How We Can Reignite America’s Manufacturing Engine

In a recent study by the Manufacturing Institute and Deloitte Consulting,1 1,000 Americans were asked their views on manufacturing in the United States.

- 60 percent of respondents believed U.S. manufacturing can effectively compete globally, 28 percent disagreed, and 12 percent had no opinion.

- When asked how they thought manufacturing would change over the next 12 months, 32 percent said it would weaken, 41 percent said it would stay the same, and only 13 percent said it would strengthen.

- When asked to look out even further, 55 percent believed the U.S. manufacturing sector would weaken, 26 percent said it would stay the same, and only 8 percent felt it would strengthen.

Its interesting that, despite the general optimism about our ability to compete in the global marketplace, a similar majority believes that U.S. manufacturing will lose ground in the long term. It could be they intuitively understand our capabilities, which makes them optimistic, but they are influenced in their long-term thinking by all the negative talk that ensues when disappointing economic growth indicators are reported.

There is a constituency that quickly weighs in whenever bad numbers come out, proclaiming:

- We have lost our competitive edge to other countries.

- Manufacturing is in decline due to off shoring.

- Our days as a manufacturing leader are over.

However, balancing these negative voices are positive ones, which have not been as sensationalistic.

So who is right about manufacturings future: the optimists or the pessimists? To answer this question, Booz & Company and the University of Michigans Tauber Institute for Global Operations2 recently completed a sector-by-sector analysis of U.S. industrial competitiveness, which included a survey of 200 manufacturing executives and experts.

The conclusion of the study is that U.S. manufacturing is at a critical crossroads and could either succeed or fail, depending on actions and choices taken by business leaders, educators, and policymakers in the immediate future. In other words, whether the optimists or pessimists are proven right hangs in the balance.

Lets consider the findings. Many Americans are led to believe virtually nothing is manufactured in the U.S. anymore. In reality, our factories produce roughly 75 percent of the goods we as a nation consume. The study suggests that, in the years ahead, this number could rise to 95 percent, if the right choices are made. This conclusion is partly based on the finding that todays U.S. manufacturing is far more productive than manufacturing in other counties that Booz & Company has studied, including China and Switzerland.

If, on the other hand, the wrong choices are made and the U.S. manufacturing sector remains neglected, the study warns that output could fall from meeting 75 percent of domestic demand to meeting only 40 percent. If this were to happen, U.S. manufacturing capabilities would drop below "the point of no return."

For the U.S., this would be disastrous on many fronts. Not only would we lose manufacturing jobs, but wed also see jobs and enterprises disappear in fields such as equipment maintenance, transportation, construction, and scientific and technical services. Even product and service innovation, the hallmark of American industry, would suffer. Dow Chemical CEO Andy Liveris sums it up when he states, "Where manufacturing goes, innovation inevitably follows."

This downward slide is easy to imagine. Off-shoring manufacturing work leads to local suppliers closing or moving, engineers choosing to focus on different bodies of knowledge, local colleges eliminating some job-training courses, and the whole innovation ecosystem shrinking.

So the key to Americas manufacturing future is to make the right choices that lead to advantageous courses of action.

The Trends editors believe the United States can compete very effectively and grow its manufacturing base if we leverage five clear-cut advantages we currently hold. These are opportunities we dare not miss ? opportunities that can drive that number toward 95 percent.

The first advantage is our close proximity to huge markets, which can reduce logistical costs, delays, and complexity. Economic and market dynamics are putting pressure on manufacturers to locate factories closer to their main markets. Companies are discovering that this proximity is producing scale and volume, minimizing transportation and logistics costs, and increasing market responsiveness and innovation.

These forces, driven by proximity to markets, will help fuel the most promising emerging technologies. Unlike electronic chips, with digital designs that have been easily sent to overseas fabrication factories over the past few decades, the new nanotechnologies and biotechnologies will only thrive when made in factories that are near the rest of a companys operations, rather than a world apart.

Examples of these emerging technologies can be found in aerospace, chemicals, machinery, and medical equipment. But other established and more traditional products will continue to leverage closeness to markets as they contribute to our manufacturing base. Food, beverages, and many other consumer products cant support the high cost of shipping and the long lead times coming from overseas. Additional products in the nonmetallic mineral and wood products segments also give domestic manufacturers an advantage because of their transportation requirements.

For U.S. manufacturers, this proximity to huge markets, coupled with demand for vast quantities of goods that are best manufactured near the end-user, represents a clear-cut advantage.

Market proximity enables U.S. manufactures to capitalize on the second key advantage: our unique understanding of our markets.

When manufacturers are immersed in the cultures they serve, its only natural they will better understand the wants and needs of the market. As a result, a company does a better job customizing products that match the unique demands of different regions and cultures.

Knowing a market more intimately also enables a company to react more quickly to needed changes, whether its to an existing product or a new product. Evidence that companies understand the significance of knowing and connecting with their markets can be seen in a phenomenon called "reverse outsourcing" or "home-sourcing."3

This is best illustrated by the process of repatriating formerly off-shored customer service jobs back to the U.S. Many companies are discovering its actually less expensive for customer calls to be answered by higher-paid local personnel, who understand the customers culture, customs, and dialect.

The third advantage U.S. manufacturers need to leverage is state-of-the-art technology. This advantage leads to higher productivity, which delivers cost savings and a competitive edge.

A defining characteristic of American industry goes beyond simply building a better mousetrap: Its creating a better way to build that better mousetrap. This mentality led to an increase in manufacturing productivity from 1987 to 2008 that was 65 percent higher than in business as a whole.

That mentality, combined with our technological edge and a highly trainable workforce to run sophisticated manufacturing technologies, can still propel manufacturing firms to competitive positions.

