Industryweek 6505 C Chalkboard

Professor Shih Gives Manufacturing Renaissance a C-

April 11, 2014
Over last 5 years, much greater recognition of importance of manufacturing to US economy in Washington Improvements in US manufacturing have more to do with economic fluctuations than policy actions and could be temporary Continuing need to strengthen "industrial commons" in United States Close proximity of manufacturing design and production important element in innovation Reshoring is occurring in "fits and starts"

Willy Shih is still worried. Five years ago, the Harvard Business School professor and his colleague Gary Pisano wrote that “restoring the ability of enterprises to develop and manufacture high-technology products in America --is the only way the country can hope to pay down its enormous deficits and maintain, let alone raise, its citizens’ standard of living.”

But when IndustryWeek asked Shih to assign a grade to our nation’s efforts to reverse the impact of decades of manufacturing offshoring and lost production capability, he answered, “C-.”

Shih certainly isn’t all doom and gloom. He says there is much greater recognition of the problem now in Washington and among manufacturers than in 2009 when he and Pisano wrote “Restoring American Competitiveness” for the Harvard Business Review. “That’s very important progress,” he notes. “Until you recognize a problem, you don’t have much chance of addressing it.”

He points to the promise by Walmart to source more merchandise from U.S. manufacturers as a positive sign. Walmart has pledged to spend $250 billion on U.S. products over the next 10 years.

But Shih remains concerned that much of the recent improvement in manufacturing has not come from policy changes designed to make the U.S. a more attractive location for manufacturing but from changes in the economic environment that have made competitors less attractive.

For example, wage inflation in China and wage stagnation in the U.S. has taken away some of the benefit of labor arbitrage.

Willy Shih: Many managers fail to value "how much of the overall product innovation actually happens in production." (Photo: Stuart Cahill)

Another factor, he says, is the rising cost of transportation for manufacturers which has driven a transition from air to ocean freight and increased the amount of inventory in supply chain pipelines stretching from Asia to the U.S. That is causing some companies to bring manufacturing back to the U.S. or Mexico to serve the domestic market.

Those trends have contributed to auto manufacturers such as Honda, BMW and Daimler increasing their footprint in the U.S.

Manufacturing also has benefitted from the energy boom in the U.S. caused by fracking, turning the nation from an energy debtor to a leading oil and natural gas producer, and making the cost of energy much lower than for U.S. competitors in Japan and Europe.

“We recall [in 2007] when GE sold off their plastics and engineered materials group to SABIC because we didn’t have the oil here and that is such a big component of the cost,” said Shih. Now, major chemical projects are underway or planned in the U.S. because it has become a low-cost source for feedstocks.

While all this is consequential, says Shih, it has been a case of overseas locations becoming less attractive. He cautions, “Those negatives can turn relatively quickly.”

Shih said some industries such as consumer electronics are likely gone from the U.S. He said the country needs to focus on industries that could be at risk.

“We are still very strong in aerospace but we are coming up on a wave of retirements of a generation of aerospace workers,” he said. “Do we have the talent in the pipeline to maintain our strength there?”

Shih is also concerned about the biotechnology manufacturing sector. There is a mentality among venture capital firms, he said, not to make these products but to have companies “get through phase 1 and phase 2 trials, monetize it, sell the company and let somebody offshore do it. That is not good for the long term.”

Appreciating Production's Role in Innovation

Years of offshoring and outsourcing badly damaged the “industrial commons” in the U.S., Shih and Pisano warned in their HBR article and then in their 2012 book, “Producing Prosperity: Why America Needs a Manufacturing Renaissance.” The commons are the networks of suppliers of a vast range of products from production tooling to specialized components, the skilled workers, the engineers and academic researchers who all contribute to a vital manufacturing sector.

“The idea of a commons transcends a cluster. The commons is the core capabilities in the supplier base like metalworking - castings, forgings, the ability to produce microstructure alloys,” Shih explains. “Some of them seem very ordinary but they are used by multiple industries.”

When companies begin to outsource production, Shih and Pisano observed, it creates a snowball effect that eventually can cripple a manufacturing sector.

“When a major player in an industry outsources an activity, cuts funding for long-term research and gains a short-term cost advantage, competitive pressure often forces rivals to follow suit,” they wrote in their HBR article. “As potential employment opportunities shrink, experienced people change jobs, moving out of the region, and students shy away from entering the field. Eventually, the commons loses a critical mass of work, skills and scientific knowledge and can no longer support providers of upstream and downstream activities…”

Shih and Pisano argued that this outsourcing did more than reduce the U.S.’s ability to competitively manufacture advanced products such as laptop computers or advanced rechargeable batteries. They said it also damaged the nation’s capacity for developing new products and technologies because it failed to recognize the critical role of production in innovation. In many industries, Shih explained, important improvements in products come after the first prototype is developed. The interaction between designers and production personnel can help improve the manufacturability of the product as well as improve quality and lower cost.

“It’s not just that the parts get cheaper,” said Shih. “It’s that I learn to do it better or I simplify the parts or get rid of parts that aren’t necessary. All of that requires a close interaction between the people who are building it and the people who designed the product.”

Shih said as a manufacturer for 28 years, he appreciated the value of close ties between engineering and development, and the production floor. He spent the 1980s at IBM, where he recalls his manufacturing director being proud that the engineers were situated across the street from the manufacturing site in one case and just off the production floor at another.

The value of this close linkage has been understood for decades, Shih said, with the Toyota Production System serving as an important lesson in its value.

The counterargument has been that issues of distance could be overcome through telecommunications and flying people to China and other manufacturing sites. Shih said a generational gap has developed where manufacturing becomes a matter of purchasing components rather than making them.

“There is very much a belief among many managers that if I design it, someone else can make it,” said Shih. “That fails to value how much of the overall product innovation actually happens in production.”

What is Needed for the Manufacturing Renaissance?

Shih and Pisano have called for both government and industry to increase support of basic and applied research. Shih noted that government support of the human genome project, for example, had “catapulted the U.S. to world leadership in biotech.” He said the Obama administration’s efforts to develop a network of manufacturing innovation centers are on the right track.

“I like what they are doing in terms of recognizing where the future is going such as with additive manufacturing,” Shih said, adding that the administration was taking a “thoughtful approach” to identifying important emerging technologies and supporting early stage research. He noted that companies shy away from such investments because the risk they won’t capture a return on their investment is too high. He said he agreed with many economists that the government should invest in these “long-term, R&D public goods” and then let the market commercialize technologies and determine winners and losers.

But Shih said Washington has failed to tackle major issues such as taxes and regulations which are inhibiting the growth of manufacturing in the U.S.

“It is very frustrating to me to see our inability to step up to problems that everyone agrees on,” Shih said.

Not surprisingly, Shih sees reshoring moving along in “fits and starts.” He wonders if some of the moves back to the U.S. will have staying power over the long term as global energy prices eventually equalize.

“I will be more convinced when I see supply chains growing back here,” he says. “Maybe the decline has been arrested but that is quite different from seeing it growing again.”

To help rebuild those supply chains, the nation will have to ensure that there are workers with the skills to fill those new jobs. Shih says manufacturing needs an image makeover to showcase the fact it offers good-paying jobs, often in very high-tech environments.

“This may sound heretical but we have to get off this notion that all kids need to go to college to get on an upward path,” he said, adding, “We seem to have stigmatized this industrial route and I don’t think that has served us well. It can be a route to a good income. We need to not discourage people from going that way.”

For now, says Shih, the U.S. has a “window” of opportunity to take action to strengthen manufacturing.

“It’s not exactly a sea tide change yet,” he concludes. “It’s still a work in progress.”

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