By: Neil Irwin and Alicia Parlapiano
Via: The Washington Post

The recession and financial crisis had a great toll on workers, leading employers to shed jobs by the millions. While the economy is expanding again, jobs are being added slowly and unevenly.
See which sectors are adding jobs and which are still in bad shape:

NOTE: June and July 2011 data are preliminary.
SOURCE: Bureau of Labor Statistics.
GRAPHIC: Kat Downs, Neil Irwin and Alicia Parlapiano – The Washington Post.
Published May 20, 2011 and updated Aug. 31, 2011. Download a PDF of the version that ran in the paper here.

by: Jon Roberts, Principal, TIP Strategies, Inc.

We have been following manufacturing trends closely for the last decade. The decline in manufacturing employment – which we predicted would continue – is as apparent as ever. In fact, we argued that manufacturing employment would follow the same downward trend that agricultural employment followed at the end of the previous century. For both sectors, increased automation has steadily replaced labor and helped drive tremendous productivity gains. The primary difference is that we are far removed from the transition which took agriculture from farm laborers to combines. In the case of manufacturing, we are square in the middle of it.

The August 15th Cheap Robots vs. Cheap Labor editorial from the New York Times regarding Foxconn is revealing. Foxconn is the world’s largest manufacturer and assembler of electronic components. Despite the fact that Chinese employees typically earn only a fraction of what U.S. workers earn ($1.36/hour), the founder and chairman of Foxconn is aggressively seeking to reduce his workforce through industrial automation. Productivity gains within the workforce have natural limits. Employees get sick, need personal time off, and are subject to spells of low productivity in ways that “robots” never are. Or, to put it differently, investment in new equipment heightens productivity in a cost-efficient manner. Even a very low-cost labor force is not as efficient (or as affordable) when industrial equipment is an option.

We know that productivity and employment growth are not necessarily linked. As a business we become more productive when we do more with less. And that “less” is first and foremost represented by labor costs. Which is why Foxconn will replace thousands upon thousands of workers with machines. This is a trend that has been occurring for decades and it will only accelerate. While we know this, and accept it as a business reality, it is deeply disturbing to say the obvious in a political context. We cannot simultaneously praise productivity gains while bemoaning the loss of manufacturing employment. Productivity can – in many cases – be achieved precisely by cutting workers. Reduced employment rolls often follow in tandem with significant productivity improvements.

If we assumed that our competitive advantage, as a nation, was being compromised by the off-shoring of our manufacturing we would be missing the larger point. Whether we manufacture in the U.S. or in China (or anywhere else), the pressure to reduce labor costs is the same. And the more that other countries achieve greater productivity, the greater is the incentive for our businesses to make the capital investments that reduce labor costs. There is, after all, no better way to reduce labor costs than to reduce the total number of workers.


Not only is the total number of people employed in manufacturing declining, so is manufacturing’s share of total employment. Of course, it is worth repeating that a decline in the share of manufacturing employment does not indicate a decline in the productivity (or output) of the manufacturing sector. In fact quite the contrary has been true in recent decades. While the actual number of manufacturing jobs has dropped steadily since 2000, the value of manufacturing output (as measured in shipments per worker) has increased dramatically.

These trends in no way imply that manufacturing (or agriculture, for that matter) is not important to the economy. It is as important as it has ever been. What we have been arguing is that manufacturing employment is a problematic economic development indicator. In other words, measuring local economic development success by the number of new manufacturing jobs created can take you down the wrong path.

August 30, 2011 from WAMU

The Walter Reed Army Medical Center has a storied past. It has been the country’s leading Army hospital for more than 100 years, sitting on a complex that includes a Civil War battlefield. There was a time when 16,000 patients a year sought treatment for wounds of war or illness.

By the end of August, all of the patients and doctors will have left, moved to Bethesda and Fort Belvoir as the Army consolidates its bases. But as one era closes, another opens: Washington, D.C., may be left with nearly 70 acres of prime real estate.

Neighborhood Businesses Face Change
Just after the midday rush at Ledo’s Pizza on Georgia Avenue in Northwest D.C., Tim and Kelly Shuy sit down at a table.

“We get a lot of military families, people who are visiting, folks who are in the hospital. We get a lot of contractors,” Kelly says.

Their pizzeria is across the street from the sprawling Walter Reed campus. Lush with trees and a hilly landscape, the campus includes several iconic 100-year-old buildings with red tile roofs where patients, their families and staff were able to wander and just look out on the rest of the neighborhood from a distance.

Many in the neighborhood call the medical center a fortress. But for the Shuys, it was a mainstay. Doctors and patients alike have supported their business for years.

“Some of them come in uniforms. We have patients who come in who haven’t been out of Walter Reed,” Kelly says. “I’ve had dozens of people tell me this is their first meal out of the hospital.”

But those days are just about over.

“We’ve been saying goodbye to people for a long time. We say goodbye to people every day,” Kelly Shuy said. “But it’s horrible — we’ve had tears over saying goodbye to people who are regulars.”

Of course the Shuys are losing more than just familiar faces.

“As far as the business goes, obviously it’s a huge hit for us,” Kelly says. As Walter Reed closes down, it leaves behind questions. What is going to take its place? There is no shortage of opinion among interested residents:

“We are looking for quality space for our students,” says Christine Encinas.

“We’d like to use part of it to develop affordable family housing,” says Troy Swanda.

“We’d like to see a bit of parkland right along here,” says Ellen McBarnett. “Many of the neighbors have been talking about dog-walk parks or places for children to play.”

City Eyes Retail Development
And that’s just the beginning. The State Department will take a chunk of Walter Reed’s 113 acres, possibly for embassies. But that leaves almost 70 acres for D.C. In a city where a quarter of the land is owned by the federal government, demand for land is high.

“This is a uniquely vocal community, let me just put it that way,” says Victor Hoskins, deputy mayor of Planning and Economic Development. He co-chairs the committee that is going to figure out just what the District of Columbia is going to do with all of this land.

“Actually, the interest we’ve gotten from a number of retailers already has been, really, quite astounding. What’s going to happen is when that fence comes down [and] we develop the retail along there, it will become a place to go,” Hoskins says. “And there’s a chance now to revive a Main Street, which is Georgia Avenue, which has for years been suffering from decay.”

D.C.’s government has a major interest, as well. For 100 years, this property has been federal and untaxable. The city estimates it could get $20 million a year in tax revenue. And the people who worked at Walter Reed mostly drove in and drove out, not spending as much in the neighborhood as destination consumers might. Plus, if retail takes off, it might supply local jobs. Of course, that’s assuming the city gets it right.



This satellite image shows how the Walter Reed Campus will be divided between the District of Columbia (purple) and the State Department (yellow). The District’s 67-acre portion includes both the old and new hospital buildings.

Coming Up With A Plan
Faith Wheeler is a neighborhood representative who lives near Walter Reed. Standing about a mile away from the hospital, she points to a block where new development didn’t work out so well.

“Well, I don’t want to see all those for-lease signs; look at that,” she says. “If that happened on Georgia Avenue’s Walter Reed campus, it would be awful, horrible. According to textbook ideas, this is the place where retail ought to be booming. It’s not.”
This is what Wheeler does not want to see: a street that’s a commuter corridor, lined by sterile and vacant office buildings. One thing she does want is some sort of tribute to the place’s history. And that is likely; many of the historic building facades will be kept. But Wheeler’s voice is one of many.

