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7 AfterwordâRationale for Continued Engagement with the Institutes To conduct this study, the committee faced a fundamental questionâwhy should the Department of Defense (DoD) continue to play a role in the advanced manufacturing institutes and their publicâprivate partnership model? Manufacturing plays a key role in national security, both in providing equipment for the military and also in building a strong, resilient economy required to fund national defense. DoD requires technology leadership, and that requires manufacturing technology leadership.1 DoD plays a key role in the U.S. manufacturing eco-system, purchasing 8 percent of U.S. manufacturing output2 and accounting for approximately 15 percent of total U.S. R&D spending.3 Hence, DoD not only plays an important role in the U.S. manufacturing eco-system, but it also crucially depends on a strong civilian manufacturing base. While most Americans believe the United States is losing manufacturing to low-cost producers in Asia, Germanyâs manufacturing experience tells a different story. Its manufacturing wages are much higher than in the United States, yet manufacturing accounts for almost twice as large a share of GDP as in the United States, and it runs a massive manufacturing trade surplus, including with Asian nations. Germany maintains a strong manufacturing ecosystem for its manufacturers that closely ties innovation and production. It undertakes collaborative R&D between small and large firms and university engineering, and has a world-renowned skilled manufacturing workforce.4 Its system of over 70 Fraunhofer institutes is a publicâprivate partnership conceived in 1949 that effectively pursues each of these tasks. In contrast, the United States faces a series of gaps in its manufacturing innovation system: ï· Low productivity. While U.S. manufacturing productivity was increasing by an average of 2 percent per year from 1992-2004, it declined by an average of 0.3 percent per year from 2004-2016.5 Manufacturing productivity has grown at less than 1 percent for the past 8 years.6 The low productivity level is a signal of an underlying innovation system problem. 1 Department of Defense (DoD), Office of the Undersecretary of Defense for Acquisition and Sustainment and Office of the Deputy Assistant Secretary of Defense for Industrial Policy, Assessing and Strengthening the Manufacturing and Defense Industrial Base and Supply Chain Resiliency of the United States, Sept. 2018, 19, 24- 31. 2 L. Uchitelle, 2017, Making It, Why Manufacturing Still Matters, The New Press, New York.(citing BEA data). 3 15% of R&D spending, See, AAAS Research and Development Funding in FY2016 Appropriations (2017), http://www.aaas.org/sites/default/files/16c%20RD%20Agency.jpg (includes Defense 6.1-6.3 Science and Technology funding of $15.41B, plus $58.06B in later stage funding (see also, table in Option C); National Science Board, Science and Engineering Indicators 2018, Table 4-1, https://www.nsf.gov/statistics/2018/nsb20181/report/sections/research-and-development-u-s-trends-and- international-comparisons/recent-trends-in-u-s-r-d-performance#u-s-total-r-d-and-r-d-intensity Accessed on 1/2/2019. ($495B in 2015 U.S. R&D expenditures by performing sector and source of funds). 4 W.B. Bonvillian and P.L. Singer, 2018, Advanced Manufacturing, The New American Innovation Policies, MIT Press Cambridge, MA, 178-183. 5 Bureau of Labor Statistics, Multifactor productivity slowdown in U.S. manufacturing, Monthly Labor Review, July 2018, https://www.bls.gov/opub/mlr/2018/article/multifactor-productivity-slowdown-in-us-manufacturing.htm. 6 Bureau of Labor Statistics, Productivity and Costs, News Release, Feb. 6, 2019, 2, https://www.bls.gov/news.release/pdf/prod2.pdf. See also, S.N. Houseman, Understanding the decline of U.S. PREPUBLICATION COPY â SUBJECT TO FURTHER EDITORIAL CORRECTION 7-1
ï· Its supporting manufacturing ecosystem has thinned out. U.S. manufacturing investment in capital plant, equipment and information technology is also at historically low levels. Ironically, at the same time, the United States is running a massive trade deficit in manufactured goods, rising to $868 billion in 2016,7 including a 2018 deficit of over $120 billion in advanced technology goods.8 The loss of one-third of manufacturing jobs between 2000-2010 is a signal of a hollowing sector, with 64,000 plants closing from 2000-2013.910 For a series of reasons, the U.S. financial sector has pressured firms to go âasset lightâ to lower risk; in this less integrated system small and mid-sized firms are left âhome alone.