28 Mar 2011  Research & Ideas

Why Manufacturing Matters

After decades of outsourcing, America's ability to innovate and create high-tech products essential for future prosperity is on the decline, argue professors Gary Pisano and Willy Shih. Is it too late to get it back? From HBS Alumni Bulletin. Key concepts include:

  • Exporting manufacturing has a negative impact on the country's industrial commons, which represents the collective capability to sustain innovation.
  • Manufacturing capability takes a while to erode, but the damage is almost irreversible. So now is the time to be doing something about it.
  • There is a role for public policy in terms of making sure the country is maintaining a broader set of manufacturing capabilities.
  • A generation of MBA students and managers have been brought up on a false idea that manufacturing is kind of the brawn and not the brain, and that the country should focus on the brain.

 

After decades of destructive outsourcing, America's ability to innovate and create high-tech products essential for future prosperity is on the decline, argue professors Gary Pisano and Willy Shih. They won the prestigious McKinsey Award for their July-August 2009 Harvard Business Review article, Restoring American Competitiveness, which lays out their views in detail. Despite their dire analysis, Pisano and Shih remain cautiously optimistic that the United States can regain its competitive footing.

Roger Thompson: When it comes to manufacturing, do you see a future for Made in America?

Willy Shih: I think it becomes more and more problematic. We see the symptoms of decline, which are driven by things like labor arbitrage and industries moving assembly overseas, followed by more and more sophisticated work. The thesis that we advance is that exporting manufacturing has a negative impact on the country's industrial commons, which represents the collective capability to sustain innovation.

Gary Pisano: Is there a future? Yes. It's not too late. There's still a manufacturing base in the United States, and it's quite large even though it's a small percentage of the economy. But if things continue the way they're going, I'm more doubtful. Manufacturing capability takes a while to erode. But the damage is almost irreversible; that's the concern. So now is the time to be doing something about it before we get to the point where the answer is no.

Thompson: Isn't it true that the United States is still an innovation powerhouse?

Shih: I think so. But the problem comes about as more manufacturing moves offshore and commercialization capabilities diminish. Flat-panel displays are a good example. Because there is no flat-panel manufacturing capability in the United States, there is a real question in my mind whether companies here will continue to be competitive in developing flat-panel display innovations.

Thompson: So exporting manufacturing ultimately drains away American innovation?

Pisano: Absolutely. That's the heart of our argument. That's what we feel is not well understood in a lot of discussions. Willy and I would characterize it as a naive view that innovation is just about R&D and separate from manufacturing. People in the United States and other advanced industrialized countries say that the future is in innovation, not manufacturing, as if manufacturing is not part of the innovation process. In many sectors that's simply not true. The ability to develop very complex, sophisticated manufacturing processes is as much about innovation as dreaming up ideas.

Thompson: What does this reliance on manufacturing tell us about globalization?

Pisano: For any individual company, it is often better, in the short or intermediate term, to outsource production to an overseas supplier. The company can buy manufacturing services at a much lower rate if it goes to China or elsewhere, depending on the industry.

But if everybody is doing that, you get a general erosion of the economy, which could lead to a decline in the standard of living. An individual company, though, can move assets anywhere. So companies can reward their shareholders regardless of what happens to the national economy. As a result, the interest of companies and the country have diverged.

Shih: I'll give you a historical example. In the semiconductor industry, outside of Intel and a few smaller players, most U.S. semiconductor manufacturing has moved offshore to places like Taiwan, Singapore, South Korea, and increasingly China. As more and more capability moved offshore, other industries in the host countries have benefited from the semiconductor manufacturers' capabilities. It's no coincidence that the entire flat-panel display industry emerged from semiconductor industry capabilities. The people who built the factories to make semiconductors used that knowledge to build factories to make flat-panel displays.

The next thing to watch is the replacement of the incandescent lighbulb. The lighting industry is moving to LED technology at a very high speed. And all the LED lighting companies draw on the same capabilities that emerged in the flat-panel display and the semiconductor industries. So the world's supply of high-efficiency lighting will be from those same regions of the world, primarily Taiwan, South Korea, and China.

Thompson: Could semiconductor makers have foreseen that outsourcing one day would hurt the country's ability to produce flat-screen TVs and LED lighting?

Pisano: Semiconductor companies were not thinking about the future of lighting. That's not their business. But that's a challenge, and that's the complexity of this. It also suggests a role for public policy in terms of making sure the country is maintaining a broader set of manufacturing capabilities.

Thompson: You talk about China having a national strategy for economic development. Does the United States need one?

Shih: One of the issues in developing a national economic strategy has been confusion with the term "industrial policy," which has been anathema in Washington. "Industrial policy" involves some degree of central planning. What we're talking about is a discussion about strategic capabilities that need to reside within the country.

