Uncle Sam’s New Role in Manufacturing

The economic rebound that American manufacturing is enjoying right now will not be sustained without our government helping to create a globally competitive business climate. The good news is that Uncle Sam appears to have finally heard the word.

“Manufacturing is at the heart of our economic recovery,” proclaimed Doug Woods, the president of AMT – The Association for Manufacturing Technology (McLean, VA), to machine tool distributors and customers attending the Discover Mazak Midwest event recently held at the company’s Midwest Regional Headquarters and Technology Center in Schaumburg, IL.

Woods explained how the explosion of new products introduced last September at IMTS – the result of innovation developed by companies during those dark days of the recession – has now launched a renaissance in manufacturing that has replaced the services sector in leading the U.S. rebound: Manufactured goods now represent 64 percent of all exports. Durable goods shipments have grown 21 percent since June 2009. Manufacturing technology sales grew to $3.04 billion last year and are projected to increase 29 percent to $3.92 billion this year.

Yet lurking behind all of this excitement is the troubling fact that our manufacturing base is still at a long-term competitive risk in several fundamental areas due to a creeping change in the business of globalization that has affected how domestic and foreign government policies impact U.S. manufacturers. This change has created, for the first time, a consensus among large groups of private manufacturers and public policy makers that a cohesive national strategy is necessary to maintain a competitive manufacturing base in America.

Why? If things are going well now, why must our federal government have some sort of new role in how 300,000 small and mid-sized private American manufacturers conduct their business?

Because manufacturers – all manufacturers – now compete in the global business environment of a new industrial era. “U.S. manufacturers must learn that the entire game has changed,” explains Woods. “Their customers have gone global to benefit from cost advantages, address regional tastes, provide assurances through proximity, and reduce logistical challenges. Suppliers to these companies need to see these advantages and take advantage of them also.”

STRATEGY FOR A NEW INDUSTRIAL ERA
Think about how things have changed. When global business opportunities began to expand beyond large multinational corporations twenty years ago, many small and mid-sized U.S. manufacturers started outsourcing their low-cost components overseas to countries where labor was relatively cheap and doing business was inexpensive. The huge initial success of these efforts ignited a wave of offshoring from the U.S. that, over the years, unleashed unprecedented industrial market forces across the globe. Those market forces helped grow foreign economies, educate communities, advance cultures . . . and enable the governments of those nations to become politically business-savvy about international trade.

Before long, government-managed economies – particularly China – entered the game and unleveled the playing field. Foreign manufacturers, armed with public subsidies and backed by national policies that protected their pricing, began bidding on all components built for American companies, not just the low-cost parts. When U.S. policy makers failed to recognize how the business climate was changing, a tsunami of unfairly low-priced imports swept in to steal huge shares of certain markets, inflate our trade deficit and harm the competitiveness of U.S. manufacturers, even those same small and mid-sized firms where it all started. From 2000-2007 alone, more than 1.8 million manufacturing jobs were lost to offshoring.

For a while it appeared that government-managed economies – the antithesis of free market enterprise – would eventually rule global markets. But then came the fallout from the global financial crisis and the Great Recession, two catastrophic events that appear to have reversed the U.S. government’s attitude about manufacturing . . . as evidenced by President Obama’s creation in January of a new post overseeing manufacturing policy and his appointment of Ron Bloom as Special Assistant to the President for Manufacturing Policy within the White House National Economic Council. Bloom, the administration auto czar since 2009, had overseen the restructuring of the U.S. automotive industry.

Woods, optimistic that this is a step in the right direction toward establishing a national manufacturing strategy, said, “I’m hopeful this administration recognizes how job creation and competitiveness depend upon a national agenda that emphasizes the importance of manufacturing.” Bloom already appears to be on the same page.

In the “Integrated Vision for U.S. Manufacturing” that he presented to the National Council for Advanced Manufacturing (NACFAM; Washington, DC) in October 2009, Bloom stressed that “global competitiveness demands an American Manufacturing Strategy, a vision and plan that links the roles of all Federal agencies, is informed by all relevant stakeholders, and creates an internationally competitive environment for U.S. manufacturing as the major wealth creating engine of our economy that creates, retains and restores jobs.”

For private manufacturers to compete on the global stage in this new industrial era, the playing field must be level. This can only be accomplished by embracing a national strategy that maximizes our government’s impact and leadership in ensuring a healthy and competitive manufacturing base. For free-market America, the public and private sectors both agree that the new role of Uncle Sam is not to direct industry initiatives, but to coordinate, support and provide a fertile environment.

How? Where does this start? As one might expect, the sheer volume of desired goals of a national strategy is enormous, as seen in the private sector recommendations submitted by AMT, NACFAM, the National Association of Manufacturers (NAM; Washington, DC), the Original Equipment Suppliers Association (OESA; Troy, MI), and the Alliance for American Manufacturing (AAM; Washington, DC) that are coupled with public sector objectives from the U.S. Department of Commerce, the National Defense University (NDU; Fort McNair, Washington, DC) and other federal groups.

While a national strategy is being cobbled together from all of this, a common theme of priorities has risen to prominence that identifies three fundamental areas of long-term competitive risk for private manufacturers that must be immediately addressed. Each area was once a traditionally source of comparative American advantage, but now a shrinking gap exists between the U.S. and the rest of the world. The good news is that Uncle Sam is already working on them:

INNOVATION
Because manufacturing is the overall engine of innovation that grows our national economy, the private and public sectors agree that the U.S. national strategy must invest in an innovation infrastructure composed of basic research and “technology clusters.”

“Our future competitiveness and sustainable growth depends on maintaining an edge in technological innovation. Not only are products in the mature stage of the product lifecycle not as profitable as those at the early stage of the innovation curve, but innovations in one area can spawn entirely new industries,” explains Susan Thornton, one of the authors of the NDU objectives. “R&D unlocks the technology and innovation cycle by providing for an accelerated ramp-up that allows the new technology to hit mainstream applications more quickly and compete at a higher plateau or end-state that is a step above what it would have been without upfront R&D.”

Woods agrees: “Increased spending on R&D is a good start. Though the U.S. is still tops the world in gross R&D expenditures, Chinese research has exploded and is projected to catch us by 2025. This is why we need a federal policy that incentivizes innovation and R&D in new products and manufacturing technologies. Integrating innovation into our businesses, from product development through the production process, is essential to staying ahead of international competitors that have advantages in structural costs, labor costs and, in some cases, have blatant disregard for patent and copyright protections.”

Woods recalls recent examples of U.S. innovation found in potentially disruptive technologies such as additive manufacturing, laser/water cutting, composite materials, micro manufacturing and nanotechnology. To get funding for more research into these sorts of applications, AMT and others lobbied for the reauthorization of $46 billion over the next three years for the America COMPETES Act – which President Obama signed into law in January – as well as improving the R&D tax credit and making it permanent.

In March, the administration agreed to expand the R&D credit and make it permanent. Michael Mundaca, assistant Treasury secretary for tax policy, told Reuters that “this credit is a significant incentive to conduct research that would not otherwise be performed here in the U.S.” Stay tuned, however, because this expanded $6 billion subsidy is part of a 2012 budget that will probably be shredded by Democratic and Republican lawmakers in the battle over budget cuts for fiscal 2012.