U.S. Leadership in Manufacturing: A Symposium at the Eighteenth Annual Meeting, November 4, 1982, Washington, D.C., National Academy of Engineering. (1983)

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OPENING REMARKS, KEYNOTE ADDRESS, AND RESPONSE

WELCOME Courtland D. Perkins This technical session, entitled "U.S. Leadership in Manufacturing," continues our tradition of the past years of having a technical session on important national engineering subjects. In l979 the subject was energy, a broad view on the most important subject of the last decade. In l980 we featured engineering education, an especially timely subject, which has held the center stage ever since. And last year we had a very important session on genetic engineering, an evolving technology. This year there is nothing more timely in the minds of many of the people in the field of engineering than manufacturing and what new technology can do for us. As you know, the new technologies are robotics, computers, automation techniques, and new materials requiring new processes. We have new design techniques available, such as computer-assisted development/computer-assisted manufacturing (CAD/CAM). We have been moving from batch processing to continuous flow manufacturing. That is the main thrust of this meeting. The preparation for the meeting was chaired by Erich Bloch of IBM, who with an able group of outstanding people has been planning for this session for many months. It has also been led, from our point of view, by our eminent associate, Kerstin Pollack, who has worked very hard to make this program possible. Erich Bloch is Vice President, Technical Personnel Development of IBM, where he has been since l952. He has a B.S.E.E. from the University of Buffalo in New York in l952. He has also studied at the Federal Polytechnic Institute of Zurich, Switzerland. He is a fellow of the Institute of Electrical and Electronics Engineers, a member of the American Association for the Advancement of Science, and a member of NAE. It gives me great pleasure to introduce Erich Bloch, who will now take charge of the program.

INTRODUCTION Erich Bloch Courtland Perkins described the reasons for NAE to focus on manufacturing, and I would like to set the stage with a few more comments. But before I do that, let me acknowledge at the outset the work done by the various members of the steering committee. Without their efforts and their insight into this topic—a difficult topic I should say—today's program could not have taken place. New technologies and technological innovation are the major driving forces behind productivity increases. I can best illustrate this point by showing the result of a study by the Brookings Institution (see Figure l) that quantifies the point that technological innovation is the biggest contributor to productivity—more than scale economics, training, and capital investment. Many times we forget this truth. This could be the reason why, in fact, U.S. industry is experiencing a lower rate of productivity growth compared to our trading partners. Similarly, our plants are aging because our capital investment is falling behind that of other countries (see Figure 2). What is shown here are facts that we are going to discuss at length during today's program. While employment of science and engineering people is increasing in U.S. industry, their employment in the manufacturing sector, is, at best, staying constant or maybe even decreasing (see Figure 3). This is particularly a bad sign because we are at the threshold of a significant change in manufacturing, one based more on science and technology activity. This requires the participation of science and engineering professionals in the manufacturing process more than in the past. Let me describe, in historical terms, what is happening in manufacturing. During the nineteenth century the Industrial Revolution was brought about by harnessing energy, leading to the consolidation of manufacturing resources and their organization into activities exploiting economy of scale. In the twentieth century, and especially since World War II, we have seen and experienced further development in manufacturing disciplines utilizing methods of batch processing and automation of individual tools and focusing on better procedures for ordering, logistics, and control. The developments benefited many companies and industries that took advantage of them. Hard technologies were the driving force in this particular era. Now we are seeing on the horizon, and it is already being implemented in isolated applications, the necessary technologies to proceed in a significant way to the next step: the total integration of the manufacturing process. This requires

Better Resource Allocation 12% Technological Innovation 44% FIGURE l Contributions to U.S. productivity increases. Source: The Brookings Institution. not just the use of new hard technologies, but also the extensive use of soft technologies, such as systems programming. While robotics has captured the imagination or fear of many and computer- assisted design/computer-assisted manufacturing (CAD/CAM) has become a familiar concept, the changes in manufacturing we are seeing today and will see in the future are much more far-reaching than that. They are analogous to what, in a special way, has been accomplished in process industries for some time, namely the conversion from batch processing to continuous-mode flow processing. The technology is here to apply this concept to discrete parts manufacturing and assembly. The concepts of group technology, flexible tooling, flow production, and computer-integrated manufacturing are all technologies that are part of the factory of the future. We need to change our model of manufacturing. Manufacturing is no longer just the physical tools and assembly lines but also the complex software programs that tie together all facets of manufacturing: in particular, the design, organizing, scheduling, and control of the whole manufacturing enterprise. These activities themselves are becoming highly automated and highly mechanized, and intertwine in real time with the hardware. What we are experiencing, I believe, will be judged as revolutionary as what happened during the nineteenth century: In the latter case it was the harnessing of power; today it is the harnessing of information. We are trying today to focus on exactly that—the technological developments that are the cause of these changes, the significant problems that arise because of these changes, and what is required to exploit these new developments.

Productivity Growth (Real Gross Domestic Product Per Person Employed) Age of Plant/Equipment 1978 Capital Investment as a Percentage of Output 1960-1978 Q: 1870• t- 1950 1 1.8% P 1950- W 1965 Q 1965- £ 1973 J 2.4% Tl.6% 16-17 — 1973- § 1979 J 0.3% _~] 1.1% Z 1870- < 1950 S 1950- m 1965 5.2% S 1965- h 1973 4.3% W 1973- ^ 1979 3.1% S 1870- 1950 1 1.0% Z 1950- < 1965 | 7.2% ^ 1965- -i 1973 1fi 9.1% 1973- 1979 | 3.4% 15.9 28.8 FIGURE 2 Productivity growth, age of plant and equipment, and capital investment as a percentage of output, United States, West Germany, and Japan, selected years, l870-l979. 0 O CL 1,100 1,000 900 800 700 600 500 400 300 Total Private Industry • — — — — — Manufacturing __ — Nonmanufacturing I 1970 1974 YEAR 1978 1980 FIGURE 3 Employment of scientists and engineers in private industry by sector, l970-l980. Source: National Science Foundation and Bureau of Labor Statistics.

To set the stage, we are fortunate to have with us our keynote speaker, James Brian Quinn, Professor of Management at Amos Tuck School at Dartmouth. He was a fellow of the Ford Foundation, a Fulbright Fellow, and the recipient of the MacKenzie Award. He will view U.S. leadership in manufacturing from an economic and academic perspective. I also want to introduce our second speaker, Thomas J. Murrin, President of Public Systems for Westinghouse Electric Corporation. His response will be from the viewpoint of an executive active in the management of a large manufacturing enterprise. He is a physics graduate, a past member of the U.S. delegation to the NATO Industry Advisory Group, and serves on the Board of Governors of the Aerospace Industry Association. He, too, is qualified to speak about these problems before us.

OVERVIEW OF CURRENT STATUS OF U.S. MANUFACTURING: HISTORY, STATUS, IMPACT ON U.S. ECONOMY, FORCES AT WORK, EDUCATION James Brian Quinn In the past few years it has become clear that the Japanese can land a passenger car on the U.S. West Coast for $750-$!,500 less than U.S. companies can deliver comparable models.1 Japanese unit shipments of semiconductors grew by 37 percent from l980 to l98l and dollar shipments grew by 25 percent while U.S. and European suppliers' volume grew by only l percent, with value down 8 percent.2 The l970s saw productivity growth rates slow in virtually all U.S. industry classi- fications and even become negative in some.3 With the United States in its deepest recession since World War II, layoffs are common in manufacturing industries that were once dominant in the world. And some U.S. companies seem to have permanently lost their competitive edge against foreign producers. This has led to a plethora of articles criticizing American managerial and corporate performance.* Does this signal the imminent decline of history's greatest manufacturing nation? Or will U.S. institutions adapt to maintain the capabilities for wealth creation and national independence that manufacturing strength has provided in the past? At the moment a dim perception of our future potentials seems dominant. Is such a forecast either justified or essential? LONG TERM TRENDS Unlike agriculture, U.S. manufacturing has employed a relatively stable per- centage of the total U.S. workforce for some years. But like agriculture its great productivity has made other sectors' growth possible. In the early l800s some 70 percent of the U.S. labor force was in agriculture. By l9l0 close to 70 percent had moved into nonfarm activities (see Figure l). Now, in the l980s, service activities account for over 70 percent of the nonagricultural workforce, with only 22 percent in manufacturing. Only about 3 percent of the workforce is left on the farm. Technological innovation—largely mechanization and its modern concom- mitant automation—was the primary force releasing labor from each area and providing opportunities in others. From Adam Smith to modern times, phil- osophers have been concerned that these forces would dehumanize work and ultimately drive so many out of the workforce that there would be no consumers left for the goods machines could produce.5 To date the opposite has occurred. Per capita real wealth in the U.S. has continued to grow at a relatively constant rate in excess of 2.4 percent per year (see Figure 2) with vastly increased job opportunities in the nonfarm sector, 8

100 i- LU o cc LLJ Q. 40 - 20 - 1840 1860 1880 1900 1920 YEAR 1940 1960 1980 1995 FIGURE l Employment as a percentage of total labor force, l850-l995. Prepared by M. Dingman from Historical Statistics of the U.S.: Colonial Times to l960 and Predicast, l982. ~ " predominantly created by imaginative use of new technologies. Factory jobs have in general become more humane as the most onerous and noxious tasks have been automated. Wealth and leisure have been redistributed as work weeks dropped from over 60 hours in the l800s to the high 30s in the post-World War II era. And income has shifted from property holders (40 percent in l930 to l5 percent now) to workers (60 percent in l930 to 70 percent today).* Perhaps the most surprising shift has been in the movement from goods production (manufacturing plus mining and construction) to service activities. Employment in service activities grew from 42 percent of total employment in l950 to approximately 74 percent today, while manufacturing per se dropped from 23 percent to today's approximately l9 percent.7 The term service activities, however, should no longer connote small retail shops, as it once did. The sector embraces worldwide banking and insurance groups; huge utilities; and sophisticated laboratory, transportation, government, and communications systems that are very similar in scale, technological complexity, management scope, and output power to large manufacturing enterprises. The health of both sectors is intimately intertwined, each as the customer and supporter of the other. It would be a mistake to design selective policies for one sector without a clear perception of their impact on the other. About half the benefit from manufacturing R&D accrues to the service sector.' Conversely, lower cost and higher quality utility, banking, transpor-

l0 8 <N r- O> O B 160 120 80 40 FIGURE 2 Per capita GNP. Source: Federal Reserve Board Chartbook, May l98l. 20 1900 1920 1940 YEAR 1960 1980 tation, communications, software, etc. services can have high leverage in decreasing manufacturers' costs in the United States. Service imports and exports also significantly affect the U.S. balance of payments and the strength of the dollar in trade. In l980, services accounted for a $5.8 billion positive balance of trade plus some share of the $32.7 billion return on direct investment abroad—due to the technology and management contributions embodied in that flow (see Table l). A nation conceivably could have a total services economy exporting insurance, banking, education, transportation, technology, and recreation access to others in exchange for goods. Monaco and other small principalities operate essentially on this basis. But it is unlikely that a large heterogeneous nation that values its independence could go to this extreme. From a strategic viewpoint, how much below its current l9 percent of the workforce employed in manufacturing can the United States shrink without sacrificing (l) the vital challenges a strong manufacturing sector poses in maintaining the health of the nation's science, engineering, technical, business TABLE l U.S. International Services Transactions, l980 (Billions of Dollars) Services Transactions Inflow to U.S Outflow from U.S. Net Difference Travel and transportation Miscellaneous services 24.I I2.4 24.9 5.8 -0.8 +6.6 Total +5.8 Income on U.S. assets abroad Income on foreign assets in U.S. 75.9 43.I +75.9 -43.I Total +32.8 SOURCE: Statistical Abstract of the United States, I98I .Table I492.

