How America forgot how to make things
In 1791 the US finance minister Alexander Hamilton paved the way for the nation to progress from an agrarian economy to industrial production. By the end of the 19th century the US had overtaken Britain as the word's largest manufacturing nation. For a century — until the 1960s — the USA had undisputedly become the location for mass production: the new workshop of the world. This was underscored by innumerable in-novative ideas such as Henry Ford's power-driven assembly line or Frederick W. Taylor's concept of Scientific Management.
Gradually over time Japan and Germany — nations with strong manufacturing and engineering traditions — began to make a name for themselves as exporters (to the USA) of automobiles, machinery and other equipment. Initially these imported manufactures were considered 'cheap goods' and their makers were seen as being niche suppliers; suppliers such as Honda, VW and Sony were small compared with their US competitors and were not taken seriously by the market leaders. Yet, slowly but surely, they gained in strength.
Half a century after US industry had peaked, say 2010, China finally overtook the USA as the world's largest manufacturing nation. The US share of its own core markets eroded significantly between 1999 and 2009: in aero-space by 36 %, in information and communication technology by 9 % 1(whereas the share of financial services actually rose by 8 %). Wage-cost driven offshoring experienced an unprecedented boom, and the flight to the maquiladoras of Mexico and, above all, China took hold. The US trade deficit in technically sophisticated products had grown to over 80 billion US dollars by 2010 and the upward trend continues.
A great number of products, which in the minds of consumers are inseparably linked with the United States, are now manufactured abroad. These range from US icons such as Barbie dolls, Fisher Price, Levis, My Little Pony, Candyland, Monopoly and extends to household products like Black & Decker tools, cutlery, TVs, Cannondale bikes, Samsonite luggage, vending machines; and more recently high-tech products, first developed in the USA, that have given birth to entirely new applications and innovative technologies: LEDs, cell-phones, PCs, iPods, iPhones, laptops. These selected examples demonstrate how a broad and significant cross-section of value added is not only denied to the USA at present, but is probably lost forever.
Another important aspect is the loss of once-admired major companies, the market-dominating pioneers, the big corporate names. These included AT&T and the legendary Bell Labs, that straddled the whole field of telecommunications and semiconductor engineering, the demise in 2012 of Kodak, the inventor of the digital camera; and the long forgotten RCA (Radio Corporation of America), one of the largest firms in 1960s –1970s with its Sarnoff Labs, a powerful incubator in the field of telecommunications engineering and consumer electronics2, Xerox had for a long time a monopoly position in photocopiers and was synonymous with the product (its PARC Lab in Palo Alto was a hotbed for inventions3); Motorola was the specialist for radio technology, a cellphone manufacturer and a semiconductor producer (6800 family).
Gradually, things began to change. Twenty years ago, the US pioneer in the field of classical electrical engineering, Westinghouse, began to dissolve itself. Ten years ago, the long-time high-earning and highly inventive IBM (International Business Machines) which had become an integrated technology concern, announced its withdrawal from manufacturing of hardware (except for computers and servers). General Electric (GE) had become proud of its powerful financial performance, rather than its manufactures, at least until the year 2000, regardless of the fact that its innovative manufacturing power, measured by patents, had rapidly declined4. For the most part by then GE had voluntarily abandoned its traditional role as leading US manufacturer: around 30 manufacturing plants had been closed or off-shored. This had enormous and far-reaching consequences: many inventing & manufacturing powerhouses disappeared, while others transformed themselves from producers to service providers — and if they still produced at all, then primarily in places like China and Mexico.5
Public interest was briefly aroused whenever major traditional manufacturers, like Bethlehem Steel, collapsed: it was once the world's number two in the steel industry and in 1960 ranked twentieth among global companies. Today its main plant is an industrial ruin within a depressed neighborhood in Baltimore. The textile machinery industry too has died: hardly noticed by the general public. This decline includes the strange demise of Singer6, symptomatic of a continued thinning out of the machine tools sector, including plastics machinery7. The collapse of leading high-tech companies in the computing sector: Silicon Graphics, Apollo Workstations, minicomputers (Digital, Data General, Wang), Alliant Computer Systems, Convex Computers and supercomputer pioneer Cray Research, are iconic names that are now mostly forgotten.
