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U.S. Manufacturing Power: Down from Offshoring, but Is It Out?

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I never realized my dream of writing for "Entertainment Weekly" or a similar magazine, but occasionally my thwarted ambition surfaces with an odd pop culture reference. This is one of those times. In trying to come up with a pithy way to describe America's widespread offshoring of manufacturing operations, I came up with a Michael Stanley song, "Baby If You Wanna Dance." In the chorus, those words are followed by "you gotta pay the band."

 

A recent Harvard Business Publishing piece gives an idea of how large a price the U.S. is paying, after years of economists hailing an economy built on consuming products rather than producing them. As the piece notes, the nation's trade balance in high-tech products in 2002 turned negative for the first time and has been declining ever since. Average real weekly wages have remained essentially flat since 1980. (Though maybe people didn't notice, as they were busy purchasing lower-cost electronics and other consumer goods manufactured in other countries.)

 

IN addition to manufacturing, U.S. companies began offshoring more of their research and development functions. As with most outsourcing-related issues, it's more nuanced than it seems at first blush. As Battelle analyst Jules Dega told me when I interviewed him in 2007, U.S. companies with offshore R&D enjoy benefits other than labor arbitrage, including increased access to growing foreign markets.

 

With the push to establish offshore high-tech manufacturing and R&D operations and/or partnerships with offshore providers, less attention was paid to onshore efforts. From the Harvard Business Publishing piece:

... The outsourcing has not stopped with low-value tasks like simple assembly or circuit-board stuffing. Sophisticated engineering and manufacturing capabilities that underpin innovation in a wide range of products have been rapidly leaving too. As a result, the U.S. has lost or is in the process of losing the knowledge, skilled people, and supplier infrastructure needed to manufacture many of the cutting-edge products it invented.

 

I made a similar point in a post from last August, describing an effort by several community colleges to retool their courses to produce graduates equipped to handle more sophisticated manufacturing processes. In another post from the same month, I quoted the CEO of a company that produces automotive components, who said the U.S. "is not producing the right skill sets." The U.S. Bureau of Labor Statistics is predicting a shortage of 160,000 engineers in the U.S. by 2016, though many observers, including the aforementioned CEO, think it'll be worse than that.

 

A frequent theme from engineers who comment on blog posts about offshoring here and elsewhere is: "It's no wonder there is a shortage of engineers. Why would anyone spend the money required for the appropriate degree(s) and go into the field with no guarantee of job security?"

 

How about the possibly promising market for electric cars? American manufacturing is not well equipped to capitalize on it. A CNNMoney.com article offers the story of startup Ener1, with a production facility near Indianapolis, "the only U.S. company able to mass produce batteries on American soil for an automobile industry poised to make a monumental shift from gasoline to electric power." The article notes it faces stiff competition from Asian companies with more experience manufacturing lithium-ion batteries. (And lower-cost workforces, I'll add, though the article doesn't mention it.)

 

General Electric CEO Jeff Immelt, in an interview with Harvard Business Review's Steve Prokesch, bemoans an economy where "a mortgage broker is pulling down $5 million a year while a Ph.D. chemist is earning $100,000." Immelt, like some others, is beginning to stress that the U.S. needs to refocus on manufacturing and R&D capabilities, with the goal of becoming a top exporter.

 

Interestingly, perhaps realizing that business can't go it alone, Immelt welcomes government as "a catalyst for leadership and change." It's not a partisan thing; Immelt describes himself as a Republican and "free market guy," Prokesch notes. (Ener1, the company featured in the CNN piece, is trying to get a $480 million government loan to jumpstart its manufacturng operations.)

 

But business must play its part by focusing on America's long-term future rather than short-term gains. Immelt tells Prokesch:

We must end the impression that American CEOs are short-term speculators.

As we prepare to celebrate America's birthday, let's hope U.S. CEOs are listening.

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