1l services, and education sector; (2) the essential jobs that manufacturing provides for the less skilled; and (3) the strategic independence and stability manufacturing offers for the United States in world affairs? Manufacturing creates important values beyond its own sales and profits. And to the extent that these values benefit the society and not producers, it may be necessary to provide compen- sation to keep manufacturers alive. This is the choice European countries have made for steel and other vital sectors. Past U.S. Strategies For historical-institutional reasons the United States has never has a formal, preplanned and stated national industrial strategy in the same sense as other nations. But U.S. strategies have nevertheless emerged9 with profound impacts. Three strategies (of the late l800s-early l900s, post-World War II, and l960s eras) are summarized in the footnotes.10 Such summary descriptions are obviously incomplete. But there were some common and perceptible dimensions in U.S. industrial strategies during these periods. And the strategies were successful. By the late l960s Western allies were concerned that they could never overcome the tragically overplayed technology gap between themselves and the United States. But weaknesses in specific sectors, such as shipbuilding, were already eroding American trade dominance. As relative U.S. wage and raw materials costs rose, foreign manufacturers took over selected niches in the U.S. market and became more competitive elsewhere. When competition forced profit margins in commodity manufacturing to minimal levels, capital and talented people naturally migrated to more glamorous, higher-value-added activities— including services—where gross margins allowed more attractive wage and capital returns. The U.S. share of total world trade dropped from 25.3 percent of exports in l960 to l7.3 percent in l977. The effects were masked because dollar values of exports grew from $l7.3 billion to $80.2 billion in that same period.11 Many of these shifts were natural outgrowths of affluence and the fact that more countries—often with U.S. help—had entered the manufacturing arena. But it is also likely that the lack of a positive, coherent industrial strategy in the l970s had a strong influence. No affirmative national energy policy emerged. Over- consumption—as opposed to industrial investment—was encouraged on all fronts: by huge federal deficits devoted to income transfers, by easy credit policies, by inflation rates higher than savings returns, and by tax policies that selectively encouraged real estate investment over industrial development. By l979, $2,254 billion was invested in real estate, while the aggregate value of all the stocks and bonds on the New York Stock Exchange was only $l,42l billion.12 And transportation, education, and other infrastructures went into a state of relative decline.13 Although U.S. manufacturing trade balances remained positive in most sectors (see Table 2), dominance in all could not be maintained in perpetuity. Ultimately, a strong exporting nation must import extensively, invest abroad and build its own competition, or see its currency exchange rates rise to unreasonable levels. But strategic as well as market considerations should determine which manufacturing activities are performed domestically and which abroad. It is hard to imagine U.S. strategic independence without strong steel, energy, motor vehicle, micro- electronics, and aircraft industries. Yet three of these five represent serious trouble spots today. The causes of their problems differ; hence

l2 TABLE 2 Selected Elements of Merchandise Trade Balance, l980 (BUlions of Dollars) Merchandise U.S. Exports U.S. Imports Net Difference Total 220.7 244.9 -24.2 Food and live animals 27.7 I2.0 I5.7 Beverages and tobacco 2.6 2.7 -0.I Tobacco and tobacco manufactures 2.4 0.4 2.0 Crude materials 23.8 I0.5 I3.3 Mineral fuels laboratories 8.0 82.9 -74.9 Petroleum 4J 77.6 -73.I Oils and fats I.9 0.5 I.4 Chemicals and related products 20.7 8.5 I2.2 Organic chemicals 5.7 2.5 3.2 Manufactured goods 22.3 32.2 -9.9 Iron and steel 3.I 7.4 -4.3 Nonferrous metals 4.7 7.6 -2.9 Machinery and transportation equipment 84.6 60.5 24.I Power machinery 8.4 3.8 4.6 Special purpose machinery I2.5 4.6 7.9 General industrial machinery I0.4 3.9 6.5 Office machinery 8.7 2.9 5.8 Telecommunications 3.4 6.7 -3.3 Electrical machinery I0.4 8.I 2.3 Road vehicles I4.6 I9.2 -4.6 Passenger cars, new 3.9 I6.7 -I2.8 Aircraft, spacecraft I2.9 I.9 II.0 Transportation equipment 28.8 28.6 0.2 Professional and scientific instruments 5.2 I.4 3.8 Gothing and accessories I.I 6.4 -5.3 Miscellaneous manufactures I6.3 23.7 -7.4 SOURCE: U.S. Department of Commerce, Highlights of U.S. Export and Import Trade, December I98I. special policies may be required to maintain each for appropriate strategic purposes. Some Macro Trends Fortunately, though under intense current pressures, most U.S industries still appear viable and able to maintain their health through the l980s, given sensible national and corporate policies. Table 3 sets forth some macrotrends in the U.S. manufacturing structure and some consistent, politically neutral forecasts suggesting mid-l990s positions if current trends continue. Forecast figures are conservative in terms of reflecting possible radical shifts. Some believe electronics/communications markets will explosively expand the manufacturing sector. Others believe the steel, automobile, machine tool, and other mechanical industries may not survive. Whether such dramatic changes actually will occur is still largely a matter of choice, with built-in inertias probably slowing or offset- ting more extreme scenarios in the near future. Nevertheless, the structural changes and implications these forecasts suggest are profound, and positive actions are necessary (l) to avoid more disastrous possibilities and (2) to achieve the relatively benign consequences they suggest are possible. In l995, manufacturing is still likely to be the largest single-digit SIC

l4 activity, at some $2.4 trillion (current) dollars or about 22 percent of an $ll trillion economy (see Table 4). In this scenario some 3 million more workers would be anticipated in manufacturing (a l.l percent growth rate), but employment in services would expand by some 20 million. The largest sector shifts in GNP appear likely to be toward communications, finance and real estate, and services with greatest manufacturing output increases in electrical machinery, instru- ments, and chemicals and related products (see Table 5). Average per capita personal incomes would rise to over $33,000 (see Table 4), implying continuing pressures for wage increases and for tax relief at today's surtaxed levels. Most interesting, however, is the estimated $68,000 investment necessary to support each new manufacturing worker and the $45,000 per service worker.1* These imply aggregate investment needs of $l,l04 billion just to handle expected additions to the workforce by the mid-l990s. Other forecasts suggest that new plant and equipment expenditures will be running over $750 billion (current dollars) per year by l990.I5 All figures are, of course, only scalar indicators, not precise predictions. But projected capital expenditures imply savings, investments, and new equipment markets at vastly expanded dollar levels in the late l980s. Amounts of capital per worker employed may become ominously high. Assuming 3- to 5-year payback targets, one could hire l0 to l5 workers in developing countries before capital investment would be justified to replace one U.S. worker. With capital costs also rising, capital intensive strategies may become ever more difficult for U.S. firms to maintain in future years. But the alternatives are few. Manufacturing Health by Sectors Tables 5 through l0 set forth some measures of the relative health of various manufacturing sectors today. These data show that it is both unfair and unwise to TABLE 4 Key Macro Indicators, Manufacturing and Services in the United States, l960-l995 Indicators I960 I970 I980 I990 I995 Gross National Product ($ billions) 506.5 992.7 2,626.I 6,785.0 I0,3I5.0 Manufacturing output ($ billions) I43.8 252.2 59I.I I,605.0 2,370.0 Nonagriculture employment (millions) 54.2 70.9 90.4 I07.3 II3.7 Manufacturing employment (millions) I6.8 I9.3 20.3 22.I 23.0 Gross investment per manufacturing employee" ($ thousands) I0.7 I7.7 52.4 62.3 68.4 Total services (nonagriculture) employment (millions) 33.8 47.4 64.8 79.2 84.4 Gross investment per (nonagriculture) services employee" ($ thousands) I3.7 I9.6 48.2 45.3 45.9 Population (millions) I80.6 204.9 227.2 247.0 256.0 GNP per capita (current $) 2,805 4,854 II,786 29,987 43,600 GNP per capita (I972 constant $) 4,08I 5,295 6,5I7 8,036 9,062 Blue collar workers (millions) 24.I 27.8 3I.4 35.6 37.3 White collar workers (millions) 28.5 38.0 5I.9 6I.2 64.6 Average work week, manufacturing (hours) 39.7 39.8 39.7 38.3 38.0 Average work week, nonagriculture (hours) 38.6 37.I 35.3 34.2 34.0 Personal income (current $ billions) 402 8II 2,I60 5,563 8,458 Personal income per capita (dollars) 2,225 3,958 9,507 22,525 33,040 "Calculated figures for periods I960-I980 from Statistical Abstract of the United States, I98I. For I990-I995 calculated figures on same basis from projected growth rate of new plant and equipment expenditures, Predicast Forecasts, I982.

15 TABLE 5 Index of Production Output Changes (1967 = l00) FRB Industrial Production I960 I970 I980 I990 I995 Industrial production 66.2 I07.8 I47.2 223 258 Manufacturing 65 A I06.4 I46.7 226 262 Durable manufactures 62.9 I02.3 I36.7 2I6 248 Ordinance, private and government 50.I 92.7 77.9 96 I09 Lumber and products 74.7 I05.6 II9.3 I72 I8I Primary metals 72.4 I06.6 I0I.6 16I I83 Fabricated metal products 7I.I I02.4 I35.I 20I 22I Nonelectrical machinery 56.9 I04.4 I63.I 258 300 Electrical machinery 5I.6 I08.I I72.7 295 359 Transportation 65.4 89.5 II6.9 I83 204 Instruments 57.8 II2.0 I7I.I 299 36I Nondurable manufactures 69.3 II2.3 I6I.3 240 28I Foods 78.6 I08.9 I49.4 I99 225 Tobacco 90.5 I0I.5 II9.8 I34 I40 Textile mill products 69.3 III.8 I36.9 I9I 2I9 Apparel 8I.7 I0I.4 I28.3 I75 I94 Paper and products 68.0 II5.2 I5I.2 2II 240 Chemical and products 56.4 I20.4 206.9 354 434 Petroleum 76.7 II3.2 I34.9 I60 I64 Rubber and plastics 52.2 I32.3 256.I 475 592 Leather 90.2 90.4 70.I 63 59 SOURCE: Predicast Forecasts, I98I. condemn the performance of all U.S manufacturing on the basis of a few industries—notably steel, autos, textiles, and leather products—that were in serious difficulty even before the sharp l98l-l982 recession. Most other (l-and 2-digit SIC) manufacturing sectors had positive trade balances (Table 2), growth rates (Table 5), productivity growth (Table 6), R&D growth (Table 7), new plant and equipment investment (Table 8), and return on equity (Table 9) profiles. Despite shifts toward the service industries, national data show that investments in manufacturing have grown at a slightly faster rate from l960 to l980 than those in nonmanufacturing areas (see Table l0). Other than the troubled industries mentioned above, the most disturbing measurable sector observations are (l) the heavy $70+ billion import balance in petroleum, (2) the negative productivity gains in aircraft and parts, and (3) the negative (l980) trade balance in telecommuni- cations. But one must add to this some less measurable concerns: Japanese leadership in new antibiotic compounds and use of robotics, increased European competition in aircraft and space launches, and emergent Japanese power in RAM semiconductors and light-source technologies for fiber optics.1' These developments represent threats for the future that must be addressed. In the near future, however, many U.S. producing industries are performing well and will continue to provide attractive investment and employment opportunities as the recession eases. Others are currently in the doldrums, and some traditional industries will probably stay depressed because of permanent cost shifts in their natural resources. Still others can recover given enlightened management and national policies. Policy efforts should operate in a triage mode, focusing on those that can recover, future growth industries, and the few industries that are vital for strategic reasons.

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20 TABLE l0 Average Annual Rates of Increase for Plant and Equipment Expenditures by Company-Based Industry (Percent Based on Constant l972 Dollars) Industry I947-I980 I947-I972 I972-I980 Total nonfarm business 3.8 3.9 3.6 Manufacturing 3.5 2.4 3.6 Durable goods 4.4 3J 7.3 Primary metals 2.4 I.2 6.2 Blast furnaces I.6 0.3 5.9 Nonferrous metals 4.2 33 6.2 Fabricated metals 2.0 2.2 I.4 Electrical machinery 6.8 6.2 8.9 Machinery except electrical 5.3 4.2 9.I Transportation equipment" 5.4 3.8 I0.2 Motor vehicles 3J 2.8 5.8 Aircraft I2.2 8.7 23.9 Stone, clay, and glass 3.0 2.4 5.I Other durables6 3.8 4.7 0.9 Nondurable goods 2.7 I.5 6.5 Food and beverage I.8 I.6 2.3 Textiles -0.9 -0.2 -2.8 Paper 4.5 2.I I2.2 Chemicals 3.2 I.4 8.9 Petroleum 2.7 I.0 8.I Rubber 2.2 3.3 -I.2 Other nondurablesc 3.7 3.I 5.5 Nonmanufacturing 4.I 4.8 I.9 Mining 3.8 2.6 7.8 Transportation 0.8 I.4 -I.I Public utilities 4.8 6.I 0.9 Trade and services 4.4 5.I 2.I Wholesale and retail trade 2.7 3.I I.3 Finance, insurance, and real estate 6.3 7.0 4.2 Personal business and professional services 4.3 5.5 0.7 Communications and other 4.8 5.7 2.I Communications 5.9 6.4 4.3 Otherd 2.8 4.6 -2.9 "Includes industries not shown separately. ''Consists of lumber, furniture, instruments, and miscellaneous. ^Consists of apparel, tobacco, leather, and printing-publishing. ''Consists of construction; social services and membership organizations; and forestry, fisheries, and agricultural services. SOURCE: M. J. McKelvey, "Constant-Dollar Estimates of New Plant & Equipment Expenditures in the United States, I947-I980," Survey of Current Business, September I98I, p. 26.

