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Part IV
Manufacturing Globalization



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New Directions in Manufacturing: Report of a Workshop Part IV Manufacturing Globalization

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New Directions in Manufacturing: Report of a Workshop 10 Manufacturing Globalization: Is the Glass Half Full or Half Empty? Margaret Eastwood Motorola GLASS HALF EMPTY If you walk through almost any store today and read the labels on the merchandise, you will find: “Made in China”; “Made in Indonesia”; “Made in Mexico”; “Made in Hungary.” Whether you are in a toy store, an electronics store, a sports store, or a general department store, chances are there will be fewer items labeled “Made in the USA” than ever before. From the viewpoint of the U.S. economy, it is very easy to think of the globalization of manufacturing as a “glass half empty.” Newspapers report on U.S. balance-of-trade deficits, factory closings, and big job layoffs at the same time that they advertise the products from many countries that are in demand by U.S. consumers. Two primary factors are responsible for the movement of manufacturing to sites outside of the United States: substantially lower labor costs and production of acceptable quality. Lower labor cost has always been available elsewhere, but previously it was often paired with substandard goods that did not meet minimum customer expectations. Today, this has changed, and many non-U.S. factories produce products with equal or superior quality compared to U.S. factories. The electronics industry is an example of an industry that has experienced a shift in manufacturing locations in recent years. In the early 1990s, semiconductors, computers, cell phones, and similar products saw an upsurge in both their market and production in the United States. It seemed as though technological advances were being introduced daily. Computers and cell phones evolved from big-ticket special purchase items shared by the entire family to must-have items acquired for every member of the family. Semiconductors proliferated in everyday items from microwave ovens to automobile airbags. Initially, the majority of these products were produced in the United States. Production swelled for a number of years, only to be cut back near the end of the decade as competitive pressures forced the transition to lower cost locales. Factory closings in the United States followed, along with the loss of many jobs. It can be argued that the loss of these jobs was not necessarily a bad thing, if it is assumed that they were all held by unskilled workers, laboring at mind-numbing assembly lines in unpleasant, hazardous environments. For several reasons, however, that is not an accurate assessment. First, state-of-the-art electronics factories in the United States today, particularly those owned by large, multinational companies, have a very sophisticated workforce probably running a highly automated line in a clean environment complying with demanding health, safety, and environmental regulations. Less obvious, however, are the vast number of degreed engineering jobs and research and development infrastructure organizations that were added and then lost during this same decade. Those engineers were the primary source of innovation and competitive advantage in the industry. Manufacturing engineers created new processes,

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New Directions in Manufacturing: Report of a Workshop equipment, and materials that enabled design engineers to realize leading-edge products. For example, coincident with the emergence of many consumer electronics products, and contributing to their success, was the widespread introduction of surface mount technology (SMT). This technology allowed semiconductor chips and associated circuitry to be packed more densely on circuit boards, thereby helping to shrink the size of the overall products. When first developed, however, SMT was a new technology with many problems to be overcome. Manufacturing research and development (R&D) laboratories were created to improve and refine the techniques and materials and to make them robust and reproducible. Many of these laboratories were internally funded organizations, but the National Science Foundation, the National Institute of Standards and Technology, and other government organizations contributed R&D funds to spur development. Because commercial suppliers did not already exist, an entire industry of equipment manufacturers for SMT devices was established. Engineers designed this new equipment, and value was created in these new offerings. Auxiliary parts and material suppliers also emerged to support this trend. Universities got into the act, expanding their manufacturing and industrial engineering programs. Encouraged by funding from major corporations, programs like the Massachusetts Institute of Technology’s Leaders for Manufacturing Program provided a new level of skills and knowledge in their graduates. Universities located near major manufacturing sites frequently had joint development programs, summer intern opportunities, and instant job openings for their graduates. During this period of research and development, trial and error, refinement and fine-tuning, having the factories located near the engineering base made life a lot easier. The high margins available from selling the resulting leading-edge top tier products were sufficient to sustain the U.S. manufacturing. As the SMT technology and corresponding industry matured, however, its availability was no longer restricted to a few big corporations with manufacturing R&D departments. Once the commercial supplier base was in place, well-tested processes documented and understood, and many people trained in the technology, manufacturing of this type of product could successfully be done by anyone. No additional breakthrough improvements were forthcoming to provide competitive advantages or premium margins. Electronics manufacturing became a commodity. As with all commodities, cost became more and more important. Many companies set up manufacturing operations in places like China or utilized a supplier already there. Third-party manufacturers, such as Flextronics, Solectron, and others, leveraged their low-cost factory locations, economies of scale, and purchasing muscle to provide a successful manufacturing service. Although individual companies could set up their own factories in low-cost locations, many chose to spend their employees’ time, talent, and capital budget on other things, such as product design or marketing, that provided more differentiation and customer value. Unfortunately for the U.S. economy and workforce, electronics is just one of many industries that has followed this general pattern. Over the years, steel, textiles, toys, and machine tools are among the products whose production has moved predominately elsewhere. Each shift has caused major disruptions to the people, municipalities, local governments, and companies involved. A constant influx of new products/technologies/industries is needed to compensate for this outflow. Currently, promising areas such as biotechnology and nanotechnology are touted to be the emerging fields that will boost the U.S. economy as other industries have done in the past. Cities as diverse as Boston, Massachusetts, Ann Arbor, Michigan, and San Diego, California, have organized industrial, educational, and governmental programs to foster these industries in their regions. This would start a new cycle of development, supply base creation, and eventual

