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4 Considerations for Government While the technological and organizational changes needed in manufacturing will be the result of market pressures and private initiatives, government policies will play an important role in set- ting the economic and political environment for private business. Workers, managers, and technologists will develop and implement the strategies necessary to have a competitive manufacturing sec- tor in the future. Their acceptance of change, pursuit of new breakthroughs, and willingness to take risks will determine the long-term competitiveness of U.S. manufacturing. Government policies can stimulate this process, and every tax, spending, and money supply decision has an impact, but it is very difficult to identify specific policies that would be indisputably beneficial and politically acceptable across the broad spectrum of U.S. industry. Reports from both public and private groups have made specific policy recommendations (see Appendix C). The value of adding a set of similar recommendations, or even of endorsing what others have said, was thought to be negligible. The magnitude of the changes that the Manufacturing Stud- ies Board (MSB) is forecasting for U.S. industry, however, should have an impact on the way policymakers think about manufac- turing. Policymakers will need to recognize that the policies used in the past to help domestic manufacturers may no longer pro- vide the desired results and that the policies used by government agencies as consumers of manufactured products may no longer 61

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62 be effective. For instance, if the changes needed are as profound as this study indicates they will be, many companies in many in- dustries will be unable or unwilling to adapt. These firms will want to maintain the status quo and undoubtedly will petition government to slow or stop the process of change. Calls for trade protection, tax relief, or direct subsidies may result in policies that work against the long-term goal of a competitive manufac- turing sector and are detrimental to the long-term health of the firms or industries being helped. Experience demonstrates clearly that in all but a very few cases, such government intervention has slowed change as intended, but has also damaged the interests of consumers and other industries and has not helped the long-term prospects of the industry assisted. Government assistance may sometimes be unavoidable, but it should be contingent on explicit commitments by the industries involved to make the changes necessary to regain their compet- itiveness. Such a quid pro quo for government assistance would create the correct impression within the affected industry that change is mandatory and that the industry itself must devise and implement the necessary strategies. Government policies can help ease the dislocations suffered by various industries and regions by using a process that stimulates future growth rather than preserv- ing the status quo. Demanding an explicit quid pro quo in return for trade pro- tection, loan guarantees, regulatory relief, or other government- provided support represents a departure from past government practice. Other government initiatives to support manufacturing, however, need not require dramatic changes in policy. Existing programs provide unemployment compensation, training and re- location assistance, trade adjustment assistance, and protection against dumping by foreign firms. These programs may receive inadequate funding or include too many restrictions to provide sufficient support in a changing environment, but they continue to represent important government support mechanisms. Federal activities in transportation, education, research, and defense di- rectly benefit the competitiveness of U.S. manufacturers. These and many other federal efforts contribute to the economic and so- cial infrastructure in a way that ensures that all firms are affected

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63 fairly and that progress and success depend on market factors, not government. These types of supports should continue to be the major pri- ority in government policy toward manufacturing. In addition, several areas of traditional federal concern that will be affected by the coming changes in manufacturing may need to be reevaluated to ensure the continued efficacy of government programs. The areas are trade, education, research, and defense. TRADE Continued progress in international economic development and the growing internationalization of the U.S. economy will cre- ate increasingly strong competition in manufactured goods from an expanding number of foreign producers, even in industries that traditionally have not had significant import competition. These developments will change the international and domestic trading Environment. Two specific developments should be of particular interest to policymakers. First, while an open and fair international trading system should continue to be the goal of U.S. policy, it may be increas- ingly difficult to devise effective trade policy, in part because of the diminishing number of clear-cut trade policy tools. Flexibility in U.S. trade policy will be hampered by such factors as the grow- ing number of foreign manufacturing facilities in this country, the increasingly complex pattern of equity ownership across national boundaries, a growing incidence of foreign products in the product lines of domestic manufacturers, and a trend among multinational companies to make components in scattered plants and assemble them at a single location. It is becoming increasingly difficult to determine what is an American firm and just what is meant by "U.S. manufacturing.n In such an environment, any trade measure designed to benefit domestic producers or encourage other coun- tries to open their markets not only will result in additional costs to domestic consumers but also may have conflicting effects on a single industry or even a single company. Developments among private firms, specifically the integration of international produc

