lead times
  • More balanced approach to global sourcing

A January 2010 survey by Grant Thornton of Supply Chain Solutions survey showed that sourcing is moving home slowly.  In 2009, 20% of companies brought sourcing closer, of which 59% reshored.

The main reasons for reshoring are:

  • Component/material prices increasing
  • Rising labor rates in China – 15-20% year over year
  • Transportation costs increasing
  • Political instability
  • Exchange rate variables as U. S. dollar continues to drop
  • Disruption from natural disasters

“As energy costs go up, transportation costs rise, and the distance that goods travel begins to matter,” said Paul Bingham, a trade and transportation specialist at Global Insight, a financial analysis firm in Massachusetts.  “For low-value products that take up a lot of space, like furniture, for example, transportation costs can get quite high,” said Bingham. “And if you’re not saving enough money from using low-cost labor, it makes sense to bring your production lines closer to home.”

Thomas Murphy, RSM McGladrey’s executive vice president of manufacturing and distribution said, “Manufacturing will be regionalized and the countries with the raw materials will drive a lot of manufacturing investment. Energy will be a key driver of what is located where.”

While all countries are subject to unexpected natural disasters, the 7.9 magnitude earthquake that struck the Sichuan province of China on May 12, 2008, and the 9.0 earthquake in Japan that occurred on April 7, 2011, generating a devastating tsunami and radiation exposure from damage to the Fukushima nuclear plant have exposed the problem of how vulnerable the global supply chain is to major disruptions.  The Japanese disaster has caused a major disruption in the supply chain, especially for automakers.  “Toyota says its vehicles contain 20,000 to 3,000 parts, coming from about 600 suppliers.  And the chain doesn’t stop there.  The 600 suppliers themselves rely on hundreds of other companies to provide raw materials and components.”

“Inshoring” and “Nearshoring”

“Inshoring” refers to a company from a foreign country setting up a plant in the United States, and “nearshoring” refers to the same type of company setting up a plant in the nearby location of Mexico. For companies from India, the reasons for this “reverse offshoring” trend include the declining exchange rate of the Indian rupee versus the dollar, the decline in H1B visa availability, and the desire to be closer to their U.S. customer base. Other factors are the labor shortage in India for technology professionals and the tremendous upward pressure on wages.

For example, Wipro Technologies, India’s third-largest outsourcing company, set up an “inshore” development center in Atlanta, GA, where it will work with the University of Georgia to educate and train nearly 500 employees. The Bangalore-based firm also established a “nearshore” location in Monterrey, Mexico.33

San Diego’s CONNECT organization has recognized the current trend of bringing operations closer to home to reduce costs and become more flexible, responsive and adaptable in the constantly changing marketplace.  CONNECT calls it “nearsourcing” rather than “nearshoring,”and launched a new industry cluster in December 2010 for technology manufacturers to help them connect with local and regional sources for products and services.  CONNECT is collaborating with the San Diego East County Economic Development Council to utilize the EDC’s well-established database of manufacturers to facilitate the connections.  CONNECT put on a program May 3, 2011 on “Nearsourcing vs. Offshore:  What it is and What are the Initial Considerations for Technology Companies.”

Lean Manufacturing

The application of lean manufacturing techniques is also helping to bring manufacturing back to the USA.  One is example took place at General Electric’s appliance plant in Kentucky.  While doing a Kaizen event, employees came up with better way to assemble the GeoSpring water heater made in China.  General Electric’s U.S. team changed the design to have a control panel that will swing open like a glove box to connect 17 electric connections instead of having to squeeze fingers through tight spaces behind the control panel as was being done in China.  They also changed the assembly process so that the 20 lb. compressor will be attached while the GeoSpring unit is in horizontal position instead of upright position.  The GeoSpring water heater was brought back to Kentucky plant this year, creating 400 new jobs.

Luke Faulstick, COO of CJO Global, recently told the TechAmerica Operations Roundtable, “Any company on the lean journey should rethink offshoring.  If you are doing the ‘one part pull’ of lean, then you don’t need to offshore.  We have reshored our PCBs to our plant in South Dakota, our textile products to our plant in North Carolina, and our implant parts to our plant in Texas.  We have cut our inventory buffer down from 12 weeks to two weeks.”