2l O Q Ik O tO O 40 i— 30 20 10 -10 -20 -30 -40 1960 R&D-intensive manufactured products I J C/5 ec ° 1964 1968 1972 YEAR 1976 1979 20 |— 18 16 14 12 10 § 8 CD 6 4 2 _ Chemicals Aircraft I-!*-] N/•* Instruments I960 1964 1968 1972 1976 1979 YEAR FIGURE 3 U.S. trade balance in R&D-intensive, non-R&D-intensive, and selected other manufactured product groups (exports less imports). Note: "Chemicals" includes drugs and other allied products. After l977 the Commerce Department made revisions in the product group classifications that affected the balances of these product groups. The overall R&D-intensive balance was unaffected. Source: Science Indicators, l980. The Basic Challenge Without the massive hemorrhage caused by imported petroleum, the United States would have enjoyed a strong $44 billion positive trade balance (in l98l). Expec- tedly, most of the positive U.S. trade balance is in technology-intensive products (see Figure 3), for which U.S. exports grew in volume (l975-l980) faster than those of any of its major competitors except Japan.17 Overall, non-R&D- intensive manufacturers incurred a heavy trade loss. The most disturbing trade trends are (l) our increasing dependence on manufacturing exports to developing nations, which may require heavy financial support, and (2) the growing negative trade balances in R&D-intensive products with Japan since l975 (see Figure 4). Other than the Japanese challenge, today's core problems can be phrased relatively simply for many U.S. manufacturers. Wage rates and local environ- mental standards in developing countries are significantly lower than those in the United States. Product and production technologies can often move across national borders easily and have been doing so more rapidly in recent years (see Table ll). Many products can be produced to world-quality standards in a variety of countries by semi- or fully-automated techniques, and capital is relatively easily available to qualified users in most locations throughout the world. If labor

22 24 20 16 c/i 12 QC 5 s 8 tfl FIGURE 4 U.S. trade balance with selected countries for R&D-intensive manufactured products (exports less imports). Source: Science Indicators, l980. Developing nations .« .« Western Europe /Can West Germany L _L I I J_ I J 1967 1969 1971 1973 1975 1977 1979 YEAR 20 16 13 12 i K * 8 FIGURE 5 Costs of capital for industry in selected countries, l97l, l976, and l98l. Source: An Assessment of U.S. Competitiveness in High Technology Industries, 1982. | | United St«t« KSi Wtst G«fmany 1971 1976 YEAR 1981

23 or raw materials cost differentials in other countries are greater than shipping costs to the United States, the added margins available can be poured into quality if desired, thus giving foreign companies potentially dual advantages. Japan has had significant labor cost advantages as well as lower national overheads due to lower defense, inflation, and government spending—hence Japanese capital costs have been lower to producers (see Figure 5). Other high-discipline countries, like Singapore, Hong Kong, and Taiwan, can soon duplicate the Japanese threat on a smaller individual—but aggregatively large—scale.1* How can U.S. companies compete under these circumstances? For an increasing range of industries, the answers are not easy. U.S. MANAGEMENT PRACTICES Because of increased technological substitution and transfer potentials, long-ter m proprietary leads based on a fixed product or process technology are probably not possible any more. With economies of scale due to capital investment also harder to justify in an era of high-cost capital and low-cost foreign labor, leadership and affluence will increasingly depend on foresight, continuous innovation, and rapid response capabilities both at the national level and in individual companies. The willingness and capability for managers (l) to make long-term strategic invest- ments and (2) to innovate continuously (in both organizational and technological domains) will continue to be the most important factors—other than access to special resources—determining future success for most U.S. manufacturing sectors and individual companies. Unfortunately, both unwise U.S. government policies and widely accepted management practices have often militated against positive actions in both areas. The fact that both strong and weak manufacturing sectors—and usually strong and weak companies within sectors—exist side by side suggests that much of the burden for past problems and future changes must fall on the top managers and technical leaders of individual companies.19 One must be careful not to condemn our many well managed companies because of the shortsightedness displayed by others. But the following problem areas are widespread enough to be considered critical sources of U.S. manufacturing difficulties. Inappropriate Strategies While Japan exploited the high-quality, high-volume, low-cost, science and tech- nology importation strategies of American industry in its halcyon years, many U.S. managements adopted the limited-niche, price-skimming, elitist strategies they once disparaged in European companies. Some ignored emerging world markets and concentrated on a "series of highly segmented product niches" in the United States rather than using the full potential of scale economies in aggressive international strategies. Some mistakenly focused on luxury rather than quality within their segments and overlooked until too late the potential impact of experience-curve effects in mass markets where large opportunities lay. Others defended existing investments far too long, rather than adopting more attractive new product lines or processes. These strategic errors were compounded by (l) Japan's rapid emergence based on a highly intelligent and disciplined manufac- turing system with a strong motivation to export and (2) the extended capacity and willingness of competitors to diffuse manufacturing technologies to other countries.

TABLE ll Percentage U.S. Transfers of Innovations to Foreign Manufacturing Subsidiaries and Independent Licensees, by Period of U.S. Introduction, l945-1975a Transfers, by Number of Years Following U.S. Introduction Less than 2 Years After 2 01 4 or 5 Years After 6 to 9 Years After I0 or More Years After Period of U.S. Introduction 3 Years After Total I945-I955 (94 innovations) Via subsidiaries 4.3 5.6 3.4 I3.4 73.0 3I9 Via licensees 0.3 2.8 8.7 5.0 28.8 I46 Subsidiaries as percent of total 93.3 66.7 28.2 72.9 7I.7 68.6 I956-I965 (70 innovations) Via subsidiaries I3.4 2I.8 II.7 25.6 27.3 I79 Via licensees I0.4 I4.9 22.4 I9.4 32.8 67 Subsidiaries as percent of total 77.4 79.6 58.3 78.0 69.0 72.8 I966-I975 (57 innovations) Via subsidiaries 22.6 38.I 2I.6 I6.5 I.0 97 Via licensees 8.3 I6.7 4I.6 25.0 8.3 24 Subsidiaries as percent of total 9I.7 90.2 67.7 72.7 33.3 80.2 Total, I945-I975 (22I innovations) Via subsidiaries I0.I I5.8 8.9 I7.6 49.5 595 Via licensees 4.2 9.7 22.4 I4.8 48.9 237 Subsidiaries as percent of total 85.7 80.3 50.0 75.0 70.9 7I.5 "832 transfers abroad of 22I innovations by 32 U.S.-based multinational enterprises after these innovations were intro- duced in the United States. SOURCE: R. Vernon and W. Davidson, Foreign Production of Technology Intensive Products, Washington, D.C.: National Science Foundation, I979. Time Horizons As money prices increased for a variety of reasons, corporate time horizons generally were compressed and acceptable rates of return for investments grew apace. The latter was perhaps as much a function of increased uncertainties— which higher interest rates reflected in part—as the actual price of money. But these practices tended (in the early l970s especially) to discriminate selectively against research, development, and major investment projects that required long delays and great risks for fulfillment. Many companies sought short-term market payoffs or diversified through acquisitions (see Tables l2 and l3) to offset uncer- tainties and to acquire competencies rapidly rather than investing in longer-term technological or quality support programs for their existing lines. Because of antitrust policy constraints in their markets, lateral diversification became the only way many larger companies could grow as rapidly as they wished. And the stock market rewarded this behavior in the short run. In the late l970s, however, management horizons seemed to expand as net interest rates fell below inflation rates (see Figure 6). Real industrial R&D expenditures rose rapidly (see Figure 7) and civilian R&D expenditures as a percent of GNP began to move upward more rapidly than those of Japan and our large European competitors (see Figure 8). In the late l970s, mergers and acquisitions slowed (see Table l2) in the manufacturing and mining sectors from an annual average of 949 in l970-l974 to 543 in l975-l979, although average mergers were larger. Real annual growth rates in fixed plant and equipment for manu- facturers increased between l972 and l980 at 2.8 times the growth rate of

25 l947-l972 (see Table l0). Much of this was a response to new environmental laws and to the growing strength of Japanese and European incursions. Unfortunately it was also offset in international trade by the continued higher investment rates of both German and Japanese industries (see Table l4.) Financial Measures As large companies grew, their product lines naturally proliferated, and the complexity of most was compounded by diversification through acquisition (as noted above). Financial- and acquisition-minded managers naturally replaced manufacturing and technical top managers in these companies (see Figure 9). These managements perhaps responded more than their predecessors to the exigencies of reporting attractive quarterly or yearly earnings growth to the financial community. More importantly however, few top managers in such highly diversified companies still had the intuitive feel for their process or product technologies or the deep experience in technological innovation that bred comfort with major technological risks. Instead, financial allocation and control systems tended to emphasize near-term, surer prospects, whose results were more quan- tifiable and predictable. Together with rapid executive transfers and traditional incentive systems that rewarded short-term measurable performance, these control systems often undercut more basic technology building, quality improvement, and human and organizational development activities that would have given future strength. Most devastating was the effect on the not immediately measurable aspects of product quality. Under economic pressure, individual managements (l) under-invested in processes and designs that would guarantee consistent quality; (2) pressed their operating managers to "ship product" in order to dress up end-of-period state- ments, letting customers and distributors worry about product failures; and (3) failed to train workers adequately or develop work attitudes conducive to quality. Some marketing groups purposely placed the labels or trademarks of former top line products on poorer quality lines and lowered the specifications on their replacements to such extremes that former quality levels—like earlier top-line plywoods—were virtually impossible for consumers to obtain. Few U.S. manufacturers chose to understand W. E. Edwards Deming's maxim that, properly managed, high quality can actually cost less. And they gave up their market share and profit margins to those who did. World Competitve Trends While such practices have been observable in many situations, by no means did all U.S. companies fall into these traps. Many companies have maintained their strength and foresight. But overall trends of U.S. actions versus those of other large OECD countries (notably Japan and Germany) show many points of weakness. Rates of savings and investment in the United States have been lower than in most competitor countries (see Table l4). Productivity growth rates correlate strongly with investment rates, and the U.S. productivity growth rate was fourth among the five major OECD countries between l960 and l980 (see Table l5). Only the growth rate of the United Kingdom was lower. There has been a significant slowdown in output growth in most industrialized

26 x Os 9> <s^o^r^so•*osfsr.«.sorsim•*l^sDO Os ^ fi 2 IO fsinm — l • csicsj — rsi rsi so •* <N ^« 2 u u a cS BO oo o ^r-^vnsoooooOsoNO-^osrs.oo^rs, Os ~c Os r s QI vn - w •«• - - - f> vo « ^ rs •3 1 r- o •C "~.• *_••, t/^ — r i OO ~T -C r •• •~C- •— — rf • ~ — t^ O r^i ^^ r- ON ^ ; ON "i• ^ — - ^ r ) T ^^ — r J *" i '^ 'T r i _ o tn r i r — (X 3 O " r— ON OO v) •" i — •••". -^ O ON ON r•~ O •"• ft fN •*«•. T f- r s 0 so 0 in r s i -f _ _ _ ^ , — . ^ __ .- j ^ -* -t _ m £ M •j in •o Os r-oor-^•mr-oo^^r^fsmi^fs^-oouoO o> ^. •= 2 m <NOO<N fS^ •l <<NfS^•f^— • rsi .0 •o ^ u ^, fS ~c- oo O fS in t-- O oo t^ ^- ^• O in r^ in in in ^ 00 oo _£• Os O m•-H^ ^<Nf^^H^ <NfSfN^j•^f^ ^H -f• 3 ~* SO ^• ^ cr o CO r— * ^oor-^o^-oo^sorj^os^^os^o; — Os so V oo i/l rsi U c o u •A Os fsr^oN»^inwF)inrsiO•-«^•— HNO^^•sO<NON * so oo r- r- p in ;| ^H 1l « of •- •o 6Tt o< S|J? = §5SS5s-'S§5 = 5s [~- sO O r— t— BO O«• GN ^ 3 •O ^ en ^'rs.oor-oso^^somos.orsso-r-o^ JJ 00 n „; 0 VO VO rs ^S«i •fl-S — rsso — rsin^oo--•* o r? 1 Ot 3 oN ^^ QtT ej 8 s ^O os^so^oosmoomoo^rsim^^r-wrs, Os m 0 i a sOsO ^ ON sO CNsOfO <N^^^H^ -H•-H<Nr^m<N — sO M 1 _o V O •5 c •3 vI C E• 8 1 a" o i « O 3 •<3 3 1 •o ^ !» 1 1 II 1 <f. O •O i 1 Industry of Acquiring Con c "Includes miscellaneous an SOURCE: Statistical Absti u rsi os Total concerns acquired l|||Il LI |f|| Professional scientific i Nonmanufacturing* ''Includes unknown. u 2 u•o -: •_ — 5•^ E O•^^ g£ 2 •zi — r* S oO(4-QQ*^gO«.52,*-32O.5•Sefl4*2 EC ^™ a«B«WB«» C/3U«ti.«UJK s s

27 TABLE l3 Mergers and Acquisitions-Manufacturing and Mining Concerns, l960-l979 Large Concerns (Assets of $I0 Million or MoreJAcquired" Total Number of Mergers Assets Acquired (Millions of Dollars) Concerns Horizontal Horizontal Year Acquired Total and Vertical Conglomerate Total and Vertical Conglomerate I960 844 5I I4 37 I,535 453 I,082 I965 I,008 64 I6 48 3,254 573 2,68I I970 I,35I 91 I2 79 5,904 I,I74 4,730 I97I I,0II 59 8 5I 2,460 578 I,882 I972 9II 60 24 36 I,885 773 I,II2 I973 874 64 25 39 3,I49 I,093 2,056 I974 602 62 24 38 4,466 I,4I7 3,049 1975 439 59 7 52 4,950 267 4,683 I976 559 8I I8 63 6,279 I,03I 5,248 I977 590 99 30 69 8,670 I,937 6,733 I978 6I0 III 35 76 I0,724 4,675 6,050 I979 5I9 97 I0 87 I2,867 I,23I II,637 "Concerns for which financial data are publicly available. SOURCE: Statistical Abstract of the United States, I98I. countries since the worldwide recession of l974-l975. But as output slowed, most other countries reduced employment hours thereby bolstering their relative productivity rates. The United States was the only one of the large countries that generally maintained manufacturing employment and hours since l973.28 From l970 to l980 productivity in manufacturing industries grew almost four times faster in Japan (up l02 percent) and twice as fast in France (up 6l percent) and West Germany (up 60 percent) as in the United States (up 28 percent) in l0 years. These countries were, however, improving from substantially lower productivity bases. The United States still has the highest productivity levels among these countries as measured by GNP per person employed. The productivity level in France and West Germany in l980 was over l0 percent lower than in the United States, and the overall productivity level in Japan was over 30 percent below that in the United States (see Table l6). Nevertheless, the U.S. lead in productivity has decreased over the past decade. Virtually all U.S. manufacturing industries exhibited slowdowns in produc- tivity growth during this period. Printing and publishing, primary metals, lumber and wood products, and aircraft and parts were the worst relative performers. Since there seem to be different root causes in each case, no single productivity policy is likely to yield desired results across all industry. Total U.S. civilian R&D figures as a percent of GNP have not been as high as in West Germany or Japan (see Figure 8) auguring ill for future competition with these countries after the usual five- to seven-year incubation delay for R&D results to become commercial. The United States improved its R&D-intensive trade balances with Western Europe and developing nations in the l970s. But it has experienced a sharp loss of position versus Japan after l975 (see Figure 4), with Japanese companies achieving almost complete competitive dominance in small autos, motorcycles, electronic home applicances, and selected other sectors during this period. Finally, both Japan and West Germany have been producing more engineers per capita than the United States in recent years (see Figure l0), again suggesting greater future competitive pressures.

