It pains me to see how our pharmaceutical and electronics companies are rapidly outsourcing manufacturing operations overseas. I surely understand that they are under margin pressure and low-cost Asian manufacturing seems to be the right prescription.
Since 1970, we have lost 1 out of 3 manufacturing jobs in the United States. What we have been doing, in reality, is selling off our manufacturing infrastructure and replacing it with an economy based on debt and finance. By 2007, 40% of America’s corporate profits came from the insurance and financial sectors.
The losers have been middle-class workers. For example, if you took a service sector job in 2012, you would earn about $610 per week — as compared with an average weekly wage in the goods producing sector of about $810.
Yet companies are under pressure to maintain their bottom lines, and cost cutting seems important.
To me, this is a short-term solution that has ominous implications. The result will be a diminishment of our innovation capability. Here’s why.
The Manufacturing Sector Drives the Balance of Trade
70% of GDP is based on consumption. We buy stuff. In response, other people make it. More and more ‘others’ outside of the U.S. are making what we buy. They are earning the economic added value, rather than us.
What do we import? Industrial supplies, capital goods, consumer goods, cars and parts represent 92% of what we import. Items someone must manufacture.
What do we export? Agricultural products, minerals, airplanes, plastics and wood products now top our list (in that order). Do you see a pattern?
It is not just the Manufacturing, but the Infrastructure That Matters
Certainly, I get that factory worker wages may be lower overseas. But consider that surrounding these manufacturing facilities is an infrastructure of technicians, construction firms, engineering companies, and others who make the manufacturing processes run. These people are an integral part of the innovation chain which starts with an idea and ends with something actually being produced. These supporting jobs are KNOWLEDGE jobs, demanding high skills and training in science, technology, mathematics, chemistry, and biology. By outsourcing these functions, we are inviting overseas competitors to become stronger by investing in their entire ancillary infrastructure.
Places like Detroit, Toyota City (Japan) the Research Triangle and Silicon Valley became successful because they developed into meccas for all kinds of businesses that were related in some way to the area of main industry focus (autos, biotech, electronics and software). No matter what problems you encountered, there was always someone nearby who could help.
Innovation Requires Intimacy Between R&D and Production
In my former business, R&D was a big deal. Our R&D spend topped 7% of sales and 20%+ of our sales in any given year were from products and services we didn’t have 4 years earlier. One of the things I learned from this is how crucial it is to have your R&D people near to your operations. We no longer have the luxury of inventing in an “ivory tower”. Our best designs by far were the ones where the engineers and scientists saw and understood the manufacturing processes used to produce their brainstorms. We used to call it “designing for manufacturability”, but what it means is that the R&D people need have one eye on the customer and the other on the people who ultimately have to produce these things. We have to be holistic.
For a time, we experimented with manufacturing in Mexico. The number of new program launch problems grows exponentially (I think) with the distance between the manufacturing and R&D locations. In our case, Mexico was not that far away, but translating design intent into practical manufacturing processes was not a trivial undertaking.
Don’t We Want High Skill High Paying jobs for Our Kids?
China already graduates six times more engineers per year than does the United States, and now publishes more scientific papers than Germany and Japan.
Call to Action.
This is not an easy one to fix, and requires, I believe, collaboration between government and business. For my money, I think this is a strategically vital issue that does not seem to get as much attention as does, to take just one example, the topic of contraception (which consumed a full 20 minutes of the latest Republican presidential debate).
Preserving our infrastructure and ensuring the chance for our kids to have high skill jobs ought to be at least as important.
Tell us what you think. How optimistic are you about the future of your kids?
Other related articles:
Just How Important Is Manufacturing?, by Willy Shih
How Should We Think About the Exportation of Jobs, by James Heskett
Why We Need To Revive American Manufacturing, Institute for America’s Infrastructure
Why We Need a Manufacturing Renaissance – Economically and Ethically, by Leo Hindery, Jr.