A report titled “What’s your plan for 2025?” released by Accenture in October 2010, identified the winning manufacturing attributes for the next 15 years as being:

  • Customized products/services to serve customer’s unique, specific needs and priorities
  • Global locations to balance regional demand with regional supply
  • Supply chain flexibility to support diverse channel and customer needs
  • Agility on shop floor and beyond
  • Negotiate and “partner” for scarce resources

This same report stated that the top challenges for manufacturers would be:

  • Production skills, workforce availability
  • Transportation costs
  • Supply base and supply base access
  • Capital Required
  • Employment related issues
  • Local/government content requirements
  • Government incentives
  • ·         Local taxes

The Accenture report concluded that the following capabilities are needed to rebalance manufacturing within the United States vs. outsourcing offshore:

  • Accurate Total Cost of Ownership analysis of options
  • Comprehensive manufacturing and supply strategy
  • Skills and knowledge of staff
  • Ability to increase supplier capability and capacity
  • Changing internal mindset for longer-term total cost view
  • Improved understanding of local market capabilities

Finally, the future of American manufacturing holds much promise as new technologies provide opportunities.  Just a few of the new technologies to be further developed are:

  • Nanotechnology
  • Biomimicry
  • Bio fuels
  • New processes for PCB industry
  • New trends in rapid prototyping
  • Electro forming

Each month, I see examples of the inventiveness, ingenuity, and entrepreneurial spirit of Americans at the San Diego Inventors Forum.  Our SDIF steering committee is helping these entrepreneurs and inventors find sources for their new products in the United States.  This provides me with the best hope for the revival of American technology-based manufacturing and services for the future.

The Future of American Manufacturing Part One – Where are we at now?

Tuesday, May 3rd, 2011

The average American rarely thinks about manufacturing, and if he or she thinks of it at all, he or she thinks that American manufacturing is dead or dying.”  They may think that we have transformed into the postindustrial society predicted by John Naisbitt in Megatrends, in which the Untied States was supposed to transform from dirty heavy industry into the clean bright world of services and high technology.

Many may wonder why we should expend any effort to save American manufacturing.  What difference would it make to the United States if we lost virtually all of our domestic manufacturing?  Is it too late to save American manufacturing?  Can American manufacturing be saved or even revived into a new period of growth?

The truth is the so-called postindustrial society was a dream that failed to generate any new net jobs either in manufacturing or services.  We’ve learned that it’s even easier to outsource services, such as telemarketing and customer service, computer programming, and software design to India and other offshore countries than it is to outsource manufacturing.

Americans may be surprised to learn that the United States is still the world’s number one manufacturer, accounting for 17 % of global manufacturing output, but down from 25 % in 2007 before the Great Recession.

For over sixty years, American manufacturing has dominated the globe.  It was responsible for turning the tide for the Allies in World War II and defeating Nazi Germany and Japan.  It helped rebuild Germany and Japan after the war and enabled the United States to win the Cold War against the Soviet empire, while meeting the material needs of the American people.

High paying manufacturing jobs helped spur a robust and growing economy that had little dependence on foreign nations for manufactured goods.  American families and communities depended on a strong manufacturing base to improve our quality of life.

Manufacturing is the foundation of the American economy and was responsible for the rise of the middle class in the 20th Century, in which the average daily wage rose from $2.50 per day to $96 per day.

American companies like General Motors, Ford, Boeing, IBM, and Levi Strauss became household names.  American manufacturing became synonymous with quality and ingenuity.  Now General Motors is recovering from bankruptcy thanks to American taxpayers through a government bailout.  IBM sold their computer line to Chinese company Lenovo, and Levi jeans are made in China just like every other brand of jeans.

The U. S. manufacturing sector accounted for $1.7 trillion or 11.2% of the country’s Gross Domestic Product (GDP) in 2010, up from $1.58 trillion in 2009.   If this sector were a country, it would be the eighth largest economy in the world.  Manufacturing output of the nation’s factories in the United States today is at the highest level in history and continues to rise.

The five largest manufacturing industries today are: chemicals, food products, computers and electronic products, transportation (automobiles and aircraft), and fabricated metal products.  Automobiles and auto parts dropped from third to fourth between 2002 and 2007, and fabricated metal products slipped from fourth to fifth in the same time period.

Manufacturing is the engine that drives American prosperity.  It is central to our economic security and our national security.  Federal Reserve Chair Ben Bernanke stated on February 28, 2007, “I would say that our economy needs machines and new factories and new buildings and so forth in order for us to have a strong and growing economy.”

However, Franklin Vargo, vice president for international economic affairs of the National Association of Manufacturers, said, “If manufacturing production declines in the United States, at some point we will go below critical mass and then the center of innovation will shift outside the country and that will really begin a decline in our living standards.” 3

In the 1970’s, over 26 % of American workers were in manufacturing, but this number has decreased every year since 1990 until it dropped down to less than 11 % by the end of 2009.  