Some claim that the decline of industrial value-added (goods manufacturing) is part of a maturing process of a national economy that reflects a 'natural' structural trend. However, what is crucial is the relative decline as well as the starting point or level. In the USA, between 1970 and 2010, industrial value-added halved from 24.3% to 12.8% (the corresponding share in Germany fell from 27.5% to just 21%; it is around 20% in Aus-tria and Switzerland). In the so-called Tiger economies is much higher: the share of industrial value-added is around 20% in Taiwan and about 30% in China. These relationships clearly demonstrate the impact of a global redistribution of value-added that has taken place. It should also not be overlooked that productivity in industry is two-thirds higher than that in the overall economy: this accounts for the disproportionately high contribution that industry makes to a nation's overall prosperity.
In the Great Depression of the 1930s around 30% of workplaces in the production sector was lost; a similar one-third share was lost during the period from 2000 –2010. The difference here is that the earlier loss was due to a long trough in the economic cycle whereas the recent loss of jobs has structural causes. The share of industrial employment fell from 20% in 1970 to 15% in 2000 and 11 % by 2009: today it is down to 10%. According to ITIF (Information Technology & Innovation Foundation) over the past 12 years in the USA there has been an average net loss of 1,300 industrial jobs each day and a total loss of 66,000 industrial plants. Whereas during 1980 – 2000 the number of industrial employees in the USA declined by only 0.5% each year, this accelerated in the following decade to 4.3% annually, which corresponds to a decline of around one-third in three decades. The impact of this trend on the national economy and society has been hugely underestimated: the production sector hires an above-average proportion of the non-college educated and has a multiplier effect of between 2 and 3 on employment and value-added. Industry is also an indispensable driver of innovation.
Due to the global political role of the USA, military technology, including the aerospace industry, has a political weight unlike any other country. Notable corporations are United Technologies, Boeing, Lockheed-Martin, General Dynamics, Northrop-Grumman, Raytheon and Rockwell Collins. The military sector has its own major research landscape (Livermore Labs, Lawrence Berkeley, Los Alamos, Sandia National Labora-tory, Langley) and is a leading source of funds for research projects at many universities. But the spill-over effect and technology transfer to civil technological applications has long lost its dynamism. The general public has failed to notice that some critical components can no longer be made by US manufacturers. It is not only military experts who must ask themselves how much longer, with a shrinking industrial base, the US will be able to fund the expensive technology that is the basis for its military superiority and presence worldwide.9
Unlike in other sectors, the USA still occupies a strong position in the aviation industry, thanks to Boeing Inc., the jet turbine makers GE and Pratt & Whitney, and aviation systems suppliers like Honeywell. Computer suppliers are relatively strong too, due to the enormous demand for computing power generated by the inter-net. Google and other major internet companies with their computer farms have also joined the ranks of the world's largest private utilities.
One innovative sector in which the USA still leads is the highly profitable pharmaceutical industry. It is here above all that cooperation between renowned clinics and global pharmaceutical makers, as well as collabora-tion with US licensing authorities and the world's largest domestic market, all play a central role. The chemi-cals industry too, in particular specialist chemicals firms, assumes a leading position: with US chemicals manufacturers like Dupont, Dow, Rohm & Haas.
In medical technology the USA has individual clusters of leading device and component manufacturers in the Midwest 10– making defibrillators, heart pacemakers, instruments, orthopaedic equipment. These are some of the relatively few hidden champions of US industry. Another leading sector is agricultural machinery with companies such as Deere, Case, AGCO, and Alamo Group, which supply a highly productive agriculture sector.
We can roughly summarize this as follows: the USA has tended to lose it competitive strength in many fields where highly complex and qualitatively sophisticated products are manufactured, apart from some in-stances, for example the military sector, where specific locational factors present a high entry barrier to foreign suppliers or where SME structures are intact, and corresponding supply chains still exist.
The most iconic product of the USA in the 20th century is the automobile. No other product acted as such a powerful motor of the economy. What initially counted was the price, later appearance, and then prestige value. The automobile became a consumer product with constantly changing models which were tailored to specific societal segments. They became icons of life-style and image. In the USA – unlike, for example, in Germany – automobiles never stood for innovation and quality. The automobile was programmed for fashionable obsolescence; not for economic fuel consumption; as evidenced most recently by the mega-sized SUVs. The initial numerous auto manufacturers soon shrank through mergers and anti-competitive practices to a handful, and finally just three major manufacturers. For many years, GM dominated the market with a share of around 50%. GM initially approved of imports to avoid the threat of anti-trust measures, but in the 1980s began advocating import restrictions to protect its own lucrative SUV segment. GM also took steps to suppress the emergence of alternative methods of urban transport.
For a long time the automobile market was ruled by major players and still powerful unionized labor was appeased with pension promises and various benefits. The hierarchical structures in the major corporations were bureaucratic and Managerist methods were widespread; the leadership of engineers was eventually usurped by sales, marketing and accounting/financial people. The product no longer held centerstage; what counted now were volumes and margins.