Pisano: Unlike other nations, we don't have a national economic strategy. There's this big debate about whether we should have one. My answer is absolutely yes. If you look at the United States in the postwar period, there was a very strong national economic strategy around using science to drive economic growth. We created the National Science Foundation and the National Institutes of Health, among others, and the government invested dramatically in building a scientific and technical infrastructure needed to fuel growth. That was the national strategy, but it was not industrial policy. There's an important need today for having a coordinated national strategy at the policy level.

Roger Thompson: Will U.S. manufacturing stage a comeback?

Pisano: There are real reasons to be optimistic: The U.S. economy is quite resilient, and it's quite flexible. These are things to build on. We wouldn't want anybody to interpret what we are saying as the sky is falling. While there are some issues around policy, and there are some issues around management, it's time for executives to be leaders in terms of building the kind of capabilities that are going to make their enterprises great over a longer period of time.

Thompson: When you address the country's manufacturing challenges in your classes, what do you hope your students take away from the discussion?

Shih: What I hope for is that future managers will take away a more thoughtful approach about manufacturing and think about, as Gary said, the longer-term implications of their actions for their companies as well as for the countries in which they operate.

Pisano: One of our key messages is to get students to appreciate that manufacturing involves a lot of knowledge work. There has almost been a whole generation of MBA students and managers who have been brought up on a false idea that manufacturing is kind of the brawn and not the brain, and that the country should focus on the brain.

We also have to acknowledge our predecessors in the Technology and Operations Management Unit. For many years, people like Bob Hayes, Kim Clark, and Steven Wheelwright were arguing that manufacturing mattered to competitiveness. So what Willy and I are saying today is a continuation of a core theme taught here for 20 years. And we plan to stay at it for another 20 years.

About the author

Roger Thompson is editor of the HBS Alumni Bulletin.

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Comments

    • Doug McDonald
    • Principal Associate, Abt Associates

    Two comments-- 1. Those who build the product, whether it be a good or a service, have a huge advantage in directing the course of innovation because they are the ones who face directly the technical questions and challenges that get solved by creative solutions. Potential competitors who are not already in the business not only lack the deep bench of engaged employees but are also out of the communications loop, whereby problems and ideas for enhancements are passed around. 2) The US does have a de facto industrial strategy, which has been to pour huge investments into the development of military technology. Seymour Melman, who taught industrial engineering at Columbia, argued in his 1970 book, Pentagon Capitalism, that this diversion of money, skill, and brains into building stuff that doesn't get used or blows up has been accompanied by a decline in investment in our broader industrial/manufacturing base. To be sure, military investments create work in the short run, and some techniologies are spun off for non-military purposes, but these gains are too short-lived or infrequent to offset the cost to the broader industrial economy in the US.

     
     
     
    • Anonymous

    I agree that innovation goes together with manufacturing. As a national industrial policy I think it won't work, it would take a lot to avoid the temptation of cheap labor from China. At some point the government will figure out that the only way to reduce deficits with out increasing taxes is increasing the number of tax payers. Outsourcing reduces the number of tax payers, so far selling TB was working to balance deficits but seems that we are reaching a limit. I don't see other options other than placing tarifs to all imports from cheap labor countries. US companies will adapt by increasing productivity using automation.

     
     
     
    • Clyde Rettig - MBA '71
    • Managing Director, Strategic Imperatives

    Professors Shih and Pisano are absolutely correct about the relationship between maufacturing and innovation. In fact, I observe that in many cases, manufacturing is the primary driver of important innovations (as opposed to Twitter and the like).

    The manufacturer must always be working to improve the cost/performance ratio in his products. Products must become smaller, faster, lighter, harder, etc. and less expensive to make or they will be replaced in the marketplace. I would argue that this pressure to improve is the primary stimulus for innovation. Thus, less product manufacturing means less competitive pressure, yielding less innovation.

    I don'y agree, however, with the professors' optimism about reversing the tradjectory of either U.S. manufacturing or its associated innovation. That would require a level of public intelligence and perspective that long ago disappeared and is unlikely to magically return.

     
     
     
    • Anonymous

    When is the last time you heard someone say "I want my son (or daughter) to grow up and be a machinist?"

    What percentage of the HBS Class of 2010 ended up working for a real "Manufacturing" Firm. For that matter, how many HBS students focus on Production and Operations Management? Nitty gritty production is not looked on favorably in the US.

    At the moment, the future of "Made in the USA" is not bright. Maybe this trend can be turned around. I sure hope so because as you say in the title "Manufacturing Matters".

     
     
     
    • Anonymous

    I think there is danger of over-generalization based on the example of flat panels. How do the authors view Apple's ongoing innovation in consumer electronics while it outsources manufacturing ? Secondly, the authors need to address why many areas such as pharma where US has significant manufacturing base have seen limited innovation. The US does have an industry policy whose goal is to protect certain industries such as aerospace, internet, military mfg, port operations, telco and broadcasting. These has mainly served to stifle innovation, depress productivity and increase costs. One could argue that areas where we see large footprint of govt policies are the ones with the least innovation.

     
     
     
    • Gary M. Oosta
    • President, Emerging Tech Insights, Inc.

