By Ann Grackin
I guess I am not alone in my concerns for the US
manufacturing base. I turned on C-Span and Jerry
Jasinowski, President of the National Association of
Manufacturers (NAM), was speaking
on the shrinking base of US manufacturing. I hope it is
not too late, but our policy makers in Washington do
to understand the issues—and neither does Walleet,
but we'll get back to Wall Street later.
“If the U.S. manufacturing base continues to shrink
at its present rate and the critical mass is lost, the manufacturing
innovation process will shift to other global centers. Once
that happens, a decline in U.S. living standards in the future
is virtually assured,” states NAM. A dramatic kick-off
to a very important report.
Why is US Leadership
A recent study sponsored by the NAM called "Securing
America’s Future- A Case for a Strong Manufacturing
Base”, points out how the innovation process in manufacturing
provides enormous benefits for the entire U.S. Economy:
the Economy - Manufacturing growth spawns more new economic
activity and jobs than any other economic sector.
Every $1 of final demand for manufactured goods generates
an additional $0.67 in other manufactured products and
$0.76 in products and services from nonmanufacturing sectors.
the Future - Manufacturers are responsible for almost
two-thirds of all private sector R&D—$127 billion
in 2002. Spillovers from these R&D investments benefit
other manufacturing and nonmanufacturing firms.
- Generates Productivity Increases - Manufacturing productivity
gains are historically higher than those of any other economic
sector – over the past two decades, manufacturing
averaged twice the annual productivity gains of the rest
of the private
sector. These gains enable Americans to do more with less,
increase our ability to compete, and facilitate higher
wages for all employees.
- Provides More Rewarding Employment - Manufacturing salaries and benefits average $54,000,
higher than the average for
the total private sector. They also provide higher paid
benefits, and opportunities for advanced education and training.
- Pays the Taxes - Manufacturing has been an important contributor to
regional economic growth and tax receipts at all levels
Though manufacturing’s contributions are high, the
US position as a global manufacturer has significantly diminished:
of Jobs - U.S. manufacturers historically lead the way
in an economic expansion, but
are still struggling to recover from the recent recession.
Since July 2000, manufacturing has lost 2.3 million jobs,
many of which have been outsourced or relocated overseas.
Manufacturing output has shown virtually no growth since
December 2001. (See figure 1)
- Investments are Going Elsewhere - U.S.
manufacturing's share of capital investment and R&D expenditures,
once a dominant feature of our nation’s commitment
to progress, is diminishing. While U.S. manufacturers conduct
two-thirds of private R&D, their R&D spending between
2000 and 2002 grew at only half the pace of the previous
This study also quantifies the issues around the US’s
bleak balance of trade: “Manufacturing exports as a
share of GDP have contracted since 1997, reflecting the strong
dollar overseas, the impact of the recession on our trading
partners, the terrorist attacks in the United States in September
2001, and increased global competition. The U.S. trade deficit
has ballooned to historic highs – reflecting an increase
in purchases of foreign-made goods, especially from countries
which do not freely float their currencies."
OK, shrinking taxes, expanding debt, poor trade balance;
hmmmm, doesn’t sound like how my parents taught me
to managed my finances.
But, why should the rest of the world
The US, like it or not (and that this is a political view
point, not for debate in this publication) is the world leader
in pulling together disparate points of view about just about
everything; trade policy; IMF bailouts (another controversial
topic), peace keeping, etc. In addition, from
an industrial and innovative standpoint, the US is the big
of things: We innovate, and generally share those innovations
with the rest of the world—from healing global disease,
to technology advances. Other country's economies grow when
they build, buy, and earn profit from these innovations.
America (including Canada) as an Economic Center of Expertise
(ECE) for innovation needs to play this urgent and leading
role for the rest of the world. The fact is we have the legislative
policy and investor base that supports intellectual property
discovery. Skittish capital markets, along with our shrinking
manufacturing base, put that R&D investment pool at risk.
The Falling Dollar
Currently, Washington seems to be enamored with quick fix
strategies such as tax cuts to stimulate consumer spending
(which seems to translate into more goods purchased from
foreign sources). And the US government is encouraging some
free-fall in the dollar, which supposedly helps the balance
of trade. If American goods are cheaper, so the argument
goes, then more goods will be purchased outside the US. This
is true for farm goods, but not industrial. The impact, though,
will be seen over the long haul. Why would anyone invest
in an economy where your investments are based on a shrinking
currency value? That is why countries like India have poor
stock markets and countries like China and Vietnam have growing
markets. It is not just their increasing industrial base—a
country's currency value also rises with favorable balance
of trade and the rising income of its citizens.
So, with America's shrinking capital markets, less R&D,
less innovation—it’s not a pretty spiral.
No industry is an island. Value chains are created by innovation
and demand, creating commerce. An innovator has to have her
dream manufactured, distributed, sold, implemented, and serviced.
That creates the value chain. For example, in the software
industry, ecosystem value created ratios can be very high.
Software license to service revenue ratios vary from 1:2
to 1:20. Also in the ecosystem are hardware or hosted services
to run the software, ongoing maintenance fees, educational
services, etc., raising the total ecosystem's value from
the pure demand of say $250,000 for the software to close
to $1M by the time the project is complete. These ripple
effects hold true for manufacturing, as well.
Another way to look at it, in a recent article in Scientific
American, they charted the network affect—what they
called Scale Free Networks—and found that whether the
subject was the Internet or the brain, “that complex
systems have an underlying architecture governed by shared
organizing principles.” They found that a small number
of nodes are at the heart of the network—the organizing
principle, the foundation, the driver, and the rule setter.
The Economic Center of Expertise (ECE) for an industry crafts
these organizing principles. And the manufacturing base frequently
is the driver of ECE creation or at least sustains it.
Innovation Means Wealth—And
The risks are high—but compete or perish! Although
the NAM study focuses on government policy, Washington cannot
really be the answer. The world markets must be open to create
a better world. Better business practices and processes,
and supply chain management opportunities are still at the
surface—business differentiation and customer service;
innovation on process, service, and product!
In the end, this is not a US parochial issue. We have learned
in modern economics that it is not a fixed sized pie (if
you get more, I get less). It’s a growing pie! But
innovation is the key stimulator of wealth. The fact
is, global prosperity and productivity truly means peace
on earth. When
you are innovating, building, and working, you don’t
have time for war.
 "Securing America’s
Future- A Case for a Strong Manufacturing Base” by
Joel Poppen and Company
 Another controversial topic
which is coming soon for our Policy dialogues
Scientific American, May 2003, “Scale Free Network”,
by Albert-Laslo Barabasi and Eric Bonaneau
ChainLink Research, Inc.