Public Meetings, And Many Rules
“It’s kind of the new realities of urban planning in the 21st century,” says Lisa Benton-Short, a professor of geography at George Washington University who has written about previous base closings. She says the Walter Reed campus will take awhile to sort out.

“I think for much of the 20th century, planners were quite top-down in their planning,” she says. “They told us what we needed in our spaces. Sometimes they were right, and sometimes they weren’t. In the last 25 years or so, the planning profession has really changed. And one of the most important ways it’s changed is to bring in public participation and planning.”

That means public workshops, public forums and many public meetings. Benton-Short says it will be messy. And the military has its rules, as well.

There will have to be services for the homeless, there will have to be organizations that serve the community, such as schools. And there’s an entire bureaucratic process that will probably take two years before a deal is finalized, let alone anything getting built. The U.S. Department of Housing and Urban Development will have to approve the plan, and there will have to be an environmental impact assessment, as well.

“We’re talking 10 years, 15 years before these visions are actually transformed into reality,” Benton-Short says.

That only heightens the fear of area businesses who will have to wait that long. There’s also radioactive waste from X-ray machines and cancer treatments that needs cleaning up. And there’s asbestos to be removed. That’s all possible — but it will take time. It’s also one reason that the amount D.C. will have to pay the Army for the land hasn’t been nailed down yet. But when all is said and done, one thing everyone agrees on is that the site holds real potential.

A Positive Legacy
“This is something that I hope will be a positive,” says Ethelbert Dawson, 77, who attended Walter Reed’s official closing ceremony last month. He lives around the corner, and for 25 years, he worked at Walter Reed as a research chemist.

“When I was here, I never thought that this day would ever come. We used to call it Walter Wonderful, because that’s what it was.”

He says he can’t really predict what this new space will mean for Washington, D.C.

“But for Walter Reed and all of the positiveness that hospital has given this community,” Dawson says, “I don’t know if they can ever reduplicate that.”

All eyes are on this space, to see whether the disappearance of a 100-year-old place of healing will usher in an urban rebirth — or leave a scar.

You can drive almost anywhere in the state of Michigan — pick a point at random and start moving — and you will soon come upon the wreckage of American industry. If you happen to be driving on the outer edge of Midland, you’ll also come upon a cavern of steel beams and ductwork, 400,000 square feet in all. When this plant, which is being constructed by Dow Kokam, a new venture partly owned by Dow Chemical, is up and running early next year, it will produce hundreds of thousands of advanced lithium-ion battery cells for hybrid and electric cars. Just as important, it will provide about 350 jobs in a state with one of the nation’s highest unemployment rates.

Over the last two years, the federal government has doled out nearly $2.5 billion in stimulus dollars to roughly 30 companies involved in advanced battery technology. Many of these might seem less like viable businesses than scenery for political photo ops — places President Obama can repeatedly visit (as he did early this month) to demonstrate his efforts at job creation. But in fact, the battery start-ups are more legitimate, and also more controversial, than that. They represent “the far edge,” as one White House official put it, of where the president or Congress might go to create jobs.

For decades, the federal government has generally resisted throwing its weight —and its money — behind particular industries. If the market was killing manufacturing jobs, it was pointless to fight it. The government wasn’t in the business of picking winners. Many economic theorists have long held that countries inevitably pursue their natural or unique advantages. Some advantages might arise from fertile farmland or gifts of vast mineral resources; others might be rooted in the high education rates of their citizenry. As the former White House economic adviser Lawrence Summers put it, America’s role is to feed a global economy that’s increasingly based on knowledge and services rather than on making stuff. So even as governments in China and Japan offered aid to industries they deemed important, factories in the United States closed or moved abroad. The conviction in Washington was that manufacturing deserved no special dispensation. Even now, as unemployment ravages the country, so-called industrial policy remains politically toxic. Legislators will not debate it; most will not even speak its name.

By almost any account, the White House has fallen woefully short on job creation during the past two and a half years. But galvanized by the potential double payoff of skilled, blue-collar jobs and a dynamic clean-energy industry — the administration has tried to buck the tide with lithium-ion batteries. It had to start almost from scratch. In 2009, the U.S. made less than 2 percent of the world’s lithium-ion batteries. By 2015, the Department of Energy projects that, thanks mostly to the government’s recent largess, the United States will have the capacity to produce 40 percent of them. Whichever country figures out how to lead in the production of lithium-ion batteries will be well positioned to capture “a large piece of the world’s future economic prosperity,” says Arun Majumdar, the head of the Department of Energy’s Advanced Research Projects Agency-Energy (ARPA-E). The batteries, he stressed, are essential to the future of the global-transportation business and to a variety of clean-energy industries.

We may marvel at the hardware and software of mobile phones and laptops, but batteries don’t get the credit they deserve. Without a lithium-ion battery, your iPad would be a kludge. The new Chevrolet Volt and Nissan Leaf rely on big racks of lithium-ion battery cells to hold their electric charges, and a number of new models — including those from Ford and Toyota, which use similar battery technology — are on their way to showrooms within the next 18 months.

This flurry of activity comes against a dismal backdrop. In the last decade, the United States lost some five million manufacturing jobs, a contraction of about one-third. Added to the equally brutal decades that preceded it, this decline left large swaths of the country, the Great Lakes region in particular, without a clear economic future. As I drove through the hollowed-out cities and towns of Michigan earlier this year, it was hard to tell how some of these places could survive. Inside the handful of battery companies that I visited, though, the mood was starkly different. Many companies are working on battery-pack designs for dozens of car models. At the Johnson Controls factory in Holland, Mich., Ray Shemanski, who is in charge of the company’s lithium-ion operation, said, “We have orders that would fill this plant right now.” Every company I visited not only had plans to get their primary factories running full speed by 2012 or 2013 but also to build or expand others. Jennifer Granholm, Michigan’s former governor, has predicted that advanced batteries will create 62,000 jobs over the next decade.

It is tempting to see in this the stirrings of an industrial revolution. These days, confidence is itself a rare and precious fuel, and in Michigan’s nascent battery belt, there is no shortage of it. As the country’s jobless rate hovers above 9 percent, could this manufacturing revival be part of the answer to the jobs crisis? Or is it merely an expensive government bet on a lost cause?

About 30 minutes northwest of Detroit, just off the Interstate, in Livonia, sits the modern, red brick automotive headquarters of A123 Systems, a beneficiary of about $375 million in federal stimulus funds and matching state grants. A123 provides the cells for a new electric car called the Fisker Karma, as well as various electric bus and truck projects around the world. A123 is also the first large-scale lithium-ion manufacturer whose domestic operations are up and running, though its pedigree is international. Its battery technology was developed at M.I.T., and for the last several years, the company had been making its lithium-ion cells in factories in Korea and China. When I asked Jason Forcier, the head of A123’s automotive division, why the company went to Asia to make its products, Forcier said he had no choice. “That’s where the supply base was,” he said. “That’s where the know-how was — it was nonexistent in the U.S.”

Repatriating a high-tech manufacturing plant to the United States is not simply a matter of hiring the local talent. It requires good-old foreign know-how. “We call it ‘copy exact,’ ” Forcier said. “We bought a company in Korea that had the technology around this type of battery and had developed the manufacturing process there. We basically brought that here, copied it exactly and scaled it up.” A123 also brought a team of six Korean engineers to help transfer the technology to the U.S. and sent a team of Americans to Korea to learn.

