The manufacturing future

Can the United States become more competitive as a maker of things?

Harold Meyerson writes about China and Germany’s ability to ride through the current economic conditions in a relatively good position:

What sets them apart from the world’s other major powers, purely and simply, is manufacturing. Their predominantly industrial economies meet their own needs and those of other nations, and have made them flourish while others flounder.

At Foo Camp 2010, I caught up with Liam Casey of PCH International, an Irishman living in China who runs a supply-chain business, helping mostly American tech companies manufacture things in China. Casey offers his insight into why China has become the place to make things. China has the infrastructure, the expertise and the labor force to be the world’s leader in manufacturing.

Casey’s view is that manufacturing has become a commodity; fewer large companies own their own factories. In a sense, they rent rather than own, and the cheapest places to rent are those in China. As China begins to create web interfaces to its manufacturing capacity, the rest of the world will find it even easier to make things in China.

As John Keefe writes, we may find it surprising that the U.S. is still the leader in making things: “The U.S. still manufactures more stuff than anyone else — $1.7 trillion in manufacturing value added in 2009, compared to $1.3 trillion from China.” But he points out that the lead won’t last for long and China may surpass the U.S. by 2013.

I want to know what we can learn from China. Can the U.S. become more competitive as a maker of things? What will happen to our manufacturing base in cities like Detroit? (I’m organizing Maker Faire Detroit, July 31-Aug 1.)

Here’s video from my conversation with Casey:

Harold Meyerson holds up Germany as an example of a country that successfully competes against China by producing high quality products with a skilled workforce. Most Americans assume, Meyerson says, that we can’t compete “against cheap Chinese labor” yet Germany manages to do so with a unionized workforce that receives better pay than American workers. He also notes that when we lose manufacturing, we’re not just losing blue collar jobs; we’re also losing science and engineering jobs.

A few weeks ago, I was at Ford Motor Company’s R&D facility. When we think of the auto industry, we think of assembly line workers. What amazed me at Ford was the number of advanced research labs, filled with scientists developing and testing new processes and new materials. In a sustainability lab, a team of five women scientists are refining a process for making the foam for seat cushions from a biodegradable material derived from soybeans. Manufacturing involves a lot more than assembly; it creates the need for investing in research and development.

Meyerson believes that one secret to Germany’s success is that their financial system is designed to support manufacturing businesses. “Its financial sector serves the larger economy, not just itself,” he writes.

I recently read Andrew Ross Sorkin’s “Too Big To Fail.” One of the great ironies in the book is to hear executives from Lehman Brothers justify a government bailout because it will save jobs in the financial sector. These are the banks that made deals that were good for themselves but which eliminated jobs and moved some industries out of America.

Meyerson writes:

So even as Germany and China have been busily building, and selling us, high-speed trains, photovoltaic cells and lithium-ion batteries, we’ve spent the past decade, at the direction of our CEOs and bankers, shuttering 50,000 factories and springing credit-default swaps on an unsuspecting world.

The tech industry as well has served its own interests in eliminating jobs either through automation or by sending them overseas. Sometimes the justification that is given is that the tech industry is creating high-value jobs to replace low-value jobs. Yet, should we be asking how can technology create jobs?

Andy Grove, former CEO and Chairman of Intel, in a recent Bloomberg article, asks “what kind of a society are we going to have if it consists of highly paid people doing high-value-added work — and masses of unemployed?”

Grove calls for “rebuilding our industrial commons”:

Long term, we need a job-centric economic theory — and job-centric political leadership — to guide our plans and actions. In the meantime, consider some basic thoughts from a onetime factory guy.

Silicon Valley is a community with a strong tradition of engineering, and engineers are a peculiar breed. They are eager to solve whatever problems they encounter. If profit margins are the problem, we go to work on margins, with exquisite focus. Each company, ruggedly individualistic, does its best to expand efficiently and improve its own profitability. However, our pursuit of our individual businesses, which often involves transferring manufacturing and a great deal of engineering out of the country, has hindered our ability to bring innovations to scale at home. Without scaling, we don’t just lose jobs — we lose our hold on new technologies. Losing the ability to scale will ultimately damage our capacity to innovate.

Grove makes a pretty good argument for not thinking of manufacturing as a thing of the past, but rather a vital part of re-building for the future.

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  • Tito Jankowski

    Question for Liam –
    You say packaging is a huge part of brand and product experience. What sites and resources can you recommend for designing and executing small runs of packaging (50 to 1000)?
    Thanks!
    Tito

  • Tom Foremski

    IF we had “Fair Trade” manufacturing of goods such as electronics, this could bring back some manufacturing to developed countries such as the US.

  • apurva narang

    @Jankowski

    try mailing vikram142@gmail.com for your requirement

  • Gray Rinehart

    Very interesting article, and quite timely. I’ve argued for a long time that de-emphasizing manufacturing in favor of the information economy would lead to no good end.

    Are you aware of the Commerce Department’s Manufacturing Extension Partnership? They have centers around the U.S. that work to improve manufacturing.

