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New Directions in Manufacturing: Report of a Workshop Executive Summary The United States is a prosperous nation. Many of the assets that signal this prosperity are a result of the nation’s manufacturing proficiency. Manufacturing is a principal driver of growth in productivity, with a revolution in manufacturing having occurred over the last 50 years. In addition, between 1992 and 2000, the manufacturing sector contributed 22 percent to the U.S. gross domestic product and at its peak, in 2000, it employed more than 17 million people.1 Manufacturing has historically been the engine for greater economic growth, including in the service sector. But the 2001 recession hit manufacturing significantly harder than the rest of the economy, in terms of both depth and duration. According to the Bureau of Labor Statistics, the manufacturing sector lost 3 million jobs between July 2000 and January 2004. This has led to a sharp and sustained decline in the nation’s overall employment levels and a drop in capacity utilization. Potential reasons for these declines include the nature of increasing productivity; decreased business spending; changing strength of the dollar; and an increased trade deficit. There is disagreement over whether the movement of production jobs overseas is a net positive or net negative trend—that is, whether production capacity today is a commodity or a strategic asset. CHALLENGES FACING U.S. MANUFACTURING The U.S. manufacturing sector faces seven central challenges in rebuilding the nation’s manufacturing capacity and jobs. Understanding Manufacturing Trends Manufacturing is a means of satisfying higher societal objectives, and the current state of “making things” therefore deserves to be placed in a larger societal context. The current national debate on manufacturing is often narrowly focused on “little m” manufacturing, or the actual physical fabrication of goods. Manufacturing also involves “big M” concerns, meaning the business practices that surround the physical plant. Because all manufacturing organizations must attend to both little m and big M concerns, any government actions intended to help the manufacturing sector must take both concerns into account. It is increasingly important that the discussion of manufacturing issues, which forms the basis for decisions and policy at the federal, state, and local levels, take place using appropriate metrics in the correct context. For example, measuring manufacturing in terms of the wealth it generates among both investors and workers, leading to the stimulation of the economy as a whole, could help policy makers understand the true impact of changes in the manufacturing sector. 1 National Association of Manufacturers. “Quickfacts” summarized from data from the Bureau of Labor Statistics and the Bureau of Economic Analysis. Available at http://www.nam.org/secondary.asp?TrackID=&CategoryID=1155. Accessed November 2003.
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New Directions in Manufacturing: Report of a Workshop Manufacturing Globalization Globalization—an overwhelming trend that is affecting almost every facet of manufacturing—is a reality for U.S. manufacturing, in both the civilian and defense sectors. In this new reality, manufacturers must find ways to exploit the advantages of globalization of production and expansion of world markets to the benefit of everyone, including employees, companies, consumers, and the nation as a whole. In addition, maintaining defense capacity must be taken into consideration. A combination of factors is responsible for the movement of production overseas. Although labor costs in developing countries have traditionally been lower than those in the United States, only in recent years has the infrastructure of these countries improved enough to allow them to manufacture with reliable quality. Their transportation and communication systems are much more robust than in the past, and because these systems are often built on new technologies, they have not required the same investment as older systems. The infrastructure for education and training of workers is also much improved in many countries around the world. Labor organizations and businesses have serious concerns about the loss of U.S. manufacturing jobs resulting from this movement of capacity overseas. While this is a clear trend, some corporate representatives at the workshop claimed that moving certain jobs overseas resulted in overall job retention in the United States. Because globalized production can enable the efficient distribution of engineering and manufacturing responsibilities, it can result in decreased overall costs and the creation of better jobs in the United States. Additionally, the globalization of production has created opportunities for many companies to capture new market growth in developing regions around the world. Such influences as trade policies, dollar valuation, and tax policies are arguably crucial in the competition with the low labor rates and varying regulatory environments abroad. If manufacturing cannot provide a distinctive competitive advantage in new or existing markets, companies stand to gain by channeling their resources into functions and activities that will result in a competitive advantage to them. This may lead to a further reduction in investment in domestic capacity. Information Technology Opportunities New information technologies present a continuing and growing number of opportunities to manufacturers. Information, data communication, and data processing technologies are powerful tools that can be used in every element of the manufacturing enterprise, including just-in-time delivery of raw materials, activities on the factory floor, shipping, marketing, and strategic planning. The power of information technology has contributed to globalization and the ability to outsource manufacturing activities both inside and outside the United States. These trends could result in reduced domestic content in the products of U.S. manufacturing firms, with significant implications for national and regional manufacturing jobs and labor markets. At the same time, the growing reliance of manufacturing and other economic sectors on information and communications technology has spawned completely new industrial sectors—and occupations—devoted to the production and implementation of these systems. Maintaining Innovation Technological innovation and engineering design capabilities are critical for the creation of new industries and jobs. The growing demand for products with improved quality, functionality, and reduced time to market can strain established production processes, making
