American Manufacturing

Discussion in 'Economics' started by ShoeshineBoy, Jun 18, 2008.

  1. Our domination is under attack. But not because we have given away technology, but because the Other Guys are working harder and faster and putting out more engineers and PhD's:

    Losing Our Lead in Innovative R&DJune 11, 2008 11:00 AM ET advertisement

    All BusinessWeek newsTo hear the National Academy of Sciences tell it, the U.S. faces little risk of losing its technology dominance. In a new study, the NAS says industries such as software, semiconductors, pharmaceuticals, and biotech have adapted well to the opportunities presented by globalization and have kept innovation close to home. After analyzing patent filings, economic data, and prior academic research, NAS researchers report that work being done in India and China is mainly low-level, confined to such tasks as manufacturing and clinical trials. The U.S., the study concludes, will maintain its global lead in research and development if it keeps investing in its research infrastructure. This would be great news for the U.S. -- if it presented the full picture.

    Our research at Duke and Harvard shows that the reality on the ground is much different. Indian and Chinese companies are performing the most advanced types of R&D for multinational corporations. As a result, scientists from those corporations are rapidly developing the ability to innovate and create their own intellectual property. Our take is that the global technology landscape has changed dramatically over the last decade and that we're at the beginning of a new wave of globalization.

    The U.S. can continue to lead, but we need to be clear about our means and the enormity of our challenges. Industries are changing at an unprecedented rate, and we must take the rise of India and China seriously. We also must understand our new competition and work hard to stay ahead -- or risk losing dominance in key industries.

    Missed Clues

    We agree with the NAS that basic supply chains and distributor networks in most industries are becoming fragmented -- that they are now more like LEGO blocks. Decades ago, industries tended to be monolithic, with most R&D occurring within national boundaries. Today, in industries such as personal computers, components are designed anywhere in the world, with manufacturing performed mainly in China. American companies such as Microsoft (MSFT) and Google (GOOG) still dominate in operating systems and Web applications, but they are increasingly developing important elements of their software in India.

    That's where the similarities between the research efforts of the NAS and and Duke and Harvard end. The NAS research relied largely on patent and R&D investment data. But in our view, the scientists looked in the wrong places and relied on information that was incomplete or out of date.

    Take their report on the pharmaceuticals industry. It analyzed U.S. Patent & Trademark Office filings in 2000. They determined that an insignificant 1.1% of inventors filing pharma patents were based in India, and 0.2% were in China. We believe that to understand what is happening globally, you need to look outside the U.S. So in our recent research into outsourced R&D, released on June 11, we analyzed patent applications filed with the World International Property Organization, based in Switzerland. And we used 2006 data, which showed a fourfold rise in patent filings by Chinese and Indian inventors since 1995. We found that 5.5% of these patent applications listed one or more inventors located in India, and 8.4% listed one or more in China.

    But patents only tell part of the story. Patents are a good indicator of R&D, but they don't always translate into innovation. And it usually takes 18 months to five years to get a patent. So these are indicators of research investments made years earlier.

    Go, Meet, Ask Questions

    Another way to chart R&D, of course, is to follow the money. Yet R&D spending data available through the National Science Foundation and other agencies are very limited; they don't include activities such as product design or technology acquisition, for example. And there are hardly any data on international R&D investment by U.S. and non-U.S. companies. The NAS report noted this and acknowledged the limitations of their analysis, which used these data.

    We realized that the best way to learn what was happening globally was to visit the countries growing fastest. Over 18 months we made several trips to India and China and interviewed the executives of approximately 115 companies in the pharmaceutical, semiconductor, automotive, aerospace, cell-phone, and computer-networking industries. We toured their labs, met their researchers, interviewed their customers, and reviewed many of the technologies they had under development.

    We found that in aerospace, Indian companies are designing in-flight entertainment systems, collision-control/navigation-control systems, fuel-inverting controls, interiors of luxury jets, and other key components of jetliners for American and European corporations. In the automotive industry, Indian engineers are helping to design bodies, dashboards, and powertrains for Detroit vehicle manufacturers. In telecom and computer networking, Indians are developing futuristic technologies for the intelligent cities that are being constructed in the Middle East. Indian engineers are also developing technology for the next generations of cell phones for European and American companies.

    State-of-the-Art R&D

    China is already the world's biggest exporter of computers, telecom equipment, and other high-tech electronics. Multinationals and government-backed companies are pouring hundreds of billions of dollars into next-generation plants to turn China into an export power in semiconductors, passenger cars, and specialty chemicals. In 10 to 15 years, they may also develop their own commercial airplanes.