I heard a similar story at LG Chem Power — a battery start-up and an American subsidiary of LG Chem, a Korean firm. LG Chem is building a factory in Holland, Mich., to make batteries for the Chevy Volt. Production depends on replicating the company’s lithium-ion plants abroad, down to the smallest detail. “In fact, we’re making it like a copy — cut and pasted from Korea to here,” Prabhakar Patil, the C.E.O. of LG Chem Power, said.

Neither Forcier nor Patil made any apologies. Each told me that the moves to Michigan provided them with a skilled work force and operating expenses that are largely competitive with factories abroad. (Only 5 to 10 percent of the cost of a battery cell, Patil told me, comes from labor; material accounts for the bulk of expenses.) Each also saw his company’s strategy of importing manufacturing technology to the United States as imperative. A state-of-the-art lithium-ion battery plant is as different from an automobile plant as a science lab is from a gymnasium. Cell-making — the automated administration of thin chemical coatings on the batteries’ inner components; the mechanized cutting and folding of metal parts; the workers in sanitary “bunny suits” overseeing conveyor belts that move pristine cells through sealed assembly chambers — is painstakingly precise. A stray hair or a drop of sweat can ruin a lithium-ion cell. “Don’t touch anything,” Forcier advised me as we began to walk through the factory at A123.

Lithium-ion cells like the ones made at A123 probably don’t look like any battery you’ve ever used. They are stiff, rectangular, metallic-colored envelopes, roughly the dimensions of a thin trade paperback, with two small tabs. Individually, the cells aren’t much use for a car; they must be stacked with others in modules or packs. The Chevy Volt, for instance, has a pack of 288 cells, wired together and running down the center of the car. The pack is the most expensive and sophisticated element of the car, much in the way the processor is the most important element of a computer. Everything about the cell pack — its interior chemistry, its unifying electronics, its cooling systems — is variable and made to order. “With G.M., we’ve been working for two years on their exact requirements for the next-generation Volt,” Michael Sinkula, a founder of a battery-component company called Envia Systems, explained. “They say: ‘We want it to perform this way. Is that possible?’ And then we tell them if it’s possible.”
The Volt is just one car, of course — one whose sales are unremarkable. Still, the global automobile market is so large that even modest gains in market share could spark tremendous growth for battery-makers. “If you look at the year 2016, and you say, ‘Only 5 percent of the market is electrified?’ Well, that’s a $14 billion market for lithium-ion batteries,” Forcier says. “To hit 5 percent is a huge number of vehicles. And the business around making lithium-ion batteries for 5 percent of the world’s cars is a huge, huge business.”

In the late ’80s, Patil, of LG Chem Power, was working at Ford, trying to build a pure electric-battery vehicle called the ETX and getting nowhere. He was using a more primitivelead-acid battery technology. Automotive engineers tend to use two distinct measures — power and energy — to evaluate battery chemistries. Power relates to acceleration; energy relates to how far a car can travel before it needs to be recharged. The ETX wasn’t good by either yardstick. “The car went 0 to 60 in 12 seconds,” Patil recalls. “Its range was 60 miles on a good day.” The lead-acid batteries were so heavy that the cars were nicknamed lead sleds. With a performance and range so inferior to a typical gasoline vehicle, how could you expect a consumer to pay a premium — what was then about $10,000 — for it?

Eventually, lead-acid batteries yielded to nickel-metal hydride, which was incorporated into the Toyota Prius and, later, a range of hybrid vehicles. At the same time, a more promising battery chemistry based on lithium — with far greater potential for both power and energy — was being developed by various scientists, notably John Goodenough at the University of Texas. Sony was the first company to broadly adapt the lithium technology at its factories in the early 1990s; the company consistently improved the product and began incorporating it into consumer-electronic devices. But automakers couldn’t figure out how to cost-effectively adapt the technology. Patil recalls a “chicken-and-egg problem” as he tried to build a Ford Escape hybrid in the late 1990s. “I used to get thrown out of C.E.O.’s’ battery offices regularly,” he said. “They said: ‘Show me the market. Otherwise, leave.’ ” Patil knew there could be no market in the United States without significant drops in the batteries’ price and significant increases in their performance. But it was a Catch-22. Improvements in price and performance were impossible unless companies became serious about manufacturing.

Federal agencies like the Department of Energy have long financed scientific research — through university grants, for instance — on technologies like lithium-ion batteries. But a basic feature of government policy is to allow corporations and entrepreneurs to pick through the results of that research, commercialize the promising ideas and let the market sort things out. In other countries, it often works differently. Governments are more willing to help companies pool information about a new industry or technology and (especially in Korea and China) assist with the early-stagecommercialization of products, including the construction of plants. While Patil was getting booted from executive offices at Ford, companies in Asia, in some cases with a boost from their governments, focused on streamlining the manufacturing process. Battery performance steadily improved, and costs dropped. By the mid-2000s, it was clear that if the lithium-ion battery continued to get better at the same rate, the product might soon be suited for automobiles.

In January 2009, two weeks before Barack Obama’s inauguration, Senator Carl Levin of Michigan sent a letter to Obama and his advisers — Rahm Emanuel, David Axelrod and Lawrence Summers — about the promise of lithium-ion technology. “The country or region that controls and dominates the production of batteries will also ultimately control green-vehicle production,” Levin said in a speech he later gave to the Senate. Levin’s efforts effectively laid the groundwork for battery grants to be part of the $787 billion American Recovery and Reinvestment Act.

“It was a calculated risk — a lot of money, to be sure, but given the stakes, I think it was a pretty thoughtful bet,” says Ron Bloom, who recently served as an assistant to President Obama for manufacturing policy. “If vehicle electrification really does take off, as many, many people think it will, and we’re not part of it, then we could lose our leadership of the global automobile industry.” Which would be catastrophic. By some estimates, as much as 20 percent of all manufacturing jobs are directly or indirectly related to the automobile industry. Bloom points out that the United States is not the only country betting on batteries; a number of Asian countries have done so as well.

On both sides of the world, the fundamental appeal of expanding manufacturing is jobs. It is a curiosity of modern life that information companies can create extraordinary social disruptions and vast shareholder wealth but relatively few jobs. Facebook has about 2,000 employees worldwide. Google has about 29,000. Even in its new, slimmed-down state, General Motors, a decidedly less valuable company, has about 200,000 employees. What’s more, that number represents only a fraction of the people behind the production of a G.M. car. “When you’re manufacturing anything, even if the work is done by robots and machines, there’s an incredible value chain involved,” Susan Hockfield, the president of M.I.T., says. “Manufacturing is simply this huge engine of job creation.” For batteries, that value chain would include scientists researching improved materials to companies mining ores for metals; contractors building machines for factory work; and designers, engineers and machine operators doing the actual plant work. By some estimates, manufacturing employs about 65 percent of America’s scientists and engineers.

Hockfield recently assembled a commission at M.I.T. to investigate the state of American manufacturing and to offer a plan for its future. “It has been estimated that we need to create 17 to 20 million jobs in the coming decade to recover from the current downturn and meet upcoming job needs,” she said at a conference this past March. “It’s very hard to imagine where those jobs are going to come from unless we seriously get busy reinventing manufacturing.” This logic has been endorsed by Jeffrey Immelt, General Electric’s C.E.O.; Andy Grove, the former chairman of Intel; and Andrew Liveris, Dow Chemical’s C.E.O. A widely circulated 2009 Harvard Business Review article — “Restoring American Competitiveness,” by two Harvard professors, Gary Pisano and Willy Shih — has become one of the touchstones of the manufacturing debate. In the article, Pisano and Shih maintain that U.S. corporations, by offshoring so much manufacturing work over the past few decades, have eroded our ability to raise living standards and curtailed the development of new high-technology industries.