    To me, it makes sense that we need a national innovation policy and appropriate investment in new technology research and manufacturing to enhance or restore American competitiveness. While the manufacturing decline reported was occurring, there has also been an explosion of publications exploring the HOW part of the innovation process. Again, Harvard has been in the lead with work by Christensen, Chesbrough, Davenport, Kim, O'Connor and others.

    Echoing other comments, it seems to me that the time is right for America to wake up and see the changes and to invest in our future with new innovation exploration processes, new technology ideas and policies that retain new manufacturing jobs.

     
     
     
    • Cliff Lindholm
    • President, Falstrom Company

    To answer the question why manufacturing matters one need only look at what sector of the economy is driving the current recovery. Manufacturing.

     
     
     
    • Chuck Fienning
    • Advisor to the CEO, Sumter Packaging Corporation

    My career in manufacturing (corrugated paper shipping containers and packaging) has exposed me to a wide variety of U.S. manufacturing companies in the Southeast U.S. Our sector of the economy 'has taken a licking, but we're still ticking'. Why? Because we have had to adapt to global competition by becoming more competitive. We don't need a 'national manufacturing strategy' formulated by government bureaucrats and academics. We don't need increased tariffs, except in certain targeted industries that might be vital to national defense. We understand that consumers benefit from lower prices of products manufactured offshore. But the U.S. can't have its "cake" (lower product prices) and then expect its manufacturing sector, with high-paying jobs and benefits, to grow and prosper.

    The necessity of survival in a global economy and a more regulated U.S. economy has caused U.S. manufacturers to either outsource certain product lines or to upgrade capital assets and the domestic workforce to become competitive. Government can encourage the retention and growth of manufacturing jobs by (1) not increasing government regulation of manufacturing; (2) developing lower-cost energy sources, to include existing coal, oil, and gas resources in the USA; (3) providing accelerated depreciation allowances on new investments in capital assets; (4) continuing tax credits for research and development; (5) upgrading existing road systems; (6) maintaining a favorable tax rate on corporate profits and dividends; (7) establishing a reasonable threshold for estate taxes on private businesses; (8) reducing the federal deficit.

    The National Association of Manufacturers, of which our company is a member, has laid out a strategy for manufacturing growth which incorporates many of the eight points above. Members of Congress have paid attention to visits by private sector company CEOs like my son (our current CEO) and me. They understand, "It's all about jobs."

    It's good to learn that HBS is putting more emphasis on manufacturing. Our company founder, my father, Ed (AMP 20), believed that our country's strength lay in its ability to produce products (mining, manufacturing, and farming). Our national DNA is innovative in nature, and creative entrepreneurs in the 'traditional' wealth generators and the 'new' fields of information and medical technology, services, logistics, and retailing are pushing ahead. We American manufacturers believe that the future is bright for those of us who are quick, innovative, and customer-service oriented.

    Chuck Fienning MBA 1970 Sumter (SC) Packaging Corporation

     
     
     
    • Philip Neukom
    • Managing Director, Profit Analytics Inc.

    I enjoyed reading the HBR article last year and the above interview.

    Over the past 15 years, I have worked with many manufacturing companies that have specific and competitive intellectual property. Consistent with the finding of the authors, I find that those that have outsourced most or all manufacturing lose a lot of the innovation edge that allows the company to grow and keep competitors at bay. The tie between continuous improvement in manufacturing and innovation is a critical factor.

    For those that outsourced, I feel it has been easier to outsource the manufacturing rather than deal with operational issues and manage the cultural change necessary to be competitive in manufacturing.

    It has been a shortsighted decision.

     
     
     
    • Stuart Mackenzie
    • PhD candidate, University of Ballarat

    "...the interest of companies and the country have diverged." This goes to the heart of the matter and is an inevitable consequence of a narrow focus on shareholder value, especially in the short term. Corporations, and their shareholders (wherever they are resident), benefit from a range of economic institutions and conditions that prevail in the corporations' home countries including political stability, legal systems, monetary systems, etc. These are public goods that are rarely paid for directly by the corporations that benefit from their existence and operation. The mutual obligation that all corporations owe to the taxpayers that fund the provision of these public goods is that they support and fully participate in the development of the national economy for the benefit of all citizens. If Pisano and Shih are right, corporations that outsource manufacturing overseas for short-term cost advantage, and the institutional shareholders who drive the short-term profit imperative, are failing to live up to their side of this mutual obligation. And wait a minute...aren't many of these institutional shareholders from the same financial services industry that brought us the global financial crisis? Perhaps it's time for a fundamental re-think of the role of financial capitalism in developed economies?

     
     
     
    • Allen Roberts
    • Director, StrategyAudit

    If you want to look at the dire consequences of letting manufacturing go over a long period, look at Australia. Touted as the economy that best weathered the GFC meltdown, Australia just digs stuff up and sells it to China, India, et al, and counts the money. Manufacturing is hardly on the agenda, certainly not on the political agenda. When China gets a cold, Australia will get a sudden and perhaps terminal for our standard of living, case of pneumonia.