In many respects, the US auto industry is an example of how an attitude can destroy industrial substance: primarily finance-oriented Managerists; employees with only union-organized self-interest; citizens who allow the state and government to be highjacked by massive lobbying and market power, all in the naive belief that what is good for GM is also good for America. After the government had to rush in to save the so-called system-relevant GM and Chrysler, the auto sector appears to have lost its special national halo; it is now just another regular sector in the national economy. In terms of innovative strength and product quality it has for a long time lagged well behind in international comparisons.
There are three main factors:
Denial of reality is one main reason – perhaps the decisive one – why opportunities to stop disadvantageous developments and readjust relationships are missed. In particular firms spoiled by success and proud corporations and nations run the risk of self-delusion. American economists and media describe the shrinking of the production sector as a natural consequence of high productivity and clear evidence of the superiority of the American economy ― this is also found in Great Britain. They find proof of this theory in the apparent success of the US as the world's biggest exporter of services (without mentioning the exaggeration caused by Financial and Legal Services). This creates the general impression that backing the primacy of the services sector is the same as progressive thinking.24
The euphoria about the New Economy at the end of the 1990s (repeated over the past five years with Social Networking companies) also saw a devaluation of production. The new 'glamor girls' were the virtual business models and firms that focused on marketing, sales and distribution/logistics .Firms like Amazon, Google, Facebook, Groupon and others. These were the firms that attracted the MBAs. However, it was not simply employment they were interested in; of even greater interest was the rising capital valuation of these firms.
In recent times, reports have proudly highlighted instances where US manufacturers are now onshoring production: NCR plans to make ATMs in the US again (with the common-sense argument that they are then closer to innovative customers, the domestic sales network and universities), GE is onshoring water heaters (after closing 30 other plants in the past 10 years). Reports that Caterpillar and Procter & Gamble (after a gap of 40 years) each plan to open a single new plant are claimed as sure signs of an industrial renaissance.25 Due to the continuing practice of offshoring this optimism may be misplaced.
A key advantage of the American economy was rightly judged to be its innovative strength based on a never-ending stream of start-ups. Enterprises such as Hewlett Packard (1939), Intel26 (1968), Apple (1976), Cisco 1984) are among the most prominent 'alumni' of Silicon Valley. With the exception of Intel such companies have increasingly transferred a large share of their manufacturing to Southeast China or, like Dell, do their entire manufacturing abroad. The latest business start-ups ― for example in the Clean Tech field ― outsourced their manufacturing from day one, but without a single exception, all failed when trying to up-scale manufacturing. Raising production volumes is less and less successful in the USA, because venture capitalists do not have any 'patient' money, and the dynamic competitors, above all in East Asia, are increasingly aggressive market entrants. If the eco-system for innovation loses the advantage of geographical proximity and radically shorter-term shareholder expectations come into play, the situation becomes fragile. The assumption that the USA economy will continue to benefit from break-through innovations is based on positive past experience; however a detailed analysis shows that many such innovations are offshored well before they are launched in the market.
According to a study by Booz Allen nearly half of all US value added and over half of manufacturing jobs are under threat. And yet, this study with the title Wake-up call has not, as one might expect, been a cause for alarm. Warnings are issued mostly by think-tanks, from Clyde Prestowitz of the Economic Strategy Institute (ESI) and Robert D. Atkinson (ITIF). The response to these warnings is one of appeasement: "But, say manu-facturing experts, there is little risk that the manufacturing base will disappear".27 Nevertheless, the number of leading nationwide companies with famous names that still produce in the US, as various lists show, has be-come a short one: Harley Davidson, Luxury Kitchen Devices (Viking Range), pianos (Steinway 28), guitars (Gibson); there are not so many more.
Yet there is still no general consensus that offshoring of end products weakens the value-added chain; this even though it clearly reduces the demand for modules, semi-finshed goods, parts, machines and equipment, all of which are used in production, and of course, raw materials. Innovation and manufacturing are part of a process community or as Andrew N. Liveris, CEO von Dow Chemical,29 put it, "There where manufacturing goes, innovation will follow."