When I spoke with Pisano, he noted that industries like semiconductor chips — the heart of computers and consumer electronics — require the establishment of “an industrial commons,” the skills shared by a large, interlocking group of workers at universities and corporations and in government. The commons loses its vitality if crucial parts of it, like factories or materials suppliers, move abroad, as they mostly have in the case of semiconductors. At first the factories leave; the researchers and development engineers soon follow.

The most punishing effect, however, may be the one that can’t be measured — the technologies and jobs that aren’t created because the industrial ecosystem is degraded. The semiconductor industry, for example, led to the LED-lighting and solar-panel industries, both of which are mostly based in Asia now. “The battery is another fascinating example,” Pisano told me. “The center of gravity is Asia. But why?” If you go back to the 1960s, he says, the American consumer-electronics companies decided they were better off in Japan, and then Korea, where costs were lower. “And then you have to ask: Who had the incentives to make batteries smaller or more powerful or last longer? Not the car industry. The consumer-electronics industry did.” This explains why the U.S. is now playing catch-up with lithium-ion batteries. It also underscores the vulnerability of an economy with a shrinking manufacturing sector. “When one industry moves,” Pisano says, “there can be other industries in the future that follow it that you couldn’t even anticipate.”

Even in the battery industry, there are skeptics. Menahem Anderman, a California-based consultant, says that transforming 10 percent of the world’s automobiles into either plug-in hybrids or electric vehicles by 2020 is a pipe dream. His projection is for less than 2 percent. U.S.-based factories, he says, are at a disadvantage. The U.S. industry, he told me, “was not ready to take in $2 billion from the government and spend it wisely. And so now we will build a lot of plants, and we will create overcapacity, and a lot of the companies will fail.” He has no ideological objection to federal support, he adds, “but the status of the technology and the market were incompatible with the desire of the government to create manufacturing jobs.” For pure electric vehicles in particular, which will likely need an expensive battery replacement within 10 years, Anderman still sees the dilemma Patil faced at Ford in the ’90s, when he questioned whether consumers would pay $10,000 more for an inferior car. As Anderman puts it: “Has there ever been, in the modern history of capitalist countries, a new product for which the mainstream customer paid more for less?”

By his math, gas prices have to reach about $7 a gallon to make plug-in electric-hybrid vehicles attractive to consumers. To create demand for fully electric vehicles, gas prices would have to rise even higher. Which means generous government subsidies for purchases of these vehicles. Currently, Chevy Volt owners receive a tax break that brings the cost of the car down to about $33,500, from $41,000. In Washington, several people told me that unless there is consistent and increasing demand, taxpayers will have helped build an industry to nowhere. This fear is what turned so many politicians and policy makers against industrial policy in the first place. When government-backed ventures fail, taxpayers are left on the hook.

For now, battery makers think they can bring down costs quickly enough to be competitive. Improvements in the manufacturing process — spreading a better chemical coating on the sensitive elements inside the batteries, for instance, or raising the plant’s conveyor belt speed ever so slightly — will increase quality and efficiency. I also heard talk of start-ups in California working on new cost-effective chemistries. “We see prices over the next five years coming down 50 percent,” A123’s Forcier told me. “And it’s easy to say that, because we’re quoting 2014 business, and we know what the prices are.”

Whether this adds up to American jobs is less clear. The hope is that lithium-ion plants will seed a network of new chemical and equipment providers. To some extent, this has already happened. Some Japanese and Korean companies have set up shop in the United States, and local colleges are offering training courses for aspiring lithium-ion-battery factory workers. But it’s a fragile ecology. Job numbers are small relative to the huge plants of Detroit’s past. As the former labor secretary Robert Reich pointed out, high-tech manufacturing is increasingly automated. At capacity, the lithium-ion factories in Michigan will each employ between 300 and 400 people. Even the most optimistic forecasts — enough hybrid- and electric-car demand to necessitate several dozen factories — suggest the battery industry can’t significantly offset declines in American manufacturing.

Which doesn’t mean that it’s a bad investment. If nothing else, the Obama administration’s efforts in Michigan reawaken the conversation about industrial policy. To a large extent, this is an old war among Washington politicians. In the 1970s, it was fought over the federal bailouts of Lockheed and Chrysler — and a few years later during debates over whether the country needed to assist domestic companies in their efforts to gain ground on the Japanese in the semiconductor industry. By the time George H. W. Bush ascended to the presidency, the move away from industrial policy was clear.

“All you had to do in the 1980s was say, ‘That’s industrial policy,’ and it killed anything it was hurled at,” says Senator Levin, who along with Senator Sherrod Brown of Ohio is now among the most vocal advocates of such a policy. “It was the kiss of death. And it set us back 10 to 20 years in terms of manufacturing in America.” What is different now, Levin argues, is that “our companies are not competing with those companies in Korea and Japan. They’re competing with those governments that are supporting them. It’s naïve to believe that we just have to let the markets work and we’ll have a strong manufacturing base in America.” In his view, the lithium-ion investments are tantamount to repairing a kind of market failure.

The battery executives I spoke to viewed the stimulus money as a once-in-a-lifetime opportunity. None seemed to think a federal windfall would come their way again. None saw their business endeavors as inherently political or ideological. And none seemed to believe they could survive if they didn’t drive battery costs down and demonstrate that they could compete with the best lithium-ion factories abroad. “My own feeling is this will happen just as the government incentives wear off,” Patil told me. “By then it has to become a self-sustaining business, and we actually see a line of sight to get there.”

If the battery stimulus ultimately succeeds, does it demonstrate that expanding the United States’ economy only through knowledge and services is no longer a viable strategy? “All of the great new American companies of the past few decades,” says Suzanne Berger, a chairwoman of M.I.T.’s panel on the future of American manufacturing, “have focused on research and development and product definition — Apple, Qualcomm, Cisco.” These were technology companies that could take full advantage of what she calls the “modularity” of the global economy. Their genius resided in the design of their gadgets and information systems; offshoring the industrial work did not leave them at a disadvantage. It did the opposite, greatly reducing costs and raising profits. “Now I think we’re at a really different moment,” Berger says. “We’re seeing a wave of new technologies, in energy, biotechnology, batteries, where there has to be a closer integration between research, development, design, product definition and production.”

One challenge to moving in this direction may be that our banks, hedge funds and venture capitalists are geared toward investing in financial instruments and software companies. In such endeavors, even modest investments can yield extraordinarily quick and large returns. Financing brick-and-mortar factories, by contrast, is expensive and painstaking and offers far less potential for speedy returns. Berger maintains that for the economy to get “full value” from our laboratories’ ideas in energy or biotech — not just new company headquarters but industrial jobs too — we must aspire to a different business model than the one we have come to admire.

Which is to say, companies that have a passing resemblance to A123 Systems in Livonia, Mich. Or to use a more familiar example, a business that looks less like Google and more like Ford.



Jon Gertner (jongertner@gmail.com) is an editor at Fast Company. His book “The Idea Factory: Bell Labs and the Great Age of American Innovation” is due out in March.
By JON GERTNER, NYTimes
Editor: Dean Robinson (d.robinson-MagGroup@nytimes.com)

What do communication patterns tell us about how communities are connected to one another?
AT&T mobile phone data was used to create this interactive map of the United States that illustrates connectivity between counties based on phone conversations and SMS (text) communications.

