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American manufacturing: the ostensible decline and the real quandaries
What can China learn from the U.S.'s experience in manufacturing development?
The following article was published on 财经十一人 Caijing Eleven on June 26, a column created by eleven professional financial journalists from the industry reporting team of 财经 Caijing magazine. The original piece is available in Fudan American Review. (Author: Ma Xue).
The article argues that the U.S. manufacturing industry still sustains its core competitiveness, while the structural changes in manufacturing have led to the dilemmas between developing a high-end manufacturing industry to maintain technical superiority and the short-term goal of promoting employment, as well as the incompatibility between building resiliency and pursing efficiency.
By looking into the development of U.S. manufacturing, the article comes up with suggestions for China's manufacturing industry, including emphasizing labor force development in manufacturing, balancing the investment in labor and technology, strengthening national policy support, highlighting demand as the central role in manufacturing innovation and also rationalizing government funding.
Ginger River is aware that some GRR subscribers are from the United States and that some are professionals and business gurus. As stated in the newsletter's subtitle, Ginger River thinks this article, which was published in a journal by a prestigious Chinese university, is a useful resource for China watchers to understand how the Chinese academic community views the growth of American manufacturing and their reflection on China's own path to developing its manufacturing industry to the next level (see Section 4 of this article).
The translation was done by GRR, which hasn't been reviewed by the author, so it does not represent an official translation of the article. The highlights are from GRR.
The development and change of the American manufacturing industry over the last two decades should not be characterized as a "decline." In fact, America's focus on employment and trade deficit masked the fact of structural changes in the industry, that is, the country is maintaining its core competitiveness by focusing on high-end manufacturing and making varying degrees of changes in aggregation and distribution across industries, as well as creating new types of jobs.
However, structural changes in American manufacturing have also brought about a series of problems, and policies of the U.S. government can still lead to unexpected and undesirable results in actual operations, creating quandaries for American manufacturing development -- the impenetrable barrier between "created in the U.S." and "made in the U.S.", the conflict between developing high-end manufacturing industry to maintain technical superiority and ensuring the short-term goal of employment, the incompatibility between building resilience and pursing efficiency, and the dilemma of interest split-up between "large multinational corporations" and "small and medium-sized enterprises (SMEs)”.
The United States is a country where progress is driven by crisis. The financial crisis has triggered a reflection on a manufacturing revival from economic society and the government, and the "decline theory" has gradually formed. But America's real purpose is to accelerate industrial upgrading and quality optimization and consolidate competitiveness and absolute advantage. The article examines the changes in U.S. manufacturing from direct and objective indicators, to demonstrate that its industry is continuing to grow, and its competitiveness is still at the forefront of other developed economies. By analyzing the growth trends and structural changes of the manufacturing industry in the U.S, and the real predicament faced in the process of development and upgrading, the article puts forward some suggestions for the high-quality development of China's manufacturing industry.
Section 1 Is American manufacturing really in decline?
Though the problem of political polarization in the U.S. always becomes more acute during election years, Washington retains at least one bipartisan consensus, that is, "revitalizing U.S. manufacturing capabilities". Since 1992, both Democrats and Republicans have chosen to focus on manufacturing. Bill Clinton, under his corporate-tax reform proposal, argued that American manufacturing companies must be prevented from "creating jobs overseas". Hillary Clinton made rebuilding the manufacturing base and supporting small businesses the focus of her economic plan. Donald Trump once said that Americans "don't make things anymore," claiming that "we have to bring Apple - and other companies like Apple - back to the United States". Joe Biden also pointed out manufacturing jobs are vital in supporting middle-class Americans, as manufacturing companies are shifting their businesses and jobs overseas.
All these campaign plans above have championed one notion, that is, American manufacturing has been locked in a downward spiral in recent decades. That notion often was backed by three arguments:
First, America saw the weakest growth in U.S. manufacturing in the past several decades since World War II. The overall share of U.S. manufacturing in the economy has been shrinking over time. In 1970, the manufacturing's share of GDP in the U.S. was 24.3 percent, twice as much as in 2018. Today, the figure stands at 12.4 percent, far below the level registered between the 1950s to 1960s. In the meantime, America's share of the world's manufacturing sector has also fallen from 40 percent in 1970 to 17.4 percent nowadays.