     
     
     
    • Anonymous

    Very valuable and insightful and Could not agree more. How critical it is for our policy makers to understand and act on. Reacting during election when unemployment rates continue to dwindle, is not going to solve the root causes addressed here. The idea of a national council / foundation is fundamental, opposed the poiltics of being elected.

     
     
     
    • Anonymous

    If everbody goes after sophisticated softwares and technologies who will be there to produce the goods one can touch? And one cannot produce goods (gain experience) in thin air.

     
     
     
    • Walter P. Blass
    • President, Strategic Plans UnLtd

    What ever happened to basic economics such as comparative advantage ( Ricardo) ? Look at the economy of New England when the textile firms all went south to lower their labor costs: NE switched to electronics! Why did BMW and Daimler put new design and assembly plants in the U.S. after 1985 when the Japanese took them to the cleaners? Answer: need for innovation to please the American customer. When I teach in France, China, Singapore and Mexico City, I am all the more impressed with American flexibility, innovativeness, including switching product and service paradigms. Michael Porter taught us about reconfiguring the Value Chain--do any of the readers of this column remember that? SWATCH, Electric cars, ZARA , ILLY ? Xavier Gilbert and Paul Strebel of IMD have expanded Porter's concepts to include both defensive and offensive strategies.

    One of our major advantages in international competitiveness lies in our superior graduate universities ( Harvard included.) When I ask about Chinese engineers, I get a loud Bronx cheer from my Chinese friends who bemoan the way Chinese engineers are taught. Likewise, most Indian engineers suffer from rote memorization and inability to abstract to higher levels of management, except in the 6 best Management Institutes.

    If the new markets that show 8-11% growth are in Asia, are we surprised that our companies are locating manufacturing there? This is what I learned from H-P 30 years ago--go for Market entry, not lower costs as a priority; lower costs always climb( viz. South Korea, Taiwan and now the SEZ zones in China.)

    Come on, guys: let's look not just at innovation vs. manufacturing but at the whole context: where are the growing markets? What Value Chains are dying and need reconfiguring? What educational skills do we need to insist on? Arnold Toynbee echoed Charles Darwin in saying the the most adaptable survive, not the biggest or strongest. Maybe Biology and History have something to teach us in management.

    Walter P. Blass

     
     
     
    • David Cawlfield
    • Principal Engineer, Olin Corporation

    A good article; I couldn't agree more. We must have an industrial base. American industry cannot grow industry without a fundamental advantage in energy and raw materials and a skilled workforce. Politically-driven anti-industrial policies at EPA are a great hindrance to US industrial growth. A particular problem with EPA politics is the uncertainty created by political tides. These create huge risks to investment. The politics at EPA need to be replaced with science-based responsible and stable environmental regulations. The unique natural resource availability of wet shale gas (high ethane/propane content) could potentially drive an industrial rebirth. However, we must also have low-cost energy to offset the disadvantage of high wage expectations. Oddly enough, even with with high unemployment, it is really hard to find skilled tradespeople for industrial jobs. The root cause of this seems to be the common perception th at US manufacturing is inevitably declining. This is a deadly positive feedback cycle today.

     
     
     
    • Mark A. Gomulka
    • GM, Nypro

    Manufacturing is and will remain the backbone of our economy! What is disturbing to me is that we are not bringing up the next generation of engineers and skilled manufacturing workers. I still believe in manufacturing and work very hard in making my company leaner, meaner and more competitive through technology and innovation. We can not compete on labor costs but can provide technology solutions that put us firmly back in the game. The focus needs to remain on the Walmarts of the world to support state side manufacturing. Everyone is waving the sustainability flag and with that social responsibility needs to be present. What is more sustainable then manufacturing all our consumable goods and household goods in the neighborhoods' that buy them. That is the true sustainability and social responsibility in my opinion.

     
     
     
    • Sajee Sirikrai
    • Lecturer, Thammasat Business School

    I couldn't agree more with Professor Pisano, especially his last remark. Success business needs effective systems & processes. Manufacturing is the very basic platform to understand that. People may dream of joining the service industry for better pay-off but in fact, effective service cannot be realized without understanding its delivery procedure.

     
     
     
    • Anonymous

    The problem is, that the corporatism is greedy and not extremely intelligent [e.g. it does not recognizes that it is cutting the branch on which is self sitting], never thinks about the country's whole, but only on his short therm interest. The first problem is to change that conditions. After that almost everything needs some fix, and therefore it is not so easy to tell where to start.

     
     
     
    • Dev Gupta
    • CTO, APSTL, Scottsdale, AZ

    Since the '70s the US industry, often led by the exalted alumni of Business schools such as yours, have decided on Outsourcing of Manufacturing as the painless and more immediately profitable way out. An abundance of Science & Technology in the US, generated both domestically as well as obtained as war booty after WW II, has trivialized these disciplines w.r. to arrogant and speculative management practices backed by degrees bestowed by august Universities and the 'lords of the universe' privileges for the latter has been forced down the throats of a democracy in the exalted causes of efficiency & free market !