    NC State University’s Industrial Extension Service is the MEP center for the state of North Carolina. We help manufacturers of all sizes to improve their products and processes in order to stay competitive and even re-capture market share. This fall we will celebrate manufacturing with a “bus tour” across the state — we call it the “Manufacturing Makes It Real” tour. See http://mfgmakesitreal.ies.ncsu.edu for details.

    Thanks,
    G

    http://twitter.com/GrayRinehart

  • vinnie mirchandani

    I have recently released a book about tech-enabled innovation titled The New Polymath – broadly to cover infotech, biotech, cleantech, healthtech etc and while there are plenty of German and Chinese examples in the book, there are many more US examples. From that POV, we are doing pretty well.

    Our big issue is once our companies get into a leadership position based on innovation, pursuit of margins more than sustaining that innovation is a common issue. Innovation buys shorter competitive advantage than it did 2-3 decades ago but we are clinging to older price curves (with few exceptions like Intel which believes in “killing its own children”) and leave flanks open to global price competition.

    Since our major suppliers pursue similar goals we have built in a systemic layer of fat versus protein in our diet. Trust me the Chinese don’t pay 90% margins to Oracle or $ 2 a minute in roaming charges when their execs travel. We know it just cannot beat that out of our system.

    We need to obselesce faster is the best way to put it. We do fine on ingenuity and innovation, our business models need to move to much shorter depreciation cycles for those investments.

  • David Megginson

    It’s easy to idealize other economies in the abstract, but try looking at numbers:

    Germany:
    Per-capita GDP (PPP): USD 34,100
    Unemployment (2009): 9.3%
    Services 72.3%, industry 26.8%, agriculture 0.9%
    11% live below poverty line

    US:
    Per-capita GDP (PPP): USD 46,400
    Unemployment (2009): 7.5%
    Services 76.9%, industry 21.9%, agriculture 1.2%
    12% live below poverty line

    (CIA World Fact Book)

    The composition of the economies is pretty-much the same as far as services and manufacturing go. The US has a higher unemployment rate, but even after the recent economic downturn, it’s still 33% ahead of the German economy in per-capita GDP.

  • David Megginson

    Sorry, switch the US and German unemployment in the last comment:

    Germany (2009): 7.5%
    US (2009): 9.3%

    Just a typo.

  • Alex Tolley

    Germany’s industrial structure is more that that of Japan. It is dominated by large companies that have strong ties to banks for financing. Add in the unions who are represented at all levels of corporate structure. This makes it very hard for German companies to outsource their labor, unlike free wheeling US companies. The downside is that it is very hard to start your own business there if you need capital.

    The US has essentially hollowed out it’s manufacturing by rushing to the bottom of the cheapest labor pool, rather than developing human capital. Andy Grove’s recent missive on this was hypocritical given Intel’s actions during his tenure, and now he has turned protectionist in the guise of changing industrial policy.

  • Hal W.

    If Clinton hadn’t given away America’s industry under GATT (signed in 1995) we wouldn’t be having this conversation. Why a US President would propose, push through, and sign legislation that gutted American industry I’ll never understand. Now, we’re supposed to compete with nations that we literally gave our industry to?

  • David Megginson

    I’m still looking for evidence that Germany is actually better off than the US as far as manufacturing goes.

    Germany’s looking at a lot of its manufacturing moving, not to China, but to cheaper former East-Bloc countries in the EU (where they’re not allowed to be protectionist). The proportion of GDP from manufacturing in the US and Germany is almost identical, but since the US has a 1/3 higher per-capita GDP, the US actually generates considerably more per person from industry/manufacturing than Germany does.

    Germany has lower unemployment during this recession, but historically, their unemployment rate has been higher than the US, due to more rigid labour laws (the German unemployment rate hit nearly 12% in 2006).

    I think an American living in Germany would like the healthcare and the decent rail system, but wouldn’t necessarily feel better off financially.

  • Max Harris

    Thank you for starting this discussion, and thanks to all the participants for their comments and facts. I believe it is crucial to the health of our (U.S.) political economy to do what we can to support and build up our manufacturing base. If we can learn from others, let’s do so.

  • Alex Tolley

    @Hal W. I think you mean NAFTA. Do you actually have evidence that NAFTA is a problem for the US?

  • Martin

    What percentage of US manufacturing is exported?

  • EJF

    Manufacturing is what has driven our ecomony and our standing in the world markets for the last hundred years. Our inovative and techonoligical advances have driven our lead but it has been manufacturing that has paid for it. It was our manufacturing ability that saved us in two world wars and made us the leader of the free world.Over the last 25 years we have allowed greed to drive our industrial capibilities and given our competition everything they needed to bypass us in most markets. It’s time to turn back into a country of MAKERS and not just BUYERS.

  • Vince

    To the people quoting “Per Capita GDP” of Germany vs. the US, that is not always the best metric.

    You should also look at wealth distribution. I would guess that the distribution is far more polarized in the US than in Germany.

  • KeithCu

    Jobs move offshore because of the high cost of labor and energy. We need to get some commonsense (libertarian Republicans) into Congress to fix these things.