By Ed Bernstein, President, Industrial Research Institute
Researchers from the Massachusetts Institute of Technology (MIT) came to DC last Friday to deliver a report covering their research into our manufacturing sector. So what did they find? Unsurprisingly, they identified gaping holes in our industrial ecosystem that need to be filled with the right talent, the right infrastructure and the right incentives to make our manufacturing sector healthy again. Closely in line with IRI’s Innovation Economy 2020 initiative and position statement, the report offered solid data matching what IRI member companies have discussed at our meetings for at least a decade now. So what else did the MIT report provide that made it intriguing? For starters, it offered a useful comparison.
The twenty MIT faculty members studied 255 manufacturing companies, 178 of them located across the United States and ranging from start-ups and small-scale “Main Street” manufacturers to large, multinational corporations. The remaining 77 manufacturers were located internationally, but primarily in China (36) and Germany (32). What stood out was the stark contrast of the American manufacturing sector with Germany’s tightly interconnected system of “legacies.”
Before we get to Germany’s system, however, let’s first walk through where the U.S. stands according to the MIT report. Over the past decade, the United States has shed over 30 percent of its manufacturing sector to off-shoring and outsourcing. Companies have sought ways to boost their bottom line and expand globally and in the process have stripped the manufacturing ecosystem down to its core elements by making it almost exclusively an out-of-house element in their commercialization efforts. What these MIT researchers learned was that by doing so companies limited manufacturing’s R&D and scaling capabilities.
Additionally, as manufacturing got outsourced, large corporations with the resources necessary to train the next generation of manufacturers simply stopped doing so, opting instead for those positions to be sent overseas. Compounding this issue of training and development, the small local banks with intricate knowledge of local manufacturers were gradually being bought out by large national banks making access to loans much more difficult for smaller-scale manufacturers.
The report highlighted that manufacturing is more than a factory producing products; it is an ecosystem of many moving parts working in tandem to research, identify, scale-up, and then commercialize and produce new products. All of which cannot be done effectively by manufacturers alone working with limited, and shrinking, access to resources.
This brings us to Germany.
As the panel discussed on Friday, Germany’s innovation ecosystem builds on legacies. Germany has well-established industrial specializations, long-standing relationships with customers, an advanced and highly trained workforce, and a close-knit network of producers and suppliers resting in close proximity to their industrial parks. Their success has not come solely from creating new, disruptive products from start-ups like the U.S. model tends to do; rather, its industries identify new uses for old products and services and then reformat and repurpose them. German companies interviewed had transformed, for instance, from auto manufacturers to solar module producers and from semi-conductors to solar cells, just to name two. Their ability to adapt came from intimate access to a wide network ranging the entire span of the R&D and commercialization process.
The MIT panel noted that among “Main Street” manufacturers in the U.S., the majority only had access to the resources, personnel, and finances available in-house when it came to scaling up and commercializing a new product. The German companies, by contrast, could take advantage of their region’s advanced legacies. They could tap into a rich reservoir of resources from universities, trade associations, lab consortia, industrial research centers, technical advisory committees, and nearby suppliers. The panel concluded that “it’s impossible to understand the different fates of manufacturing in the U.S. and Germany without comparing the density and richness available to German manufacturers… with the thin and shrinking resources available to U.S. manufacturers.”
Market pressures to ship manufacturing and suppliers overseas diminished our system’s ability to repair itself, let alone transform it to a sustainable “advanced manufacturing” ecosystem. So what can we do? IRI has already taken a step to addressing this. If you have not yet read our organization’s position statement and “Innovation Economy 2020” infographic, now is the time to do so. Education, resources, and incentives to collaborate in public-private agreements are cornerstones of both the MIT report’s recommendations as well as IRI’s position on where we go from here. It is time to act and what better catalyst could we have hoped for than a study vindicating precisely what we argued for at the start of our anniversary year?
The MIT PIE report is excellent and a continuation of the great work at MIT over decades in recognizing the importance of manufacturing in the U.S. economy and especially the need for innovation in manufacturing as they did in 1991 with the publication of the book, “The Machine that Changed the World” that summarized the results of the MIT $5 million five year study of competitiveness in the automotive industry.
Click to access machine.pdf
MIT helped convince manufacturers in America to adopt the Toyota Production System, which is now called lean production.
But I didn’t see the word “manufacturing” mentioned in the IRI Position Statement on U.S. Economic and Technology Policy. What is the position of the IRI on the need for manufacturing in the American economy?
As they have incorrectly advised policy makers in America for decades, most economists still appear to be saying that domestic manufacturing doesn’t matter in the American economy should be offshored.
A very important point that was missed in the PIE report is the importance of labor policy in an innovation economy. Germany labor policy retains and retrains German workers as a valuable resource and an investment in the domestic intangible capital (IC) needed in an innovation ecosystem whereas America policy does not make the proper investment in domestic IC. America policy supports the free and easy firing and offshoring of workers rather than the need for an investment in IC needed for a domestic innovation ecosystem. Germany has effective, cooperative labor unions. Current American policy doesn’t seem to recognize the importance of unions in the innovation ecosystem. Offshoring in America is not limited to manufacturing but also includes IT services such as software development. Only when American policy understands the need to properly manage an investment in the intangible capital (IC) of workers (more than STEM education) will America have an effective, competitive innovation policy and ecosystem. An excellent reference on the policy changes need for a competitive innovation economy that includes manufacturing in America is the book, “Innovation Economics”, by Atkinson and Ezell, of the Information Technology and Innovation Foundation.