Second, U.S. manufacturing fails to provide more jobs — This is one of the most common statements made by American politicians and one that worries the public the most, for they are convinced that the absolute decline in manufacturing employment, as well as the decline in manufacturing's share of total employment in the country, are indicators of a shrinking American manufacturing industry. In 1987, manufacturing in the U.S. was still a labor-intensive sector, the 68 percent of gross domestic output earned by labor in manufacturing was considerably higher than the 56 percent share in the typical industry. After 1987, however, labor's share within manufacturing fell precipitously. In 1987 labor compensation in manufacturing contributed 20.1 percent of labor compensation in private industry. In 2011 it provided just 10.9 percent. In the meantime, there was a 33.4 percent drop in manufacturing employment between 1987 and 2011. In 2013, there were 3.4 million fewer manufacturing jobs than in 1960.
Third, the U.S. manufacturing trade deficit is widening. Up until the late '90s, U.S. trade deficits in the manufacturing sector were relatively small, never exceeding $131 billion annually, or 1.7 percent of GDP. After 1998, the deficits began rising sharply and peaked at $568 billion in 2017. Some believe that the manufacturing trade deficit is linked to job losses. During a time of increasing trade deficits since 2000, the industry lost more than 5 million jobs, which added weight to the argument of a decline in American manufacturing.
Nonetheless, U.S. politicians' long-standing focus on U.S. manufacturing employment in fact has obscured important signs of the country's continued expansion of the industry, and the concerns about the manufacturing trade deficit can lead to misreading its global competitiveness.
A more direct indicator of productivity shows that U.S. manufacturing is not really in decline.
(1)The overall scale of the American manufacturing has continued to grow rapidly for nearly four decades. Compared to other sectors, U.S. manufacturing remains the country's leading growth sector, with its productivity growth rate surpassing that of overall GDP. Between 1960 and 2014, the broadest measure of productivity - total factor productivity, which embodies the improvement in technical efficiency via all inputs -grew 1.18 percent faster in manufacturing than in the economy as a whole. Over the same period, labor productivity in manufacturing grew 1.51 percent faster than labor productivity in the economy as a whole. From 2009 to 2019, manufacturing value-added as a share of US GDP has grown at an average annual rate of 2.2 percent, reaching $2.5 trillion by 2019. This growth in manufacturing value-added as a share of GDP is also much faster than the world average of -1 percent over the same time period. Both the total output and the output per capita in manufacturing are faster than the economic growth, especially in industries aside from computer and electronic, including transportation equipment, medical facility, mechanical engineering, semiconductor, communications equipment, and motor vehicle.
The productivity growth in U.S. manufacturing is strong even in comparison to other countries. In 2019, U.S. manufacturing output was 2.5 times that of Japan and Germany combined. Since the financial crisis, manufacturing growth in the U.S. has been much faster than in the UK and France, and even surpassing developing countries such as China, India, and Mexico. While the U.S.' share of the world's manufacturing output has fallen, all other OECD countries saw their share of manufacturing output decline too, From 2005 to 2015, the U.S. share of the world's manufacturing output fell by 3.5 percentage points to 15.3 percent. Japan's share declined from 10 percent to 7.9 percent, and the euro area's share declined from 17.7 percent to 13.9 percent. China's share of the world's manufacturing output rose by 10.1 percentage points to 19.7 percent. U.S. politicians always blame Chinese manufacturing for taking the share of American manufacturing industry, but it has gained more from other countries.
(2) U.S. manufacturing productivity is rising
While manufacturing is shrinking both in terms of absolute numbers of jobs and as a share of U.S. domestic employment, this is not the result of a shrinking manufacturing sector, but a sign of growing productivity workers and the U.S. manufacturing sector. The most convincing explanations for the decline in U.S. manufacturing employment are technological reforms and intra-industry changes. Increased automation and innovation in U.S. manufacturing have encouraged companies to boost output without having to invest more capital and by using labor more efficiently.
Compared with 1987 levels, output per hour for all workers today in manufacturing has increased by more than 2.29 times. Productivity was about 1.91 times higher for non-agricultural businesses. It's worth noting that durable goods manufacturers have registered higher growth in production efficiency - output per capita is nearly 2.7 times higher than 35 years ago. This trend has shifted American manufacturing to demand for skilled workers. In terms of labor compensation, between 1987 and 2011, the Employment Cost Index (ECI) for manufacturing declined by just 2 percent relative to the ECI for all civilian workers. This means that a drop in manufacturing employment, rather than slow wage growth, was the major source of the fall in labor compensation share in the economy overall. Another major factor affecting the compensation of the manufacturing industry is the internal changes in the manufacturing industry in the U.S. U.S. labor-intensive industries are shrinking and manufacturing as a whole is becoming more capital intensive. Between 1980 and 2009 only 16 percent of the decline in compensation of the manufacturing industry is attributable to shifts in output shares between industries, while 84 percent of the decline is due to changes within the manufacturing industry.