28 STRENGTHS AND POTENTIALS Among these bleak trends are there any positive aspects to the U.S. situation? Fortunately, yes! The higher per capita GDP of the United States (see Table l6) allows it a much-needed latitude for investment and risk taking, if properly encouraged by policy. The United States enjoys the world's most aggressive venture capital market. Its capacity to cultivate and grow the small-scale technological entrepreneurs who often introduce the most radical changes is without parallel elsewhere. And the country has the world's largest organized money markets with which to back up successful ventures, support intelligent world trade strategies, and build the huge mega projects called for in some future technologies. What other strengths exist as the basis for a future industrial manufacturing strategy? Certain R&D-intensive industries' exports through l980 (see Figure 3) showed strong net balances in chemicals and related products ($l2.2 billion), power machinery ($4.6 billion), special purpose machinery ($7.9 billion), general industrial machinery ($6.5 billion), office machinery ($5.8 billion), electrical machinery ($2.3 billion), and aircraft and spacecraft ($ll.0 billion). The best-managed U.S. companies are still in the vanguard worldwide. These companies have found ways to maintain their vision, entrepreneurial vigor, and capacities for change. The +6%r- ut -6% I I 1965 1967 1969 1971 1973 1975 1977 1979 1981 YEAR FIGURE 6 Real interest rates (average rates for three-month treasury bills less quarterly change in CPI seasonally adjusted annual rate). Source: Federal Reserve Board and Bureau of Labor Statistics.

29 50 i— 40 c/> 30 EC § QC oc 3 10 o 5 oc 3 o Q 50 40 30 20 10 Federal Government I o I960 1964 I I I I Total Company ..«•" * Federal Government I I I 1968 1972 YEAR 1976 1980 1960 1964 1968 1972 YEAR 1976 1980 FIGURE 7 Expenditures for industrial R&D by source of funds. GNP implicit price deflators were used to convert current dollars to constant l972 dollars. Note: "Company" includes all sources other than the federal government. Preliminary data are shown for l978 and l980, and estimates for l98l. United States enjoys preeminent positions in many fields, including such key fields for the future as semiconductors, computer hardware and software, biogenetics, communications, aerospace, energy, Pharmaceuticals, and medical equipment. And the management practices of its best companies could well be emulated by others. Whether they will be in the future is the open question. Groups like McKinsey and Company, through its "Excellence in American Management" and "Excellent Company" series, are actively attempting to distill and report on outstanding management practices in critical fields to provide potential models for others.21 Structural Strengths The outlook for manufacturing depends largely upon the way in which U.S. institutions use their potential strengths and respond to key challenges. The important point is that with intelligence, foresight, and flexibility many attractive options remain for a healthy manufacturing sector. The United States has some impressive structural strengths for industrial strategies. It has the world's largest truly integrated market (see Table l7), with special transportation access, cultural understanding, and psychological advantages for its own companies. Unfortunately this very advantage has sometimes in the past led to a parochialism and compla- cency that damaged the United States in world competition. But a significant

30 change in management outlook seems to be taking place in response to current competitive pressures. In the past when the U.S industrial system has been sufficiently pressed, it has proved itself capable of an awesome response. The current competitive trauma may be precisely what is needed to keep U.S industry's sclerosis from moving into terminal phases.22 U.S. industry has a range in scale of companies, diversity of products, and raw materials access enjoyed by few other countries. The United States has perhaps the greatest known—though not most easily recoverable—energy resources of any nation. Its workforce is highly disciplined, mobile, and well educated compared to most others. And recent studies report that American workers enjoy perhaps the highest degree of job satisfaction and pride in their work of any industrialized nation's workforce.23 European managers have often noted that U.S. union leadership has been more flexible and less politically dogmatic than its counter- parts elsewhere. In terms of cost pressure, U.S. wages—though starting from a higher base—have grown at only 5.9 percent per year from l970-l980. Corresponding figures for other countries are France, l2.5 percent; West Germany, l3.4 percent; Japan, ll3 percent; and the United Kindgom, l4.5 percent. Real hourly compensation in the United States grew at the slowest rate of these major countries (0.7 percent). Others grew as follows between l970 and l980: France, 4.7 percent; West Germany, 5.6 percent; Japan, 4.6 percent; and the United Kingdom, 3.3 percent. Although total national R&D expenditures shifted downward as a percentage of GNP relative to other industrialized countries through the late l970s, U.S. industrial R&D, at l.9l percent of industry GDP (as of l977), remained higher cc LU Q_ 2.5 r- 2.0 1.5 1.0 0.5 FIGURE 8 Estimated ratio of civilian R<5cD expenditures to GNP for selected countries. Source: Science Indicators, l980. WM Germany / ' United y ^* Japan Kingdom .'> l" 0 1961 1965 1969 1973 YEAR 1977 1981

3l TABLE 14 Comparative National Performance, by Country I962-I980 Savings as %ofGNP I970-I980 Average Investment Government Spending as Average Annual % Increase Total Productivity I980 Maximum Capital Gains Tax (%) as%ofGNP %ofGNPa Real GNP Japan 32.6 32.5 8.7 7.9 7.8 0 Belgium 2I.5 2I.5 I5.0 3.9 6.6 0 Netherlands 22.3 23.6 I6.8 4.I 6.4 0 Italy 20.2 20.6 I5.4 4.I 5.6 0 France 22.9 22.9 I3.8 4.4 5.4 0 Germany United Kingdom I9.6 I8.7 20.6 I8.4 I7.5 I8.7 3.6 S.2 2.7 0 30.0* 2.3 United States I7.6 I7.8 20.6 3.5 2.2 28.0 "Federal, state, and local current spending excluding transfer payments and capital spending. ^Applies to both short-term and long-term gains. SOURCE: J. P. Grace, speech before the Center for International Business, Houston, October 2I, I98I. than that of major OECD countries and Japan.2* But if past trends continue, Japan will soon have neutralized this comparative strength (see Table l8). While U.S. government R&D expenditures (as a percentage of GNP) dropped after a l964 peak, industrial expenditures grew as a percentage of GNP by a factor of 25 percent from l964 to l98l (see Table l9). And a current study shows that U.S. firms raised R&D expenditures by l6 percent in l98l and intended to raise them by l7 percent in l982 to $59.7 billion despite the recession.25 Profit and Trade Positions In l980, total returns to investors in the 500 largest U.S. industrial corporations averaged 2l.l percent. Petroleum, aerospace, transportation equipment (other than motor vehicles and aircraft), and electronics appliances were leading with returns well over 30 percent. All single-digit SIC industries had positive ratios of profits to stockholder equity until l980, when the automotive industry became negative (see Table 9). Highest performers were fabricated metal products, electrical and nonelectrical machinery, aircraft guided missiles and parts, tobacco manufactures, printing and publishing, pharmaceuticals, and petroleum refining and production. The weakest sectors in l980 were passenger automobiles, textile mill products, rubber and miscellaneous plastics products, and iron and steel. l980 has been used as the indicator year for most major trends because (l) more comparable data exist for that year and (2) l98l-l982 have been arbitrarily and heavily depressed by anti-inflation policies. To look ahead, large U.S. companies have leadership positions in key tech- nologies—energy, computer software and hardware, microelectronics, extreme environments, aerospace, communications, foods, health care, and genetics—that will be central to growth in the next decade. Individual companies also have very strong technical and market positions in pharmaceuticals, chemicals, plastics, power equipment, military technologies, construction, and other fields. And these areas of strength can be exploited by U.S. companies in related supplier and user industries.

32 o I 5 0 IE FIGURE 9 Percentage changes in profes- sional origins of corporate presidents from baseline years l948-l952—l00 largest U.S. companies. Source: Golightly & Co. International, l978. 40 20 -20 „— Technical N 33% \ M>rk<ting 20% OtlMT 14% 1948 1953 1952 1957 1958- 1962 1963 1967 YEAR 1968 1972 1973- 1977 The United States is still a recognized leader in product innovation in most fields, the greatest exceptions involving the strong Japanese emergence in motor- cycles, electronic consumer durable products, and small passenger cars. The highly individualistic training and outlook of American technologists; a responsive, affluent U.S. marketplace; and an aggressive venture capital system will probably contribute to continued U.S. product innovativeness in the future. Although there is some indication of a slowdown in inventiveness as measured by the number of patents granted (see Figure ll), this may be a function of the lack of patent protection in frontier areas like health, genetics, electronics, and software, as well as the courts' tendency to break up or prevent enforcement of strong patent positions in other fields. The individualistic management style of American companies lends itself to the fast decisions necessary for new product introduc- tion, especially in smaller companies. And being first to market in new product areas offers potentially important experience-curve advantages when strategically exploited. The small-company entrepreneurial structure of the United States will probably be a continuing strength to build on unless government policies uninten- tionally and arbitrarily discriminate too heavily against such companies—as specific, high-investment environmental regulations and the overuse of high- priced money for inflation control unfortunately have. FUTURE MARKETS Many recent articles express considerable pessimism about the future, discounting new market potentials and emphasizing the possibility of continuing world stag- flation. Yet strong demands exist, which if properly channeled and developed, can serve as bases for leveraging U.S. manufactures into other areas. Consumer goods markets that now appear relatively saturated will undoubtedly encounter the l980s1 own innovative equivalents of video tape records, video games, automated appliances, and home computer centers, which were certainly not recognized as

33 near-term markets in the early l970s. Service sectors will begin to automate, pushing their capital investments from the $3,000 per person levels common for office personnel today2' toward the $50,000 per person levels found in manu- facturing, thus helping expand other equipment and durables markets. In addition, recent studies suggest that more than $l trillion is needed in the next decade to refurbish the aging U.S. infrastructure of roads, sewers, water supplies, flood control systems, public buildings, etc.27 Major banks now predict that more than another $2 trillion will be required by the U.S. energy industry over the coming decade, with more than another trillion being invested by the energy industry worldwide.2' U.S. manufacturing companies should be major beneficiaries of the materials, supplies, and equipment markets created. Between l980 and the year 2000, a new population approximately the size of the world's total population in l940 will have to be fed, housed, clothed, and cared for. Since North America will increasingly be the buffer source of food supplies for the world, a large new infrastructure will be necessary to store and ship food to areas of need around the world. Although most of this will be for production and distribution structures overseas,29 these structures should present large opportunities for equipment, services, and trade support activities of American manufacturers. U.S. food trade and its financial support to developing nations should also offer access to crucial raw materials through counter trade relationships. TABLE 15 Productivity Growth (Output per Hour) in Manufacturing Industries of Selected Countries, l960-l980(l977 = l00) United West Germany United Kingdom Year States France Japan USSR I960 60.I 40.0 40.0 2I.7 58.3 55.9 I96I 6I.7 4I.9 42.I 24.6 58.8 57.9 I962 64.4 43.8 44.7 25.7 60.3 59.9 I963 69.0 46.4 46.8 27.7 63.5 62.I I964 72.4 48.7 50.3 3I.5 67.9 64.4 I965 74.6 5I.5 53.5 32.8 69.9 66.6 I966 75.4 55.2 55.4 36.I 72.5 68.7 I967 75.4 58.2 59.0 4I.4 75.6 70.8 I968 78.I 64.8 63.0 46.6 8I.2 73.0 I969 79.4 67.2 66.9 53.9 83.I 75.3 I970 79.2 70.6 68.5 60.7 83.2 77.6 I97I 84.I 74.3 7I.6 63.3 86.I 8I.3 I972 88.3 78.6 75.9 69.6 92.2 84.3 I973 93.I 82.9 80.4 77.6 97.5 89.I I974 90.9 85.8 85.2 80.8 97.2 92.9 I975 93.5 88.4 89.3 84.0 95.0 96.3 I976 97.7 95.7 95.0 9I.9 98.8 97.7 I977 I00.0 100.0 I00.0 I00.0 I00.0 I00.0 I978 I00.9 104.9 I03.8 I06.8 I03.2 I02.3 I979 I0I.9 I09.8 II0.3 II5.5 I05.8 I04.0 I980 (preliminary) I0I.4 II3.4 I09.5 I22.7 I04.4 NA SOURCES: Department of Labor, Bureau of Labor Statistics, International Comparisons of Manu- facturing Productivity and Labor Costs, Preliminary Measures for I980, May 20, I98I, mimeograph. Productivity figures for Soviet Union were provided by Francis Rushing of SRI International.

