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

In January 2012, President Barack Obama convened nineteen CEOs and business leaders at a White House forum to tout a potentially promising new phenomenon: instead of “shipping jobs overseas,” U.S. companies were bringing them back. “[W]hat these companies represent is a source of optimism and enormous potential for the future of America,” Obama said. “What they have in common is that they’re part of a hopeful trend: they are bringing jobs back
to America.”

Anecdotally, the record is impressive. A number of major companies—including some of the same firms that first took flak for “offshoring” jobs to China—are now expanding their manufacturing operations stateside. General Electric, for example, says it has created 16,000 new U.S. jobs since 2009, including jobs at a new locomotive plant in Fort Worth, Texas; a solar panel factory in Aurora, Colorado; and an engine manufacturing facility in Pennsylvania. The company’s recent revival of Appliance Park, in Louisville, Kentucky, as a maker of high-end refrigerators, was the subject of high-profile coverage, including a recent piece in the Atlantic.

Other companies that have seemingly caught the “reshoring” wave are appliance maker Whirlpool (which rejected sites in Mexico in favor of Tennessee), and iconic brands like Intel, Canon, Caterpillar, and DuPont. All of these firms have reported expanding or building new U.S. facilities in the last few years. In December 2012, computing giant Apple announced it would bring some Mac production back to America, investing about $100 million to do so.

So given these recent wins, can “insourcing” save America’s economy?

No. And yes. On one hand, insourcing is unlikely to be the magic elixir for a job market that’s only slowly gaining steam more than three years after the official end of the Great Recession. Only some jobs are coming back, and not in nearly large enough numbers to reverse the overall decline in U.S. manufacturing employment. While manufacturing gained about 530,000 jobs between January 2010 and December 2012, America is still 7.5 million manufacturing jobs down from its last peak in 1979. Even if reshoring picks up steam, manufacturing employment is unlikely to recapture the heights of the 1950s, when more than one in three employed Americans worked the line.

Nevertheless, policymakers should encourage insourcing as much as possible, even if net job growth might be a fraction of what’s been lost. At stake is something much broader—America’s future capacity for innovation.

Though President Obama has praised insourcing’s leaders as “CEOs who take pride in hiring people here in America,” what’s prompting some companies to consider insourcing isn’t mere corporate patriotism.

For one thing, some companies have learned the hard way about offshoring’s hidden downsides, such as the lack of intellectual property protection for proprietary manufacturing processes, quality control issues, and the frustration of waiting weeks for products to arrive by container ship while rivals potentially rush hot new products to the shelves. Moreover, long supply chains mean more exposure to earthquakes and tsunamis, wars, oil shocks, and other unpredictable disruptions.

In an oft-cited 2011 study, the consulting firm Accenture surveyed 287 major companies and found that nearly half are plagued by “cycle or delivery time” problems and quality issues due to offshoring. For some manufacturers, such as baby crib makers, the problems went far beyond quality to basic safety. In 2010, the Consumer Product Safety Commission recalled more than two million cribs—made mostly in China, Thailand, Mexico, Indonesia, and Croatia—for safety defects leading to at least thirty-two infant deaths.

The breadth of these recalls prompted at least one crib manufacturer—North Carolina-based Stanley Furniture Company, Inc.—to invest about $9 million on a plant in Robbinsville, North Carolina, to produce its “Young America” line of cribs and other children’s furniture. In its 2011 annual report, the company made this business case:

Because we target a younger, often pregnant consumer shopping for her child, we believe Young America products must be domestically made in our own manufacturing facility to meet both a well-informed consumer’s demands for product safety and the health of her child.… In addition, our retailers are finding that this consumer, unlike the consumer for our Stanley brand, has a growing desire for certain products carrying the words “Made in USA.”

Another advantage of “Made in the USA” is the ability to meet customers’ needs better and more quickly if production is nearby. BMW and Nissan, for example, have built plants in South Carolina and Tennessee instead of just shipping more cars from Germany and Japan to meet growing U.S. demand.

Perhaps most significant, however, are offshoring’s shifting economics, which have begun favoring U.S. production. In a 2011 study by the industry-supported Manufacturing Institute, researchers calculated that the “raw cost” of American manufacturing—including wages, raw materials, and capital costs, but excluding taxes, regulatory compliance, and other “structural costs”—is now 9 percent lower than the average raw cost of production among America’s nine largest trading partners (including China, but also high-cost places like Canada). In 2003, by comparison, American raw production costs were 20 percent higher than the average among our trading partners.