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New Directions in Manufacturing: Report of a Workshop innovation necessary for sustained competitiveness. Advances in technology can also provide ideas for new products. Innovation, in this case the successful exploitation of new ideas, has many prerequisites. The most important is the new idea itself, which in turn relies on research. The federal government can facilitate innovation in the manufacturing sector by establishing policies that encourage basic science and, at the same time, implement programs that share the risk of development with the private sector. This type of public-private partnership can be very effective in accelerating the transition of new technology concepts. For all the partners to interact effectively, it is important to establish responsibilities for the intellectual property and standards for research, product development, and product realization. Strengthening Small and Medium-Sized Enterprises Manufacturing employment is becoming increasingly concentrated in small and medium-sized enterprises, which are the primary suppliers for large domestic companies. As large companies outsource more of their manufacturing and services, they choose where their business goes based on competitiveness. It is therefore important to modernize and strengthen these small and medium-sized companies in the United States. Improved integration of the supply chain is needed, as is easier access to technology and to capital for small manufacturers. A holistic approach that includes all stakeholders—employers, educators, students, and government leaders—is needed. Workforce Education The educational and training systems that support the manufacturing sector are key to its success. These systems will ensure that an adequate talent pool exists for manufacturing jobs and that workers already on the job continue to be trained. To implement technological innovations and promote sustained improvement, the manufacturing workforce must possess continually updated technical knowledge. It is important that accessible and broadly distributed workforce development programs be supported and integrated into economic and technology development programs. Increased accessibility and dissemination of information on these programs to incumbent workers, for example, may provide opportunities for promotion and free up manufacturing jobs that can then be filled by displaced workers. Rising Infrastructure Costs The costs of infrastructure, including those for health care, legal protection, and regulatory enforcement, are often the difference between competitiveness and closed doors. Health care costs are a serious concern for both large and small manufacturers. The rapid rate of increase in these costs has caused some firms to reduce hiring or limit spending on capital improvements. At the same time, many U.S. concerns feel that the cost of compliance with current regulatory and legal requirements undercuts their global business competitiveness. Small manufacturers may be especially hard hit by the cost of legal and regulatory compliance because of the variety of raw materials they handle and the many industrial processes they use. NEW DIRECTIONS This summary of the ideas raised at the workshop points to the national need for a strategic conceptual framework for the support of domestic manufacturing. Such a framework can allow constructive debate of policies and legislation and can foster new attitudes and practices. Some workshop participants felt that the federal government, specifically the
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New Directions in Manufacturing: Report of a Workshop Department of Commerce, is the logical home for the development of such a strategy. The workshop participants discussed a number of issues. Foremost among them was the observation that the United States has long had a number of advantages for attracting manufacturing businesses, including personal freedom, political stability, an entrepreneurial business environment, a skilled and educated workforce, and access to large consumer markets. However, to ensure that the United States remains an attractive place to locate manufacturing businesses, the country must consider the supporting infrastructure for manufacturing. In many cases, this infrastructure is aging and may become unreliable or outdated. This has already happened for the power grid and is expected to happen for our crumbling bridges. An important question is how manufacturers can reduce the risks associated with operating in the United States. Actions by federal, state, and local governments could contribute to the attractiveness of the United States as a location for production activities. Suggestions for such actions raised during the course of the workshop include: Available and reasonably priced health care for all; Sustained and increased support for small and medium-sized enterprises; Continued attention to the costs of compliance with regulations; Support for standards such as those for data exchange and production quality; Tax incentives for investment in production activities; Strengthened public-private partnerships; and A heavy commitment to improved education and training at all levels, including the critical K-12 years and the continued training of incumbent workers. Because these ideas have implications beyond the manufacturing sector, their implementation would need further investigation of alternatives and consequences. As a first step, improved understanding of the underlying issues and the challenges facing U.S. manufacturers could encourage government responses that are more prudent, more targeted, and more likely to succeed. In this respect, a number of metrics are routinely used as the basis for federal policies and legislation, and it is very important that these measures be well understood. Such indicators as the percentage of the manufacturing sector’s contribution to the gross domestic product; the level of manufacturing orders; industrial production and capacity utilization; labor productivity; income and compensation; and energy production and prices may not be adequate for understanding the underlying issues. Both the measurement strategy and the measured information, and the ways they have changed over time, complicate the interpretation and understanding of the information. Whereas some trends are easily seen in retrospect, it is unclear whether or not the measures currently in use accurately reflect the state and trends in the economy as a whole or the manufacturing sector. It is also important for a healthy manufacturing sector that the supporting infrastructure for manufacturing is maintained and improved. The United States currently maintains superior service in such areas as transportation, including land, sea, and air; information systems, including telephone and broadband; and power systems, including electricity and natural gas. As these provide the foundation for the manufacturing enterprise, workshop participants observed that they need to be upgraded and protected against terrorist attacks.
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