    Whereas Germany has reverted to its traditional pious "knowledge capitalism", since the advent of Reaganism the victorious Anglo - Americans seem to have reverted to "exploitation capitalism" that was the backbone of slavery and colonialism.

    So rather than bemoaning the passing of individual knowledge - based industries like the Semiconductor ( in which I participate ) or once again come up with crash Govt. programs like SemaTech ( set up originally, thanks to Bush 41, in Austin, TX to make the US industry more competitive against Japan ) which ended up really training personnel for the then nascent Taiwanese semiconductor industry ( TSMC, UMC ! ), the underlying cultural issues need to be aired before throwing more public funds down the drain.

    To conclude, the only way to revive manufacturing in the US will be break out of the straitjacket of mass production & distribution and the regimentation it demands from the workers or the subservience it imposes to arrogant capital and their enforcers with MBAs.

    American Scientists & Engineers who created the Internet or the iPhone are fully capable of creating this transformation with innovative technologies. But they will need not so much venture capital but protection from the dark forces.

     
     
     
    • Concerned with the answer!!!
    • American, America the Beautiful

    America is shooting its self in the foot. We buy clothes from Paris and Italy. Our cars come from Germany and Japan. The computers, cell phones and tv's (when's the last time you heard that term) we use on a daily basis are made in China and Korea. It seems that investors have determined our lives for us and their fortunes for themselves. How long are we going to sit back and have poll takers determine our futures? Americans must take back America. If it ain't "made in the USA don't buy it." I don't know about you but I'm tired of people who are outsourcing jobs telling me that it's too late for industry in America. This country was built on strength and a love for freedom, we understood that when all prospered, we all succeded. Are you going to sit back and watch this glorious country be sold right from under you???

     
     
     
    • Anonymous

    Policy makes policy

     
     
     
    • David Dezse
    • VP Engineering, Microcom Corporation

    We are a US manufacturer in a highly competitive industry. Our products are of the highest quality and yet are competitively priced. Our problem is the US comsumer/customer dosen't reward US manufacturing with orders, period. This is a basic flaw in the brainwashing of the American consumer. I believe "Made in the USA" means something and I continue to buy things made here, I just wish other people did. Our offshore competetors do and if they like our product, they take it to a manufacturer in their country and copy it, even if they have to pay more for it. This has happened to us numerous times. They have an obligation to their own, we don't.

     
     
     
    • Anonymous

    I would like to add an international perspective to the debate about how much manufacturing matters. Being based in India, I observe a degree of concern in an emerging economy like India as well, about how the Services led growth model that the Indian economy seems to have taken is ultimately unsustainable without a strong Manufacturing backbone, driven by Innovation and R&D. At 17% of Indian GDP, manufacturing is in danger becoming irrelevant to short term growth objectives of policy makers, but there is increasing realization that the country must build its manufacturing competitiveness and innovation capability, in order - yes, to provide jobs to the tens of millions of young Indians who will enter the labor market in the next ten years.

    And why the focus on innovation in a low cost country? Shouldnt its labor arbitrage suffice to give it a competitive edge in manufacturing? The answer seems to me to have two parts: firstly making products that have utility and offer value in the context of the local consumer's needs, requires local innovation, not imported designs. Secondly, China has already 'cleaned up' in the mass manufacturing game, with economies of scale and enabling infrastructure other 'emerging' economies cannot match (with the exception of Taiwan and Korea in certain semi-conductor driven industries). Countries like India and possibly Brazil, therefore, have realised the need to promote local innovation to compete. The word 'frugal engineering' was recently used in the context of Indian automotive designs, by the CEO of a global automotive company. When successful and accepted in other emerging markets, such products are low cost not merely because of the low cost of labor (which several other countries offer too), or because they bypasses safety or environment standards. I believe such products are able to compete on the price-value curve because they offer nothing that is not valued by their target user base - the local, value conscious consumer. That to me is why local manufacturing is essential to local innovation, and why I believe local innovation is the only "true" innovation. When extended to other markets without local customization, it is essentially a form of imitation - whether the product be a Laptop or a Burger....or for that matter, a German design car in the United States.

     
     
     
    • Frank Sirianni
    • President, Gear Visions, Inc.

    Two months ago I started a manufacturing company specializing in power transmission components. I am taking the skills I have learned over 40 years and trying to "get back in the game" and see what I can do to help with regaining some manufacturing resurgence in this country. Every local, state and federal organization that I contacted, and that are involved in promoting job creation or entrepreneurship was not interested to help me in my endeavor. Sounds a little crazy but I am investing all personal funding and will attempt to meet the challenges of a startup in a mature industry. I hope it is sustainable because "manufacturing matters" more now than ever.

