Manufacturers Must Reposition Themselves

By Robert J. Martin

Published by Business First in the December 9-15, 2005 issue

U.S. manufacturers are battered as never before. In a few short years, the U.S. has been displaced by China as the world’s manufacturer.

This quick fall is documented in manufacturing job losses, plant closing and the loss of entire industries to off-shore competition. To most Americans the changing face of global manufacturing is best reflected in the flood of foreign-made consumer goods that have displaced U.S.-made products on our store shelves.

So what is wrong with U.S. manufacturing? In some respects, there is nothing wrong with it. The fall of U.S. manufacturing is unavoidable. After generations of U.S. manufacturing preeminence, there has been a rapid leveling of manufacturing capabilities. China has been the primary beneficiary of the most recent leveling, but India and other developing countries are also emerging as manufacturing powers.

Capital Investments

The availability of low cost labor in developing countries is usually blamed for the fall of U.S. manufacturing. Although low cost labor is a major factor, the situation is much more complicated than that. Changes in capital investments are another factor.

The U.S. is no longer the primary recipient of foreign investments, with most of these capital flows going to China to build new infrastructure including manufacturing plants. These new plants reflect the latest in plant designs and equipment and operate using current manufacturing philosophies.

Their high productivity provides a competitive edge. Since manufacturing plants worldwide are operating at about seventy-five percent of their total capacity, each new plant robs production from other plants—often a U.S. plant.

Growing technical competence in developing countries is another factor in the loss of U.S. manufacturing. A decade ago, many business and political leaders seemed content to allow China to produce most of our cheap, low quality, consumer goods assuming that the U.S. would maintain its dominance of high tech production.

Today, China is capable of producing high tech products that rival those produced in the U.S. Americans often complain that the China has encouraged the wholesale stealing of U.S. intellectual property. This is certainly true, but we have also given our technology to them. As companies invested in new foreign plants capable of producing higher technology products, many moved the production of high tech products off-shore and trained their foreign employees to design and produce them.

Highly Skilled Workers

Technology must be supported by a technically competent workforce. China and India are graduating 10 times more engineers and scientists than the U.S. The United States is renowned for great universities, attracting and educating students from across the globe.

More than ever, these foreign students are returning to their homes, because jobs are now available there. Many of our best universities have opened branches in foreign countries to teach modern management and business practices. The University at Buffalo School of Management has been teaching an MBA program in China for nearly 20 years.

Because of global education and business networks, knowledge and information immediately flow throughout the world. Technical and business books, journals, philosophy and training are immediately shared. There is little strategic advantage in receiving information first when second is so close behind.

The U.S. has a limited pool of talented, domestic labor. Good paying manufacturing jobs often go unfilled, because there are no qualified applicants. Too many of today’s U.S. workers lack the basic reading and math skills needed in today’s manufacturing environment. The U.S. cannot afford to waste and underutilize its most valuable resource—its people—because of inferior schooling.

Manufacturing Power

Government is responsible for encouraging the flight of manufacturing through over-regulation, taxes, trade policies and reducing investments in basic R&D.

Business, too, is responsible, because of its emphasis on short term earnings rather than longer term competitiveness, which leads to tactical successes and strategic failures. There is plenty of blame to share.

So what can be done? Although the loss of U.S. manufacturing preeminence is unavoidable, we must maintain a position as one of the few dominant manufacturing powers. We need to recognize that the strength of the U.S. is in high value-added, high tech manufacturing and position ourselves accordingly.