(3) U.S. manufacturing has maintained competitiveness in global participation
American multinationals' foreign operations often complement rather than replace their domestic operations. The increase in offshore business is positively correlated with the increase in the size and strength of the U.S. manufacturing industry. Statistics show that a 10 percent increase in manufacturing employment at foreign affiliates of U.S. firms leads to a 4 percent increase in employment inside the U.S. Also, a 4 percent increase in the spending and exports of U.S. firms' foreign affiliates is associated with a 5.4 percent increase in R&D spending on its U.S. site.
This shows that the biggest benefit of offshoring manufacturing is increased R&D spending in the U.S, which is also the key reason for the increased competitiveness of American manufacturing. American multinationals outsource their relatively routine manufacturing processes but retain the most complex and personalized processes at home. Based on the strong comparative advantage that the U.S. has in relatively high-skilled and unconventional tasks like innovation, engineering and management, rather than conventional ones such as basic assembling, the offshoring business has contributed to the specialization of American manufacturing, which then create more highly skilled and better-paying jobs in the U.S. In addition, in an increasingly competitive international environment, the vast number of SMEs are not exactly struggling as politicians described. Between 15 percent and 33 percent of SMEs have lower production costs than the median costs of competitors located in low-wage countries. And almost all of these firms have higher productivity than the firms in their industry that do not have lower costs.
Section 2 Characteristics of structural changes in American manufacturing
The American manufacturing industry has largely maintained its international competitiveness, and changes in the industry cannot simply be interpreted as a “decline." American politicians obscured the fact of structural changes in the manufacturing sector by hyping up the first decade of the 21st century as the decade of decline of American manufacturing. American manufacturing maintained its core competitiveness by focusing on high-end manufacturing and making varying degrees of changes in aggregation and distribution across industries, as well as by creating new types of jobs.
(1) Changes in industry: focusing on high-end manufacturing
Disruptive technologies are revolutionizing American manufacturing. U.S. labor costs have always been significantly higher than those in other countries, but high productivity makes up for the difference. The use of 3D printing, artificial intelligence, the Internet of Things (IoT), and big data has boosted U.S. productivity, making America an attractive place for high-tech manufacturing companies to invest. Foreign Direct Investment (FDI) in U.S. manufacturing reached a record high of $1,785.7 billion in 2019 from $499.9 billion in 2005. FDI in manufacturing accounted for 40 percent of total FDI.
The top eight manufacturing sectors in the U.S. by value in 2020 are 1) chemical engineering, 2) computer and electronics, 3) food, beverage and tobacco, 4) aerospace and other transportation equipment, 5) motor vehicles and parts, 6) machinery, 7)metal products, and 8) petroleum and coal products. Judging from the contribution of industrial value-added to GDP in the first quarter of 2021, chemical products accounted for 1.9 percent, computer and electronic products accounted for 1.5 percent, food, beverage and tobacco accounted for 1.3 percent, petroleum and coal products accounted for 0.8 percent, motor vehicles and parts accounted for 0.8 percent, machinery accounted for 0.7 percent and aerospace and other transportation equipment accounted for 0.6 percent.
Statistics show that the most competitive industries in U.S. manufacturing can be divided into three categories.
The first category includes aerospace and other transportation equipment, as well as the military industry. These industries are characterized by high technology content, high added value, and strong competitiveness, making them the "crown of the manufacturing industry". Most of the top 10 U.S. manufacturers in this sector reported earnings growth even in the 2020 pandemic year. In 2020, Lockheed Martin Corp. reported a 9.34 percent rise in sales, and Raytheon Technologies posted a 24.78 percent increase in revenues from 2019. Revenues of Northrop Grumman rose 8.74 percent, those of Aerojet Rocketdyne Holdings Inc. were up 4.6 percent sales growth, and BWX Technologies Inc enjoyed saw a 12.06 percent increase.
The second category includes businesses related to the designing and manufacturing of automobiles. They involve machinery equipment, automation, computer and materials, etc, reflecting the comprehensive level of the national manufacturing industry. The production model of this category is changing from the traditional mass and single product production to small-batched and personalized production, and from the producer-led production mode to the consumer-led production mode. This flexible model has the advantages of small-scale, customized production and zero inventory. Ford, GM, and Chrysler all implement the "lean manufacturing" approach. Computer-aided manufacturing involves the integration of production lines and the application of a large number of new materials and electronic systems and enables personalized production and mass customization to be realized.