34 An aging population in the industrialized world will demand more in health care, recreation, personal support, housing, and other specialized facilities than it can produce itself. With its high health care, social standards, and affluence levels, the United States should have a natural lead in identifying and satisfying these needs. Concepts of health delivery are undergoing radical changes, with important new technologies and market opportunities appearing constantly. Further hundreds of billions of dollars are also needed to maintain and modernize the capital base of key U.S. industries that could utilize new technologies to regain competitiveness. Capital investment markets are forecast to grow at more than l0 percent per year through the next decade if government policies or cata- strophic economic downturns do not intervene. To avoid deterioration of the environment, more billions will annually go into markets to prevent and capture the effluents of modern society. All of these demands will call for structures, equipment, and supplies requiring manufactured goods on a scale rarely encountered before. Developing many of these markets effectively demands more carefully conceived government policies than we have often seen in the past. Most important are: (l) approaching public expenditures and regulations for environ- mental or safety purposes as aggregative markets" that compete at the margin for the public's limited expenditure or investment dollar and (2) developing federal capital accounting, reporting, and budgeting systems—which literally do TABLE l6 Real Gross Domestic Product per Employed Person for Selected Countries, l960-l980 (United States = 100)a United West Germany United Kingdom Year States France Japan Canada I950 I00 42.7 37.5 I5.6 54.0 85.0 I955 I00 45.7 45.I I8.9 52.8 88.3 I960 I00 54.2 56.6 24.I 54.5 90.4 I965 I00 60.2 60.I 3I.3 52.5 89.4 I966 I00 6I.0 62.3 32.9 5I.9 87.7 I967 I00 63.4 6I.5 36.2 53.8 87.9 I968 I00 64.0 63.8 39.5 55.0 89.0 I969 I00 67.2 67.6 43.8 55.6 905 I970 I00 7I.I 7I.3 48.7 57.6 92.6 I97I I00 72.7 7I.3 49.4 57.5 94.0 I972 I00 74.8 72.3 52.6 56.I 94.I I973 I00 76.5 74.2 55.2 56.8 94.2 I974 I00 80.3 77.8 56.5 57.4 96.0 I975 I00 8I.0 78.6 57.2 57.I 94.9 I976 I00 82.9 8I.7 59.I 57.9 96.3 I977 I00 82.7 82.7 60.2 57.2 95.I I978 I00 84.9 84.4 62.7 58.7 94.9 I979 I00 87.5 87.I 65.5 59.0 93.9 I980 (preliminary) I00 89.4 88.7 68.4 60.5 92.I "Output based on international price weights to enable comparable cross-country comparisons. SOURCE: Department of Labor, Bureau of Statistics, Comparative Real Gross Domestic Product, Real GDP per Capita, and Real GDP per Employed Person, I950-80, May I98I, mimeograph.

35 60 r- (9 I 40 _ ee w CL 20 United States Japan West Germany France FIGURE l0 Growth in scientific and engineering personnel, l970-l979. Source: An Assessment of U.S. Competitiveness in High Technology Industries, l982. not now exist.31 Properly developed public markets and investments can create added values substantially in excess of their costs—just like any other markets—and can be important productivity contributors and demand stimulators for manufacturing. New Process Technologies In another realm, new process technologies and their associated inventory control, quality development, and supplier and market coordination systems also offer new areas of emphasis for production innovation in both large and small companies. Radical innovations have traditionally come from smaller companies.32 But recent studies suggest that larger companies have accounted for an increasing percentage of important innovations.33 Their much-discussed consensus style may offer large Japanese companies some advantages for large process innovations in which coordination and cooperation among many disciplines and units may weigh more heavily than in product innovation. But critical elements of this style can be easily adapted if desired and applied to developing those process technologies of the future where the United States has natural potentials. Most important for U.S. manufacturing in the short run is the aggressive use of electronic automation technologies. Although Japan has about three times the number of robots in use, the United States probably leads in robotics design and research.3* Companies that have not yet committed can catch up quickly if they choose. Costs of electronics capabilities of a given power are dropping some 30 percent annually. Hence, later entrants, if they move with a strategic sense, may even have a systems costs advantage, as did Japan and Germany with their delayed entries into mechanically automated industrialization in the recent era.35 With genetics, health, and communications technologies also offering potential radical product changes, American companies that move in a timely fashion can still be at the frontier of a wide range of automated modern industries

36 TABLE 17 Comparative Gross National Products, l980 Dollars (Billions), at International Exchange Rates Country I980 GNP United States 2,626 Belgium II8 France 653 West Germany 823 Italy 394 Netherlands I60 United Kingdom 5I9 Japan I,040 in which wages are not a high percentage of total cost. For greatest impact, however, many need to reconceptualize the basic nature of their supplier, office, factory, quality achievement, workplace behavior, and man-materials-machine relationships in a true systems sense. As Goldhar and Burnham's paper will suggest, these are profound and exciting challenges that can offer strategic, productivity, and innovation leadership potentials to U.S. companies for the next two decades. Since scientific results in such frontier technologies are likely to be shared worldwide, key elements will be (l) maintaining close and imaginative relation- ships with leading thinkers in science and the universities and (2) aggressively innovating at the applications level. Here U.S. manufacturers should have comparative advantages. U.S. science maintains world leadership in a broad range of inquiries, dominating the Nobel Prizes and publications in many fields (see Table 20). STRATEGIES FOR THE FUTURE Given these potential strengths and the very real threats outlined above, what strategies can engineers, manufacturing managers, and government policymakers realistically adopt? Unfortunately, most solutions lie in the realm of attitudes, incentives, and political changes that will be hard to effect, rather than in specific and more easily impelemented policy changes. But systems that have been put in place by humans can be changed by humans. Positive Visions of the Future A genuine expectation of continuous and real economic growth could have important effects on U.S. innovation. In Japan the predictability of government economic policies is an acknowledged factor affecting the willingness of business- men to make long-term investments, where any variability increases risks." Technology also responds to demand. And expanding markets are very forgiving, decreasing the actual (and perceived) risks always involved in investment and innovation. Rapid growth stimulates both selective innovations and the broader restructuring of industries. As overall demand grows, small niches appear for highly specialized solutions. Innovations satisfying these frequently become desirable for wider applications (as did plastics and semiconductors), creating

37 TABLE l8 Industrial R&D Expenditures and Expenditures as a Percentage of the Domestic Product of Industry, l967-l977 (National Currency in Millions) Country BERD" DPI BERD/DPI United States I967 I6,385 659,200 2.49 I97I I8,3I4 862,700 2.I2 I975 24,I64 I,223,200 I.98 I977 29,907 I,563,000 I.9I United Kingdom I967 605 30,2I2 2.00 I97I 697 NA NA I975 I,340 76,739 I.75 I977 NA I02,663 NA West Germany I967 5,683 444,070 I.28 I97I I0,52I 682,350 I.54 I975 I4,469 9I2,660 I.59 I977 I6,7I7 I,0I6,730 I.64 France I967 6,292 442,700 I.42 I97I 8,962 695,297 I.29 I975 I5,6I7 I,I40,204 I.37 I977 I9,999 I,476,848 I.35 Japan I967 378,969 45,3I5,500 0.84 I97I 895,020 80,9I4,400 I.II 1975 I,684,846 I4I,I73,000 I.I9 I977 2,I09,499 I63,449,000 I.29 ^Business enterprise R&D (total industrial R&D expenditure). ''The domestic product of industry. SOURCE: Organisation of Economic Cooperation and Development, International Survey of the Resources Devoted to R&D by Member Countries. International Sta- tistical Year. I97I, Paris: OECD; and unpublished tabulations from OECD, I980. whole new industries and fueling potential future growth. Growth eases the problems of substituting new industries for old maturing ones and encourages a more modern competitive base to satisfy future demands. Productivity also tends to improve as markets grow. While layoffs are delayed during economic declines, thus decreasing productivity, new hires are delayed during upturns with just the opposite effect. The rest of the world still looks on the United States as offering a most attractive investment environment, and much of other countries' interest is in U.S. manufacturing. Foreign corporate investments in the United States are increas- ing. The largest component of the $65.5 billion investment in the United States in l980 was in manufacturing. Overall 37 percent of all foreign investment in the United States is in manufacturing with another l5 percent in petroleum. The remainder is in service areas. Obviously, foreign companies find U.S. markets and manufacturing bases of significant interest for the future. As noted, there is a plethora of constructive manufacturing and related service opportunities for U.S. industries if managers and engineers can convince the public and its political institutions to seize them. Seeing and communicating these to a public nurtured on current crises and doomsday forecasts will be a

38 asic and nnlied esearch r^^so^OO o oo ao so r^ m r— fl sTs o O -H O O O f} f*s. OO OO CTs Os O O ON Os ON ON Os oo OO t~- DO OO OO OO OO OO OO OO co < a: d d d d -H ~- d d d d ddddd dddd d d d irt v1 r- ON ON .-Hino^r^ ^ O so ON r»» o ^ l ' •-« ^ .-• iri IM O 1 B V u ON ON ON ON ON O O ^ •l • «-• ~H .l • O O l • ^H^H^H^I *-• <N <N B tofGNP 8 a. 1 73 1 S C/3 4) nr-inoo^ ooino-Hoo osoor^f^t-- r-inm—« o ra ?N t^r-r-ooaN oooooor-in ^•r^mr4^ _•-«^^ ^ ^ ^ T3 s a percen £ U. 2 Q •3 I 2 a 3 r-r^r^r-so ON oo o N <s l • mooO<Nas r-so^•r^ in r«i t— sor-r—ooCTs oooooooor- so^•^r^rs <Nr4<N<N <N m m < 5 o H <N<Nfs<NfS <N<N<N<NfS CS<SfS<N<N <N<NfSfS <N IN <N a xi •a •s 1 1 <A S •0 O «| .1 •-H ^ NO CTN OO P4sOOsfS.l i «- 'OOOOOO OsOON^- ON r*> ^~ BQ S II •.S sONOr-r-00 ONONONOO OOsOsOO OOO-H ^ <N C4 i 2 S 1 O<Noonr- in <N •l i r- ^r f«^fsr-ino r- in *N «l • o ON r- CO « U> •3 Q ^f O •3 00 >J-j g i £ I 1 oo 3 O •S r-r^ONOfs ^•<Nfs«-«<N rssooosooo iOOiOON m so oo f"i £ <Nfi^-inr- r-oooooor- ioininin^ ^•ininin so ^ io *3 M- O rt .0 i i \O t> •o Q <s a S ; t* 5 73 sosooor-ON ON^•<NOOXO inoo^-Hoo <Ninr-O f> in in y. *• «< a: ^ >ource os (2 ONO^mirt ^OOONONON OOt-OOONOO OOONOfS f> ^ iO ^H<NfS<Nrs nfS<NfSfs <Nrsfs<NfS fstNr^m m r^ m r^r-fssom ^•o>^•<Nr- m^osoo OO^-P-ON o r- l « 3 «i ?s » «j o a § i; 13 •§ 1 s Q* r-sOO<NNO ON^•«-•OOP- IO<NiOiOOO f^O•-'sO fl O 00 2 •8 1 1 3 p! 1 1 >> r«iinOmr- <N oo «-• in oo oo<Nootn^ mot-r^ oo oo ON r-r-oooooo ONONOOO o-H^fsn <Nr^m^- ^- ^- ^> ^ 0 « S; ^ ^ itofGN, O u € i i ii S •a i i u S•4 .3 •K ° rsm^•r-Tf ON^•OO^•OO <N^-ooin^ ^•ONmrs ^r os — !* S * ^ B •3 ^•^>ininso ^r-r-oooo ON ON ON o l • <Nf«^inr- CTN ^ j* 2 o <^<g 0 V* m < s ; ^s § 1 H & cd i* V ooo«nONr^ OONOor-r- r^oo^OTto ^H—•r<^ so oo ^> 3 •a Si G ca •O ^inininso P-P-OOONO •-• — <N^-^ P-ON-H^ r- ^ ^ M) S >•> o _ „ _ _ _ _ _ _ r i ^f n m rrj « c ,g •s• T3 «> •*. O i § g •s i i & 3 O 00 •g u Sell 3 ^ •o r-r^oN<Nin OO^ONON ooONOomoo «-«oor-ON so m r- 2 a * ^ X £ — 73 § 5 *L..f i Q E 8 §£ S O o •3 73 x V) tnr^^-^HON ooo-Hsoso -Hr-^-r-oo <NONONO <N ~* ^ * •S •s < u al ^ £ f*i^inr-oo o»-«m^in sOsOOOO<N inoofsoo ^ — oN 5 I § o § ta ^ O c Q 3 E "• 1 0^ insoor-r- l « O so ^ O P-sOON^<N <NOO»-« ON —« o O O WC •« 6 0. so^inscr- -HsooNm^- <Nr-inso^r ONOOOOsO r^ so O ofssooN^ o>tnONr-^• ONP-oo<Nr?i ^J-^H^V> l « <N n tninininso sor-r-ooON ONO«-«r^^• W^P-ON^H ^ so ON •3 1 9| jz « « •R w o u O NOTE: Percentages ai JGNP Impucit price d SOURCE: National S Commerce, Bureau ol ^ ca f ON W QQ rt ^». /— s C « jg 1 I 1 3 IH CO •> O~Hfsm^> insor-ooON o — <N f•i ^ msor-ooON£otS^to sososososo ^sosososo r-r-r-r-r- r-r-r-r-r-D-oowoow > ON ON ON ON ON ON ON ON ON GN Q\ ^^ ON ON ON ON ON ON ON ON s•"' ON s••' ^^ ••••'

39 80 60 i § 40 O 20 • To All U.S. / N Inventors •—..,. '. •••v / v •• X. To All Foreign Inventors _ Japan ••^—^v. cs.rm.nv FIGURE ll U.S. patents granted Unit«) Kingdom . ' ' ~*i Franc. to inventors from selected 1966 1968 1970 1972 1974 1976 1978 countries, l966-l978. Source: YEAR Science Indicators, l980. major challenge. But developing more positive visions of the future is a vital first step in instilling the morale and commitment to effect changes. Just as antici- pation of inflation can feed inflation, so can positive visions of the future set the climate for accomplishment.38 It is anomalous that knowledgeable people talk gloomily about future market demands when the government had to intervene so forcefully to quench these very demands through its monetary policies. Lower Capital Costs Lowering capital costs is a key to any U.S. strategy allowing high wages relative to the rest of the world. Critical components are: (l) lowering inflation by greater use of fiscal and productivity policies, rather than through monetary policies which selectively impact longer term investments, new entrepreneurial ventures, and hence the technological innovation that leads to new market opportunities and productivity growth; (2) greater emphasis in government expenditures on productivity-producing infrastructures (education, transportation support, disease prevention, disaster control) that, by employing people produc- tively and creating values higher than their factor costs, actually decrease total national costs; and (3) less emphasis in controlling inflation through unemployment techniques, which quench demand, but lower productivity by removing people from the workforce while maintaining a great portion of their demand potential through transfer payments. Other countries have proved that, properly managed, high employment levels need not be inflationary. One key is a significantly increased capital formation and savings rate (see Table l4).