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64 tion facilities, may increasingly preempt the ability of the federal government to make a substantial positive difference in trade. One exception to this general trend, however, should be noted. Government protection of intellectual property rights will be an important and essential support for U.S. companies competing in both domestic and foreign markets. Too many foreign com- panies have used infringement of patents, trademarks, and copy- rights to establish market share, sometimes with shoddy goods that damage the reputation of the original manufacturer. Ef- fective enforcement across national borders has proven difficult, particularly when foreign governments are slow to recognize the problem, and delays compound the damage. Court proceedings can sometimes award restitution and legal sanctions against con- tinuec} infringement, but such "solutions" are too time-consuming and often temporary. U.S. manufacturing companies and U.S. consumers have a tremendous stake in this issue because together they are the major victims. Provisions in the 1984 Trade Act make benefits under the U.S. general system of preferences condi- tional on the protection of copyright by the importer of American works; this initiative already has begun to have an impact. The U.S. government must remain committed to continued vigilance and the implementation of strong sanctions to ensure quick and effective resolution of international patent, trademark, and copy- right infringements. A second development in the trade area is that U.S. firms that have had no experience with foreign trade will be thrust into the international economy as imports compete in a growing range of products and markets. In response, many manufacturers will adopt new technologies and management techniques and in most cases will compete effectively against imports in the domestic mar- ket. Many firms, however, may not consider competing in export markets unless they receive special encouragement, as well as help in securing expertise and information. Government programs al- ready exist to provide this assistance, and private initiatives can be expected to meet many of these needs, for example, through export trading companies, but policymakers should be aware of the need to expand the export base as much as possible and rec

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65 ognize the potential for additional government efforts in ensuring access to foreign markets and encouraging export activity. EDUCATION The reduction of direct employment opportunities in man- ufacturing and the different skill requirements of future manu- facturing jobs will put new demands on postsecondary training and education. Technical schools will need to base their training for displaced workers and young people entering the labor force on realistic reassessments of industry's skill requirements, recog- nizing that industry's ability to predict its needs sufficiently in advance to accommodate educational planning cycles is weak at best and that most future manufacturing jobs will not be on the factory floor. Furthermore, skill requirements for the remaining positions in manufacturing may vary significantly among plants, creating a need for customized training programs. Cooperation between public educational institutions, such as technical and vo- cational schools, and private training programs can be expected to increase, but there also may be increasing policy debate over the distinction between the responsibilities of public education and private training needs. At the university level, manufacturing will compete with other sectors for broadly educated engineering graduates, and rapid technological change will make it more necessary for older engineers to update their skills. The conflicting pressures of a growing demand for knowledgeable engineers and a rapidly ex- panding knowledge base will increasingly strain the ability of uni- versities to supply enough engineers with broad-based knowledge. A balance is needed between good grounding in one field and in- terdisciplinary instruction. That balance is likely to improve as industry learns how to articulate its needs and as salaries reflect those needs. A shortage of engineers would pose a serious barrier to prog- ress in manufacturing and many other fields. There is continuing debate about the likelihood of a shortage of engineers-some ob- servers claim a shortage already exists. Part of the debate stems from the relative decline in the number of U.S. students in post

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66 graduate engineering programs. This drop seems to reflect in- dustry's high demand for baccalaureate-level engineers and the small perceived benefits of a postgraduate degree. If the situa- tion is detrimental, industry should work with universities and government to provide incentives for postgraduate study and ad- just compensation levels to encourage more postgraduate work. Of course, an overall increase in engineering students would in- crease the pool of potential graduate students, so efforts should be made to increase the number of students entering engineering. This is a complex problem, requiring adjustments on at least two levels. First, students leaving high school wiD need a thorough grounding in mathematics and science so they will be interested in and not intimidated by engineering curricula. Second, relative starting salaries must be adjusted to encourage bright students to enter engineering instead of other lucrative fields. Both of these adjustments require a commitment by society in genera] that man- ufacturing is important and a desirable career choice. In management education, future business programs at both the undergraduate and graduate levels will need to reflect the ex- tensive organizational and technological changes on the factory floor. For example, the criteria for operational decisions are likely to change significantly, which management education must reflect. The relationships between individuals and functions in the fac- tory environment also will change. Graduates will need realistic expectations to become effective in the new environment. Pro- visions also will be needed to educate current managers about new production processes, strategies, and goals to change their traditional approaches to factory management. As with worker retraining, company-provided training and public education will need to work in partnership to produce effective manufacturing managers. RESEARCH A major advantage of U.S. manufacturing has been in basic research and the resulting product and process applications. A1- though the nation continues to spend far more than other coun- tries on research and development, the U.S. share of world research

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67 spending has declined steadily in the past 20 years as other coun- tries have increased their expenditures. The United States can no longer be assured of unchallenged leadership in research findings and applications. This shift could prove crucial to manufacturing competitiveness. Manufacturing is becoming increasingly science based; that is, scientific knowledge is virtually a prerequisite to the effective design and implementation of advanced process technologies. The integrative nature of future manufacturing technologies (see Chap- ter 2) is less tolerant of imprecise data than traditional manufac- turing operations. The "art" of a skilled machinist, for example, cannot be duplicated exactly by an automated machining center, especially for a complex part. The machine must "knows what is happening at the interface of the part and the cutting tool, which varies tremendously with the material, size, and shape of both the part and the tool. Enough is known about the various interactions to automate the basic machining process, but the fundamental sci- ence is poorly understood. It will need to be known in detail as tolerances get tighter and the number of available materials and processing technologies changes. Just to program this one ma- chining application involves thermal dynamics, materials science, surface physics, and a number of other disciplines; given the huge number of process activities in the factory, the need for scientific research explodes. The required level of investigation will be far more precise than it has been traditionally. Even now, research into the sur- face behavior of materials is being conducted at the atomic and subatomic levels. These and other research efforts require sophisti- cated equipment, controlled environments, well-trained personnel, and time costly but necessary inputs for progress. The ability of supercomputers to simulate physical phenomena may help con- tro} costs, but actual experimentation and measurement cannot be replaced completely.2 As these developments unfold, federal support of basic re- search in both government laboratories and universities will be increasingly important to the health of U.S. manufacturing. For- eign competition, more sophisticated research, and the burgeoning need for scientific knowledge in many aspects of manufacturing