The third category is the medical industry, which is also the one with the highest concentration of innovation in manufacturing. According to data from European Commission in 2019, five U.S. biopharmaceutical companies ranked among the top 10 companies with the largest global R&D investment. According to Fast Company's "The World's Most Innovative Companies in 2019", the world's top 10 companies in the biotech sector all came from the U.S.
U.S. manufacturing R&D expenditures have reached $293.6 billion in 2019 from $184.2 billion in 2000, with the pharmaceutical industry spending $89.8 billion and accounting for 30.6 percent of the total. 17.9 percent of the R&D expenditure went to the computer and electronics sector, 12.6 percent to semiconductors and other electronic, and 9.2 percent went to automobiles and parts. In contrast, labor-intensive, technology-mature, resource-consuming industries, such as leather, paper, printing, plastic and rubber, metal products, and other traditional or basic manufacturing industries, all have a stable development trend, with an annual R&D expenditure growth rate of less than 3 percent. Only high-value-added parts such as design and customization are manufactured inside the U.S.
(2) Changes in geography: manufacturing industries with different technology types show different degrees of changes in aggregation and distribution.
Middle-skilled industries in the U.S. - including computer and electronics, transportation equipment, chemical engineering, machinery, and food production - are forming a new geographical cluster as a result of their high degree of specialization, and are shifting their operations from metropolises to smaller counties. The initial geographic migration of this kind of manufacturing industry was mainly to seek manufacturing bases with low wages, and they usually moved southward.
But since 2000, medium-tech manufacturers are moving away from places where their advantage was based on low wages and began to seek locations that boast industrial clusters and diversity. They are moving away from densely populated, centrally located metropolitan areas, to counties that can provide manufacturers with maximum advantages of diversity, so as to form a new geographic cluster of the same or related industry. This gives manufacturers better access to professional workers, suppliers, and customers, and makes it easier for them to access production methods that improve performance. Manufacturers can also benefit from greater access to services such as engineering, finance, legal services, and management consulting across a range of different industries in their geographic vicinity.
Meanwhile, U.S. high-tech manufacturing industry is spread among metropolitan areas. High-tech manufacturers are geographically isolated from each other, because their needs in skills, R&D, or supply chain vary widely, and they do not benefit from industrial clusters and scale economies.
Most of them are usually located in six different metropolitan areas: Bridgeport in Connecticut, Cedar Rapids in Iowa, Cleveland in Tennessee, Dubuque in Iowa, Fort Wayne in Indiana, and Mansfield in Ohio. As they are largely located in distinct places, 52 metropolitan areas specialize in pharmaceuticals, 61 are home to the computer and electronic industry, and 44 are engaged in the aerospace industry.
In particular, the American automobile manufacturing industry experienced the transition from decentralization to spatial concentration, and then back to decentralization again for manufacturing. In its initial phase of spatial concentration, the goal of the automobile industry was to improve productivity with scale economy, and then form industrial clusters around high-density metropolitan areas, or to be more specific, around the central counties of these metropolitan areas. During this stage, the industry is usually concentrated in the east-west corridor south of the Great Lakes region located mainly in Michigan. As production became routine and mature over time, the advantages brought by geographic concentration became less important as determinants of industrial location, and production costs became a rising problem. As a result, the less technology-intensive part of the industry began to scatter geographically, moving to lower-cost areas, such as peripheral metropolitan and non-metropolitan counties. The automobile industry cluster expanded into southern Alabama, Kentucky, and Tennessee. Over time again, even the high-tech part of the industry chose to sprawl out for the same reason, putting more production lines in California and Texas, to get closer to markets and suppliers and reduce the cost of transporting cars.
(3) Changes in employment: skilled-oriented jobs integrated with service-oriented jobs
Manufacturing and producer services in the U.S. have formed a trend of integration, thus changing the type of employment in manufacturing. The "Industry 4.0" promotes the integration of various technological innovations, bringing to the American manufacturing industry mass intelligent production, cost-effective automated factories, and highly customized production lines. For example, IoT sensors feed real-time data into analytics systems to adjust machines remotely; collaborative robots can handle dangerous tasks and eliminate safety risks; 3D printing can produce complex multi-material components and final products, coordinating new application programs of distributed supplier networks and fast simulation platform can be used for design. This creates a huge demand for jobs in producer services, and as producer services became part of the means of production for American manufacturing, the duo are now highly integrated.