Connections to Travis County, TX are selected below. Click on the map below to access the visualization. How regionally and nationally connected is your county?

Interactive Map

Call Data Community Map

Administrative boundaries are often at odds if one compares these to a bottom up approach calculating the regional delineation only based on how people interact. Communities based on call data is one example of how such interaction-based communities can be defined. The result is striking in that some states merge and others split. For example sister states emerge, such as Georgia and Alabama, Mississippi and Louisiana, and Tennessee and Kentucky among others. Pittsburgh (Pennsylvania) and West Virginia form a new “state”, while St. Louis (Missouri) expands its reach and splits Illinois into two communities. New Jersey and California also split into two separate communities because of large cities. In contrast, Texas remains whole, despite potentially splitting cities of Dallas, Houston, San Antonio, and Austin. We observe that the inter-city communication is strong enough to hold Texas together.

More about the Connected States of America project:
Press Release: The Connected States of America — Using mobile communications to redraw community boundaries.

CAMBRIDGE, Mass. — Researchers at MIT Senseable City Lab, AT&T Labs-Research and IBM Research are revealing new research that redefines regional boundaries in the United States, using patterns of social connectedness across the country derived from anonymous and aggregated cell phone data.

In some cases, connectedness follows traditional demarcations such as state lines — but in other cases, new patterns are emerging that have little to do with political or administrative boundaries. By looking at billions of instances of aggregated[*] mobile communication, researchers are able to define communities through the more informal lens of social networks.

“This work proposes a novel, fine-grained approach to understanding cities and human communities in space,” says Carlo Ratti, director of the MIT Senseable City Lab.

Cities play an important role in defining community boundaries, as they tend to pull nearby counties into their radius of influence. This radius of influence depends on factors such as size, population density and geography of the city’s surroundings. The researchers explain cities’ radius of influence in terms of laws similar to Newton’s laws of gravitation: Larger places attract more people and businesses than smaller ones, and the attraction between closer places is greater than that between remote ones. As a first approximation, the likelihood of two people communicating with one another depends on the respective populations of the origin and destination of the call, and drops off according to the distance between them.

The “Connected States of America” provides a more natural delineation of regions that follows relationships between family, friends and business partners. However, “telecom and state partitionings of the US results are very similar, as 90% of counties in the official state partitioning fall within a corresponding (by largest overlap) telecom community” – comments Francesco Calabrese, advisory research staff member at IBM Research-Ireland. “Sister states” emerge, such as Georgia and Alabama, Mississippi and Louisiana, and Tennessee and Kentucky, among others. Metropolitan areas often form pockets of influence that extend into neighboring states or communities; for example, Chattanooga, Tenn., is more closely linked to communities in Georgia and Alabama than to the rest of Tennessee. Pittsburgh, Penn., and West Virginia form a new “state,” while St. Louis, Mo., exhibits an expanded reach that splits Illinois into two regions. New Jersey and California also divide into two distinct regions due to large cities. In contrast, Texas remains whole: Despite the potentially splitting influence of cities such as Dallas, Houston, San Antonio and Austin, the researchers found that there is enough inter-city communication to hold the state together.

However, a simple gravitational model does not explain all of the results. For example, distance between places can be measured in several ways: as the crow flies, along transportation routes or by travel time. Mountain ranges and other geographic features influence how people interact, because they contribute to an increased perception of distance and therefore hinder communication. “This phenomenon may explain, for example, why Chattanooga appears cut off from the rest of Tennessee and better connected to parts of Georgia and Alabama,” says Dominik Dahlem, a postdoc at the Senseable City Lab.

Interestingly, analyzing boundaries according to aggregate and anonymous records of text messages (SMS) instead of phone calls yields a different map of connectedness. Some sister-state pairings change — for example, instead of Georgia-Alabama and Louisiana-Mississippi, SMS data link Mississippi and Alabama, leaving Louisiana and Georgia as stand-alone states. Oklahoma and Arkansas break apart, while West Virginia and Ohio join together. California splits into three communities instead of two. According to the researchers, these differences can be explained by the fact that SMS is generally favored by a younger population and is less likely to reflect cross-generational communication. Also, the SMS map is more divided overall, indicating that people are less likely to send text messages over large distances than they are to make phone calls.

This data reveals patterns of social and economic activity that the researchers expect will be of interest to social scientists and policymakers. “We are particularly interested in how such rich information can help us gain a better understanding of our society, which in the future, could lead to more democratic, bottom-up structures of governance,” Ratti says.

“This example illustrates once again the insights that can be inferred from aggregated communication patterns, as wells as how collaboration across fields of research can benefit for society,” said Alexandre Gerber, a researcher at AT&T Labs.

Analogous results for Great Britain were recently published by the same team in the journal PLoS ONE, which analyzed 12 billion anonymized records representing more than 95 percent of Great Britain’s residential and business landlines. In that study, communities that emerge out of people’s communication habits were found to be more cohesive than administrative boundaries.

The research was done in partnership with AT&T Labs-Research, IBM Research and the National Building Museum in Washington. Support was generously granted by the Rockefeller Foundation, the National Science Foundation, the AT&T Foundation, the MIT SMART program, GE, Audi Volkswagen, SNCF and the members of the MIT Senseable City Lab Consortium. For visualizations and more background information, please visit http://senseable.mit.edu/csa.

[*] All communication data was aggregated by county, determined by the caller’s and recipient’s most frequently used cell tower, which was assumed to be near their residence. In order to determine which counties are connected most closely by communications, researchers analyzed anonymized location data for both ends of the calls and texts. No personal information was used.

A new study shows how the decisions made today by goods producers and policymakers will shape U.S. competitiveness tomorrow.

A debate over the future of U.S. manufacturing is intensifying. Optimists point to the relatively cheap dollar and the shrinking wage gap between China and the U.S. as reasons the manufacturing sector could come back to life, boosting U.S. competitiveness and reviving the fortunes of the American middle class. Whenever production statistics in the U.S. surge, it seems to bolster that hope; as New York Times columnist and Nobel laureate Paul Krugman put it in May 2011, “Manufacturing is one of the bright spots of a generally disappointing recovery.”

But then when disappointing economic growth indicators are released, the pessimists weigh in. They argue that the U.S. has permanently lost its manufacturing competitiveness in many sectors to China and other countries, that the sector is still declining after years of offshoring and neglect, and that it might never return to its role as the linchpin of the U.S. economy.

Both the optimists and the pessimists are partially correct. U.S. manufacturing is at a moment of truth. Currently, U.S. factories competitively produce about 75 percent of the products that the nation consumes. A series of identifiable smart actions and choices by business leaders, educators, and policymakers could lead to a robust, manufacturing-driven economic future and push that figure up to 95 percent. Alternatively, if the U.S. manufacturing sector remains neglected, its output could fall by half, meeting less than 40 percent of the nation’s demand, and U.S. manufacturing capabilities could then erode past the point of no return.

Those findings emerge from a recent sector-by-sector analysis of U.S. industrial competitiveness, along with a survey of 200 manufacturing executives and experts, conducted by Booz & Company and the University of Michigan’s Tauber Institute for Global Operations. (So researchers could best analyze the relationship between U.S. employment and the future of manufacturing, plants located in the United States were counted as American, regardless of where the company that owned them is headquartered.) The studies — which included comparisons to similar Booz & Company studies of China and Switzerland — found that the U.S. has a much more productive manufacturing base than many people think. But no single country, not even China or the U.S., can claim to be the factory of the world, in the way the United States was after World War II.

