It's Time to Bring Manufacturing Back to the U.S.

06 Mar. 2012 | Comments (0)

A growing number of executives of U.S.-based companies are repatriating their manufacturing capabilities — moving some production operations back from overseas. One such company is Ford, which announced last year that it will move jobs from China and Mexico back to the U.S.

Another example is Caterpillar, which is investing $120 million in a new plant in Victoria, Texas, which will make excavator machines — including some models that had been made at a Caterpillar plant in Japan and exported to the U.S.

Washington policy makers strongly support these moves. But if corporate leaders and government policy makers are increasingly focused on American manufacturing, why has this sector lost six million jobs since 1997? Are we truly entering a new era or are the above examples rare exceptions to a largely irreversible trend?

The United States remains a large, affluent market that generates significant global demand. It has — and will continue to have — many demographic characteristics that are extremely attractive to companies. The reality, however, is that less and less of that demand is being filled by stateside manufacturing operations.

Still, manufacturing is now going through a genuine transformational period, driven particularly by increased labor costs in developing countries, shifting demand patterns, heightened market volatility, and significant rises in the price of oil. Manufacturing companies should acknowledge that these events might be the impetus for a shift in how and where they make their goods.

In effect, there exists a huge opportunity for U.S.-based companies and American policy makers to return the country to an era of manufacturing growth. The biggest hurdle may be that a new mind-set is needed — a sense of urgency, an acceptance of new ideas, and an acknowledgement that the playing field is often uneven and that hyper-aggressive programs and policies must be enacted.

The good news is that we are not starting with an entirely blank slate. Similar challenges — such as those faced when Japan emerged as industrial force — were addressed and largely surmounted in the 1980s and early 1990s.

The key then, as it is now, is extensive collaboration among industry, government, and academia. In the automotive industry, for example, the U.S. government negotiated a Voluntary Export Restraint program in 1981 that limited Japanese exports to the U.S. to 1.68 million cars annually. This agreement compelled Japanese companies to open factories in the U.S. to serve the local markets.

In 1987, Congress allocated significant funding to a consortium that included American semiconductor-manufacturing companies, software vendors, and government agencies. The goal was to "strengthen critical segments of the U.S. semiconductor-equipment industry [a sector considered important for America's security and prosperity] by working with individual suppliers on projects to improve the performance of their equipment."

The next year, responding to the threat to American manufacturing, MIT teamed up with several U.S. manufacturing companies to establish a unique graduate program, the Leaders for Manufacturing (LFM). This program focused on developing manufacturing company leaders who possess both a management perspective and deep technical knowledge. Now called Leaders for Global Operations (LGO), this program is still running strong at MIT and will address the future of manufacturing at a session this coming May.

President Obama has also recognized the importance of manufacturing to the U.S. economy and has taken some encouraging steps.

Last June, the president announced the Advanced Manufacturing Partnership (AMP) to provide recommendations on restoring U.S. manufacturing competitiveness. In December, a national program office was formed to execute on the recommendations of the AMP and to identify and invest in emerging technologies with the potential to create high-quality domestic manufacturing jobs and enhance the global competitiveness of the United States.

And in his recent State of the Union address, President Obama called for a wide-ranging package of policies to help create American manufacturing jobs, including trade-enforcement measures, business tax breaks, and worker training programs.

These efforts recognize that:

  • Consumer demand is changing, with emerging markets contributing more and more to a typical company's revenue.
  • Manufacturing investments naturally flow to countries and regions where financial incentives are substantial. Chief among those incentives — and what drives jobs in and out of a region — is a country's tax policy.
  • Companies compete on cost and responsiveness, and this balance shifts dramatically when labor costs rise and the locus of demand shifts.
  • Local talent and skills are essential to productivity and innovation. Long-term depletion of manufacturing skills will make it hard to reverse the trend.
  • Research and development incentives provided by the U.S. government must be tied to manufacturing operations. Otherwise, whatever is developed with taxpayer money could easily be moved to other regions associated with low-cost manufacturing.
  • Dynamic supply-chain-management capabilities are now essential. In the 21st century, successful U.S. manufacturing companies will be those that can respond quickly to demand changes, cost increases, and economic and political shifts. Prime enablers will be powerful analytical tools and operations that demonstrate unprecedented flexibility.

Revival of the U.S. manufacturing industry also depends on other factors, such as the strength of the U.S. economy, inflation, and the value of other currencies relative to the dollar. But without a concentrated, collaborative, national effort, it will be difficult for the United States to reestablish worldwide manufacturing prominence.

This post is part of the HBR Insight Center on American Competitiveness.

This blog first appeared on Harvard Business Review on 2/27/2012.

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  • About the Author: David Simchi-Levi

    David Simchi-Levi David Simchi-Levi is a professor of civil and environmental engineering and engineering systems at the Massachusetts Institute of Technology and the founder of LogicTools, a provider of software for o…

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