But jobs created in producer services are nonetheless included in the employment data of the service industry. Considering the fact that producer services have a higher intermediate demand rate, and that a large portion of its output is invested as means of production into manufacturing production, it can be said that the growth of the producer services employment is proof that manufacturing is boosting employment. But this is not reflected in the contribution of manufacturing growth to employment.
Producer services employment accounted for only a third of service jobs in 2005 and rose to 41.2 percent in 2013. This shows that producer services in the U.S. are an important driving force for the rapid growth of the service industry. It also reflects the driving effect of the manufacturing industry on the service industry. These productive services are characterized by high knowledge-and-technology intensity, high productivity, and high value-added, and are widely used in U.S. manufacturing to minimize manufacturing defects, increase output, and reduce equipment downtime and waste. They also helped improve the processing and tracking of raw materials and finished goods, shorten design time, and improve engineering efficiency, thus upgrading the organizational patterns of the American manufacturing industry. In particular, SMEs and start-ups are more inclined to introduce productive services as external knowledge sources to establish an advantageous position in non-price competition. The relative changes of the declining proportion of the manufacturing industry and the rise of the service industry in the U.S. fail to reflect the innovative integration of the two industries, and it is easy to ignore the real situation of the manufacturing industry when focusing only on changes but separating the connection between the two industries.
Section 3 Real quandaries facing American manufacturing
Structural changes in the manufacturing industry also generated a series of problems. The U.S. government's industrial policy could lead to unexpected and undesirable results in actual operation, which to a large extent restricts the development of the U.S. manufacturing industry and becomes a bottleneck.
(1)The impenetrable barrier between "created in the U.S." and "made in the U.S."
The U.S. leads the world in scientific research but has failed to translate its dominance in basic sciences into dominance in manufacturing innovation and productivity growth. There is a significant "death valley" between basic sciences development and commercial innovation. The President's Council of Advisors on Science and Technology (PCAST) believes that the decline in U.S. manufacturing leadership is not defined by the loss of low-wage jobs and low-tech industries, but that its manufacturing innovation has begun to fall behind high-income countries such as Germany and Japan.
One of the reasons for this lagging behind is that the vast majority of U.S. government funding is limited to improving technology maturity, not manufacturing maturity. This has led to the differentiated increase in "American creativity" and "American manufacturing power”. Most of the U.S. federal funding goes to basic research through the Advanced Manufacturing Office under the Department of Energy, the Advanced Manufacturing Plan under the National Science Foundation, and the manufacturing technology projects under the Department of Defense, to provide support for R&D in manufacturing technologies. This model of government funding is subject to a single measure of success and clear indicators of eligibility for continued funding and has led to cutting-edge projects tying up too many federal R&D dollars. Many initial research findings are confined to academic level or national laboratories.
Many U.S. companies balk at the high cost of turning proof-of-concept prototypes into actual products, making it difficult to scale up new technologies to commercial scale. For instance, the Defense Advanced Research Projects Agency (DARPA) often funds programs to address manufacturing capabilities. One example is the Electronics Resurgence Initiative, a $200 million program over 4 years intended to reinvigorate the U.S. semiconductor manufacturing base.
National Association of Manufacturers points out that in the absence of detailed spending data, it is difficult to determine how much of their R&D budgets impact commercial transformation in the manufacturing industry. Also, the U.S. put relatively less investment into improving new products and manufacturing processes. Over the past 20 years, industrial giants such as GE, IBM, Xerox, AT&T, and others are reducing or abolishing corporate R&D labs in a bid to cut costs to maximize quarterly earnings. According to statistics, the U.S. spent only $796 million on research and development related to manufacturing readiness, far less than other developed economies such as Japan, Germany, and South Korea.Japan's R&D investment in manufacturing readiness is more than three times that of the United States. Germany is nearly six times, and South Korea is more than 10 times that of the United States in this regard. These three countries spend 7 percent to 30 percent of their science and technology budget on manufacturing readiness, whereas the U.S. spends less than 5 percent of its budget in this area.
Also, the various policies aimed at supporting domestic manufacturing in the U.S. lack coordination and sustainability, and they come in small scales but with great restrictions. For instance, the Manufacturing Extension Partnership (MEP) currently comprises 51 manufacturing centers, each operated by a state government, university, or other nonprofit organization, with the aim of helping small-and-medium-sized manufacturers improve production processes, upgrade their technological capabilities, and promote innovation. The actual level of federal support is quite low. In the fiscal year 2019, the MEP budget allocation was $140 million. But the U.S. federal support for the entire MEP program is less than one-sixth of Germany's support for Fraunhofer centers, which is Germany's version of MEP. The German system also has over 13 times more employees than those of MEP.