     
     
     
    • Jerry Silverman
    • President, Greentron Inc

    I have been saying pretty much the same thing for the last 30 years, but no one has given me an award for it! First the manufacturing goes. Then the engineering follows. Then the R&D follows. And eventually the educational institutions go too. Its an ongoing process. As my small company attempted to adapt to the process over the years through innovation, we frequently found ourselves hamstrung, unable to cope with all the new rules and regulations that were eventually extended to the smallest of businesses. If we want innovation, small business either will have to exempted from these burdens, or the Government will have to bear the expense of the compliance. So manufacturing has both been attracted offshore by economics and driven offshore by overregulation.

     
     
     
    • Harold Phillips

    BOTH Germany and Japan have export surpluses. The labor cost in both the countries and in France are higher than the US. With lower cost energy. a better tax policy and a reduction of barriers to efficient manufacturing the US could return to manufacturing.

     
     
     
    • Marshall Gurian
    • Retired

    Terrific Article although this conclusion has been painfully obvious to many of us fluched away as manufacturing was outsourced in a fit of MBA educated "lowest first cost" thinkers. What hasn't been realized is that invention to a great extent comes from "necessity"-- that is a problem with need of a solution. Sometimes the answer comes from the research lab, but often the answer comes from the shop floor, the engineering support organization, or even the sales reflection of customer needs. An integrated organization with problem solving teams and enough funding to explore, test, evaluate, and upgrade process or product. Inevitably this leads to patents, and broader analysis that triggers true invention. This isn't all Ph.D. level thinking, but invoves practical experienced materials, craftsmanship, and skilled operator input, which invariably is part of a well operated manufacturing enterprise. Inevitabl y, some of these experienced and knowledgeable personnel are highly paid (and well worth it) but to "cost analysis" it may appear that they are excess cost to be eliminated by outsourcing. After all, the Chinese can employ degreed engineers who are paid less than line mechanics whose job they assume in the outsourcing recipient organization. It isn't too late, but reconstructing the deep industry with experience as well as skill will take time -- it may even cost funds that appear excessive at first gasp. However, it must be done.

     
     
     
    • Pradip V. Mehta
    • Principal, Mehta Consulting, LLC

    Manufacturing matters simply because not only it drives innovation, it also provides jobs where an individual can make a decent living and raise a family. Unfortunately, we have driven up costs of manufacturing too high due to various regulations (EPA, OSHA, etc.) and standard of living (minimum wage, etc.) to a point where other countries have become more competitive! On top of this, all retailers' hard driving attitude of bringing lowest price to consumers has resulted in driving manufacturing out of this country, at least for consumer products. I am really worried about our children and grand children.

     
     
     
    • Anonymous

    Those who blame government regulations and high wage union labor here as the primary cause for flight of US manufacturing to LCMRs from Mexico to China, conveniently ignore the German example where regulations are stricter than in the US and nearly 40 % of labor are unionized and better paid than in the US. In contrast to the US, manufacturing in Germany maintains a healthy trade surplus.

    The key difference between the US and Germany is the more inclusive / responsible practices of German capitalists and management - in contrast to their "untouchable" counterparts in the US who seem to operate above the law and over the last 4 decades have hobbled and gradually run down the US economy by skimming profit from the once supreme US manufacturing industry, then denied it investments for upgrading or innovation.

    As the source of this elitist, arrogant and pampered "nomenklatura", Harvard Business School and its ilk bear enormous responsibility for the wilful destruction of US manufacturing and economy.

     
     
     
    • Don Sepeta
    • President and CEO, Armstrong Bros. Holding Co

    I have been involved in manufacturing since the late 60's when I was an engineering co-op student and have been running manufacturing businesses since the late 70's. I am glad to report that there are thosands of very successful US manufacturing businesses (I've run three) that are thriving primarily because of their ability to innovative and keep a step ahead of the competition. The fiber of US manufacturing is in small less than $50MM in revenue. They are the engine that is currently pushing the economy forward.--Don Sepeta, MBA 1975

     
     
     
    • John Keough
    • CEO, Applied Process Inc.

    The inflation adjusted dollar value of products manufactured in the US continues to grow. The common view that manufacturing is all being off-shored is erroneous. Yes, we are making more with fewer people, but increasing productivity is what we need to do to maintain our standard of living. The US is the biggest market on the planet and growing by 3MM people each year.....but manufacturers would be short sighted to not put manufacturing facilities in faster growing markets. The small to medium US manufacturers are driving ongoing research and innovation. Because these centers of innovation are mostly small and private they are often below the radar, but the ideas continue to pour out and the US will continue to be the number one manufacturing country in the future.

     
     
     
    • Anonymous

    To say manufacturing is a broad aspects due to connect to many aspects, but I would rather speak from my personal view from 'outsiders'. Manufacturing is long-term to be thought in a view that a lot operators working in a big house and doing the same job routinely. It may change a lot now. You may have chance to see many equipments around in a big house. The former is what we see in nowadays in China or other developing countries. And later you may still see in America, say car industry. However, if you dig down to a certain level. How can they produce a ipad or other stuff we are using? From skills, technology, and equipments. Many of them were not invented/ innovated in the developing country. So, it all comes to Mr. Porter's National Competitive Advantage. American shall go towards what they good at and competitors may be developing countries....

