At a time when most economic news articles are on the negative side, it’s refreshing to read a report that corroborates the “why” portion of my book, Can American Manufacturing be saved? Why we should and how we can. Last week, the Center for American Progress released a report titled, “The Importance and Promise of American Manufacturing, Why It Matters if We Make It in America and Where We Stand Today,” co-authored by Michael Ettlinger and Kate Gordon. The 41 page report is filled with interesting charts and graphs and can be downloaded at www.americanprogress.org. The Center for American Progress is a nonpartisan research and educational institute dedicated to promoting a strong, just and free America that ensures opportunity for all.
The authors echo what I have been saying – “Manufacturing is critically important to the American economy. For generations, the strength of our country rested on the power of our factory floors—both the machines and the men and women who worked them. We need manufacturing to continue to be bedrock of strength for generations to come … The strength or weakness of American manufacturing carries implications for the entire economy, our national security, and the well-being of all Americans.”
The Executive Summary states that supplying our own needs through a strong domestic manufacturing sector protects us from international economic and political disruptions, but most importantly our national security where the risk of a weak manufacturing capability is obvious. Over reliance on imports and high manufacturing trade deficits make us vulnerable to everything from exchange rate fluctuations to trade embargoes to natural disasters. The authors conclude that American manufacturing is not too far gone to save, and that while manufacturing in the United States is under threat, and faces serious challenges, it is by no means a mere relic of the past. It is a vibrant, large sector of our economy—even if sometimes it’s hard to see that as manufacturing jobs are lost, as factories close, and as sections of the country deindustrialize.
The purpose of the report is to examine where the United States remains competitive in manufacturing at home and abroad. The authors began by detailing why manufacturing remains so important to our economy, our society, our national security, and our ability to remain the world’s science and innovation leader in the 21st century. Then it looks at our domestic manufacturing base and our top manufacturing export sectors to gauge where U.S. manufacturing remains competitive. The report does not outline a manufacturing policy agenda.
The authors state that the health and future of manufacturing in the United States matters, representing 12 percent of the U.S. economy, and put that in perspective by commenting that when the United States recently lost less than 4 percent of its gross domestic product, or national income, the result was labeled the “Great Recession.” They note that “the manufacturing sector also boasts an outsized importance that is understated by even that 12 percent.” While the United States will never again dominate world manufacturing the way it did in the decades immediately following World War II and no country is likely to ever do so again, manufacturing is, can, and should remain an important part of our economic future.
The report states that one key reason manufacturing is so important is its position as the cornerstone of the success of many other economically important activities. This role has been the subject of a longstanding debate as to whether the United States should hold onto its manufacturing sector or instead become a ‘postindustrial’ society.” This debate started in the 1980s when Japanese goods started flooding the U.S. market. Some economists argued then that America should move beyond competition for manufacturing jobs and adopt a new economic growth pattern based on service jobs in knowledge-based industries. These economists argued that just as the United States shifted away from agriculture and into industry, so should it shift from industry into services as the primary source of economic activity for the future.
The authors point out that a strong manufacturing sector does not come at the cost of a strong service sector—each manufacturing job actually supports multiple jobs in other sectors. “As economists Stephen Cohen and John Zysman wrote in the late 1980s, the manufacturing sector does not just include the group of employees who work n the factory floor. Instead, the manufacturing sector has “direct linkages” to high-level service jobs throughout the economy: product and process engineering, design, operations and maintenance, transportation, testing, and lab work, as well as sector-specific payroll, accounting, and legal work.”
As an example, they note that motor vehicle manufacturing now creates 8.6 indirect jobs for each direct job. Computer manufacturing creates 5.6 indirect jobs and steel product manufacturing creates 10.3 indirect jobs for each direct job (Authors’ calculation of Bureau of Labor Statistics, “Employment Requirements Matrix: Chain-Weighted Real Domestic Employment Requirements Table, 2008.” Downloaded March 2, 2011)
They conclude that when shop floor manufacturing jobs depart, other jobs go with them—and with those jobs go the ability to create and innovate. Declines in the U.S. manufacturing sector mean declines in our nation’s overall “industrial commons”—a set of related industries and activities including those in the highly prized knowledge-based economy. According to Harvard economist Gary Pisano, when manufacturing moves overseas so does this industrial commons, meaning that we lose not only production prowess but also the process innovation that comes from collocating research and development, design, engineering, and manufacturing.
“In addition to undermining the ability of the United States to manufacture high tech products, the erosion of the industrial commons has seriously damaged the country’s ability to invent new ones,” writes Pisano in a recent Harvard Business Journal online debate. With the loss of the commons and the jobs comes a decline in U.S. workforce skills and the ability to invent and innovate that can only come from the hands-on experience of working in an industry. The upshot: If we lose our ability to make things, we may well lose our ability to invent them. (Robert H. Hayes, “Outsourcing Is High Tech’s Subprime-Mortgage Fiasco,” Harvard Business Review, October 7, 2009, http://blogs.hbr.org/hbr/restoring-american-competitiveness/2009/10/outsourcing-is-high-techs-subprime.html.)