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New Directions in Manufacturing: Report of a Workshop high-volume, profitable production. Many other nations, however, have also targeted these two areas for their own next big wins. The United States does not have a monopoly on the talent necessary to bring these promising technologies to market and cannot be confident that we will be superior enough in these technologies to provide the stimulus and economic success that is envisioned. The success of software developers in India, engineers in Russia, product design teams in China, and help desk call centers in the Philippines indicates that globalization has expanded to many engineering and skilled functions well beyond manufacturing. Government policies have also shifted. Industrial policy in competing regions can hurt the ability of U.S. industry to capture an area such as nanotechnology. The European Union, for example, is more fully functioning now as a coordinated body, funding research programs and influencing standards and trade policies to assist their constituent membership. GLASS HALF FULL Manufacturing globalization is already a reality. The question therefore becomes how to turn it into an advantage for U.S. companies, workers, and government organizations. How do we look at the situation to see the glass half full? What new actions or activities should we engage in to capitalize on the changed business environment? One way to change the view is to stop focusing on the cost side of the business equation and instead look at the revenue side. Many U.S. companies have discovered that their biggest business growth opportunities are within the same regions that supply the low-cost labor that has attracted manufacturing. Many companies, for example, moved their manufacturing operations to China because they were concentrating on low cost. But China is one of the largest markets in the world, with over one billion potential consumers. Producing a product in China can increase the probability of successfully selling to those consumers and/or local industries. Understanding the customer has always been a basic tenet in successful marketing and product design. This is much easier to do when you have frequent visits and personal relationships with a cross section of the consumers/industrial concerns with whom you hope to do business. Having your own manufacturing operation (or a third-party partner) within the country gives a company much closer access to learning about product needs. When targeting a foreign market, it is tempting to hope that one size fits all, and that the same product that was successful in the United States will be a big hit in Beijing or Berlin. Although that may be true for some products, it is not true for all. Business and personal relationships gained through manufacturing arrangements are also beneficial in aspects of successful business dealings other than designing the right product. Cutting through red tape, getting priority service, recognizing and signing contracts with the most desirable suppliers or distributors might all require intervention or assistance from the local production organization. Seeing the glass as half full can arise from a completely different circumstance. Readily available third-party manufacturing capability has stimulated the emergence of a new class of companies that only do product design, with perhaps some sales and marketing. Although this business model is applicable to large, established companies as well as startups, it offers particular benefits to emerging companies. They are free to concentrate all their time and talents on creating new, innovative products, without the burden of fixed costs or overhead associated with manufacturing. Yet they have access to high-class production and supply chain management services equal to any of their larger competitors. This business model has been quite prevalent in the creation of “fabless semiconductor companies.” With the cost of wafer fabs approaching $1 billion, the barriers to entry are extremely high. Third party semiconductor foundries remove this barrier, and numerous creative U.S. companies now provide optimized products for niche markets that would not have been financially feasible without access to cost-