40 TABLE 20 U.S. Percentage of the World.s Scholarly Articles Field I973 I975 I977 I978 I979 All Fields 39 38 38 38 37 Qinical medicine 43 43 43 43 43 Biomedicine 39 39 39 39 40 Biology 46 45 42 42 43 Chemistry 23 22 22 2I 2I Physics 33 32 30 3I 30 Earth and Space Sciences 47 44 45 45 45 Engineering and Technology 42 4I 40 39 4I Mathematics 48 44 4I 40 40 SOURCE: Science Indicators, I980. There is a multiple cost to high priced money used as an anti-inflation tool. A high interest rate itself represents a cost increase for producers and buyers. When carried to extremes, it creates layoffs, causing a labor surplus. This lowers the relative cost of labor versus capital. Hence, companies do not invest to replace labor, and a productivity slowdown occurs. The purchase price of new equipment fell relative to wages and fringe benefits by 2.7 percent between l948 and l965, encouraging investment. If energy is included, the cost of physical capital relative to labor fell 2.9 percent between l948 and l965. But if interest is included it fell only l.l percent between l948 and l965. From l972 to l978 the cost of physical capital (including energy) actually increased relative to labor costs by 2.9 percent. Including interest, the cost rose 4.2 percent between l972 and l978." Beyond this, high monetary prices discriminate against small businesses. Higher monetary prices for debt drive down P/E ratios, making equity too expensive in terms of ownership and shifting financings toward high debt ratios inappropriate for small businesses. The potential scale of new ventures is decreased, and risks escalate for all involved. This discourages the innovativeness that has traditionally come from small businesses and their capacity to pressure larger enterprises toward productivity and innovation. Companies with fewer than l00 employees have accounted for some 8l percent of new jobs (see Table 2l) in recent years,*0 but this growth is now being severely impaired by high money prices and the recession they have created. While larger companies can survive economic downturns, heavily leveraged small enterprises cannot.* * Otherwise viable enterprises are currently being permanently lost along with their innova- tion, product, and jobs potentials. One doubts that such extensive use of monetary policy—as opposed to fiscal policy coupled with productive government investment—is compatible as an anti-inflationary tool with the historical U.S. strategy of increasing personal wealth and opportunity through capital invest- ment, innovation, and entrepreneurial endeavor. New Cooperative Arrangements All the great national industrial strategies of this century—Swedish, Japanese, postwar German, Austrian, and even U.S.—have depended on new collaborative relations between institutions, predominantly labor, management, universities,

TABLE 2l Net New Jobs Created, by Size of Firm, 1969-l976 Number of Employees in Each Firm Total New Jobs As* Number of Total 20 or fewer 2I-50 5I-I00 I0I-500 50I or more Total 4,459,8I5 759,509 288,997 353,20I 897,38I 6,758,903 66.0 II.2 4.3 5.2 I3.3 I00.0 SOURCE: D. L. Birch, "Who Produces the Jobs," The Public Interest, Fall I98I. and/or government.** In wartime, the U.S. government has stimulated and tolerated highly imaginative collaborations between a wide variety of normally hostile institutions. Similar creativity and latitude in seeking national economic goals now seems appropriate. German, Japanese, and French financial structures for directing investment to new growth areas have been cited as desirable for the United States. Except in areas where adequate market incentives do not exist, I personally doubt whether significant government direction of investment in the United States would be more effective than the aggregate wisdom of our com- bined technological and financial communities. To the contrary, past government attempts to shore up "sunset industries" rather than to stimulate "sunrise indus- tries" have actively misdirected capital allocations. However, there are a series of new forms of cooperation at the industry- university-venture capital level that do deserve stimulation and support. The Hoechst-Massachusetts General Hospital-Harvard Medical School support program provides one model in genetics. The du Font-Harvard Medical School, Monsanto- Rockefeller University, and Genertech-University of California at San Francisco- City of Hope Hospital relationships provide others. The Center for Integrated Systems at Stanford brings some l7 microelectronics firms together in joint endeavor with university talents. Similar institutes are beginning at Massachusetts Institute of Technology and Rensselaer Polytechnic Institute, with specialized company support in other fields, like chemicals research. In Arizona, Minnesota, and North Carolina, university and industrial funds are being supplemented by state support; Westinghouse and Carnegie Mellon University have started a robotics institute, and so on.*3 Mechanisms for cooperation at the development level are also being created, especially between microelectronic producers and customers, like Intel and IBM to gain some of the advantages of the Japanese integrated supplier-customer-trading company complexes. And giant cooperative mega projects among competing oil companies have been increasingly allowed for synthetic fuel programs and other overseas development programs beyond the capabilities of one energy company. Maintaining the objectivity, freedom, and integrity of academic research in specific circumstances poses some profound issues—as does maintaining com- petitiveness among participants in cooperative development programs.** But new world competitive structures should force redefinition and reinterpretation of antitrust laws to recognize and foster world—not just U.S.—competition in the public interest. In recent years universities have never been entirely free of

42 competitive, commercial, or government pressures on their resources. There is little reason to believe that earlier models of these institutions' relationships have perpetual validity and that even better new models cannot be negotiated. These developing coordinative structures are an initial response to world challenges. But there are others.*! There is evidence that some U.S. unions recognize the seriousness of the current challenge and are willing to be more helpful in offsetting foreign competition. In exchange, workers will doubtless demand and deserve an adequate voice in the pacing and nature of changes and the institutional arrangements for protecting or retraining when displacements occur. Already many newer companies, like their Japanese counterparts, are trying to eliminate distinctions between owners, managers, and workers so that all share in the benefits and costs of change. "Export trading company" legislation is under- way to facilitate coalitions between banks and American manufacturers comparable to those enjoyed by competitor nations. And a number of possible models for R&D consortia are under discussion in the Department of Commerce to aid in developing costly technologies of common interest to a number of companies. The list is long. With flexible and visionary leadership a variety of new institutional structures could develop, allowing the United States to match and outperform similar institutional structures in other nations. Most of these merely require that government give permission for private initiatives, not that government drive or direct these initiatives. Education A refocus on technical education at public school and university levels is also badly needed. Until this year, SAT and MAT scores had fallen for nearly two decades. Half of all U.S. high school students have been taking no mathematics at all after the l0th grade. Only one junior or senior in six takes a science course. Only one in fourteen takes physics, and one in three takes chemistry. In l98l a survey of state science supervisors revealed a shortage of high school chemistry teachers in 38 states, mathematics teachers in 43 states, and physics teachers in 42 states. In the l970s the annual average number of new science and mathe- matics teachers produced by colleges and universities plunged: science teachers by 64 percent, math teachers by 78 percent.*' There are some 2,000 vacancies in U.S. engineering faculties today, with particularly glaring weaknesses in computer sciences, chemical engineering, and electrical engineering. And even in a recession, l7,000 unfilled entry-level engineering jobs exist coast to coast. Much of the equipment in university laboratories is outmoded, obsolete, or worn out. To bring it up to industrial standards has been estimated to cost between $l billion and $4 billion.*7 The Japanese are already outproducing the United States per capita in engineers by more than two to one. Between l965 and l977 the number of scientists and engineers in R&D nearly doubled (per capita in the workforce) in Japan. In the United States the ratio fell. Although the United States still leads in science and engineering professionals per worker, the Japanese and Germans will probably exceed us within a few years (see Figure l2). While the current recession and some more constructive national attitudes toward science and technology are causing a resurgence of undergraduate engineering, companies express such disappointment with graduate training that many choose to hire at the BS level and train their own engineers.*8

43 A massive, joint industry-government effort is needed to refocus and refund graduate engineering and to set meaningful targets and standards at the state level for training and hiring competent science teachers at high school levels.*9 The Massachusetts High Technology Council has called for a "Morrill Act Update" with a $l billion federal grant to match industry programs to update engineering. The council has also put together a model program to retrain unemployed high school teachers as computer programmers. It is also working closely with North- eastern University on a masters degree program in engineering for technically trained women whose career development was interrupted by family obligations.50 Similar imaginative endeavors are needed as a stopgap to meet shortages, but longer term commitments from federal and state groups are required to ensure a flexible, healthy, U.S. educational structure. Limited funding could cause concentration of quality engineering education into 25 to 50 research-supported universities, which could not flexibly meet all future needs.51 This is an area where government action is necessary. The market mechanism for directing people to science and engineering has worked only moderately well. Salaries offered to technically trained students remained higher than in any other fields for college graduates during the l970s. Technical graduates also received more offers than their nontechnical compatriots. The Deutsch/Shea/Evans high technology recruitment index from l970 to l980 showed a relatively continuous rise from 60 to approximately l40, with downturns occurring only in l97l and l975. But available labor market indicators have showed consistent patterns of shortages for engineers and computer specialists. There have been ample supplies of social and life scientists. The market for physical scientists has been improv- ing, and supply and demand seemed relatively balanced in mid-l980. But in recent years employment in science and engineering has grown more slowly (2.5 percent per year) than total U.S. employment and GNP (4 percent per year), indicating shifts in national activity patterns and also a relative shortage of trained scientists and engineers. Though limited, indicators show that the quality of the science and engineering workforce has not declined. For example, the proportion of scientists and engineers holding doctorates has increased, and test scores of prospective graduate students have remained high.52 New Structures for Systems Design and Management Both university and corporate structures need revision to utilize revolutionary new genetics and electronics technologies most effectively. Fortunately, these tech- nologies are highly compatible both with (l) emerging social trends and (2) what is known about productive and innovative management structures in advanced societies. In specific situations both technologies can allow design of smaller, cleaner, more flexible and humane production units with greater potentials for monitoring and controlling undesired effluents. They also permit more complex design processes integrating all aspects of product, process, plant, production, quality, and environmental monitoring and control systems. The traditional discipline-oriented faculty structures at engineering schools are ill-adapted for this, as are company organizations that separate product, process, plant, environ- mental, and computer engineering groups. Revised classroom approaches and major facilities changes will be needed at most universities to research and teach

