Inevitable or not? The return of manufacturing to the US

The credit crisis and the recession have been good at one thing - forcing commentators, researchers and managers to challenge their implicit assumptions about the world. The end of boom and bust, the possibility of having a post-industrial society, and the continued growth of China all have been called into question since 2008.

One of the emerging discussions is on whether manufacturing will 'return' to developed or leading economies such as the United States. While this was not on policy makers' agendas five years ago, the need to find growth is forcing them to look anew at industrial structure and their role in supporting industrial growth.

As this discussion unfolds it is interesting to contrast the positions being taken by various of the writers and commentators. A new report from Boston Consulting Group claims that manufacturing cost advantages will erode between the US and China within five years leading to a rise in manufacturing in the US. Reading it made me think back to the 2009 piece from Pisano and Shi which lamented the loss of the industrial commons in the US and the need for the public and the private sector to engage in rebuilding the foundations of industrial strength in the US. Both can be true but maybe they should be taken together to get a better picture of what might need to be done to support industrial growth in the US.

Looking at the BCG report it does a good job of reminding us of the context for US manufacturing. According to the report, since 1972 manufacturing output has more than doubled in constant dollars and the US share of world manufacturing value added for 2010 is 19.4% compared to 19.8% for China. Without showing their explicit analysis the report claims that rising wages, increasing shipping costs, more expensive land and the strengthening renminbi will mean the cost advantages for China are about to disappear.

"Our analysis concludes that, within five years, the total cost of production for many products will be only about 10 to 15 percent less in Chinese coastal cities than in some parts of the US where factories are likely to be built."

This is a very strong statement and one that really needs to show the background analysis so that it can be critiqued properly. However, there are immediate reasons why this may be too rosy a picture for those hoping for increases in manufacturing in the US. The comparison between the cheapest parts of the US and the most expensive parts of China may mislead, as cheaper options will still exist in China. Also, is this really a total cost model? Have they included the potential actions of state and federal government in the US and in China? While the message may be right overall (arguments about the timescale aside) the model may just be too simple to back up the claims.

Which is what led me back to the Pisano and Shi piece in Harvard Business Review on restoring American competitiveness. The main argument here is that over the past 30 to 40 years as outsourcing of production has risen significantly the US has essentially weakened its industrial commons. Many products can no longer be made in the US as specific knowledge has left the country and has not been retained either in people or companies. The rebuilding of the commons, and possibly more importantly the building of a commons that is appropriate to the needs of the next generation of manufacturing, will be a difficult task that potentially will require much coordination and collaboration between industry and government.

So the mainly cost based analysis of BCG does not appear to admit to the kinds of issues that Pisano and Shi are worried about, the fabric of industry and its ability to adapt and do new things, the skills base of the country and its investment in retaining and improving production processes through strong R&D. This is why I'm wary of big claims like those made in the BCG report, especially when they could potentially lead policy makers to think of the return (increase really) of manufacturing as somehow inevitable. It is not and there are many complexities to be unearthed and overcome before we'll see a significant shift in the structure of the economy and strong growth based on industry in the US or in other developed economies.

Best

Finbarr

The problem of scale

I've been reading Ian Morris' Why the West Rules - For Now over the past couple of weeks (some of the blow by blow in the earlier centuries might have made way to get it down from its 600+ page length) and I've been struck by two things. First the assertion that there have at points in history been barriers or limits to development that have held until conditions or technology moved past a certain limit. And the second is that the problem of scale seems writ large even though it is not really brought out in the text.

The second for me is an integral part of the first and I'm not saying Morris doesn't recognise this or in some ways discuss it. However I thought it was worth making it really explicit. Simply put, big things are not small things made large.

Probably the best piece on this in management literature is the classic 1972 Harvard Business Review article by Larry Greiner Evolution and Revolution as Organizations Grow which discusses the differences between moments of smooth evolution and disruptive revolution based on the age and size of an organization. The idea that the small and the large don't work in the same way is fundamental in physics, in the difference between Newtonian mechanics and the strange world of quantum mechanics (for a musical version of this have a look at the Symphonies of Science the Quantum World).

And in Morris' text what I see lurking is that large countries are not big small countries, if I can mush all of that together. Or to put it another way, the scaling of companies into national economies and from national economies to the global economy involves scaling steps that are discontinuous.

This is very important when trying to understand commentary on the nature of the current recession and the actions that are being taken (or not) to try to reignite growth. How the narrative on how to address the problems is structured depends on what scale you're used to working at. Paul Krugman wrote about this in a direct way in his 1996 piece, again for Harvard Business Review, A Country is Not a Company, where he strongly argued for not following the instincts of CEOs of large companies in terms of economic policy.

It may also point to significant fault lines in economics, between those trying to work up from the microeconomics of companies to the macroeconomics of countries. Maybe, again in parallel to physics, there is no grand theory of everything.

Best

F