Features

March/ April 2013 Three Ways to Bring Manufacturing Back to America

The much-ballyhooed “in-sourcing” trend is real enough. But it won’t amount to much unless Washington acts.

By Anne Kim

While President Obama’s 2012 showcase of insourcing CEOs was a good first step, something far more systematic is called for. For example, the president should direct his senior staff to ask for pledges from any CEO they meet with to expand operations in the U.S. These pledges would be reported directly to the president, who would then publicly thank them. Such recognition is prized by even the most powerful business leaders—recall the White House cuff links JPMorgan Chase CEO Jamie Dimon wore at his congressional grilling last June (though he refused to say which president gave them to him). Most of these executives are patriotic Americans who are acutely aware of the reputational hit their companies are taking because of outsourcing, so they might well be eager to move some production back to America if they can justify it on economic grounds. Routinely asking them to do so would not cost the federal government any money nor require congressional approval.

And the president could go further still. He should ask Congress for a several-billion-dollar “war chest” to meet or beat any incentive offered to a company by a foreign government to lure production there.

As iffy as it sounds under current trade laws, the reality is that America’s competitors routinely engage in this behavior, and the United States would only be leveling the playing field by doing the same. By entering the game, Washington could use the opportunity to argue for clearer and more restrictive rules on such recruitment activity, which would be the best outcome.

Moreover, some of our elected leaders are already out on the field anyway. Governors and mayors routinely give away public funds, in the form of tax breaks, special infrastructure spending, and the like to lure firms to their states and municipalities—to the tune of $80 billion a year, according
to an investigative series in the New York Times last December.

For instance, the Texas Enterprise Fund, which calls itself “the largest ‘deal-closing’ fund of its kind,” has spent nearly $473 million since 2003 to entice companies to the Lone Star State. Some of this state and local spending probably does result in a net increase in jobs on American soil. But the bulk of it is wasted in a costly, senseless competition between states and cities for jobs that would have come to the United States anyway or that were already here to start with. For instance, according to the New York Times, in 2011 Kansas awarded AMC Entertainment $36 million to move from neighboring Missouri, only to watch as Missouri, a few months later, lured Applebee’s headquarters from Kansas.

But while states can compete against each other, they can’t win against China. Having the federal government play the lead role in the global incentive game would not only minimize this beggar-thy-neighbor dynamic among states and cities. It would also allow America to effectively use the much more powerful tools available at the federal level—such as federal tax and trade policies—to win business.

The second step to bringing back manufacturing would be to make America the most “user-friendly” country on the planet. To get the companies and industries we want, we not only need to make the first move, we need to be the prettiest girl at the ball. This means investing in what Pisano and Shih call the “industrial commons”—the shared infrastructure, human capital, and other resources that make a country attractive to business and that can support a company’s success.

The ingredients of these commons include a large pool of educated workers with skills well matched to the industries who want to invest. They also include first-rate physical infrastructure, such as well-maintained and efficient roads, bridges, and railways. As everyone knows, ours are in terrible shape compared to our competitors. With interest rates low and plenty of private investment dollars looking for safe haven, now would be the perfect time to set up a national infrastructure bank, as the Obama administration has suggested.

Infrastructure also means universal and fast broadband—the Federal Communications Commission ranks America twenty-fourth in the world on broadband speed, nearly three times slower than Korea’s and about twice as slow as Bulgaria’s. And it means a state-of-the-art energy grid. As Jeffrey Leonard has argued in these pages (“How We Could Blow the Energy Boom,” November/December 2012), ours is decrepit and blackout prone but fixable with the right regulations and minimal government investment. While thousands of pages have been written about the ideal economic habitat for wooing business, a couple of fresh ideas are worth considering.

One idea is to become more like Germany. In his recent State of the Union address, President Obama reiterated his proposal to create a National Network for Manufacturing Innovation—a $1 billion effort that was launched in August 2012 with a pilot, the National Additive Manufacturing Innovation Institute, in Youngstown, Ohio. The NNMI is the first move in replicating a robust network of nearly sixty national research labs—the Fraunhofer Institutes—that Brookings scholars Helper, Krueger, and Wial argue have been central to Germany’s manufacturing success. The country’s manufacturing sector is among the world’s best, employing one-fifth of German workers and paying an average of $46 an hour to boot (versus $33 an hour here). In a 2012 GE survey of 3,000 global business executives, Germany was top ranked as the most “innovation conducive.” Jointly funded by government and industry, the Fraunhofer Institutes act as incubators, research labs, and clearinghouses. As a result, Germany leads patent registrations in Europe. Among their inventions: the MP3.

Some U.S. states have created “mini Fraunhofers,” such as the Connecticut Center for Advanced Technology, the Florida Center for Advanced Aero-Propulsion, and Virginia’s Commonwealth Center for Advanced Manufacturing. Connecticut’s center, for example, provides a suite of services, including technical assistance for small manufacturers, field testing of innovations, and training curricula for workers. But these state centers, Wial says, “are not integrated with each other and by themselves aren’t likely to have big impact nationwide.” A coordinated national network, however, could greatly accelerate “radical product innovation.” Moreover, it could be self-funding and even profitable. In Germany, licensing rights for MP3 have generated millions of euros in revenues.

For example, an American Fraunhofer network could help accelerate advances in robotics and automation. Even as these technologies are booming here, America is actually far behind several other advanced economies. In an indication of just how much our advanced trading partners have been investing in manufacturing while we’ve been letting ours go, manufacturing firms in Germany, Japan, and South Korea use two to three times as many robots per 10,000 employees as do American manufacturers, according to a study by the International Federation of Robotics, an industry trade group. But this also shows how much potential the United States has when it comes to future innovation in this sector.

Anne Kim is Editor of Republic 3.0.

Comments

  • Jim Eckland on April 10, 2013 10:28 PM:

    A Tariff-Revenue system of 20-30% on all goods and services would certainly speed up the process and raise some much-needed revenue..

  • Ries on May 03, 2013 11:52 AM:

    A good article, and I agree with your three (really about 2 dozen) things we should be doing.
    One small quibble- a $1500 3D printer does NOT replace a chinese factory. It might be capable of making cereal box toys, at a rate of about one every three hours, but 3D printing is far from a production technology at this point. Especially one that is cost competitive with chinese salaries and government subsidies.
    Instead, you should read up on Haas, the California company that is the largest machine tool manufacturer in the US, and one of the top 3 in the world, or on Flow, the american company that developed waterjet cutting. Both of these are real technologies, real american innovations, and both sell lots of machines to China.