ID o tr O LL. oc O m cc 01 100 80 60 40 20 USSR High Estimate United States France »•••• United Kingdom 1968 1972 YEAR 1976 1980 FIGURE l2 Scientists and engineers engaged in R&D per l0,000 labor force, by country, l966-l980. Data are for all scientists and engineers on a full-time equivalent basis. Data for Japan include persons employed primarily in R&D. Data for the United Kngdom include only persons employed by government and industry. Data for USSR are estimates. Source: Science Indicators, l980. integrated design effectively. Such facilities are very costly and easily outdated. This is a special area where consortia of companies can work effectively as associates with universities, providing projects and facilities support on a quid pro quo basis creating benefits for all parties. In industry, competitive pressures will soon demand integrated product, process, and plant designs to minimize manufacturing, distribution, and full life-cycle costs to the producer and customer. Using robotics, communications, and automation capabilities, industry can integrate relatively small-scale plants with flexible, dispersed, supplier or feeder networks to minimize joint inventory, labor, and fixed investment costs in ways not possible in less advanced countries. Some Japanese companies already operate such systems with only a few days of net inventory—as opposed to weeks in the U.S.—and have installed automated and robotized self-checking systems to assure quality on a first-time-through basis. Properly modified by U.S. industry, small-scale automated plants can help to achieve more personal identity and self-fulfillment in more challenging work situations. Using the full capacities of a more intelligent U.S. workforce both to

operate such plants and to seek the many small incremental productivity improve- ments that in the long run are most easily protected may provide one of the few real bases for outstripping less motivated or less well trained competitors abroad.11 Some well-managed U.S. companies, like Intel, have already built such concepts into their strategies, cultures, and organizational structures. Leadership, Incentives, Rewards Such broad-ranging innovative changes will require the same kind of farsighted risk-taking leadership that earlier made U.S. industry the envy of the world. Without such vision all the national policy shifts and opportunity potentials imaginable will come to naught. What most differentiates an innovative enter- prise, a great manufacturing company, or a productive society is a leadership that (l) is talented, (2) is farsighted, (3) rewards positive innovation, and C*) values excellence in human performance and products for its own merit.5* Companies produce fine products largely because the people at the top care about the product per se, elevate product or innovative people to strategic levels, and commit resources behind them.55 Company managements that look at technology or manufacturing activities simply as money mills to be compared against the financial advantages or disadvantages of hoarding silver or owning banks are unlikely to create the internal pressures or atmosphere that keep their organizations strong, processes current, quality high, and technologies at the forefront. Financial measures rarely reflect these crucial aspects of performance until years after the most critical actions have been taken or ignored. Sony has been an innovative leader because Messrs. Ibuka and Morita are talented and have long cherished innovation and quality products per se.5* Pilkington's float glass innovations occurred because Alastair Pilkington wanted to invent, and its top management had long time horizons, understood the need for innovation, and empathized with the chaos and risks involved.57 Japan has emerged largely because its leaders had vision, patience, and a high regard both for technological advance and for building the worth of their human resources.5* Until boards appoint and reward top managers for being innovation oriented and interested in the company's future product and cost positions, U.S. manufac- turing companies and industries will suffer. Fortunately, when plans are well conceived and communicated, the stock market does reward progressive com- panies with high P/E ratios, the basic method of allocating less expensive capital in the United States. To be effective, this longer-term focus must also be reflected in the full control and reward systems of the company. Properly developed, multiple goal "management-by-objectives" (MBO) systems, combined with carefully designed strategic portfolio plans and controls, provide available mechanisms for orienting lower-level decisions toward the future. Unfortunately, too few companies use these mechanisms to their full capability, relying mostly on short-term accounting and return on investment (ROI) controls instead. Smaller companies often have longer-term horizons because their owner-managers look to future stock market yields rather than to more current rewards. A greater use of measures and rewards that generously compensate large company executives for their units' total performance five years later might engender very useful effects.

Government Policy Changes The kinds of policy changes needed at government levels will be harder to imple- ment. The key issue is not simply more government sponsorship of R&D, except perhaps at the university level where—if regarded as a human resource invest- ment—R&D can yield especially high rewards. Here, society gets multiple benefits of (l) the research results themselves, (2) faculty retention and upgrading, and (3) enhanced course quality and student development. The President's Domestic Policy Review on Innovation in the United States indicated many other facets of government activity that vitally affect innova- tion. This (and other) current studies59 indicate that governments can make their greatest contributions by (l) aggregating demands that individual purchasers cannot effectuate, (2) creating or guaranteeing initial markets to meet important social needs, (3) supporting scientific and technical education, (4) making technical support infrastructure investments, (5) breaking down bottlenecks to change, (6) allowing amalgamations of private resources for large-scale systems development, (7) taking unusual risks beyond the capacities of private parties, (8) encouraging institutions to extend their time horizons through enlightened incentives, and (9) easing the distress and human costs of change. Selectively applied, these, rather than subsidies, trade barries, or direct support of industries, should be the cornerstones of future policies for manufacturing. Most important, however, are incentives. The direction of any society is established by the net vector of its values and incentives, and government is the most powerful single arbiter of both. Its most important direct actions can be taken on incentives. Changing relative propensities to save and invest in inno- vation and productivity improvements is critical. Increased savings simultane- ously decrease current expenditure pressures, increase investable funds, help lower money costs, and thus encourage productive investments. Some excellent adjustments in federal policy have occurred in the last two years, but uncertain- ties still persist for small investors who need safe posttax yields above inflation rates. Research limited partnerships and small business tax decreases have helped offset some of the special advantages government policy once offered real estate investments. But neither is as important for innovation as a confident, high P/E stock market—which depends in turn on reduced inflation, low interest rates, and an optimistic economy. Fortunately, the venture capital market has recently been explosively re- instated by relatively small but enlightened changes in capital gains taxes (see Table 22). The stock market could reestablish its potentials if governments could control their deficits and interest rates could move lower. But this requires a conscious withdrawal from the overexpenditure policies of the l970s. Govern- ment deficits have increasingly crowded out private capital in the money markets (see Table 23). And other actions have passed on to future generations the repayment of trillions of dollars in national debt and future fixed commitments voted during the last dozen years.'0 These have been root causes stimulating the recent inflation and its associated high money prices. Such forces must be reversed as a portion of any coherent future industrial strategy. Government actions can significantly help or retard needed innovations. But they should not be made the sole or critical focus of the national endeavor. The driving pressure for change must come from the industry managers, concerned citizens, and educators whose own futures and effectiveness are most vitally affected. Government should be more a catalyst than a reagent in most cases.

TABLE 22 Equity Capital Raised by Companies Having a Net Worth of Under $5 Million ($ Millions) Year Offerings Current $ Constant I980$ Maximum Capital Gains Tax Rate (%) I968 358 745.3 I,643.3 25.0 I969 698 I,366.9 2,869.5 25.0 I970 I98 375.0 747.3 29.5 I97I 248 550.9 I,044.5 40.0 I972 409 896.0 I,63I.2 45.0 I973 69 I59.7 274.8 45.0 I974 9 I6.I 25.3 45.0 I975 4 I6.2 23.2 45.0 I976 29 I44.8 I97.0 49.I I977 I3 42.6 54.8 49.I I978 2I 89.3 I06.9 49.I I979 46 I82.9 20I.I 28.0 I980 I35 82I.5 82I.5° 28.0 "Up by 3,288% over I974. SOURCE: J. P. Grace, speech before the Center for International Business, Houston, October 2I,I98I. But any successful future strategy must contain certain minimum dimensions requiring joint support: (l) a widely shared positive vision of a future society attractive to a large majority, (2) incentives to defer current expenditures and invest for the future, (3) a commitment to maximum development of human intellectual and personal resources, Of) a willingness to innovate constantly in both organizational and technological terms, (5) a genuine national policy to ease the distresses of change and to retrain individuals displaced, and (6) an acceptance of social and infrastructure investments as valid markets in themselves, as well as being potential contributors to national productivity and well being.'1 Setting forth such dimensions is not hard to do; implementing them is the difficult process. One of the challenges of this meeting and its work groups is to specify more clearly how these visions might be realistically attained. CONCLUSIONS As the Economist recently said, "Policy makers keep hoping that technology can rescue their economies. Actually it is the economies that need to be got right first. Technology needs economic policies that lead to expectations of high growth and profits, low interest and inflation rates. . . . What is good for invest- ment is generally good for [technology! . . . Purchasing promotes innovation best when the purchaser is pursuing self interest. .. . Setting the right regulatory climate is another way governments can help innovation. . . . Setting high stan- dards can help to make an industry more competitive by forcing it to deploy modern technologies. . . . This should be a trustbusting climate that discourages monopoly (allowing bright young companies to compete) and avoids inordinate delays in letting technology be implemented, e.g. by imposing realistic standards.1"2

48 TABLE 23 Federal Government Crowds Private Investment (Billions of Current $, Average of Period) Total Credit Federal Borrowings Federal as % of Total Years Market Borrowings I955-I959 43.2 2.4 6 I960-I964 60.6 5.3 9 I965-I969 98.7 I0.0 I0 I970-I974 I93.8 27.8 I4 I975-I979 375.2 9I.I 24 I980 434.I I26.8 29 SOURCE: J. P. Grace, "Energy and the Economy," Eighth Annual Energy Technology Exposition, Washington, D.C., March I98I. These are excellent guidelines if coupled with a true vision of a better to- morrow and a commitment to maximum human resource development supporting that vision. Today most of the limits as to what can be done are set by imagination and institutions. Never in history have science and technology offered so many options to improve living standards and life styles for humans. Somewhat like politics, engineering is the science of the possible. The challenges are (l) to release scientific, engineering, and managerial imaginations and (2) to eliminate institutional barriers to meeting future demands. If these can be accomplished, there need be no insurmountable limits to the potentials of manufacturing and its compatriot service sectors in satisfying U.S. and related world needs for production goods, life quality, and environmental protection. NOTES 1 National Research Council, The Competitive Status of the U.S. Auto Industry, Washington, D.C.: National Academy Press, 1982. 2Dataquest Inc., SIA Japanese Ministry of Finance, March l982. * Base data are from U.S. Department of Commerce, Productivity Measures for Selected Industries l954-80, Bulletin 2l28, and National Science Foundation, Science Indicators 1980, Washington, D.C. : National Science Foundation, l98l. *R. Hayes and W. J. Abernathy, "How to Manage Our Way to Economic Decline," Harvard Business Review, July-August l980, and R. Hayes and D. Garvin, "Managing as if Tomorrow Mattered," Harvard Business Review, May-June, l982, are two much-quoted examples. 5D. Micheals, Cybernation the Silent Conquest, Santa Barbara, Calif.: Center for the Study of Democratic Institutions, l974, provides a classic of modern concerns. V. Leontief, "The Distribution of Work and Income," Scientific American, September l982 presents both concerns and possible policy alternatives. 'Leontief, l982, op. cit. 7E. Ginsberg, "The Mechanization of Work," Scientific American, September l982, Using series with other definitions, Ginsberg shows increases in services from 46 percent in l940 to 68 percent in l980. Specific numbers are not as important as scales and trends. *F. M. Scherer, Research, Development, Patenting, and the Micro Structure of Productivity Growth, Report to NSF, June l98l.

* Many strategies in major organizations do "emerge" in this fashion, Se« H, Mintzberg, D. Raisinghani and A. Thoret, "The Structure of Unstructured Decision Processes," Administrative Science Quarterly, June l976, and 3. ft. Quinn, Strategies for Change: Logical Incrementalism, Richard D. Irwin, l9SO, "In the late 1800s and early 1900s the United States imported cheap labor to exploit natural resources, applied and adapted science developed abroad, en- couraged savings and private enterprise, developed literacy and a hi^h-school- trained workforce, built transportation and communications instrastructures, allowed capital to substitute for and add value to labor inputs, and initiated research programs in agricultural and mechanical areas of vital interest to these two key production sectors of the era. Early post-World War II (19*5-l960) strategies further exploited low U.S. raw material and energy costs, helped develop new world markets through trade agreements, controlled inflation, kept money costs low, applied technologies built up in war years, utilized scale economies to attack mass markets worldwide, educated returning veterans to college levels, developed professional management cadres, and drove U.S. technology through military and atomic leadership. In the l960s strategies shifted. Various government actions developed U.S. science through R&D support for universities and national laboratories; expanded middle class demands through wealth transfers, massive public expenditures, and support of trade unionism; drove technology frontiers in human health, space, and other unexplored environmental domains; provided mass education at the university level; and encouraged institutions for multinational trade and stability. "Statistical Abstract of the United States, l98l, Washington, D.C. : U.S. Department of Labor, Table 1425. 12Real estate is a special case of allowing consumption (enjoyment) along with tax-stimulated investment gain. Adam Smith, Paper Money, New Yorkt Dell, l98l, develops shifts toward real estate investment in detail. 13See P. Choate and S. Walters, America In Ruins, Washington, D.C. : Council of State Planning Agencies, l98l. l*These investment figures appear conservative, but one must remember that some 8l percent of the new jobs will be in enterprises employing fewer than l00 people. "The U.S. Economy Outlook Through l995: l983 Edition, Cleveland: Predicast, l982, p. l0l. "An Assessment of U.S. Competitiveness in High Technology Industries, Cabinent Council on Commerce and Trade, May l9, l982. "Ibid. I§R. Hofheinz and K. Calder, The East Asia Edge, Basic Books, Inc., New York, l982, develops the nature of this threat in some depth. "Five Year Outlook on Science and Technology, Washington, D.Cj National Science Foundation, 1982, places the blame for current problems squarely on U.S. managers and government policies. 20L. Thurow, "The Productivity Problem," Technology Review, November- December l980. 2lSee "Findings from the Excellent Companies," New York: McKinsey, June l98l; and T. Peters and R. Waterman, In Search of Excellence; Lessons From America's Best Run Companies, New York: Harper & Row, 1982. My current study on large- scale innovation is attempting to do this within a selected problem area.

