Act II for American Manufacturing?

Manufacturing remains critical to American economic success. Exports of goods account for three-fifths of all U.S. sales abroad, paying the bill for imports of consumer products and oil. Without them, the U.S. trade deficit—at record levels before the recession—would be even worse.

Despite the recent boom in exports of goods, the nation’s share of the world’s manufacturing trade has been shrinking. China is predicted to overtake the United States next year as the world’s leading producer of manufactured items measured by value. And the future looks bleak. From 1989 to 2001, the United States recorded a trade surplus in advanced-technology products, including biotech. Those are the same capital-intensive goods that economists have long argued would naturally be Americans’ domain, as the production of labor-intensive wares, such as apparel, moved overseas. Since 2002, however, the U.S. has run a deficit in advanced-technology trade.

Other hindrances may lie ahead. Workers can produce only as much as their plant and equipment permit, and until recently, U.S. industrial production capacity had grown robustly—through good times and bad. In the past decade, however, companies have shown a reluctance to invest in new capacity, which has grown at a third of its 1990s pace. When the economy eventually rebounds, this may limit U.S. manufacturers in satisfying domestic and foreign demand.

Manufacturers are also an important source of innovation, accounting for more than two-thirds of all research and development conducted in the United States. Since 1999, however, American manufacturers have increased their research-and-development investments outside the United States three times as fast as at home.

Manufacturing wages also bolster the economy. Manufacturing workers get higher pay and more generous benefits—20 percent higher in 2007—than Americans in nonmanufacturing jobs, although wages have recently been growing slowly, if at all.

“If you give up on manufacturing,” New America’s Schwenninger cautioned, “you give up lots of future productivity gains—and gains in the standard of living.”

HOW TO INNOVATE

The conventional wisdom is that the United States can thrive simply as a place for research and development—that the country no longer needs to actually make things. But this assumes that new products spring full-blown from the minds of laboratory scientists. The reality is that in most industries, the manufacturing process itself is a critical factor in developing radically new products.

In Butler County, the presence of multiple manufacturers has been self-reinforcing. “People don’t understand how much manufacturers feed off each other,” said Diane Sheets, the business-development manager of the Butler County Community Development Corp. That symbiotic relationship is vital, she said, in prompting innovation and an entrepreneurial spirit.

For one thing, creating and sustaining a network of competitive manufacturing entails day-to-day interaction between suppliers and customers, which allows each to learn from the other. “The knowledge underlying emerging technologies requires person-to-person contact among manufacturing industries and between manufacturing and services,” said Gregory Tassey, a senior economist at the National Institute of Standards and Technology. That interaction is harder when a company’s supply chain stretches around the world.

New manufacturers also rarely emerge in a vacuum. They typically morph from existing businesses, when coworkers who think they can build a better gadget than their current employer go out on their own. In the 1970s, the founders of Penn United did just that, spinning off from Oberg Industries, another precision-tool firm down the road. This was history repeating itself: Oberg Industries, too, got its start when its founder left a larger local company in the late 1940s. If U.S. manufacturers move abroad, foreign entrepreneurs create these start-ups.

Consider what happened when the U.S.-based manufacturing of semiconductors and flat-panel displays for computers and televisions moved to China more than a decade ago, as Harvard Business School professors Gary Pisano and Willy Shih have recounted. At first, American economists saw no cause for concern, arguing that these weren’t part of the core manufacturing capability that the United States needed. The experience that the Chinese gained in making computer chips and screens, however, taught them how to process ultrapure, crystalline silicon into wafers and to apply thin films of the silicon onto large glass sheets. By so doing, they created a solar panel industry that has become a major international player.

“The United States cannot continue to rely on outdated economic-growth strategies that fail to understand the complexity of industrial technology and the synergies among supply chains,” economist Tassey said.