More on Rethinking the Future of US Manufactur​ing

by  David Simchi-Levi

A growing number of US executives are repatriating their manufacturing capabilities—moving some production operations back from overseas. One such company is Ford which, in August 2010,announced plans to bring back about 2,200 parts-production jobs. Another example is Caterpillar, which is investing $120 million in a new Victoria Texas plant to make excavator machines—devices formerly made at a Caterpillar plant in Japan. Washington policy makers strongly support these moves; inside thebeltway there is unanimous agreement that the United States should push for growth in the manufacturing sector.

But if corporate and political policy makers are increasingly focused on American manufacturing, why has this sector lost six million jobs since 1997? Are we truly entering a new era, or are the above examples rare exceptions to a largely irreversible trend?

The United States remains a large, affluent market that generates significant global demand. It has—and will continue to have—many demographic characteristics that are extremely attractive to companies. The reality, however, is that less and less of that demand is being filled bys tateside manufacturing operations.

Still, as we described in the recent article “Is It Time to Rethink Your Manufacturing Strategy? ”  manufacturing is now going through a genuine transformational period, driven particularly by increased labor costs in developing countries, shifting demand patterns, heightened market volatility and a significant rise in the price of oil. Manufacturing companies should acknowledge that these events might be the impetus for a shift in how and where they make their goods.

In effect, there exists a huge opportunity for US companies and policy makers to reverse the trend and return the country to an era of manufacturing growth. The biggest hurdle may be that a new mindset is needed—a sense of urgency, an acceptance of new ideas and an acknowledgement that the playing field is often uneven and that hyper-aggressive programs and policies must be enacted as a result.

The good news is that we are not starting with an entirely blank slate. Similar challenges—such as those faced when Japan emerged as an industrial force—were addressed and largely surmounted in the 1980s and early 1990s. The key then,  as it is now, involved extensive collaboration among industry, government and academia. In the automotive industry, for example, the US government negotiated a Voluntary Export Restraint program in 1981 that limited Japanese exports to the US to 1.68 million cars annually. This agreement compelled Japanese companies to open factories in the US to serve the local markets.

In 1987, Congress allocated significant funding to aconsortium that included United States semiconductor manufacturing companies,software vendors and government agencies. The goal was to “strengthen critical segments of the US semiconductor equipment industry (a sector considered important for America’s security and prosperity) by working with individual suppliers on projects to improve the performance of their equipment.” See Maybe Japan was just a warmup

The next year, responding to the threat to American manufacturing, and in partnership with several US manufacturing companies, MIT established a unique graduate program, the Leaders for Manufacturing (LFM). This program focused on developing manufacturing company leaders who possess both a management perspective and deep technical knowledge. This MIT program is now called Leaders for Global Operations (LGO) and is still going strong.

Along these lines, the Advanced Manufacturing Partnership (AMP) was recently established based on  the recommendationof the President’s Council of Advisors on Science and Technology (PCAST)  as a national effort bringing together the Federal government, industry, universities, and other stakeholders to identify and invest in emerging technologies with the potential to create high-quality domestic manufacturing jobs and enhance the global competitiveness of theUnited States. Furthermore,  in his recent State of the Union address, President Obama called for a wide-ranging package of policies to help create American manufacturing jobs, including trade enforcement measures, business tax breaks and worker training programs.  See White House Offers Plan to Lure Jobs to America 

This is a step in the right direction in pooling resources from government, industry and academia to rebuild the nation‘s manufacturing competitiveness. We recommend that these efforts recognize that:

§ Consumer demand is changing, with emergingmarkets contributing more and more to a typical company’s revenue.

§ Manufacturing investments naturally flow tocountries and regions where financial incentives are substantial. Chief amongthose incentives—and what drives jobs in and out of a region—is a country’s taxpolicy.

§ Companies compete on cost and responsiveness,and this balance shifts dramatically when labor costs rise and the locus ofdemand shifts.

§ Local talent and skills are essential toproductivity and innovation. Long-term depletion of manufacturing skills willmake it hard to reverse the trend.

§ Research and development incentives provided bythe US government must be tied to manufacturing operations. Otherwise, whateveris developed with taxpayer money could easily be moved to other regionsassociated with low-cost manufacturing.

§ Dynamic supply chain management capabilities arenow essential. In the 21st century, successful US manufacturingcompanies will be those that can respond quickly to demand changes, costincreases, and economic and political shifts. Prime enablers will be powerfulanalytical tools and operations that demonstrate unprecedented flexibility.

Revival of the US manufacturing industry depends on other factors as well, such as the strength of the US economy, inflation and the devaluation of other currencies against the dollar. But without a concentrated and collaborative national effort, it will be difficult for the United States to reestablish worldwide manufacturing prominence.

For more discussion and in depth analysis of this topic you can register to the MIT conference  “The Future of Manufacturing”