    Most of the R&D in China appears to target the domestic market. India is developing technology for a global market. India appears far ahead, but China is investing massively in building R&D capacity by subsidizing state-of-the-art labs in biochemistry, nanotech materials, computing, and aerospace technologies.

    In pharmaceuticals, both India and China are making impressive advances. Our report shows that the largest multinational drugmakers, including Merck (MRK), Eli Lilly (LLY), and Johnson & Johnson (JNJ), first moved manufacturing and clinical-trial work to China and India. And now, driven by cost pressures and growth opportunities, they are partnering with firms there to do sophisticated drug research and clinical testing. Indian and Chinese companies are making strides in the segments of global value chains that are most lucrative. They are also now performing their own drug discovery with the hope of marketing new products through their multinational partners.

    We are likely to see new types of innovation coming from India and China. Dr. Reddy's Laboratories, for example, is developing what it calls a poly pill, which combines the four most common medications taken by heart patientsanti-hypertensive, statin, beta-blocker and aspirininto a single pill. Where's the magic? Satish Reddy, managing director of Dr. Reddy's, says he expects to get it to market for less than $30 per patient per year in the U.S.

    Innovation Where It's Needed Most

    Ranbaxy Laboratories is India's largest drugmaker. CEO Malvinder Singh says his company is focused on finding treatments for neglected diseases endemic to the developing world. These include anti-malarial drugs and pediatric formulations of HIV/AIDS drugs. Similarly, Jason Jin, CEO of ShanghaiBio, says Chinese companies are aiming to cure diseases such as hepatitis B and cancers of the liver and breast, which are common in China.

    Is this good for the U.S.? So far, it is. Bob Litan is vice-president of research and policy at the Ewing Marion Kauffman Foundation, which sponsored some of our research. He says: "Having more countries like India and China develop treatments for diseases is good for the world and will help reduce the overall costs of health care."

    But will other industries go the way of LCD panels, which originated in the U.S. and moved first to Japan and then Korea and Taiwan? It's too soon to tell. We're not going to be able to stop globalization. Other countries will rise economically and will create inventions that benefit us. This will create new opportunities and competitive risks for the U.S. And it will affect employment. Meanwhile, let's own up to it and find ways to stay ahead and keep research leadership at home [, 1/18/07] -- instead of pretending that everything is O.K. just the way it is.

    Copyright 2008 BusinessWeek
  2. Ridiculous.

    If you haven't figured it out yet, you can't get a decent paying job with an engineering degree, so people aren't getting those degrees. Foreigners from India will take the jobs at dirt cheap wages, and so the companies find a reason to hire them instead, either here via H1B or if not, then outsourced there.

    I know so many engineers that are "underemployed" or have been going from company to company as they fold up tents and move the plants offshore.

    It won't be long now before there is literally NOTHING left.
  3. If you want a well-paying job, you need to get one which can't be outsourced... plumber, mechanic, nurse.
  4. poyayan


    That's not going to work..:) Those are secondary industries. They made money off local people. Without anyone getting foreign currency, sooner or later you can't get any foreign product or service.
  5. or trader
  6. Here is a timely and appropriate article. BTW, IMO, we don't "dominate" global manufacturing anymore.

    The Bear's Lair, by Martin Hutchinson
    The murder of US manufacturing
    June 16, 2008

    Martin Hutchinson is the author of "Great Conservatives" (Academica Press, 2005) -- details can be found on the Web site

    GE’s announcement a week ago that it would accept offers for its appliances business marked the death-knell of yet another US manufacturing business, one among so many in US manufacturing’s long and seemingly unstoppable downtrend since 1980. That decline may seem an inevitable historical trend, and Wall Street’s analysts would claim that the US economy can prosper just fine without it. Yet impartial analysts of the putrefying corpse of US manufacturing capability are forced into an inescapable question: did it die of natural causes or was it murdered?

    For the last 30 years, Wall Street’s insouciant attitude appears to have made sense. US manufacturing has slowly declined, as operations have moved to lower-wage centers in the Third World. However the US economy as a whole has continued to thrive, as financial services doubled its share of Gross Domestic Product and grew to provide 40% of the earnings on the Standard and Poors 500 share index. Prosperity was heavily skewed towards the very rich, but the majority of Americans continued to enjoy a general, if halting improvement in living standards.