Several factors account for this dramatic about-face. The Manufacturing Institute estimates, for instance, that raw production costs in China skyrocketed 132 percent from 2003 to 2011. This includes Chinese wages, which the Bureau of Labor Statistics (BLS) reports more than doubled from 2003 to 2008 (albeit from 62 cents an hour to $1.36). Meanwhile, American production costs have fallen. The natural gas boom, for example, has meant that industrial prices for natural gas are less than half what they were in 2001.

New advances in technology have also made American production cheaper by increasing productivity and shrinking labor as a share of total costs. Instead of hiring low-cost Chinese workers, companies can now use even lower-cost American machines. 3-D printing, for example, is part of a hot new trend in “additive manufacturing,” where 3-D objects are built through the successive layering of materials from a computerized blueprint. Not only does this technology erase the lag time (and even the distinction) between thinking and making, it’s portable and absurdly cheap. For about $1,500, a “desktop” 3-D printer can eliminate the need for a Chinese factory, along with its attendant headaches.

The downside is that 3-D printing, as well as other advances in automation, robotics, and other technologies, eliminates the need for American workers too. When DuPont recently built a highly automated $20 million battery production facility in Chester, Virginia, to make state-of-the-art lithium ion batteries for electric cars, it created just eleven new manufacturing jobs.

But again, insourcing’s potential isn’t so much about new manufacturing jobs. Rather, the current mini trend toward insourcing might be a golden opportunity to lure back the research and development and innovative capacity that the nation lost in the rush to offshore—and perhaps turn the mini trend into a mega trend that could transform the nation’s economy.

In their highly influential book, Producing Prosperity: Why America Needs a Manufacturing Renaissance, Harvard Business School professors Gary Pisano and Willy Shih argue that when countries lose the ability to manufacture, they also lose the ability to innovate. Pisano and Shih push back on claims that innovation can happen successfully in one country (America) when manufacturing happens in another (China), arguing that this thinking “is based on false premises about the divisibility of R&D and manufacturing in the innovation process.”

For some industries, they write, a product’s design is “so tightly intertwined” with the production process “that it makes little, if any, sense to talk about them separately.” As a consequence, they argue, when companies offshore manufacturing, they’re not only offshoring jobs, they’re offshoring future innovation, plus all of its spillover benefits.

For instance, Pisano and Shih cite the case of photovoltaic cells, which were developed at Bell Labs and later improved upon by a host of American universities and companies including Boeing and IBM. Now they’re largely manufactured in Asia. In 2008, only 6 percent of PV production was American.

What happened, the professors say, is that many of the technologies involved in PV cell production were offshored to Asia long ago. Consequently, Asia started out with a technological edge, as well as geographical proximity to key component suppliers (also Asian), which enabled them to dominate the competition from the get-go.

A host of other American-born inventions have moved offshore and taken their economic potential with them. A list of these lost opportunities, compiled by Dieter Ernst, senior fellow at the East-West Center, includes many staples of modern connected living: laptops, tablets, smartphones, cell phone batteries, and flat panel displays, in addition to the entire semiconductor industry. Pisano and Shih add more esoteric innovations, such as “ultra-heavy forging,” a process required for making large, super-strong structures such as nuclear reactors.

Nevertheless, Ernst says, “our innovation capabilities are still way ahead of China.” According to the National Association of Manufacturers, U.S. manufacturers account for two-thirds of the nation’s private R&D. America’s computer and electronics industries also account for half of all U.S. patents, according to Brookings scholars Susan Helper, Timothy Krueger, and Howard Wial, and manufacturers employ more than a third of the nation’s engineers.

But maintaining this track record means making sure that the industries most fueled by innovation stay at home. Fortunately for us, the companies most likely to consider insourcing right now are in exactly these innovation-intensive industries. And public policy could help tip the balance.

America still holds many of the advantages that made it the world’s foremost inventor in the first place: the world’s best universities, abundant natural resources, a stable democracy and rule of law, an entrepreneurial culture, and respect for personal and intellectual property.

Nevertheless, public policy is critical to whether insourcing picks up momentum or fizzles out. First, we need to remember that insourcing is far from the new normal. It’s true that companies are much more likely now to rethink where they make their products, rather than stampeding like lemmings as they once did toward the country with the cheapest labor, but it’s hardly a sweeping trend. Second, even if many economic fundamentals are moving in America’s direction, foreign governments have plenty of policy tricks they can and do use to lure manufacturing firms.

The question now is whether America is doing enough to push the companies sitting on the fence firmly in our direction and to compete with other countries that are doing the same. To that, the experts say no: we are falling behind by standing still.

To his credit, President Obama has made manufacturing a central plank of his economic agenda. But to accelerate insourcing’s pace and potential, here’s a three-step framework for what government can do.