The demands of shareholder value necessarily lead to excessive individualist behavior by companies: for example, reckless offshoring together with sudden cancelling of supplier relationships. In this way successful suppliers suddenly become losers. The enormous national economic cost of this behavior finally dawns on people when they eventually realize that a sound basis for a fresh start in production no longer exists. The loss of manufacturing capabilities, not just capacities, is not a temporary thing. Regaining know-how is a task for at least a generation. In the USA ever fewer work/project clusters succeed in installing and maintaining new competitive manufacturing operations. The last major project that was partly successful was in 1987 when, due to Japanese superiority in semiconductors, the consortium Semiconductor Manufacturing Technology (SEMATECH) was founded. 30The time for a similar coordinated approach in Computer-related products has already passed by. Apple31 has handed over manufacturing to the Taiwanese subcontractor Foxconn. Yet, Apple's main competitor Samsung, still uses its own components and has outstanding manufacturing facilities. The computer sector is the core of high-tech. The USA is, essentially, no longer autonomous in the field of high-tech.
At first glance, it is sobering to listen to the most proposed remedy for US de-industrialization: well-qualified and talented students should be attracted to the USA and those with top grades should be allowed to stay
To make this possible strict visa regulations should be relaxed. This is not a good solution from the global economic perspective as it means selfishly exploiting the talent of other countries. The decision to avoid making an extra effort oneself is merely evidence that so many are victims of short-term thinking.
Up until recently, the USA has repeatedly proven strong enough to change course and correct major errors and has had the courage enough to make a fresh start. The widespread entrepreneurial spirit is its greatest asset. The declaration of intent from President Obama to hire ten thousand teachers for mathematics and the natural sciences is a sign of hope that a need for action has been recognized.
Large segments of business and society no longer appreciate that a capability to produce is in many sectors indispensable for remaining competitive in the medium- and long-term. The USA needs a new model of a functioning industrial society.
The present "American Model" is an obstacle to production and value added; it is not sustainable. Continuing industrial decline will reduce prosperity of large segments of the population, will divide society and undermine the hegemonial role of the USA. This is a highly unwelcome prospect, also for Europe.
Against the background of diverse cultural characteristics and historical developments, what is called for is not the transfer of experience from the USA but instead a search for insights which are meaningful for the countries of Europe. That there is an urgent need was expressed by the European Commissioner for Industry and Entrepreneurship Antono Tajani in October 2012: "We dare not continue to allow our industry to leave Europe." 32 To bring this about the political class must set the course and call for input from the entire business community ― not just the major players ― and this out of pure self-interest, not just for patriotic reasons.
Proposed six theses:
Production and industrial value added is the productivity driver and thus the prosperity lever of a national economy. That is why a bundle of substantial measures must be acted upon to make Europe a long-term location for value added. It is necessary to remember Europe's strengths. Europe needs to abandon failed concepts of Anglo-American origin. Europe requires less superficial actionism and instead real intervention by community agencies to improve the organism of enterprises, regions and communities.
The variety of Europe should be harnessed to build a widespread and differentiated production infrastructure, a solid vocational training and with a generally long-term, flexible, integrated, regional approach to production: in other words, Europe needs entrepreneurial not Managerist solutions.
For this essay a wide range of publications was analysed including publications in the internet. Due to the scope of sources many are not listed (above all statistical sources).
Note: the software/internet sector is not included in this definition of industrial.
1 UN Commodity Trade Statistics Database, IMF BOP Statistics.
2 Notable inventions were the color TV, electronic microscope, optoelectronics, LCDs, videorecorder, high-definition TV, direct broadcasting, satellite systems and CMOS technology.
3 Laser printer, Ethernet, modern PC, graphical user interface (GUI), object-oriented programming, amorphous silicium-and VLSI applications in microelectronics.
4 From number one in world patents in 1960 to fifteenth in 2000, and now down to number 52.
5 I recommend reading about the varied history of this (mostly) great company.
6 Singer had in 1947 a single factory with 10,000 employees in Elizabethport (N.J.). Diversification into military engineering and electronics failed and it was taken over by a company raider, then swallowed up by a Chinese investor and opaque conglomerate; in 1989 it was involved in the greatest ever insolvency in Hongkong's history; currently it is a subsidiary of SVP World, headquartered in the Bermudas. Singer is a case study of a company being stripped bare under Managerism: a great enterprise that became a victim of inscrutable robber capitalism.
7 Plastics processing machinery was traditionally a strong American industry; today around three-quarters of these machines are imported. The few companies left (e.g. Cincinatti Milacron) are mostly investments of private equity and buy-out funds.
8 Teflon ("from satellites to frying pans") is repeatedly quoted as an example, perhaps because comparable case studies are scarce. We must assume that in (above all computer games) and microelectronics, microsystems engineering, robots and materials technology, computer applications derived from commercial research are more widespread than those from mili-tary sources.
9 With regard to historical analogies of 'military overstretch' see Paul Kennedy's The Rise and Fall of the Great Powers: Economic Change and Military Conflict From 1500 to 2000, 1987.