â11 ï· It has an innovation access and scale-up problem for main street firms and startups. While there are many industrial sectors, there tend to be three kinds of manufacturing firms. While large multinationals are generally strong, they are global, need to be in international markets and increasingly have been producing abroad. Small and mid-sized manufacturers (under 500 employees), which produce 46 percent of U.S. output,12 have trouble obtaining financing to scale innovation. To survive, they tend to be risk averse, thinly capitalized, and perform little R&D, so have trouble implementing innovation despite their importance to output.13 While segments of the U.S. economy rely on entrepreneurial startups with venture capital financing to bring innovation into its economy, venture capital has focused on returns from software, services and biotechs.14 âHardtechâ firms that plan to manufacture received only 5 percent of venture funding investments in 2015; the lack of an alternative financing method is a significant obstacle to scaling their innovations.15 ï· It has delinked innovation and production. R&D, not manufacturing, is seen in the United States as âtheâ innovation system. Yet innovation is about turning an idea into a solution that adds value from a customerâs perspective. It is a full system, from R&D through production stages; failure to understand production as a key part of this system is a fragmented view. manufacturing employment, Upjohn Institute Working Papers, 2018, https://research.upjohn.org/cgi/viewcontent.cgi?article=1305&context=up_workingpapers. 7 Statista, Trade deficit of goods manufactured in the United States, 2000-2016, https://www.statista.com/statistics/814589/manufactured-goods-trade-deficit-us/. 8 Bureau of Economic Analysis (BEA) and Census Bureau, U.S. International Trade in Goods and Services, Nov. 2018, Exhibit 16, U.S. Trade in Advanced Technology Products, https://www.bea.gov/system/files/2019- 02/trad1118_4.pdf. Â 9 Levels of employment and value added in manufacturing since 2013, but levels of employment and non- computer value-added in manufacturing do not come close to those of two decades ago. 10 S.N. Houseman, 2018, âUnderstanding the Decline of U.S. Manufacturing Employment.â Upjohn Institute Working Paper 18-287, W.E. Upjohn Institute for Employment Research, Kalamazoo, MI, https://doi.org/10.17848/wp18-287. 11 S. Berger and the MIT Task Force on Production and Innovation, 2013, Making in America, MIT Press, Cambridge, MA. 12 Small Business Administration, 2012, âFrequently Asked Questions About Small Business, Small Businesses Comprise What Share of the U.S. Economy,â https://www.sba.gov/sites/default/files/FAQ_Sept_2012.pdf. 13 S. Helper and T. Mahoney, 2017, âNext Generation Supply Chains,â Mforesight, July, http://mforesight.org/projects-events/supply-chains/. 14 Bonvillian and Singer, Advanced Manufacturing, 185-215. See also, W. Lazonick, 2009, Sustainable Prosperity in the New Economy? Business Organization and High-Tech Employment in the United States, W.E. Upjohn Institute, Kalamazoo, MI. 15 Bonvillian and Singer, Advanced Manufacturing, 193-194. PREPUBLICATION COPY â SUBJECT TO FURTHER EDITORIAL CORRECTION 7-2
Production, especially initial production of a new technology, requires very creative engineering and typically reconsideration of the underlying science in dense feedback loops leading to final design and production. In the postwar period, the United States had a system of âinnovate here/produce hereâ and obtained the full spectrum of gains from every stage. The U.S. has increasingly shifted, however, to a distributed system of âinnovate here/produce there.â16 Because production is part of the innovation system and most products require close connection between production and innovation, a system of âproduce thereâ increasingly risks a system of âproduce there/innovate thereâ as the production and the innovation tied to it shifts abroad. Yet a strong innovation system is crucial to DoD. A technology strategy that is disconnected from manufacturing advance leads to a broken innovation system. That is what DoD is now starting to face. ï· It has a weak and highly decentralized workforce education system. Although the United States lost 5.8 million manufacturing jobs between 2000 and 2010, 17 percent of those jobs have come back. Other countries are facing increasing production costs (especially China), and there is a greater awareness of the hidden costs of offshoring, such as those mentioned above. The U.S. has traditionally been a high-wage nation, but the German approach shows that the most likely path to success for the United States is to combine its R&D system with a highly-skilled workforce, able to speed new technologies into production by adopting and de-bugging these new technologies quickly.17 Yet the United States has reduced its spending on training, in manufacturing and generally. âCorporate spending on training as a share of gross domestic product (GDP) declined from more than one-half of a percent in 2000 to one-third of a percent in 2013. The government also significantly underinvests in workforce training programs, dedicating just 0.1 percent of GDP in active labor market programs compared with the Organization for Economic Development (OECD) average of 0.6 percent of GDP. Moreover, the United States now invests less than half of what it did on such programs 30 years ago, as a share of GDP.