The Manufacturing USA program (MUSA) is a network of 14 research institutes, each focusing on a particularly advanced manufacturing technology. The network is intended to make early-stage scientific research suitable for use in manufacturing production. The federal government provides a small amount of funding, with a minimum 1-to-1 cost share from the participating large manufacturing firms, SMEs, and state and local governments. Total annual institute expenditure in the fiscal year 2019 was $488 million, with only $133 million coming from the federal government. The federal funding for the institutes is only eligible for five years, after which federal funding sunsets. This is short of the 10 years or more required to translate basic scientific innovation into manufacturing processes.
In the meantime, there is also insufficient private investment from basic research and development to the development of commercially viable technologies. There are still two development phases for basic research to be turned into commercially viable technologies: proof of concept and basic technical analysis, and it is difficult to prevent leakages in technological innovation as spillover effect and reverse engineering can easily occur during these two phases. This means private companies involved in the process do not receive all the benefits of their research and development, and they always shy away from such investment though there could be significant profitability, as the outcome of their expensive efforts is highly uncertain.
(2) It is difficult to balance the conflict between developing a high-end manufacturing industry to maintain technical superiority, and achieving the short-term goal of employment.Economically advanced countries struggle to compete on production costs, and to keep manufacturing booming, unlocking value through the use of robotics, artificial intelligence, and big data is vital. As robots became cheaper to develop, and their efficiency has been improved through big data and artificial intelligence, these countries can retain their position as manufacturing powerhouses. In the case of the United States, future manufacturing advantages lie in the following:
First, with the use of digital technology, intelligent manufacturing, and the industrial internet of things, efficiency can be greatly improved and competitive advantage can be gained through local distributed production of customized products.Second, the popularization of new production technology and automation will eliminate residual cost advantages from low-wage labor, provide competitive advantages that are hard to replicate and create the potential for the U.S. to regain global market share in a wide range of industries.
New technologies, however, also require changes in talent type and demand. Advanced manufacturing needs workers with new multidisciplinary abilities who can combine mechanical, electronic and software knowledge and skills, thus raising the technical bar for work. If the U.S. develops its high-end manufacturing, it will create new jobs that require skilled workers and mid-level technical personnel, and will not be able to provide jobs for unskilled young people and unemployed workers in the "Rust Belt”.
Technology is evolving far faster than the upgrade of the labor force in the United States, and technology is not only replacing labor on a massive scale but also requiring flexible, highly skilled workers who can adapt to changing production processes. But the U.S. lacks an official worker training system. There are currently 50 federal worker training programs, some of which overlap and lack transparency, and they do not effectively provide workers with the skills that employers require. Existing apprenticeship programs at the federal level have had limited success in practice, and because of employee mobility, manufacturing firms have less incentive to provide training for non-firm-specific workers. Most companies only participate in these programs out of their social responsibility. They do not believe the training would help to fill the vacancy of skilled jobs.
From upstate New York, western Pennsylvania, and the Great Lakes states to the upper industrial belt of the Midwest, the urban blue-collar middle class has suffered from decades of industrial decline and the loss of low-end jobs at home. Many small towns are trapped in a downward spiral - local tax bases decline as factories close and wages and incomes fall, leaving public services, schools, infrastructure, and law enforcement struggling to maintain their former standards. People who can afford it are moving to the booming cities, but struggling families can't leave poor areas as they can't afford the soaring housing prices in the booming cities, leaving behind an aging, poorly educated workforce.
These conditions lay dangers for nativism, nationalism, isolationism, and economic nostalgia. Residents trapped by the decline of traditional manufacturing can only find answers from politicians who promise to rebuild traditional manufacturing plants. Instead of investing in long-period labor retraining, low-skilled manufacturing plants can create jobs quickly, hence it becomes the posturing of politicians. Local policymakers often fall into the short-term mindset of declaring new manufacturing plants to their constituents as political victories, they often target traditional and declining industries with ill-designed subsidies to create jobs that can absorb unskilled workers without ensuring adequate economic returns.
(3) It is difficult to take both resiliency and efficiency into account. Resiliency and efficiency are always at odds when building supply chains. Resiliency provides a securer source of supply but also means more redundancy and costs. U.S. companies used to only consider the cost when investing and purchasing globally, so offshoring U.S. manufacturing usually means cheaper, faster, more flexible, and more efficient. But the chaos caused by the trade war between China and the U.S. in 2018 and the supply chain disruption caused by the pandemic in 2020 have led the U.S, government and companies to reconsider and adapt to unforeseen systemic shocks. Two prime examples are the U.S. defense industry and the healthcare industry.