Instead, for the foreseeable future, manufacturing will largely be regional. To be sure, exports play a critical role in any strong economy, and as we’ll see, a global play (including offshoring) can be viable, especially when there are challenges at home. But for many manufacturers, economics and market dynamics increasingly suggest that they locate factories close to their major markets, including the United States. This type of region-oriented footprint is a clear way to provide adequate scale and volume, minimize transportation and logistics costs, increase market responsiveness and innovation, and customize products for the unique preferences of different regions and cultures.

If factory labor costs and currency rates were the sole enablers of manufacturing success, then the West could not compete with emerging nations or offshoring. More and more, though, these factors play a smaller part in manufacturing decisions. Four other considerations, all more complex, drive manufacturers’ choices about where to place and expand factories:

1. The skill level and quality of factory employees, especially for high-tech facilities.

2. The presence of high-impact clusters, in which many companies can learn from one another and innovate more readily.

3. Access to nearby countries with emerging consumer markets and lower-cost labor (for the U.S., this means building a future with Mexico).

4. A reasonably competitive regulatory and tax environment (for the U.S., this means simplifying and streamlining the current tax and regulatory structure).

Will U.S. business leaders and policymakers rise to the challenge and create the conditions that would support manufacturing? Or will they fritter away the opportunity now being presented to them?

Why Manufacturing Matters

As trade policy expert and author Clyde Prestowitz points out, manufacturing is critical to prosperity for several reasons: its economies of scale, impact on innovation, and multiplier effect on the rest of the economy. (See “The Case for Intelligent Industrial Policy,” by Art Kleiner, Arvind Kaushal, and Thomas Mayor, s+b, Autumn 2011.) In the United States, manufacturing directly accounts for 11 percent of the nation’s GDP: an absolute figure of US$1.47 trillion, larger than Spain’s entire domestic product. When all economic activity expressly linked to manufacturing is accounted for — including equipment maintenance, transportation, scientific and technical services, and construction — the share of GDP attributable to manufacturing grows to 15 percent. That means one in seven U.S. private-sector jobs, or 13.5 percent, is directly linked to manufacturing. The sector’s share of GDP increases to as much as 25 percent when second-order linkages such as retail sales near plants, systems development, and legal services are included.

Historically, manufactured goods are more tradeable than other categories. Thus, a strong manufacturing base is essential to reducing the U.S. trade deficit, which hit $497 billion in 2010 and is an unnerving drag on GDP. Unless steps are taken to revitalize manufacturing, up to 50 percent of the “value add” of the U.S. economy — the value of manufactured goods beyond their raw material costs — is at risk of disappearing. If that happened, the U.S. trade deficit would top $1 trillion, a troubling level for any country seeking economic growth.

Perhaps the least understood benefit of manufacturing is how closely it is related to innovation in design, product development, quality control, and factory processes. In 2008, 67 percent of all private-sector R&D was conducted by manufacturing companies, according to the National Science Foundation. And from 2006 to 2008, 22 percent of U.S. manufacturing companies reported a new or significantly improved product, service, or process, compared with 8 percent of nonmanufacturing companies. Innovation propels improvements in worker output, capital flow, usage of materials and energy, energy conservation, and other components of productivity. Increased productivity, in turn, leads to faster economic growth and a higher standard of living. Between 1987 and 2008, productivity grew in the U.S. manufacturing sector 65 percent faster than in business as a whole. (See Exhibit 1.)



Many U.S. manufacturing leaders are well aware of the role that innovation plays in a nation’s economy, and in their own performance. “The labor component — the need to choose where to set up manufacturing facilities based primarily on where the wages are cheapest — is not the major driver anymore,” says Eric Spiegel, president and CEO of Siemens Corporation. “Instead, other factors — access to skilled labor, modern infrastructure, the ability to drive innovation with world-class R&D, and capabilities like new manufacturing technologies or innovative lean production systems — propel decisions about new factories. These play well to the U.S.’s strengths. So we’re adding new manufacturing in the U.S.”

America’s Lost Decade

The conventional wisdom says that the decline of U.S. manufacturing began in the late 1970s, when Japanese automakers and electronics companies outpaced their U.S. rivals in design, quality, efficiency, and costs. But a closer examination of the historical data covering 1980 through 2010 presents a somewhat different picture.

During the 1980s and 1990s, although there were high-profile problems in specific sectors such as autos and textiles, U.S. factories as a whole held their own. Even manufacturing employment held steady. Between 1980 and 2000, production jobs fell by only 0.5 percent annually; in fact, the U.S. outperformed both Germany and Japan in the value of manufacturing output as a percentage of global production. (See Exhibit 2.)



However, in the 2000s, U.S. manufacturing output as a percentage of global production fell dramatically. The ratio of exports to imports, a critical sign of manufacturing viability, also fell. The number of manufacturing jobs dropped as well, by 4.3 percent per year, and 3.4 percent of non-production jobs were eliminated annually. (See Exhibit 3.) Many factors contributed to a relentlessly troubling decade for U.S. manufacturing. Capital investment in new and old plants slowed, dropping below replacement levels. In some industries, innovation lagged, and some U.S. companies faced a shortage of critical skills. The rapid pace of globalization and competition from emerging economies exacerbated these effects.



Still, the data shows clearly that U.S. manufacturing as a whole has great potential to rebound. When considered sector by sector, many U.S. companies can and should be the supplier of choice for the vast majority of goods sold in North America — and some can still be a primary source of production for global markets. This resilience was evident in the survey of manufacturing professionals; more than 65 percent of respondents said that it was unlikely they would stop investing in new U.S. manufacturing assets and technologies by 2025. Many of them are shifting manufacturing activities back to North America from Asia and other offshore locations.

Four Kinds of Industries

With unit labor costs playing a smaller part in manufacturing decisions, other factors — including talent availability, market accessibility, innovation, regulations, intellectual property protections, barriers to entry and exit, and scale of operations — increasingly drive decisions about where to place and expand factories. Based on the relative economics for each segment, we charted which U.S. industries can compete as exporters, which can be dominant in the regional North American market, which can survive but are threatened by foreign competitors, and which are already mostly overseas but can still manufacture in the U.S. to serve niche markets. (See Exhibits 4 and 5.)





Global leaders: aerospace, chemicals, machinery, medical equipment, and semiconductors. Companies in these industries have a critical worldwide advantage stemming from their high investment scale, established intellectual property, skilled workforces, and close ties with customers. For example, the U.S. commercial aerospace segment (primarily Boeing Company and its suppliers) benefits because aircraft development is so costly and knowledge-intensive that few new companies can compete. In addition, aerospace manufacturing requires uniquely qualified labor, substantial participation from corporate R&D, and proprietary technology efforts, often with national security implications. Thus, much overseas production is ruled out. However, even this sector could lose manufacturing to overseas sites if demand in emerging markets skyrockets, providing a sound economic rationale for some global leaders to establish manufacturing bases in China or elsewhere.

Regional powers: food, beverages and tobacco, nonmetallic mineral products, wood products, and petroleum/coal. Focusing on North American demand will continue to be a lucrative strategy for many U.S. manufacturers. The United States is the world’s largest market — wealthy and still growing (albeit not as fast as emerging economies) — and Mexico and Canada offer additional opportunities. For food, beverages, tobacco, and many other consumer products companies, the incremental disadvantages of importing (for example, the cost of transporting products to the U.S., plus long shipment lead times and product safety concerns) outweigh pro-offshoring factors such as the higher cost of U.S. production. For nonmetallic mineral and wood products segments, product transportability requirements and proximity to the supply base give U.S. factories a leg up.