In 1965, American manufacturing accounted for about 28 % of the U. S. Gross Domestic Product, but it dropped to only 9.5 % in 2009.   According to Forbes magazine, we’ve lost 50,000 manufacturing jobs per month since 2001, adding up to over 5.5 million jobs by the end of 2010.

Manufacturing ensures that the U. S. has a strong industry base to support its national security objectives. American manufacturers supply the military with the essentials needed to defend our country, including tanks, fighter jets, submarines, and other high-tech equipment.

In a keynote address “Lessons for a Rapidly Changing World” at the CA World 2003, Dr. Henry Kissinger, former U. S. Secretary of State, said “The question really is whether America can remain a great power or a dominant power if it becomes primarily a service economy, and I doubt that.  I think that a country has to have a major industrial base in order to play a significant role in the world. “

The reality is that the supply chain of goods upon which our military and defense industry rely is weakening.  The U. S. printed circuit board industry has shrunk by 74 % since 2000, and the communication equipment industry has lost 47 % of its jobs.  The U. S. machine tool industry consumption fell by 78 % in 2008 and another 60 % in 2009.    There is only one steel plant left that can product the high quality steel needed by the U. S. military.  Even more serious is that China is now the #1 supplier of components for defense systems.

The five states with the largest manufacturing workforces are: California, Texas, Ohio, Illinois, and Pennsylvania.   California’s manufacturing workforce of more than 1.5 million is almost the size of the Texas and Illinois manufacturing workforce combined.

Jobs paying $20 per hour that have historically enabled American wage earners to support a middle-class standard of living are leaving the U. S.  Only 16 % of today’s workers earn the $20 per hour baseline wage, down 60 % since 1979.

Manufacturing wages and benefits are approximately 25 – 50% higher than non-manufacturing jobs.   Manufacturing compensation averages more than $65,000, compared to an average of $53,000 in the remainder of the economy.

Another important point is that the decline in the higher manufacturing jobs produces less tax revenue making the Federal budget deficit worse.  This becomes serious when you realize that nearly half of federal revenue comes from income taxes on individuals.  Decent-paying, entry-level jobs offering a future are replaced by menial, dead-end jobs.

There is a multiplier effect of manufacturing jobs that reflects linkages that run deep in the economy.  Manufacturing jobs create three to four supporting jobs, while service jobs create only one to two other jobs.  However, steel product manufacturing creates 10.3 indirect jobs, and automotive manufacturing creates 8.6 indirect jobs.

Automation has helped keep American manufacturers not only competitive but the most productive in the world.  Manufacturing has long led U. S. industries in productivity growth.  Gains in productivity raise a country’s standard of living.  In the past 20 years, productivity -output per hour -) has more than doubled – actually 2.5 times – that of other economic sectors.

American manufacturers are responsible for more than two-thirds of all private sector R&D, which ultimately benefits other manufacturing and non-manufacturing activities.  More than 90 % of new patents derive from the manufacturing sector and the closely integrated engineering and technology-intensive services.

America’s manufacturing innovation process leads to investments in equipment and people, to productivity gains, the spreading of beneficial technology to other sectors, and to new and improved products and processes.  It is an intricate process that begins with R&D for new goods and improvements in existing products.  As products are improved in speed, accuracy, ease of use, and quality, new manufacturing processes are utilized to increase productivity.  Education and training of employees is required to reap the benefits of such improvements in manufacturing processes.  Substantial R&D is required to keep the ball rolling to ensure more successes than failures.  Co-location of R&D and manufacturing is critical because you have to know how to make a product to be able to know how to make it better for the next generation of the product.

Inside the modern U. S. manufacturing facilities, you will see the most productive, highly skilled labor force in the world applying the latest in information, innovation, and technology.  Contrary to popular opinion, the industrial age is not over.  We are on the edge of incredible advances in manufacturing – nanotechnology, lasers, biotechnology, biomimicry, rapid prototyping, and electro forming.

In summary, manufacturing is the foundation of the U. S. national economy and the foundation of the country’s large middle class.  Losing the critical mass of the manufacturing base would result in larger state and federal budget deficits and a decline in U. S. living standards.  This, in turn, would result in the loss of a large portion of our middle class, which depends on manufacturing jobs.  America’s national defense would be in danger, and it would be difficult, if not impossible to maintain the country’s position as the world’s super power.

The next article will look at what trends are occurring now and how various choices that we could make as a nation, company, and/or individual will affect the future of American manufacturing.