    The collapse of the financial services bubble has however called into question three of Wall Street’s most cherished beliefs about manufacturing:

    · First, Wall Street believes that financial services and other services can take the place of manufacturing, and that the United States can remain a prosperous economy thereby.
    · Second, it believes that manufacturing tangible products is an intrinsically low-skill and uninteresting operation, so that the US would do much better to specialize in “symbol manipulation.”
    · Third, it believes that the decline in US manufacturing was and is inevitable, so that decline would have happened whatever strategies management had adopted, and whatever resources and attention it had devoted to manufacturing activities.

    The inevitability of manufacturing’s decline is in some ways the most interesting question, which has not been addressed much elsewhere. Most large-scale events of this nature appear inevitable in retrospect, yet if examined in detail can be shown to have been triggered by a series of decisions that could have gone the other way.

    Management decision-making like most human activities is a slave to fashion: whichever guru has captured the attention of business academics and the business press at any given time is likely to have an inordinate influence on management decisions. In the 1920s through the 1950s, the production engineering of Frederick W. Taylor was fashionable, and the United States built the first mass-production economy. In the 1960s, MBA-credentialed top management was thought able to run anything, and so both conglomeration and strategy consulting came into fashion. From the early 1980s, it became received wisdom that all organizations could usefully be “downsized” and that the traditional corporate welfare protection of employees was wasteful. All these theories had their virtues; the reality however is that they cannot all be universally true since they are largely mutually incompatible.

    In the 1970s the new and very fashionable Boston Consulting Group introduced the “strategy matrix” under which businesses were divided into stars, cows, dogs and question-marks, according to their growth prospects and profitability. Stars, the businesses with the highest growth prospects and profitability, were to be nurtured and given resources, dogs, of low profitability and low growth were to be closed down and question-marks, of high growth but low profitability, were to be given modest resources to see whether they turned into stars or dogs. The whole operation was to be paid for by milking the “cows,” those businesses of low growth but high profitability. Cows, as their name suggests would be denied capital investment, since such investment should not be wasted on low-growth situations. Instead their cash flow would be milked to provide capital investment for the stars and the more favored question-marks.

    There were several problems with this mechanistic, clever-clever approach to business management. One was that the businesses’ typology could not be identified accurately; which businesses were treated as “stars” was more a matter of the business cycle and doubtless of office politics than of the long term underlying reality. A second, even more fundamental problem was this: cows that are milked and not fed quickly turn into dogs. Businesses that are treated as not part of the company’s glorious growing future quickly wither on the vine, as new opportunities in those business areas are missed. Their profitability starts to decline and quickly the cash flow that was their corporate raison d’etre disappears.

  7. When examined dispassionately in the light of posterity, it appears that far too many of these “cow” businesses were manufacturing operations which were milked for cash flow that was diverted into more fashionable businesses in the service sector, particularly in finance. Westinghouse, for example, one of the most important names in electric equipment until 1980, had split up and left manufacturing altogether by 2000. To be fair Westinghouse management had a good excuse; one of their leading and most successful businesses had been the construction of nuclear reactors, an activity that disappeared in the 1980s owing to political cowardice in the face of environmentalist harassment.

    General Electric, however from 1981 to 2001 run by ultra-fashionable “Neutron Jack” Welch, epitomized the failings of the era. It under-invested in many of its manufacturing businesses, entered into a blizzard of divestitures designed to boost its short term earnings, played games with its pension accruals and built a gigantic financial services empire of low quality businesses in which it could never be a leader. It also ruthlessly eliminated its middle management and overpaid its top management, winners in the corporate office political game. GE was a much admired operation in Welch’s later years; it is less so now, and if the bloated global financial services business returns to a historically normal size may finally be seen to have been a disaster.

    GE Appliances, GE’s home appliance business dating back to 1907, the early years of electrification, was long dominant in the home appliance field. GE Chairman Jeff Immelt has now put GE Appliances on the sale block so that GE could focus on higher margin businesses. The business has attracted interest from China’s Haier Group, but is expected to be less interesting to Korea’s LG, because LG manufactures appliances of a higher price and quality. A commoditized and fairly uninteresting business, in other words, currently worth around $6.3-6.5 billion, little more than 2% of GE’s $290 billion market capital.

    However if you look back even to 1994, a medium year that was already well into GE’s Welch-inspired transformation, appliances represented 10% of GE’s sales and 8% of operating profit. In other words, the business has been steadily starved relative to GE’s other businesses, and has turned itself from a “cow” into a “dog”.