â18 The broken U.S. labor market lacks both an information system to help employers and employees navigate it and a system for effective skills training.19 One must then ask, if the innovation system for production has significant gaps, could the United States apply its still strong R&D innovation system to fill them? Although the United States has R&D-led innovation, other countriesânotably Germany, Japan, Korea, Taiwan, and now Chinaâhave manufacturing-led innovation. Because the United States led world production output after World War II with its remarkable mass production capabilityâno other nation was closeâthe United States simply assumed its production leadership would be ongoing, and focused on the R&D stage.20 Japanâs leadership of the quality production paradigm led the United States to try to catch up in the 1970s and 80s but not to adopt a manufacturing-led innovation capability along with its R&D-led innovation. 16 Bonvillian and Singer, Advanced Manufacturing, 57-58. 17 Berger, Making in America; S. Helper and R. Martins, âThe High Road in Manufacturing,â in Strategies for Improving Job Quality in Low-wage Industries (P. Osterman, ed.), MIT Press, Cambridge, MA, forthcoming 2019. 18 W.B. Bonvillian and S.E. Sarma, âThe Quest for Quality Jobs,â Issues in Science and Technology, Fall 2018, https://issues.org/the-quest-for-quality-jobs/. 19 S.E. Sarma and W.B. Bonvillian, 2018, Fixing an Imperfect Labor Market Information System, Issues in Science and Technology, Fall 2018, https://issues.org/fixing-an-imperfect-labor-market-information-system.Â 20 Bonvillian and Singer, Advanced Manufacturing, 34. PREPUBLICATION COPY â SUBJECT TO FURTHER EDITORIAL CORRECTION 7-3
Scientists and engineers now tell us that a series of new advanced manufacturing paradigms may be in range that could transform manufacturing efficiency, productivity and returns. The opportunities include digital production, advanced materials, nanomanufacturing, mass customization, and specific new technology areas in photonics, biofabrication, power electronics, advanced composites, etc. The core idea behind advanced manufacturing, then, is to bring the still strong U.S. innovation system into manufacturing. The U.S. key trading partners and competitors spend vastly more on maintaining their manufacturing base and investing in advanced manufacturing than does the United Statesâ8 to 50 times more, as shown in Table 3.3. The importance of maintaining this base in the United States is increasingly being recognized.21 No one actor, even DoD through its contracting role, can generate all of the new manufacturing technologies and skilled workers and suppliers that it depends on. Instead, DoD can help foster a network of manufacturing innovation institutes where a dense web of firms, universities, labor, national and corporate labs all come together to both supply and demand increasingly sophisticated technology. The market alone does not support efficient levels of investment in these networks, variously called a âmanufacturing ecosystemâ or âthe industrial commons.â The institute model deals with the gaps in the U.S. manufacturing ecosystem: ï· Connecting small and large firms in collaborative innovation to restore the thinned-out ecosystem ï· Relinking innovation and production in collaboration between firms and universities ï· Pursuing production innovations to grow efficiencies and productivity ï· Providing shared facilities for scale-up ï· Building a skilled workforce in the advanced technologies. These address key structural issues but the timetable is longer than the institutesâ current 5-year terms. These are longer term problems and require longer term leveraging from federal investments. At stake is the industrial base that DoD understands it must have if it is to have the sustained technology leadership required for long-term national security. A National Academy of Engineering 2015 study, âMaking Value for America,â noted that manufacturers serve and depend on complex networks of activities that span multiple locations, companies, and economic sectors and include services and software.22 These networks create complex value chains. We fail to understand the importance of manufacturing if we focus only on the production moment; it is core to a much larger system. The report found that value chains that rely on manufactured goods as either a part or as a delivery mechanism, âaccount for 25% of employment, over 40% of gross domestic product, and almost 80 percent of R&D spendingâ in the United States.23 Manufacturing, then, is indeed a critical area for national economic strength. The report found that âthe greatest threat to American prosperity is not that other countries will get better and catch up toâor surpassâthe United States; it is that the United States will fail to keep improving itself and thus fall 21 Advanced Manufacturing Partnership (through PCAST), Report to the President on Ensuring American Leadership in Advanced Manufacturing (PCAST, The White House, June 2011; Advanced Manufacturing Partnership (through PCAST), Report to the President on Accelerating Advanced manufacturing, (PCAST, The White House, October 2014); G.P. Pisano and W. Shih, Producing Prosperity: Why American needs a Manufacturing Renaissance, Harvard Business School Press, Cambridge, MA, 2012; Berger, Making in America; Uchitelle, Making It; Bonvillian and Singer, Advanced Manufacturing. 22 National Academy of Engineering, 2015, Making Value in America, Embracing the Future of Manufacturing, Technology and Work, The National Academies Press, Washington, DC, 14, https://www.nap.edu/catalog/19483. 23 National Academy of Engineering, Making Value in America, p. 15. PREPUBLICATION COPY â SUBJECT TO FURTHER EDITORIAL CORRECTION 7-4