The authors state that there is strong anecdotal evidence that if we cede production on a process invented in the United States then we may lose future iterations of innovation of that process. They cite solar panels as one example. Invented in New Jersey at Bell Laboratories in 1954, the production of solar photovoltaic panels has largely moved overseas (China is currently the world’s largest producer), and most new innovations in panel production, such as process improvements that make the panels far more powerful by altering their electrical properties, are happening outside of our nation. (Kevin Bullis, “Solar’s Great Leap Forward,” MIT Technology Review, July/August 2010, available at http://www.technologyreview.com/energy/25565/5)
They cite a recent set of studies by Carnegie Mellon University engineering professor Erica Fuch, who examined the impact of offshoring production on technological innovation. Her key finding: When optoelectronics companies offshored production of their original designs to, for instance, Asia, they tended to produce those initial designs cheaply and efficiently. When these firms then began work on new and improved designs, however, they tended to lose valuable time and knowledge if their operations were off shore. (Erica Fuchs and Randolph Kirchain, “Design for Location? The Impact of Manufacturing Offshore on Technology Competitiveness in the Optoelectronics Industry,” Management Science 56 (12) (2010):2323–2349, available at http://mansci.journal.informs.org/cgi/content/abstract/56/12/2323
They conclude that “moving manufacturing overseas impeded the companies’ ability to compete and keep at the forefront of design and production and to efficiently push forward new technologies. These companies will follow other manufacturers who have shifted design and innovation closer to their physical operations— witness the photovoltaic manufacturing industry.” They note that “Fuchs’s findings are critical not only to the question of why basing manufacturing in the United States matters but also to the analysis of what kinds of policies might best support the types of manufacturing that will ultimately put our nation in the best economic position. Fuchs’s research shows that when you’re talking about the United States, manufacturing does matter, but advanced and cutting-edge manufacturing matters even more. When such manufacturing leaves, it takes much more than the factory floor jobs—as important as those may be—it takes technology, innovation, and the next generation of products with it.”
The authors point out that offshoring and outsourcing can grow as parts of different manufacturing supply chains develop elsewhere. U.S. companies that supply these manufacturing operations offshore find it more and more advantageous to go where their factories are, which is why industries can get slowly hollowed out as other countries become the central places of production. “The United States risks being relegated to the periphery, which in turn would hurt our capacities at innovation and thus threaten our innovation and technology leadership. Remaining capacity can hang on for a while but the leadership, the concentration of wisdom, and skill slips away—and once gone is hard to recapture.”
They note that whether the United States still dominates manufacturing as it once did is a different question than whether U.S. manufacturing can compete. U.S. manufacturers are successfully making and selling their goods on a massive scale. One reason is that we are the biggest-consuming country in the world, and “one could argue that as a result we cannot avoid being a large manufacturer. There are enough products that are expensive or difficult enough to ship that it’s hard to avoid making them here. There’s certainly truth to the story that some U.S. manufacturing succeeds because of this advantage.”
Part of how a business competes is being close to its customers so selling goods in a home market is nothing to be ashamed of. However, there’s clearly more to U.S. manufacturing success than a captive market. U.S. manufacturing is also a top exporter. Proximity is a factor to the extent those exports are to Canada and Mexico as these two countries account for about a third of U.S. manufacturing exports. But the United States was the third-largest exporter of manufactured goods in the world in 2009 and 2010, behind China and Germany.
The report shows that manufacturing in the U. S. covers a broad range of activities, but there are six large, subsectors that account for the bulk of U.S. manufacturing. The top six subsectors by value added are:
• Chemicals, including pharmaceuticals and other chemical products
• Transportation equipment, including, most prominently, automobiles and aircraft
• Food, which includes everything from steaks to potato chips
• Computer and electronic products, including semiconductors, lab equipment, and a host of other products
• Fabricated metal products, including a range of products from pre-fab sheds to I-beams
• Machinery, which includes goods such as air conditioning units and farm equipment
The report does not contain a detailed analysis of the competitiveness of U.S.-based manufacturing, but notes:
• Wage differences aren’t everything
• The overall cost differences between countries aren’t as large as they are sometimes made out to be
• Different industries care about different costs differently29
• Proximity to markets matters
• Proximity to research and management and resources also matters
• Skills matter
They conclude by stating that as “long as there is demand in the United States for manufactured goods as well as the innovators, manufacturing workers, and available capital necessary to remain competitive, manufacturing can continue to be important in the U.S. economy. U.S. workers are nervous about taking jobs in industries that have seen declining employment. Other countries offer enormous subsidies in a variety of ways. And we are not alone in being innovators—and have become much less welcoming to innovators from abroad who wish to live in the United States… President Obama’s focus on manufacturing and exports are welcome signs, as is the introduction of a new “Make It in America” agenda in Congress. But this is an effort that’s going to take more than setting goals and one president’s focus…The United States needs to get into the game and find the right steps for us that will create an environment where a nation’s manufacturing sector can flourish and succeed—not just in selling here, but to the world.” I heartily concur and have proposed many suggestions for steps to take to preserve American manufacturing in my book.