    To see how this happened, think back to the 1950s. Electric appliances were the major growth business of that decade, symbolizing the decade’s new affluence. Forecasters confidently predicted that by 2000 robot appliances would be in every household, removing the drudgery of housework once and for all. As a youthful reader of Isaac Asimov’s robot stories I shared that confidence – after all the computerization necessary for robot control systems, which had not existed in 1940, when Asimov wrote the first of his “I Robot” short stories, was already revolutionizing business management by the late 1950s.

    Now it’s not just 2000 but 2008. So where the hell are the robots? GE Appliances has no such offering; if you buy a GE vacuum cleaner you will still have do all the work yourself. Can it be that the technological optimism of the 1950s was misplaced, and that home robots will never exist, or will be invented only in the far distant future? You’d certainly think so from looking at GE’s catalog of products.

    However it turns out that GE is simply behind the curve. The iRobot Corporation of Bedford Massachusetts, founded by keen Asimov readers from MIT in 1990, manufactures fully robotized vacuum cleaners as well as some pretty neat robotized mine-clearing equipment for the military. iRobot’s standard model runs around $300, less in real terms than an ordinary vacuum cleaner would have cost you in 1980. iRobot’s total sales are only $250 million, which GE would no doubt class as a rounding error, but dammit the company doesn’t have GE’s brand name or distribution network.

    Had GE had the sense and innovative skill to develop robot vacuum cleaners, can anybody doubt that that product group’s sales would today be several billion dollars, with appropriately high margins? It is thus clear that by starving GE Appliances of investment and, more important, of research dollars, and devoting the company’s efforts to financial services, “Neutron Jack” and his cohorts have deprived the United States of a major new business and deprived us overworked consumers of a major labor-saving technology (unless we are lucky enough to find out about iRobot or its few small-company competitors). GE has commoditized its appliance business, forcing down prices by manufacturing in ever cheaper-labor parts of the world. Instead it should have been enriching that business, opening up new opportunities for products that could be sold at higher prices and higher margins and provide more value to the consumer.

    The sad story of GE Appliances is a paradigm of what has gone wrong in the US economy since 1980. No, manufacturing did not need to leave the United States; US manufacturing was killed by a multitude of foolish short-term-profit motivated decisions by inept and overpaid US management. The other questions can also be answered. Manufacturing is not intrinsically a low-skill and uninteresting operation, it involves skills at the highest possible level and can readily employ high-wage workers – after all LG’s workforce in South Korea are these days very far from being subsistence-level Third World proletariat. Finally, the US cannot survive through financial services and tech startups alone; it needs to reinvest in manufacturing or it will find itself unable to support an advanced-economy living standard for the mass of its population.

    Yes, Virginia, you could have had both robots and the Internet. The 1950s dream of an infinitely prosperous United States full of household robots and other high-tech wonders was not a fantasy, it was there for the taking. Only political and business incompetence prevented us from achieving it.
  8. I agree with the points about the financial services division completely. However, I think the argument about the appliances division is way overblown. Look at what else GE is making. (See below.) It's just odd to pick one of the very best American manufacturers and emphasize on small, commodity business that they gave up on and not exphasize all the heavy tech manufacturing they are doing elsewhere.

    GE's revenue growth has been nice and steady in one heavy infrastructure, manufacturing type of business after the other:

    Again, if you export, you'll do just fine...

    Its Infrastructure segment produces jet engines, turboprop and turbo shaft engines, and related replacement parts for use in military and commercial aircraft; wind turbines; aircraft engine derivatives; gas and steam turbines, and generators; drilling and production systems, compressors, turbines, turboexpanders, and industrial power generation equipment; diesel-electric locomotives; and water treatment solutions for industrial and municipal water systems. GE's Healthcare segment manufactures equipment for magnetic resonance, computed tomography, positron emission tomography, nuclear, and X-ray imaging. Its NBC Universal segment provides network television services; produces television programs and motion pictures; operates television stations; owns various cable/satellite television networks; and operates theme parks. GE's Industrial segment offers home appliances; lamp products; electrical distribution and control products; motors and control systems used in end-industrial and consumer products; commercial lighting systems; protection and productivity solutions; handheld and portable field calibrators; equipment for detection of material defects; stand-alone measurement instrumentation; and systems for validating or certifying commercial and industrial processes. The company was founded in 1892 and is based in Fairfield, Connecticut.
  9. One product at a time, the foreign competition drags our manufacturers under by matching and eventually bettering them on both quality and price, forcing them to initially sell at a loss, and then eventually either to outsource it to compete, or go under trying not to.
    #10     Jun 19, 2008