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.
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.
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.
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".
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.
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
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.
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?
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.
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
at US manufacturing is inevitably declining. This is a deadly positive feedback cycle today.
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.
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.
So manufacturing has both been attracted offshore by economics and driven offshore by overregulation.
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.
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.
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....
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
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.
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.
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.
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.
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.