10 Minnesota Valley Medical Manufacturers' Network (MEDNET); Chairwoman Darlene Miller is the sole representative of SMEs (Mittelstand) among the 25 members of the Council on Competitiveness and Jobs set up by the first Obama administration.
11 A comprehensive description can be found at: www.managerismus.com /managerism.org and the book Managerismus – Unternehmensführung in Not; Weinheim, Germany, 2010.
12 Production is, as a rule, capital-intensive, which has been empirically proven, among others by PIMS (Profit Impact of Market Strategies) to have a highly detrimental impact on profits.
13 The most prominent case is Boeing's procurement policy for its 787-Dreamliner. Management guru Tom Peters and the usual strategy consultants recommended the decomposition and virtualization of the value-added, the orchestrating of supply chains and to restrict the value added to final assembly or system integration). These consultants are also selling these very same concepts in Europe.
14 Many attempts to adopt Japanse manufacturing methods never took off: as happened with the joint-venture formed in 1984 by GM and Toyota (New United Motor Manufacturing, Inc.; NUMMI) in Fremont, California.
15 Obtaining an MBA is a vital career bootstrap for engineers in any company run by Managerists.
16 After 50 years GE appears to be placing great store ain a deep-rooted understanding of its actual business including production (Motto: Deep not wide).
17 The great management teacher Peter F. Drucker, after undertaking a study of General Motors (Concept of the Corporation, 1946), favoured the responsible worker as a participant in management to overcome the division in the workforce.
18Especially noticeable is the under-developed rail network when compared with other nations, in particular fast connections between capital cities and metropolitan regions: Shanghai – Peking, St. Petersburg – Moscow, Paris – Lyon/Marseilles.
19 Republican Lloyd Doggett: "Our tax system should encourage job creation and investment in America and end these tax incentives for exporting jobs and dodging responsibility for the cost of securing our country."
20 See also The Puritan Gift by Kenneth and William Hopper.
21 In the case of "advanced students in engineering" (incl. math and science) the share of non-American students in certain subjects is 70 %: of these most come from India, China and East Asia.
22 Already over 30 years ago (September 1980) James Fallows wrote in Atlantic ("American Industry: What Ails It, How To Save It"), when comparing countries, the extreme asymmetry of vocations. The USA had 20 times more Lawyers and 10 times more Accountants than Japan, but 6 times fewer Engineers. The share of Business/Strategiy Consultants is similarly skewed as for Lawyers. It is no coincidence that overlawyered (the cause of a "litigious society"(J. Opel) and over-consulted are terms often used to describe the USA.
23 In 2011, Siemens USA was unable to find suitable applicants for around 3,000 job-openings in manufacturing. The praise directed at American workers for their productivity and quality ("well trained, increasingly well educated labor force") is often merely political propaganda.
24 "The push to promote manufacturing is political in origin and may be abandoned after the election". "I can think of no rational basis for putting manufacturing ahead of services." http://www.becker-posner-blog.com/2012/04/decline-of-us-manufacturingposner.html
25 The Changing Landscape of U.S. Manufacturing, Archstone Consulting (Supply Chain Benchmarking), 2011.
26 Intel is the leading light of the US semiconductor industry, with a 90% share of the world market in 1980; today it holds just 10%. Technically complex Steppers, the "printing machines" of the industry, have not been made for years.
27 "In America, quality trumps quantity and we can take pride in the fact that many of the world's best products are still made right here in the USA". In Germany, over 25 years ago, only 6% of those questioned classified US products as "indicative of quality".
28 For example New York was in 1960 the largest industrial conglomeration in North America with a million jobs: today there are just 150,000.
29 Liveris is a chemical engineer and a rare "advocate for the criticality of manufacturing to the long-term health of a nation's economy".
30 NIST (National Institute of Standards and Technology (Agency of the US Department of Commerce) has initiated a small-scale Advanced Manufacturing Partnership.
31 Steve Jobs, asked why iPhone and iPad were not made in the USA, answered: "These jobs will never be in the US". He gave as reasons the low wage costs abroad and above all flexibile manufacturing organizations and related engineering know-how, of which there is hardly any left in the USA. (VDI nachrichten, 27 Jan 2012, No. 4).
32 Keynote Speech, High Level Conference "Resuming Growth And Competitiveness In Europe Through Reindustrializa-tion), Lisbon, 26 Oct 2012.
33 OECD criticism of the low university quota in Germany, Austria and Switzerland ignores the low youth unemployment compared to Anglo-American countries thanks to comprehensive vocational training for all school leavers.
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