During the trade war in 2018, then-President Trump issued an executive order, asking the Department of Defense (DoD) to assess and strengthen the manufacturing and defense industrial base and supply chain resiliency of the United States. DoD then responded with a thorough assessment, saying that the reliability of critical components and technologies for the defense industry is at risk: There is currently only one production line in the U.S. capable of producing large-caliber barrels; the single domestic supplier for large thin-wall castings for rotary-wing gearboxes filed for bankruptcy in 2016, putting programs such as the AH-64E Apache, the V-22 Osprey, and the CH-53K Heavy Lift Replacement Helicopter at risk; the numbers of suppliers of critical defense systems such as ammunition, weapons, missiles and space systems have all declined since 2010. Defense products were composed of aircraft, ships, communications equipment, weapons, and other complex products through highly specialized production system by major defense contractors, but the contractors themselves cannot provide all the machinery, electronics, chemical, software, and other intermediate products input. They depend on other business-oriented manufacturers. The trade war has made defense contractors vulnerable to foreign supply chains. The U.S. government asked that these industrial chains be moved back to the country, citing national security concerns and job creation demand. This involves a vast variety of networked production, and while DoD has a great demand, it is difficult to support a reliable supplier network base, as the defense needs for specific products may be too small or specialized compared to commercial needs.
In 2020, the pandemic hit the lean global supply chain of American companies. Strategies that prioritize cost-cutting, just-in-time production typically do not take into account major disruptions such as natural disasters, epidemics, or other geopolitical crises. In the early stage of the pandemic, the manufacturing capacity of personal protective equipment and ventilators was insufficient, the effective reserve of basic hygiene products was insufficient, and the supply of prescription drugs was severely short, highlighting the weakness of the U.S. industrial chain. Biden, who won support from voters on his anti-epidemic stand, released a report after he came into office on supply chains in four key sectors - semiconductor chips, batteries, key minerals, and pharmaceuticals. He required an assessment of the gaps and vulnerabilities in the supply chains in sensitive industries in 100 days. The Biden administration also announced a 'Buy American' policy to help boost domestic manufacturing. But the best way to promote resiliency is to diversify sources of supply. Choosing to manufacture products in the United States where it does not have a manufacturing advantage just to ensure resiliency can be costly and, in the long run, potentially reduce the global competitiveness of the American manufacturing industry.
(4) It is difficult to balance the split-up of interests between “large multinational corporations" and "small and medium-sized enterprises”
The United States is home to many large, well-known manufacturing multinationals that generate tens of thousands of dollars of wealth each year. Topping the list is ExxonMobil, which earned $244.3 billion in 2017, up 8.08 percent from the year prior. Apple reported sales of $229.2 billion in 2017. up 6.3 percent from the previous year. The rest of the list, including Ford Motor Company, General Motors, Chevron Corporation, General Electric Company, Philips, Valero Energy Corporation, the Boeing Company, and Microsoft Corporation, have all been solidly profitable in recent years. But the vast majority of the manufacturing industry in the U.S. is made up of smaller companies. In 2017, there were 248,039 companies in the manufacturing industry, all but 3,914 are small companies (fewer than 500 employees), three-quarters of which have fewer than 20 employees.
In the development of the American manufacturing industry, there is a growing divide between "large multinational corporations" and "small and medium-sized enterprises.”
On the one hand, the offshoring of parts production, assembly, and final production is a good way for big multinationals to achieve quarterly results, but this strategy hits small and medium-sized manufacturers hard. The global positioning industry chain of multinational corporations gave rise to the substitutes and competitors of American SMEs, and also caused industrial clusters on which SMEs rely to disperse, leading to major development obstacles for them such as logistics congestion and global participation.
On the other hand, there is a clear tendency for the interests of SMEs to be squeezed out by larger manufacturers. Industry concentration in manufacturing is increasing, with large "superstar" companies thriving while SMEs struggle as a result of weak innovation, slow digitizations, and increased competition from abroad.
Such polarization limits the overall growth rate of U.S. manufacturing.
First, large manufacturers are more interested in developing new technologies and are more able to provide matching funds for research, but it is the SMEs that play a principal role in process development, feedback, and testing in the manufacturing industry and constitute the meaningful promoter for the improvement of manufacturing proficiency. High R&D spending and low business conversion rates are further exacerbated by the divergence of interests between transnational corporations and SMEs.