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68 will place growing demands on federal research funds. Policymak- ers will need to recognize the increasing importance of research in the long-term competitiveness of manufacturing and allocate resources accordingly. DEFENSE Rapid technological progress in manufacturing in defense- related industries will be even more of a cornerstone of defense r policies than it has been in the past. For a number of historical reasons, the U.S. defense posture has been based on technologi- cal superiority of weapons systems, which depends increasingly on sophisticated manufacturing processes. Advances in manufactur- ing technologies will provide broad benefits in terms of the abil- ity to design and manufacture increasingly complex weapons sys- tems. The technologies will bring higher quality at lower cost with more cost-effective customization capabilities and better price- performance ratios (see Chapter 2 and Appendix A). Advanced technologies will give defense contractors the responsiveness, flex- ibility, and cost effectiveness necessary to meet a broad range of weapons design requirements and production schedules. The new manufacturing processes made possible by new technologies also will result in completely new products. Defense officials there- fore have a clear interest in stimulating the implementation of ad- vanced manufacturing technologies and organizational structures in the defense industrial base. Because defense contractors often respond to different market signals than their commercial counter- parts (even in the same company), federal officials have a difficult problem ensuring that defense procurement policies give contrac- tors strong incentives to implement new process technologies. Because of the inherent problems in defense procurement pro- cedures, defense officials have used specific programs to encour- age manufacturing development and implementation by contrac- tors. The Manufacturing Technology programs, Industrial Mod- ernization Incentive Program, and the Technology Modernization programs have used different strategies and criteria to support manufacturing technology improvements by defense contractors. The effectiveness and necessity of these programs have been de

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69 bated and their funding levels have fluctuated, but they remain the only specific government programs directed at improving man- ufacturing technology. These programs reflect the importance of advanced manufacturing technology in weapons systems pro- duction and the shortcomings of the defense procurement system in providing incentives for manufacturing process improvements. Policymakers will need to recognize the growing link between ad- vanced manufacturing technology and advanced weapons systems and address ways to provide incentives for manufacturing process modernization, either through major corrections in the procure- ment process, consistent adequate funding for focused programs, or a combination of both.3 CONCLUSION Government should continue to help companies and indus- tries unduly hurt by the rapid change in manufacturing. It should help primarily by continuing to provide infrastructural support to manufacturers and their workers and secondarily by easing the negative impacts of the many changes expected in manufacturing. Policy should support and encourage the emergence of a tech- nologically advanced, competitive manufacturing sector through continued strong infrastructural programs. In this vein, this re- port has three broad suggestions for future government policies toward manufacturing. Government initiatives to help special interests adversely affected by change should (1) secure explicit commitments from the industries affected to take the steps necessary to regain com- petitiveness and (2) ease the short-term economic and social dis- locations without disrupting a fair competitive environment for other producers and without hindering continued progress for U.S. manufacturing as a whole. Government programs should help speed adjustments and provide the necessary infrastructural support to manufacturers without undue government interference. Private-sector initiatives will be most effective in developing and implementing the changes needed to make U.S. manufacturers competitive.

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70 Government policymakers need to understand that the process of change in manufacturing will result in corresponding change in a number of areas in which government has primary re- sponsibility, such as trade, education, research, and defense. Poli- cymakers need to recognize these changes in the environment and adjust their policies accordingly to provide maximum service to the private sector and to achieve maximum benefits for govern- ment programs. NOTES iThe National Association of Manufacturers estimates that 70 percent of American manufacturing is already confronted with import competition. 2For a fuB discussion of the use of computers in design and manufacturing see Committee on Science, Engineering, and Public Policy, 1985, Report of the Research Briefing Pane! on Computers in Design and Manufacturing, pp. 214-235 in New Pathways in Science and Technology: Collected Research Briefings 1982-84, New York: Vintage Books. 3An MSB committee is currently studying the role and effec- tiveness of the Manufacturing Technology programs. Their initial findings are contained in a Phase 1 report. See Committee on the Role of the Manufacturing Technology Program in the Defense Industrial Base, 1986, The Role of the Department of Defense in Supporting Manufacturing Technology Development, Washing- ton, D.C.: National Academy Press.