Sectors on the edge: paper, plastics, electrical equipment and components, fabricated metal products, pharmaceuticals, automotive vehicle parts, other transportation equipment, final assembly of motor vehicles, printing, and electronics. These manufacturing segments feel the presence of low-cost overseas rivals nipping at their heels. To compete effectively, they need simplified government regulations and permitting processes, as well as more certainty and speed in gaining approval to expand old plants and build new facilities. In addition to better government support, many companies in these sectors must rethink their strategies, investing in the specific U.S. markets where they are best suited to compete. Some industries, such as printing, can maintain a foothold in the U.S. for specialized or customized products targeted at the North American market. Meanwhile, they can produce mass-quantity products with less stringent delivery schedules in lower-cost countries.

Niche players: textiles, apparel, furniture, computer equipment, and appliances. Most companies in these sectors have moved production outside the United States. The remaining activity generally serves small-scale, highly specialized niche markets. For example, the small company Timbuk2 Designs Inc. allows customers to design their own briefcases, backpacks, and totes; it has a strong customer community among cyclists on the West Coast. The furniture segment is similarly bifurcated. Flat-pack furniture for the U.S. market is mostly made in China, whereas preassembled furniture is more likely to be made domestically.

In short, nearly 50 percent of the value added by U.S. manufacturing and more than 50 percent of U.S. manufacturing jobs are at risk. (See Exhibit 6.) In these sectors, on the basis of labor and logistics trade-offs, many U.S. manufacturers have opted to build plants in emerging markets such as the BRIC countries (Brazil, Russia, India, and China). They also feel pressure from investors and other influential internal players to be proactive in the fastest-developing regions, where billions of people are joining the consumer economy. (See “Competing for the Global Middle Class,” by Edward Tse, Bill Russo, and Ronald Haddock, s+b, Autumn 2011.)



This strategy has paid off for global players and for those who target specific emerging markets in a well-planned way. But it hasn’t worked out for all manufacturing businesses; for example, it can leave them more exposed to competition in the United States, which is still their largest market. Nonetheless, if the trend continues unabated — that is, if U.S. companies rush toward emerging economies without continuing to invest in their own country — then U.S. manufacturing could fall woefully behind in new plant and production technologies, losing important links to high-value innovation and making revival more difficult.

Manufacturing Momentum

Our analysis translates into clear recommendations for improving the competitiveness of U.S. manufacturing. The following strategies can provide the greatest momentum in both the public and private spheres:

1. Attract the best workers. Qualified manufacturing employees are surprisingly scarce in the United States. As companies transform their plants from hubs of manual work to automated facilities with complex control systems and sophisticated processes, they struggle to fill multiple holes in their workforce: technical (programmers, IT developers, designers), professional (engineers, scientists, functional support), and skilled (equipment operators, specialized maintenance experts, craftsmen). A contributing factor to this employee scarcity is traditional manufacturing’s lack of appeal to students. A recent Booz & Company survey of more than 200 engineering, science, and math undergraduates found that although 80 percent of the engineering students had some exposure to manufacturing— through either firsthand experience, college courses, or conversations with factory workers — only 50 percent regarded it as an attractive career. That number dropped to 20 percent among the science and math students. Around the same time, Siemens reported having nearly 3,500 open manufacturing positions in the U.S. requiring high-level science, technology, engineering, and math skills, with low expectations of filling many of them.

The talent issue is particularly pronounced in the pharmaceutical and high-tech sectors, where science and engineering graduates are needed for many operations positions. Manufacturing recruiters must compete with R&D for qualified individuals, and some have relocated to higher-cost cities because such places attract people.

Many companies — especially those in electronics, medical equipment, pharmaceuticals, and other sectors requiring high levels of knowledge on the factory floor — find that the shortage of qualified employees in the U.S. leaves them no choice but to shift some operations to other countries. This is particularly disturbing because these job categories often involve innovation and are thus essential catalysts for productivity increases and economic growth. The shortage of technical, professional, and skilled labor also contributes to substantially higher wages in U.S. manufacturing than in other countries, including other developed economies.

Educational initiatives that promote engineering can increase the talent pool. China already graduates more engineers each year than the U.S., and a number of other countries graduate a higher proportion of their population as engineers. It would also be helpful to relax federal immigration regulations for trained knowledge workers: for example, liberalizing H-1B visa restrictions to allow foreign national students in science, technology, engineering, and math programs to remain in the U.S. more easily after finishing their education, rather than returning to their home countries. State governments are well positioned to abet manufacturing education with scholarships and programs such as South Carolina’s ReadySC program, which establishes partnerships with businesses to provide customized training in colleges. (See “Revitalizing Education for Manufacturing,” by Wally Hopp and Roman Kapuscinski.) “The philosophy [here] has been that if you invest in South Carolina, South Carolina will invest in its people to prepare them to work in your plant,” says Bobby Hitt, South Carolina’s secretary of commerce and a former BMW executive, who was a leading figure in the automaker’s 1994 decision to build its only U.S. factory in Greenville.

Manufacturing companies must also offer a more collaborative workplace experience, engaging workers and giving them opportunities to continuously improve and seek productivity gains. They can also attract workers by showcasing their latest technology at campus recruitment events and industry job fairs, increasing college internships, forming partnerships with local colleges and universities to identify and sponsor talent, inviting students of all ages on factory tours to show that manufacturing can be a rewarding career, and partnering with other manufacturers to jointly support specialized training programs or attend faraway recruitment events.

2. Invest in high-impact clusters. Since Michael Porter coined the term in his 1990 book, The Competitive Advantage of Nations (Free Press), clusters have been a widely recognized way to spur economic growth and development. In the context of manufacturing, clusters are essentially geographic concentrations of interconnected companies, suppliers, service providers, and associated institutions (such as university research labs). Silicon Valley; the collection of life sciences companies in eastern Massachusetts; and the aerospace cluster in Wichita, Kan., are good examples.

Clusters have several benefits. They increase productivity and efficiency because they bring together suppliers with customers, designers with engineers, and university researchers with corporate production managers to better share information and new ideas. This collaborative ecosystem helps new companies and innovative business models emerge. Because they represent strong, self-supporting communities — where interactions among employees inspire enthusiasm for their work and help them gain more diverse skills — companies located in manufacturing clusters tend to have lower turnover and attract better talent than non-clustered companies.

State and local governments can encourage clusters by investing in infrastructure — roads, ports, rail lines, and communication links — for centers that have begun to form organically. Policymakers can also provide up-front tax incentives or other inducements to attract companies. Both the state and federal governments can fund research institutes and university programs, but studies have shown that governments should not seek to micromanage cluster creation. They are better suited to supporting and promoting these industrial networks while allowing them to develop naturally.

Individual companies (or trade groups associated with clusters) can also take steps to fashion clusters and attract businesses and talent. They can set up improved connections between suppliers and buyers, and maintain up-to-date standards and innovative practices in infrastructure, renewable energy, and plant processes and technology.

3. Build a future with Mexico. For many companies on the edge, Mexico offers a cost-conscious and attractive alternative to China and other distant offshoring sites. By developing production facilities there, manufacturers can tap a relatively low-cost labor pool and maintain tight links with R&D talent and facilities in the United States. A Mexican footprint also helps companies tailor their supply chains: shifting less-demanding, high-labor products or components with relatively stable designs to Mexico while keeping highly skilled work or rapidly evolving technology in the U.S., where the workforce is generally more educated. Then products can be shipped around the Western hemisphere at relatively low expense.