Second, the obvious degree of industry concentration and monopoly of innovation leads to the differential distribution of manufacturing productivity growth, thus making technology diffusion into SMEs very difficult. Even if a few small-and-medium-sized enterprises achieve technological innovation, it is difficult to achieve commercial-scale production without capital sources, and it is also faced with acquisition and merger from large enterprises as they try to prevent technology spillover. The struggles of small businesses are also a drag on overall U.S. manufacturing growth in many ways. Under the current political uncertainty and the impact of COVID-19, large multinational companies are facing the crisis of supply chain disruption, and SMEs are also finding it difficult to form the foundation to support that supply chain, which poses challenges for the U.S. to rebuild its domestic supply chain and strengthen its local manufacturer network cluster.
Section 4 Lessons
The structural changes in the American manufacturing industry show that U.S. manufacturing is not in a "real decline". The wide application of innovative technology is a necessary condition for the long-term healthy development and competitive advantage of the American manufacturing industry. The U.S. is delivering cost savings and increased profits through more efficient production, higher capacity utilization, rapid design iteration, and intelligent manufacturing technologies that surpass the benefits of necessary investment. Extending intelligent manufacturing to the entire supply chain allows for closer integration of the entire production network, with more efficient production and better profitability throughout the value chain. As costs fall and flexibility increases, the faster technology is implemented, the greater the wealth effect will be, which can help to build a long-term competitive advantage in manufacturing. Meanwhile, the "real quandaries" of the American manufacturing industry provide some valuable lessons for the high-quality development of the Chinese manufacturing industry:
First, disruptive technologies are also upending the original geographical and employment landscape of manufacturing. The U.S. government pays great attention to the changes in employment in the manufacturing industry but ignores the important role of labor development. Political consequences are often reflected in elections, and thus the U.S. government shortsightedly enters the predicament between technology input and labor input. In the meantime, the U.S. government's neglect of infrastructure has severed the interests of blue-state, high-tech zones from midsize Midwestern cities and smaller heartland towns. In addition, it should be noted that innovative technology is also a double-edged sword in building competitiveness. Smart technologies enable rapid design iterations and product process simulation. But in the same time, they could enhance their competitors' ability to replicate process innovations, accelerate development cycles, and lower barriers to entry, thus leading to rapid commoditization of entire product categories. As a result, what used to be "American innovation and made in other countries" may gradually become "foreign innovation and made in other countries".
Second, the transformation of cutting-edge scientific discoveries into new manufactured products and industries requires a national strategy. America's dominance in research failed to translate into dominance in manufacturing innovation and productivity growth, and profits-maximizing firms underinvested in the commercial transformation of innovation and workforce development, and thus fail to reap all the benefits. All these slow the productivity growth. Policy intervention is required to overcome these problems of market failure. The support policy should maintain its continuity and consistency, provide an adequate duration of support for research and development. It should lead to establishing a professional manufacturing organization network, guide universities, companies, research institutes, and foundations to play an important role, seek to connect advanced technology patents with clients that are seeking cutting-edge technology, and focus on the practical application of technology. Only when innovative technology is successfully applied in business and large-scale manufacturing becomes possible, can the technological value be transferred and delivered to the public, and innovation realizes its value transmission.
Third, market demand plays a central role in sustaining manufacturing innovation. When the demand is highly uncertain, public support for manufacturing research and development alone is unlikely to lead firms to innovate commercially. The main constraint on manufacturing innovation in the U.S. defense sector is the scale of demand. Since the commercial market for defense products is relatively small, manufacturers have limited incentive to innovate on products with defense applications, and the huge defense funds are hardly motivated to innovate. Manufacturers always tend to wait for clear market demand before they develop and commercialize a technology, while buyers typically wait for a product to hit the market, which has formed an information gap between supply and demand. The key to solving the problem is for the government to open the market for manufacturers through policies such as "innovative procurement policy", stimulate the demand by public purchase, and provide manufacturers with part of the future returns. Only reasonable predictions and realization of product demand stimulation can keep the manufacturing industry in the leading position.
Fourth, government spending should go directly to domestic manufacturers which are more productive and have higher real wages. Government support to enterprises should be constrained by high-performance requirements, which is the key to the government avoiding inefficiency and waste. For instance, the added value of the labor input of enterprises should be high, the real wage should be in the top one-third of the industry, and enterprises should provide high-quality worker training. These requirements could provide incentives for the production of high-performance manufacturing enterprises. Domestic manufacturers with outstanding production advantages and the most efficient are more likely to stand out from the domestic competition and provide technical research and development and workforce training that is more in line with development trends.