First, we should shamelessly court companies to America and help them expand when they get here. Even as offshoring’s economics tilt America’s way, other
countries—less opposed than we are to heavy-handed industrial policy and even downright cheating—are busily dreaming up strategies to put a thumb on the scales in their favor.

In their book Innovation Economics, Ezell and Robert Atkinson document a slew of incentives regularly offered by foreign governments to woo business. Israel subsidized $1.2 billion of Intel’s investments in the country, while Vietnam waived all corporate taxes on the first four years of Intel’s operations there (and offered big discounts thereafter). Singapore and South Korea freely provide footloose firms tax holidays and free land. South Korea also routinely offers companies tax-free and interest-free loans, while India offers some firms a chance to deduct all profits for ten years. China plays the most aggressive and strategic game of all, often demanding that firms move high value-added manufacturing operations to China or transfer valuable technologies as a condition of accessing its market.

Some of these tactics are offered in blatant disregard of international trade laws, and the U.S. government is often quick to complain to the World Trade Organization. But because of the multiplicity of alleged violations, the complexity of proving a case, and the tremendous time and resources required to win, few cases are ever really pursued and only when enormous sums are at stake—as in the case of Boeing versus Airbus, for example.

So given the current free-for-all, why hasn’t Washington joined the game? Partly it’s because recruiting individual companies has never been seen as a federal responsibility. Presidents are supposed to think in terms of big sweeping policies, not lower themselves and their administrations to the level of marketers. Partly it’s the ingrained fear of doing anything that smacks of taboo “industrial policy” or “picking winners and losers.” Whatever the reason, such things just aren’t done. Nevertheless, there’s plenty of room for Washington to get more aggressive without crossing the line into industrial policy. For starters, suggests Economic Strategy Institute President Clyde Prestowitz, U.S. officials could simply ask companies to stay, and then thank them when they do.

Prestowitz recalls one meeting between a senior government official and an American CEO over some intellectual property issues the CEO’s company was having overseas. Instead of offering to help with the problem, the official asked the CEO if he’d ever considered moving to Singapore. Eventually, the CEO and his company did. “[This CEO] came from the Ukraine, was grateful to the U.S. for giving him a living, and didn’t want to leave,” Prestowitz says. “If somebody from the government had just called him and told him to stay in the U.S., he would have.”

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.

A final benefit of this network might be to counteract what Robert Hayes and William Abernathy called (in 1980!) “competitive myopia,” in which “maximum short-term financial returns have become the overriding criteria for many companies” as the imperative to maximize shareholder returns is increasingly urgent. By providing both the venue and the support for “patient capital” and longer-term investments, the network could help American companies recapture the vision that led to the breakthroughs of the twentieth century.

Another idea would be to train more American engineers, and keep the foreign ones we educate. America produced just 10 percent of the world’s science and engineering graduates in 2008. Moreover, a high proportion of these were foreign, including 57 percent of engineering doctorates and 54 percent of computer science grads. America is facing a potential shortage in one of manufacturing’s key raw ingredients: engineers.

One thought-provoking proposal to boost the pipeline, offered by a Florida task force on higher education reform, is to offer discount tuition for degrees in “strategic areas of emphasis,” such as math, science, and engineering. With college costs soaring, bargain engineering degrees might draw students who would otherwise choose different majors.

And if immigration reform does happen this year, Congress should dramatically expand high-skilled immigration so we don’t export back to our competitors all the foreign-born engineering graduates we’re producing. One idea, proposed in this magazine, is to provide foreign science and engineering students with green cards on graduation, so they can land a U.S. job more easily.


The third and final way Washington can lure back manufacturing is to stop building new cliffs to leap from. We need to end the self-inflicted wounds caused by short-term dramas over our long-term fiscal challenges. “If Congress has limited political capital, we should be spending less of it inflicting harm on the country and more of it on doing good,” says Ed Gresser, executive director of Progressive Economy, a Washington think tank. “If the U.S. government weren’t doing so much to damage confidence, we might be better off.”

Before businesses decide to invest, they need long-term certainty about their future tax liabilities, confidence that the government will be operational for more than three months at a time, and assurances that America won’t default on its debts or stay fixed on a course toward budgetary ruin.

Few things could do more for the long-term economic stability of America than a true “grand bargain” on deficit reduction, health care cost control, and government spending. Tax reform also wouldn’t hurt.

Hopeless as it currently seems, Congress and the administration shouldn’t give up. As Australia’s foreign minister, Bob Carr, observed, “The United States is one budget deal away from restoring its global pre-eminence.”

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.