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New Directions in Manufacturing: Report of a Workshop effective outsourcing. Large, established companies, too, are seeing the glass as half full by applying manufacturing outsourcing. As long as manufacturing cannot provide a distinctive competitive advantage to the firm, they stand to gain by channeling their time, money, and talent to those functions and activities that will result in a competitive advantage. That might be innovative marketing, superb customer service, or some other activity that blossoms when it becomes the center of attention and budget. Yet another glass half full strategy is to capitalize on the “first mover advantage.” For some products or services, being the first to market with a viable product is a critical success factor for both short- and long-term profitability. In general, prices (and margins) are the highest when a new product is first introduced. When a company captures the initial wave of customers, it may have the opportunity to set a de facto standard or corner the best patent rights. In addition, its monopoly serving the first wave of customers may allow it to ramp up to gain economies of scale more quickly than its competitors can. Locating manufacturing outside the United States, away from the development organization, can hinder, rather than help, the achievement of first mover advantage, since coordination and communication might be too cumbersome. Done effectively, however, product launch preparations can be done in parallel across the organization, cutting time and helping to meet the first-to-market goal. In addition, if globalization is institutionalized and supported by the supply chain organization, the corporate computer system, and other company infrastructure, an organization has access to best in class partners, suppliers, and contributors from anywhere in the world. Rarely is a single company best in class in every function. But with the right partnering, the resulting virtual organization can pool the necessary talents to ensure the successful first-mover advantage or other competitive position. For major corporations that are already sophisticated internationally with their facilities and customer base, finding these partners, understanding the international law, and negotiating agreements are all possible. For a small to medium-sized company, however, gaining the knowledge, hiring staff with these special skills, and attempting operations on such a broad scale may be prohibitive. Yet these small to medium-sized companies are pivotal to the employment and economic base of the country, and the ones most vulnerable to the negative impacts of globalization. One program that strives to make it easier for all companies to work more effectively with global partners is the Intelligent Manufacturing Systems (IMS) program.1 IMS is an industry-led, global, structured, collaborative manufacturing R&D program that includes large and small companies, users and suppliers, and universities and research organizations. Members of IMS include Japan, Canada, Australia, the European Union, Norway, Switzerland, Korea, and the United States. Every IMS project must include participants from at least three regions. The basic intellectual property rights guidelines are already in place and apply equally to all participants. Projects typically cover the precompetitive phases of development. Since 1995, over 200 large companies, 120 small and medium-sized enterprises (SMEs), and 220 academic/research organizations have worked on R&D projects worth over $300 million. Thirty completed or active projects and 40 proposed projects have been undertaken. IMS has a formal structured process that greatly facilitates the involvement of companies and academic organizations, regardless of their size or previous global experience. Each country has a secretariat to assist its participants. Some countries offer special funding, although the United States utilizes traditional government funding structures. All secretariats offer a matchmaking service, which queries the secretariats in other regions to find the perfect partners with the same research and business interests to join a new project. Benefits of global 1   Details about IMS may be found at http://www.ims.org.

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New Directions in Manufacturing: Report of a Workshop IMS collaboration include access to advanced global manufacturing skills, technologies, and resource bases; exposure to global best practices; shared risks and rewards; intellectual property rights agreement guidelines; leveraging of R&D investments; building of relationships that facilitate entry into new markets; learning to think and act globally; and avoid innovating in the dark. GOING FORWARD New industries such as biotechnology and nanotechnology are the potential engines for future value creation, job creation, and economic success. The development of these new industries, as well as the growth of current industries, must occur in the new global environment. Development programs, competitive strategies, and investment decisions by government and industry need to be made with an understanding of global opportunities and risks. Only by working with today’s environment rather than yesterday’s reminiscences will we be able to fill the glass rather than watch it empty.