Needed: A U.S. manufacturing policy

Several recent news items have highlighted the need for an overall U.S. manufacturing policy.

Last week, Apple announced its decision to move production of some iMacs back to the United States from China. The announcement immediately gave rise to a buzz of excitement as well as to questions about the economics of such a move and whether it was just a cosmetic decision aimed at generating good will toward Apple from Americans and deflecting criticism or whether it was actually a harbinger of change in the overall global supply chain. Closer examination suggested that it was more than a cosmetic PR move and that, indeed, it might signal a broader shift of at least some manufacturing from Asia back to the United States.

For one thing, there is a desire on the part of Apple as well as other leading companies to protect intellectual property better by controlling the design and production of key components. There is also a desire not to become overly dependent on parts suppliers who are also competitors. Beyond that is the fact that most of the production of Apple products is capital and technology rather than labor intensive, meaning that this production can be done very competitively from a U.S. base. The more labor intensive assembly operations are less competitive in the United States, but they account for a relatively small part of overall costs and value added and by doing them in America the company gains much greater control over key aspects of production. Furthermore, even this part of the production process is rapidly becoming more automated and less labor intensive.

But in their announcement and subsequent discussions, Apple executives emphasized that in moving production back to the United States they faced the obstacle that American workers with critical skills are in short supply. They attributed this to flaws in the U.S. educational system, saying that American schools no longer teach many of the subjects that Apple workers would need to know.

In fact, there may be some truth in this, but the larger truth lies elsewhere and has been well identified by Harvard Business School professors Gary Pisano and Willy Shih in there spectacular new book, Producing Prosperity: Why America Needs a Manufacturing Renaissance. They point out that historically many of the skills necessary in various manufacturing industries were taught on the job by the industries themselves rather than by the schools. Indeed, these skills often involved knowledge and company industry specific activities that schools would not be likely to have or be able to teach. They note that one reason why companies in the same industry tend to cluster together is because the existence of these skills in a broad work force constitutes a kind of commons similar to the common pastures of medieval times.

But this commons has been to a significant extent destroyed over the past thirty years by the outsourcing and off-shoring of production to Asia. With the production lines went the teaching and development of skills as well as a significant part of the innovation generation chain. The notion that manufacturing and innovation were independent of each other has been shown to be false and that is a major reason why some manufacturing is returning to the U.S. But to foster that the commons of operations levels skills must be reconstituted as Shih and Pisano emphasize. This skill development is not something that our schools ever entirely did. Much of it was on the job training.

Thus, what is needed now is some collaboration between Apple, the school systems, and the U.S. government. The government could provide training grants to schools for development of specific skills. Apple could work with the government and the schools to identify the needed skills, to assure employment for those acquiring said skills, and to provide the part of the training that can only be done on the job.

A U.S. Department of Commerce that was truly on the job would already be moving to identify industries susceptible of reshoring their manufacturing and identifying the infrastructure, skill sets, and other needs they may have as they undertake more production from a U.S. base.

A second item in the recent press is the news of the buyout of advanced U.S. battery maker A123 Systems by China’s Wanxiang America. This is another example of what happens when we operate with half baked policies. Sad to say I predicted exactly this scenario nearly four years ago. At that time, a meeting was held in Vice President Biden’s office to discuss how to promote development of an advanced battery innovation and production capability in the United States. This was in response to the question posed by President Obama as to why we couldn’t produce advanced batteries in America. Some at the meeting proposed providing various levels of financial grants and tax breaks as a way of stimulating U.S. based R&D and manufacturing. I urged caution, pointing out that other countries like Japan, South Korea, China, and Germany were already spending heavily in the same area. I argued that unless the United States was prepared to match the spending and subsidies of the other countries, any money it spent would go down the rat hole because it wouldn’t be sufficient to allow a U.S.-based company to compete with the big boys from abroad. Unfortunately, it has turned out that I was right. A123 couldn’t compete with the Chinese and others and so now will become Chinese itself. Or maybe I should say Chinese-American. I do hope that Wanxiang will be able to exploit the A123 Systems technology from an American base. But the real lesson here is, again, that a Commerce Department that was on the job would know the global situation and have a comprehensive strategy either for really competing or for not spending money that is sure to be lost.

Finally in the recent news has been discussion of the U.S. shale gas bonanza and how to exploit it. Some are pushing for large scale exportation of liquefied shale gas to take advantage of high prices abroad. Others are arguing for limiting exports in order to keep prices low for consumers and manufacturers in the United States. A well thought out policy could probably accomplish both goals while also providing financing for upgrading U.S. infrastructure and education. For example a tax on shale gas as suggested by Washington Post columnist Steve Pearlstein could be used to fund infrastructure and education upgrades. Competitive manufacturing analysis could guide the development and execution of export regulations that would assure a continuing energy cost advantage for U.S. based manufacturing while also allowing substantial profits from the export of liquefied shale gas.

Again, a Commerce Department and an Energy Department that were on the job would already be developing proposals for these benefit optimization policies.

So the key question is what is the Secretary of Commerce doing?