     
     
     
    • Anonymous

    GREETINGS Roger Thompson Your article is a most erudite analysis of manufacturing with excellent following comments from readers.

    Please consider the history of America transportation as the cornerstone of growth change and wealth building.

    Would it be sensible to seriously consider the next transportation technology transformation to advance existing manufacturing capabilities with a new vision for infrastructure? Analysis looking in the rear view mirror does not search for a path toward a future synthesis.

    There are "Four Freedoms -- Freedom of speech and expression, Freedom of worship, Freedom from want, Freedom from fear that renews the 1944 call for an Economic Bill of Rights".

    There is a fifth freedom of "rights" that of movement. Mobility is an essential ingredient of "rights" where all may do so in common public spaces in "rights of way."

    Infrastructure supports this "right" of mobility passage. We have failed in our efforts to build a visionary movement system that would redeem America's purpose and promise and champion the needs and aspirations of all working people.

    Please add to your thoughts toward a truly better mobility for all people and goods. SPACES IN SERVICE (Infrastructure) CONNECTS TO SPACES SERVED. (Villages, Towns and Cities)

    ET3 is the answer. USA and California is dithering especially when the ancient technology of HSR is still being considered and condemned as "followship" by arising nations. Next generation futures in transportation are leaping forward in both China and Korea to "leadership" status utilizing ET3.

    The future of USA, and the World's transportation is paramount for survival. A new visionary leap into "super conducting linear magnetic lines affording levitation in a vacuum" transportation technology will revive and bind future world cultures together. This brings "Space Travel to Earth." tm.

    Transportation is the substance for job creation, re-urbanization, manufacturing, self-financing and re-structuring of sustainable City habitats. The change in real estate values adapting to these portals of ingress and egress are immense. ET3 can be accomplished in California with current technologies applied to this venture.

    Websites: http://www.et3.com and http://www.et3.net Please visit: http://www.youtube.com/watch?v=92dK_yxaKvk for a brief summary.

    China and Korea are ahead of us by five and three years respectively. America should not be left behind.

    We would very much appreciate your response and narrative to this practical ET3 solution. It is time that we create, finance and construct with our own intelligence and skills to proudly say "Built in America."

    May we continue to share facts about this very near possible future for manufacturing?

    SALUTATIONS Graham Kaye-Eddie M.U.D. (UCLA)1969

    13109 Hageman Rd, Bakersfield, CA 93314 Cell: 661.319.1000 Fax: 661.589.6933 Skype: MAKABUSI

     
     
     
    • Anonymous

    So what is the HBS doing about reviving Manufacturing in the US ?

     
     
     
    • Carlton Currie
    • Trinity Commercial Capital

    A wonderful example from the 1960s illustrating why it is so important to have manufacturing and R&D closely coupled: Many companies attempted to develop a workable spacesuit for the Apollo program. None were successful although tons of money were thrown at the problem. Finally Playtex built one the astronauts could actually use. The seamstresses who were used to sewing bras and girdles from elastic materials showed them how. Playtex was not publicised as the supplier because it was though that wearing a Playtex product would damage the astronauts image!

    It took the R&D and research staffs to figure out the required materials but it took the seamstresses to put it all together. if they had not been close at hand it seems unlikely that the spacesuit would have ever been completed.

    All this is in Spacesuit: Fashioning Apollo by Nicholas De Monchaux, a great read.

     
     
     
    • John Arnott
    • CEO, nimble Ventures

    As a consulting Industrial Designer for several decades, I have had the privilege of working in many manufacturing plants in both NA, EU, and Asia. The major observation from this experience is how utterly idiosyncratic manufacturing culture can be. The 'know-how' that is developed in a plant in the exchange of ideas between production, engineering, and yes, design people is absolutely critical to the successful development of efficient and delightfully marketable products. It is simply not the same with design and marketing working in isolation and exchanging electronic documents with engineering and manufacturing people 10,000 miles away in a different culture. I think this 'Know-how' is an intangible asset that the accountants overlooked.

    I would appreciate an opinion from Pisano and/or Shih on the role of automation in this issue. I would think that theoretically, automation would permit/encourage manufacturing closer to markets as COGS becomes less sensitive to labour costs? John.

     
     
     
    • Anonymous

    Great article. Goes against conventional wisdom in vogue today. However, Innovation is still America's forte. The fact that other countries are leading innovation on some fronts does not mean America is losing its touch. In fact, it should welcome more countries innovating. Only then will the burden on the US reduce.

     
     
     
    • Anonymous

    Some comments from a european engineer.

    When you read (I am not so aged to have been living that time) most of the progress hits in innovation during the last decades, they come from the 'necessities' derived from STATES initiatives in a power context (winning the wars with more powerful bombs or rockets , leading the strategic technologies to access the rivals, detecting with radar the enemy raids, arriving first to the moon or creating a handling network of research, and so on...). To me technological knowledge is additive, as science. How many run test curves where needed to get the current aircraft turbofans in the air?? If you don't make it, you don't get the knowledge.