“When you combine the U.S. and Mexico as a manufacturing partnership, for the most part it wins over [a combination of] the U.S. and China, especially in terms of economics, demand proximity, and responsiveness of the supply chain,” says Ron Weller, vice president of global operations and power solutions at Johnson Controls Inc. (JCI), a maker of vehicle electronics, batteries, and interiors.

Of course, to build a viable U.S.-Mexico manufacturing base, substantial obstacles must be addressed by the public and private sectors of both countries. Narcotics-related violence along the border has hurt manufacturing companies’ ability to produce and ship without disruption. Mexico’s rail and road infrastructure is subpar, the country produces few basic raw materials and needs better access to inexpensive commodities (which might be supplied from the southern U.S.), and Mexican workers need further training and skills development. It may take concerted collaborative effort by government and business leaders in both countries to address these problems, but the payoff could be immense.

4. Simplify and streamline the tax and regulatory structure. At 39 percent, the official U.S. statutory corporate tax rate is the second-highest of all countries in the Organisation for Economic Co-operation and Development; only Japan has a higher rate. Because of tax credits, deductions, and tax law complexities, the federal government collects only about 28 percent. But manufacturers spend much of the difference on compliance costs and sophisticated tax minimization strategies. Unfortunately, many companies use the 39 percent figure for evaluating investment options, because it is too risky otherwise; in cost-benefit calculations, they can’t assume that deductions will be available in the future. This often dissuades them from opening or expanding factories in the U.S.

Reducing taxation levels and tax code complexity would be a revenue-neutral way to put U.S. manufacturing on a more level playing field with other leading economies. This step alone would encourage new investments in manufacturing assets, which in turn would expand the tax base, potentially resulting in higher government income. Another step would be changing tax rules to allow manufacturers to move dollars from overseas back without a tax penalty. This would make many companies more likely to reinvest foreign profits in U.S. manufacturing.

“We operate in a lot of places outside the United States, and if you’re in our position you might want to repatriate money to invest in an asset or to fund an expansion,” says Michael Rajkovic, chief operating officer of auto supplier Tower International Inc. “So if you need money in the United States and you already paid taxes on that money in another country, you have to pay taxes on it again before you can invest in your business in the U.S. What kind of sense does that make?”

The U.S. regulatory system also contributes unnecessarily to complexity and uncertainty. In 2008, federal regulations — including economic, workplace, environmental, and tax rules — cost companies an estimated $1.75 trillion, or 14 percent of national income, according to the U.S. Small Business Administration Office of Advocacy. In the Booz & Company survey, 61 percent of respondents cited government regulations and policies as having a negative impact on their companies’ U.S. manufacturing output. This was, by far, the survey respondents’ most frequently cited risk. In general, many executives complain that the regulatory process has become paperwork-driven rather than outcome-driven, requiring companies to navigate an expensive labyrinth just to gain approval for, say, a plant expansion. The associated delays make opening up facilities overseas much more desirable. “If your market window is 18 months and it takes you 18 months to get a permit in the U.S. and eight weeks to get one in Taiwan, where are you going to go?” asks Jack McDougle, senior vice president of the U.S. Council on Competitiveness.

To move forward, current and new regulations should undergo a regulatory process analysis to ensure that they are necessary to deliver health, safety, environmental, or other benefits to the community. A number of manufacturing leaders have commented that other countries have even higher environmental and regulatory standards than the U.S., but with fewer bureaucratic hurdles.

Creating Competitive Capabilities

Within companies, manufacturers can make the most of their U.S. footprint by building up their company’s bedrock capabilities. Basic manufacturing capabilities are needed in many sectors just to stay in business. However, in each company, some capabilities will deserve extra investment, to help ensure that manufacturing prowess is tightly aligned with the company’s competitive strategy and helps to set its line of products apart from the crowd.

The capabilities that manufacturers need are captured in the “ISSR” framework developed by Booz & Company. (See Exhibit 7.) Inherent capabilities involve technological excellence and market understanding. Structural capabilities cover the makeup of a company’s manufacturing footprint, the structure of its supply chain, and the efficiency of its distribution network. Systemic capabilities address manufacturing and cross-functional processes, including lean production systems. Realized capabilities focus primarily on aligning employees with the overall strategic thrust of the organization and driving efficiency improvements.



Supporting these four pillars of manufacturing prowess are other capabilities that both the private sector and federal and state governments have a hand in developing. Among them: finding and developing the right human and natural resources at the right cost, as well as ensuring that the business environment — taxes, regulations, and labor and trade rules, for starters — enhances manufacturing innovation and growth.

To be truly distinctive and to sustain a competitive advantage, manufacturers must go beyond basic operational capabilities; they must develop specific and unique capabilities that match their strategic goals. “You’d better focus on reinventing manufacturing and process technology and on finding the next breakthrough process that’s going to be leaving everyone behind, a process that the rest of the world can chase,” notes JCI’s Weller.

For example, a Tier One auto supplier that was a firm believer in a “small plant philosophy” was losing its competitive position as product designs standardized and more rivals with advantaged cost positions emerged. The company went through a “no constraints” strategy process to focus its effort on the winning technology and build a footprint that leveraged global scale. This dual strategy — enhancing the company’s capabilities in both the inherent and structural pillars — differentiated the supplier from its closest competitors and turned around its fortunes.

Toyota is well known for its attention to the systemic pillar; its acclaimed lean production system has led to substantial quality and productivity gains and a leadership role in the industry. Many other auto manufacturers have followed suit, building their quality and reliability. But lean initiatives are hard to sustain unless the realized pillar is well developed. One global diversified manufacturer learned this when its attempt to build efficiency and eliminate waste fell flat at first. Then, by segmenting its products into “stable and predictable” and “variable and customizable” buckets, the company created two production streams, simplifying the assembly line for its workers. The employees’ motivation rose as supervisors gave them more freedom and responsibility. The result was significant inventory reduction and substantially improved worker productivity.

In general, designing production systems that align employees’ activities with the company’s overall strategy and that empower employees to improve manufacturing processes can unlock the productivity and innovation potential of the well-educated U.S. workforce. For at least a generation to come, this in itself could provide a competitive advantage for manufacturing in the United States.

Chief Manufacturing Optimists

This is a defining moment for U.S. manufacturers — and, indeed, for the U.S. economy. Although the challenges may seem daunting, the executives who responded to the Booz & Company survey are generally optimistic. In stacking U.S. manufacturing facilities against plants in other countries, only 5 percent viewed offshore plants as better in quality, and only 14 percent said that other countries’ facilities would respond more effectively to volatile demand.

Every country needs creative, engaged, and profitable manufacturers if it hopes to have a healthy economy that supports the aspirations of all of its citizens. If you are a manufacturing leader in the United States, you shouldn’t have to go it alone. You should have support at all levels of government and culture — from Washington to the local cluster. Like all businesspeople, you must come to terms with the fact that the world has changed. But as the data shows, the U.S. has a strong base to build on. The future of U.S. manufacturing in general, and of your company in particular, can be extremely bright. The current wake-up call represents an opportunity for you to clarify your strengths, channel your investment, and create your own distinctive direction.



Published: August 23, 2011 / Autumn 2011 / Issue 64
by Arvind Kaushal, Thomas Mayor, and Patricia Riedl
via strategy + business