50 22 M. Olsen, The Rise and Decline of Nations, Economic Growth. Stagflation and Social Rigidities, New Haven: Yale University Press, l982, suggests that in democracies, producing and user groups form coalitions with specially protected positions. If these are not forced to change by external traumas they go into slow certain decline. 23International Herald Tribune, May 20, l982, p. 3, reports on an international study by Gallup and CARA, Washington, D.C. 2*J. D. Lewis, "Technology Enterprise, and American Economic Growth," Science, March 5, l982, cites this as one of several important strengths of the U.S. position, but also notes that R&D is not the core issue. Longer time horizons, better use of human resources, and the social context of innovation had higher impacts. 2827th Annual McGraw Hill Survey of Business Plans for Research and Development Expenditures, 1982-85. New York: McGraw-Hill, l982. "The difference between this and the average $45,950 investment cited above is caused by the huge investments of utility, transportation, etc. fields included in the broad "services" definition. "P. Choate and S. Walter, America in Ruins, l98l, op. cit., state that $700 billion is needed for nonurban highway rehabilitation and reconstruction in the l980s and another $75-$ll0 billion for waterways. If past annual public sector construction expenditures of $9-$l2 billion on public buildings, $2-$3 billion on conservation development, and $2-$4 billion on sewer systems are added, the sum exceeds $l trillion for the l980s. 28 Bankers Trust and Chase Econometrics estimates reported in Oil & Gas Journal, October l2, l98l, p. 48, and November 9, l98l, p. l46. ~ 29 Food and Agriculture Organization, Agriculture: Toward 2000, Rome: FAO, l979, and Food and Agriculture Organization, Research Report #l0, Investment in Input Requirements for Accelerating Food Production in Low Income Countries by l990, Rome: FAO, l979, estimate total needs for the next l0 years as $l.8 trillion worldwide, of which the largest structures component is in irrigation: $l5-$20 billion for essential electrification, $l50 billion for agricultural machinery, and $l30 billion for irrigation equipment and installation. 30H. M. Peskin, P. R. Portney, and A. Kneese, Environmental Regulation and The U.S. Economy, Resources for the Future, Baltimore: Johns Hopkins Press, l98l, and J. B. Quinn, "Public Markets: Growth Opportunities and Environmental Improvement," Technology Review, June l974. 3IP. Choate and S. Walter, America in Ruins, l98l, op. cit., note the need for data bases to make capital accounting possible, annual analyses of public works needs related to overall economic performance, a phased capital budget relative to cyclical and long term needs, and economic linkage analyses to understand the impact of construction expenditures outside the geographical area where the construction takes place. 32 J. Jewkes, D. Sawers, and R. Stillerman, The Sources of Invention, London: Macmillan, l958. ~ ~ 33Innovations in Britain Since l945, Science Policy Research Unit, Sussex University, England, l98l. MAn Assessment of U.S. Competitiveness, l982, op. cit. 35E. Ginsberg, "The Mechanization of Work," Scientific American, September l982. "An Assessment of U.S. Competitiveness, l982, op. cit. "Statistical Abstract of the United States, l98l. Op. cit., Table l499.

51 ""Economic Report of the President of the United States," February l982, pp. 52-54. "L. Thorow, "The Productivity Problem," Technology Review, November- December l980. "For amplification see D. L. Birch, "Who Produces the Jobs?" The Public Interest, Fall l98l and Dun and Bradstreet Reports, November/December l98l, p. ll. ~~ "Dunn and Bradstreet reports business failures for January-September l98l at an annual rate of 24,000, the highest rate in the postwar era. This does not include another estimated 4,000 weekly that pay off their debts and close their doors without formally notifying authorities. *2E. Ginsberg, l982, op. cit. * 3See the series in "News and Comment," Science May 28, l982; June ll, l982; June l8, l982; and August 6, l982. **"Can the Law Reconcile the Interests of the Public, Academe, and Industry? Learning from Experience in Biotechnology," Association of the Bar of the City of New York, April 2l, l982. *5R. M. Coloton, "National Science Foundation Experience with University- Industry Centers" Technovation l, l98l, outlines experiences with some other alternatives. *'P. D. Kurd, "State of Precollege Education in Math and Sciences," Convocation on Precollege Education in Mathematics and Science, Washington, D.C., May l2-l3, l982, summarizes many of the better surveys of this problem. "J. R. Opel, "Education, Science, and National Economic Competitiveness," Science September l7, l982. *8C. Perkins, "Graduate Engineering Education and Problems of Innovation," Conference on Cooperative Research, MIT, February l9, l980. ""See National Academy of Engineering, Science and Mathematics in the Schools: Report of a Convocation, Washington, D.C.: National Academy Press, l982, for specific suggestions, and National Science Foundation Science and Engineering Education in the l980's, Washington, D.C.: NSF, l98l. "Also see "A New Slant on Engineering Training," Science, October l5, 1982. 51 J. G. Truxal and M. Visich, "Engineering Education and National Policy," Science, October 8, l982. " National Science Foundation, Science Indicators, l980, Washington, D.C. : NSF, l98l and A. Hansen, Scientists, Engineers, and National Security: An Educationaj Perspective, American Defense Preparedness Association, December ll, l980. 5SJ. D. Lewis, l982, op. cit. points out the high impact of these changes and the essential nature of innovative climates needed to support them. 5*R. N. Foster, "A Call for Vision in Managing Technology," Business Week, May 24, l982 summarizes some McKinsey & Co. findings in this regard. "It is telling that for almost three decades no production-engineering person has been chief executive officer of a major U.S. automobile company. In many U.S. companies the manufacturing activity does not have its own strategic plan at corporate levels (as marketing often does), and manufacturing is not widely regarded as a route to top executive responsibilities. 5SN. Lyons, SONY Vision, New York: Crown, l976. 5'See J. B. Quinn, Pilkington Brothers Limited case Hanover, N.Hi Amos Tuck School, l98l.

52 ""How We See Each Other: A Special Survey of Chief Executive Officers in U.S. and Japanese Firms," Fortune, August l0, l98l. 59See especially R. Rothwell and W. Zegveld, Industrial Innovation and Public Policy: Preparing for the l980*5 and l990's, Westport, Conn.: Greenwood Press. "P. Petersen, "No More Free Lunch for the Middle Class," New York Times, January l7, l982, p. 40. 41J. B. Quinn, "Public Markets; Growth Opportunities and Environmental Improvement," Technology Review, June l974. '211 The Pitfalls of Trying to Promote Innovation," The Economist, June 26, l982, p. 98.

RESPONSE TO THE KEYNOTE SPEECH ON THE CURRENT STATE OF U.S. MANUFACTURING Thomas J. Murrin It is a privilege to have this opportunity to comment on a highly important sub- ject—the current state of U.S. manufacturing and methods of improving it. In my view there is no more important issue, for it is vital to the economic survival of our nation and to our national security. Let me recognize at the outset that our American engineering capabilities, in general, are excellent and that the National Academy of Engineering is to be applauded for its wise leadership in directing our engineering expertise to the now crucial subject of manufacturing. But the challenge to American industry, and consequently to the American economy and our people's security and prosperity, is awesome. In industries in which America was preeminent—steel, ship-building, motorcycles, automobiles, consumer electronics—our leadership has been stripped away. To illustrate this situation, let me cite the following information from a recently published report on the automobile. Ford Motor Company's better plants turn out an average of two engines a day per employee using 777 square feet of plant space; the plants have up to three weeks of backup inventory, and use over 200 labor classifica- tions. In contrast, a Toyota plant turns out nine engines a day per employee, or more than four times as many as Ford's; it uses only 454 square feet of plant space per engine, or less than 60 percent of Ford's. A Toyota plant has only one hour of backup inventory and only seven labor classifications, less than 4 percent of Ford's. According to our studies, such manufacturing sophistication is typical of the Japanese in all of the segments on which they have concentrated. And this automobile comparison does not cite what may be the biggest competitive secret to success of the Japanese—continuous total quality improvement. Implicit in such an example is the shocking reality that two of our long-time manufacturing "standards of excellence"—so-called acceptable quality levels and economical ordering quantities—are no longer excellent. In fact, they are no longer competitive. They have been rendered obsolete by the Japanese. Of vital concern to the future health of other key segments of our American economy is the current targeting by the Japanese on microelectronics, computers, communications, machine tools, robots, and bioengineering—the next industries for Japanese world dominance. In regard to robots, for example, Japan has in place several times the number that the United States has, and it is far in advance 53

of the rest of the world. By l98l the Japanese had installed over 60,000 robots, while we in the United States have installed about 4,000. There are now over 200 companies in Japan producing robots. Last year they produced some 24,000 and they expect to double that number this year. Their typical robot producer is apparently planning to triple production over the next four to five years, suggesting that by then their output will be l50,000-200,000 robots per year. Furthermore, at a recent international conference on fifth-generation computer systems, the Japanese unveiled a master plan for the development of computers to meet the needs of the l990s. Here is a mobilization on a national scale that is aimed at the domination of the world computer market, and most of their advanced computer concepts were originally developed by three American universities. An unusually clear insight into the attitudes and ambitions of the Japanese is provided in the recent book, Japanese Technology, by Masanori Moritani. His closing paragraphs state: ~~^ The time has finally come when Japan will be called upon to take the lead in technology and pave its own unique road to the future. Simply following up on principles and ideas invented in America will not be enough to convince other countries. It is time Japan graduates from playing catch-up on products germinated in American society. Japan must discover the real needs of its own people in its own society, enlarge upon these needs in its own fashion, and convince the peoples of the world that these are their needs as well. The memory is still fresh of the toughness of Eric Hayden, the American speed skater who performed so magnificently at the l980 Winter Olympics. Hayden's giant body was a mass of muscle, his thighs were almost abnormally large. America in the l950s and l960s was Hayden personified. America in the l950s accounted for almost half the Free World's GNP and foreign reserves. Year after year it racked up gigantic trade surpluses. Its outlays for R&D overwhelmed those of the Soviet Union and West Germany, and it led the world in productivity. Truly it was a five-time gold medal winner. But what of America today? Ten years later, it still has a giant frame, yet its muscles are weakening and its arms and legs no longer move as it wills. Its heart flutters, and it gasps for breath as it skates. It is no longer intimidating. Even Iranian "athletes" scoff at it. Japan has grown to its present stature through America's grace. Is it not just a little cruel to force the United States to skate in the lead from beginning to end, taking the full brunt of the wind on its giant body? The age when Japan must be prepared to take its turn at the head of the pack and share the leaderships with America in every field is not merely close at hand. It has already begun. While we in the United States has the technology, the people, and the other resources to meet these economic challenges, our response will probably be insufficient if we continue on our present course. Therefore, doing things the same way we have always done them will no longer be sufficient. Accordingly—on a national scale—business, government, labor, and academe

55 in America can no longer maintain an attitude of indifference toward the indus- trial and technological policies of other nations, nor can our institutions any longer continue in their present roles and relationship and expect to witness anything other than the continuing decline of America's productivity, international competitiveness, and military security. A truly effective response to our economic problems requires an unified effort by these key segments of American society. We need a national commitment and an explicit strategy for American productivity improvement and international competitiveness, with particular emphasis on manufacturing. I am not suggesting that we must copy our competition's political systems. Rather, the challenge is to find in ourselves a uniquely American response—a response that calls upon our creativity and ingenuity—to protect our standard of living and to assure our national security. To that end, a national strategy for American productivity improvement and international competitiveness, with emphasis on manufacturing, should focus on fundamental changes and actions in several areas, including the following: • Technology. We must increase R&D spending and more rapidly and effectively bring the results to the marketplace, the office, and the factory. • Education and training. We must fill the unsatisfied demand for new skills and for more engineers and scientists. We must also encourage more mathematics and science courses in our grade schools. • Global trade and investment strategy. We must ensure that American firms are on an equal competitive footing with their trading partners. • Domestic savings and investment policy. We must increase long-term savings and ensure capital resources for our critical growth industries. • Policy formulation strategy. To achieve these changes, we must develop a consensus-based process for policy formulation to bring together the leaders of government, industry, labor, and academe on common ground, in pursuit of common, crucial goals. To the National Academy of Engineering and to our nation's engineers I would like to make several suggestions: • Realize more fully that you and your expertise represent a rare and crucial national resource, one that can and must contribute greatly to our country's current industrial and military challenges. • With a real sense of urgency, assign top-priority emphasis to manufac- turing, and consider the manufacturability of the products you design to be as important as their function. For example, encourage outstanding design engineers to transfer to manufacturing for about a year, so they will appreciate professionally the crucial need for the improved manufacturability of their designs. • Become more familiar with powerful quality and reliability techniques— for example, to evaluate and improve components and materials through a vigorous, statistically based procedure and to optimize production processes by use of advanced design-of-experiment methodologies—in order to increase composite yields in manufacturing and mean time between failure in ultimate use. • Make certain that you are very familiar with the state of the art in your field on a worldwide basis, particularly in Japan if your responsibilities relate to semiconductors, computers, communications, machine tools, robots, or bioengi-

56 neering. In doing this, you will better appreciate, for example, that the next generation of robotic systems will embody state-of-the-art technology from several sophisticated disciplines, such as advanced sensors, novel mechtronics, and artificial intelligence, and that, therefore, we must have many of our most outstanding engineers working in manufacturing. • In your workplaces, assume a leadership role in developing joint efforts between engineering, manufacturing, purchasing, marketing, and service in order to exploit outstanding opportunities in quality, manufacturability, reliability, and cost reduction. The emergence of such advanced American technologies as CAD, CAM, and CAT—and of advanced foreign manufacturing systems, such as Kanban and OPT~requires radical changes in the interrelationships between the different functions in our organizations. • Finally, promote and participate in programs to enhance our nation's en- gineering and manufacturing capabilities through synergistic cooperation among government, business, labor, and academe, such as DOD's current VHSIC program, as well as the emerging major R&D joint ventures on semiconductors and com- puters. I hope that these comments are of real interest and value and that this National Academy of Engineering meeting helps you and your engineering associates to make even more significant contributions to our nation's prosperity and security.

SESSION l NEW MANUFACTURING TECHNOLOGIES

Session l participants. Left to right: George H. Schaffer, Susan Foss, Session Chairman Joseph Harrington, Jr., William D. Beeby, and Joseph F. Engleberger.