behind as other countries continue to improve.â24 Reliant on these value chains for much of its activity, DoD has a disproportionate stake in this outcome. The core idea behind advanced manufacturing, then, is to bring the still strong U.S. R&D innovation system into âinnovate here/produce here/prosper hereâ manufacturing. Debates over manufacturing support are not new. During the summer of 1791, Alexander Hamilton drafted his âReport on Manufactures,â battling with Jefferson over whether Americaâs future should be commercial and industrial or agrarian. At that time, Hamilton proposed that: Manufactures, and particularly the means of promoting suchâ¦will tend to render the United States independent of foreign nations for military and other essential supplies.â25 This point on the relation between manufacturing strength and independence is arguably an enduring lesson. Concerning this military-industrial connection, he found âIt would, also, be a material aid to manufacturers of this nature, as well as a mean of public security, if provision should be made for an annual purchase of military weapons, of home manufactureâ¦.â26 And applying innovation to manufacturing was one of his ideas; he advocated federal encouragement of ânew inventions . . . particularly those, which relate to machinery. A few months later he concluded that âa spirit of manufacturingâ¦ will serve to promote essentially the industry, the wealth, the strength and the independence and the substantial prosperity of the country.â27 In his remarks at the studyâs workshop, Jeff Wilcox (Vice President, Digital Transformation, Lockheed Martin Corporation) noted that: Weâre entering an era where weâve moved beyond thinking about manufacturing as an explicit distinct function into manufacturing as a community, which is the fulcrum for digital value creation. I donât know that everybody has their brain around that. So to the extent to which you think about the strategic posture of the institutes going forward, you can think in terms of how are they supporting industry 4.0, how are they supporting this fourth industrial revolution, how are they coming together to leverage data and to take a strategic posture towards our data as a U.S. industrial commons. He later continued: Iâm always struck by how much the conversation in this room today is like the conversation we had 225 years ago. Itâs really fascinating. And thatâs a good thing. It doesnât go awayâpublicâprivate partnerships. Hamilton was the progenitor of publicâprivate partnerships. He noted that Hamiltonâs 1792 âSociety for the Establishment of Useful Manufactures (SUM),â a publicâprivate partnership with Patterson, New Jersey, used the Passaic Falls, a 77-foot water drop, to found what became a cluster of factories now considered the birthplace of Americaâs industrial revolution. With government improvements providing power from the river, industry arrived in Patterson to use it. By1837 it had become the site of early American steam locomotive production and in 1897 the site where the first engine-powered submarine was produced. 24 National Academy of Engineering, Making Value in America, p. 27. 25 A. Hamilton, Report on Manufactures (to the House of Representatives), December 5, 1791, (introduction) (from, Hamilton, Henry Cabot Lodge, ed., The Works of Alexander Hamilton (Federal Edition), Industry and Commerce, reproduced at, https://oll.libertyfund.org/titles/hamilton-the-works-of-alexander-hamilton-federal- edition-vol-4#lf0249-04_head_012. 26 Hamilton, Report on Manufactures, under âIron.â 27 A. Hamilton, Report Relative to the Additional Supplies for the Ensuing Year (to the Speaker of the House), Treasury Department, March 16, 1792 (from National Archives, Founders Online, https://founders.archives.gov/?q=%20industry%20Author%3A%22Hamilton%2C%20Alexander%22&s=11113111 11&r=51). PREPUBLICATION COPY â SUBJECT TO FURTHER EDITORIAL CORRECTION 7-5
The final question is, then, are we preparedâas a nationâto lead in advanced manufacturing through the 21st century or are we willing to surrender global leadership? As a nation, the consequences are too dire to surrender; we must take the lead. With this lens, the restoration of production innovation leadership is crucial to Americaâs continued defense technology leadership. The publicâprivate institute partnership model, because it addresses current structural problems in the U.S. innovation system, is a critical route for DoD to continue to embrace in order to preserve our national security. Weâre a frontier nation, we make things. Itâs really how we think about ourselves. And so getting this right and not losing this capability and not having it atrophy is an existential issue for us as a nation â¦ prosperity and security are intertwined, and the wellspring of both I believe is the industrial commons. âJeffrey Wilcox, Vice President, Digital Transformation, Lockheed Martin Corporation Keynote Speech at Study Workshop, January 28, 2019 PREPUBLICATION COPY â SUBJECT TO FURTHER EDITORIAL CORRECTION 7-6