Some wrongly fear that leveraging technology to increase productivity means a loss of jobs. In reality, the opposite is more accurate. If a company fails to embrace technology to improve productivity, that company will be left behind in the scramble for market share, which could mark the demise of the company and the loss of many jobs. The emergence and adoption of technology increases jobs in the long run. This principle was discovered early on in our industrial history, with examples such as the cotton gin. It may have put many cotton seed pickers out of work, but the resulting cheaper cotton spawned a huge textile industry that employed many more workers. Technology continues to have the same effect today.

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There are many examples of our lead in state-of-the-art technology: Here are three:

- GE is leveraging advances to lower costs and invent new designs for its power turbines. It has created ways to improve composites for fan blades and produce resilient alloys that allow for high-temperature, efficient operation. The company is also implementing leading-edge tools that cut through high-strength alloys three times faster than conventional alternatives, reducing energy consumption by 25 percent. These improvements are being applied to products produced in the U.S. but sold globally.

- Improvements in software are also enhancing manufacturing practices. Improved "Enterprise Resource Planning" (ERP) systems are providing many benefits at a lower cost than before. These systems are now enabling software to be hosted remotely, in the cloud, and to be used on mobile devices. With these capabilities, companies are able to cut costs and streamline operations.

- Powerful software design tools are also aiding manufacturing, giving companies the ability to be flexible in delivering more customized products, which until now have been the domain of niche companies. One example is a 3-D design software product from Autodesk that enables companies to quickly prototype and test mechanical designs. Not only does this technology speed the process from digital drawing to manufacturing, it enables a streamlined path for making customized products that command higher prices.

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The fourth clear-cut manufacturing advantage America holds is a proven superiority in management practices. As we highlighted in the October 2011 Trends, the World Management Survey,4 conducted jointly by Harvard Business School, the London School of Economics, McKinsey & Company, and Stanford University, concluded that American managers and their firms are better than any others in the world at managing and motivating people. As a result, one of the sectors the U.S. dominates is manufacturing. The study cited three key reasons we excel in management:

1. We have large and open markets that provide the healthy competition that drives rapid management evolution.

2. Our labor markets are much more flexible, making it easier for managers to hire and fire employees to best meet the needs of the company.

3. We have a more highly educated population from which to draw employees for management positions.

Together, these factors give us an edge in leading our companies in the right directions.

The fifth advantage is really a diminishing disadvantage: the shrinking gap in labor costs between the U.S. and China. Currently, labor costs in China are rising at a dizzying rate of 40 percent per year. This is being driven by two factors: migrant workers who are becoming more selective about the work they do, and Chinas decades-old one-child policy that is beginning to produce unintended consequences, including a shortage of young, able-bodied workers. Compounding this rise in labor cost is a drop in quality, as a result of the labor shortage. When the cost of fixing problems or addressing product liability issues related to poorly manufactured goods from China is added to the rising costs driven by the market for labor in China, the gap shrinks even more.

These rising costs give U.S. manufacturers a renewed opportunity to combine component suppliers in nearby countries such as Mexico, where labor is still relatively cheap, with U.S. manufacturing capabilities to achieve the best of both worlds.

In light of this trend, we offer the following three forecasts:

First, U.S. manufacturing will naturally rebound when many onerous, stifling, and counter-productive regulations are removed.

In order to fairly compete in world markets, U.S. manufacturers need to be unshackled from regulatory burdens that create additional costs for compliance. At a higher level, they need to be removed because they are hindering companies from even considering opening manufacturing facilities in the U.S. At a time when our economy desperately needs a boost, placing hurdles and roadblocks in the way of job-producing ventures is nothing less than economic suicide.

Second, advances in technology will allow U.S. manufacturers to continue to dominate their markets.

Some of the emerging areas that are being aided by advanced technology are energy, life sciences, transportation, environment, communication, construction, and security. An example in life science is the bioengineering of sophisticated new drugs. The complexities that make them powerful also make them a challenge to manufacture. But this challenge should be viewed as an opportunity. Any product that is difficult to manufacture because of technological breakthroughs actually gives U.S. companies an edge over most foreign competitors that dont have the expertise to implement the newest technology - and thats an advantage that should be exploited.

Third, the national sentiment about the long-term future for manufacturing will become increasingly optimistic.

The pundits who continue to claim that the "sky is falling" for U.S. manufacturing are good at only one thing: manufacturing pessimism. The reality is that U.S. manufacturing is still thriving, and the five advantages weve explored in this analysis all point toward opportunities to revitalize American manufacturing and create a long-term competitive advantage in the global economy. As well discuss in the trend The Realities of Global Trade, when the percentage of U.S. consumption that is actually based on imports is considered, the U.S. is essentially a closed economy. Each of the five advantages for U.S. manufacturers is a disadvantage for foreign competitors, which are located far from our markets, have less understanding of those markets, are behind in technology, are stifled by inferior management practices, and face rising labor costs.

References
1. Business Impact, July 2011, “Advanced Manufacturing.” ⓒ Copyright 2011 by Technology Review. All rights reserved. http://www.technologyreview.com 2. Strategy + Business, Autumn 2011, “Manufacturing’s Wake-Up Call,” by Arvind Kaushal, Thomas Mayor, and Patricia Riedl. ⓒ Copyright 2011 by Booz and Company. All rights reserved. http://www.strategy-business.com 3. Fox News, February 9, 2011, “Bringing Customer Service Back to America,” by Jonathan Serrie. ⓒ Copyright 2011 by FOX News Network, LLC. All rights reserved. http://www.foxnews.com 4. To access the World Management Survey, visit their website at: http://worldmanagementsurvey.org