    But today, knowledge flows with the goods around the globe. Accesibility to the knowledge can bridge the need of experimenting, so you can adquire knowledge at a good price if you have money available.

    Today, out of original restricted initial use, we access to internet, we use GPS or we have cheaper energy (with pros and cons) even without burning oil.

    But water, steel, copper or simply wheat are becoming more expensive when a PC is becoming cheaper and cheaper. In a knowledge world, we are contingent and we continue having some basic need, to cover every day. The same regardles the country.

    Here I leave my second thought, inspired in a tangential manner from the above ones: The cost of goods and the standard of leaving have opposite geographical gradients. Compare techology, cost of labour and basic raw materials between the first world and those 'behind'. Those gradients must reach a balance point in an open world. I cannot imagine that Chinise citizens do not aspire to the same standard of living that a German, an American or a Swedish, for instance. Manufacturing is a combination of hard (physical goods) with knowledge and there is a barrier that cannot transform it is pure knowledge. It could be a point of debate how to rearch a balance point to respect the rest of long term human (state) interests.

     
     
     
    • Anonymous

    Most out sourcing organizations do not give up control of manufacturing processes at suppliers. Auto companies know exactly how things are done at suppliers and no change is allowed without discussion. So outsourcing manufacturing does not mean disengaing from manufacturing engineering or process development. It means usually hiring lower cost hands.

    Also much of outsourcing is driven not only by cost but also capacity and the need for flexible capacity - human labor. The US cannot provide the workforce of China or India.

    And when the volumes are high and manufacturing needs to be automated it is never much of an advantage to manufacture offshore.

    Last but not the least all trends are self limiting, the end of cheap oil, rising labor costs in emerging economies will slowly drive manufacturing balance back in favor of the US.

     
     
     
    • Tom Raducha
    • VP Sales & Marketing, Rostra Tool Company

    A vibrant manufacturing based economy not only spurs innovation in many different areas but also creates and maintains healthy consumers of the products we manufacture. Henry Ford in 1914 realized that if he paid the Ford assembly line workers more, they would be able to afford his relatively inexpensive automobiles. He would then sell more cars, manufacture more cars, hire more assembly workers, create more consumers of automobiles, etc. I'm not saying to double all assembly workers' pay, which is what Mr. Ford did. I am simply stating that a long term danger of outsourcing manufacturing to distant lands is the erosion of a large group of US consumers and deterioration of domestic markets.

     
     
     
    • Anonymous

    Innovation is being choked in these hard economic times. I"m not certain that the US will bounce back on manufacturing; especially when there are so many 3rd world countries vying for jobs.

     
     
     
    • Martin Stein
    • Vice President, Competitive Capabilities

    Global competitiveness is rapidly becoming a requirement in the global economy. Tools for using global best practices and innovative training have been created that consolidate innovations from companies such as Toyota, P&G and SABMiller. One example is TRACC and a presentation that summarizes this breakthrough system of global competitiveness is available on request. Core competencies for success in the global competitive environment are the ability to understand and utilize such a system to gain competitive advantage globally. Other global best practices are the ability to integrate business process across plants, countries and functions, the ability to centrally manage and monitor integrated planning systems and the ability to create a homogeneous culture globally.

     
     
     
    • Michael McKeldon Woody
    • President, International Marketing Advantages

    Well said, particularly the point that innovation is separate from manufacturing. Small U.S. manufacturers, even in basic industries, can compete with low cost producers like China by implementing the principles of FEWER (smaller, more customized orders), FASTER (speed to market), FINER (product quality/safety). For more information on these principles, check out www.americandragon.us

     
     
     
    • Rich Bubb
    • Consultant (Engineering & Six Sigma), Private

    Brief comment to those considering off-shoring their respective operations & jobs:

    1] If you (CEO / Decision Maker / et al) are so sure off-shoring is The Answer, try it on yourself, e.g., hire Your counterpart in some non-American company, lay Yourself off, & terminate Your position in this country.

    2] When a production issue or quality issue happens, try calling somebody in your off-shore ops during your business hours, or Welcome to 2:00 AM Conference calls.

    3] Look at this list of why Re-Shoring is the Right Answer: [ http://www.reshorenow.org/resources/library.cfm ]. I did not count the documented case studies, but there must be a few hundred there.

    And in my personal opinion, anyone who thinks a 10,000 mile supply chain is a Good Idea, needs to get a pair of See-Farther-Than-The-Next-Quarter glasses. Do not be a fool: Bolting-on a supplier is more complex and a lot harder than it sounds. I have personally seen the quality of products and watched as so-called Supplier-Partners (who have basically no IP Law and no concept of copyright law) steal designs, components, and production methods and then end-up becoming competitors selling exact copies for around 1/2 the price. That is one of the most brutal-to-face aspects of off-shoring. Another aspect is that the people in the C-Suites (many of which could not possibly attempt the jobs they're attempting to dispose of through off-shoring) do not care.