President’s Council of Advisors on Science and Technology –

[Module 7 – Policy inputs]

• 
  U.S. is losing leadership in manufacturing, both low and high-tech, including manufacturing from its own innovation and R&D
  
• 
  Other nations are heavily investing, poised to overtake U.S. advanced manufacturing leadership
  
• 
  Advanced manufacturing is essential to create and maintain high-paying domestic jobs
  
• 
  Interdependence between manufacturing production and R&D
  
• 
  Advanced manufacturing tied to national security
  
• 
  U.S. is not as conducive to advanced manufacturing business as other nations
  
• 
  Federal investment in new technology is crucial for future development of new major industries
  
• 
  Private investment must be complemented with public investment to overcome market failure, spur spillover benefits such as infrastructure building, and support new methods of manufacturing process.
  

Principles for Promoting Advanced Manufacturing in the US:

1. 
   Create an innovative environment by investing in R&D, cultivate and attract high talent for a skilled workforce
   
2. 
   Overcome market failure through joint public and private investment in domestically developed technology and infrastructures. Develop better methodologies to expedite the manufacturing process
   

Recommendations:

1. 
   Launch an advanced manufacturing initiative (AMI), a whole-government effort led by the Departments of Commerce, Defense and Energy, coordinated by the Executive Office of the President. The coordinating body of AMI should prepare a biannual report to the President on the most important needs for Federal investments, including:
   

(ii) Public- private partnerships (PPPs) to advance such technologies through precompetitive consortia

(iii) Development and dissemination of design methodologies

(iv) Shared facilities and infrastructure to help small and medium sized firms compete globally

• 
  AMI should identify and focus on the most pressing technological challenges
  
• 
  AMI should report on the availability of financing for pilot plants and early-stage activities within these technology areas.
  
• 
  Funds to implement the programs recommended by AMI should be appropriated to the 3 Departments, at the level of $500 million rising to $1 billion over four years.
  

2. 
   Federal government should improve tax policy by reforming corporate income tax to other OECD countries’ rates, extending R&D tax credit permanently and increasing it to 17%
   
3. 
   Federal government should support research by doubling the research funding for NSF, DOE Office of Science and National institutes of Standards and Technology. Public and Private R&D investment should reach 3% of GDP.
   
4. 
   Federal government should strengthen the workforce by supporting STEM education and attracting foreign talents to U.S. companies.
   

Manufacturing still contributes a significant share of GDP, performs a disproportionately large fraction of R&D, and produces jobs that are substantially higher paying than service sector jobs Moreover, its network effects run wide and deep, with domestic companies from other industrial and non-industrial sectors participating in extended value chains. In particular, the rapidly growing technology-based service sector depends heavily on manufactured goods. Given the increasing complexity and rapid rate of change of modern technologies, co-location of these two sectors – advanced manufacturing and related services - remains an important strategic factor. Consequently, manufacturing must be targeted as an essential element of the technology-based economy.

1. 
   Diversification: Manufacturing contributes $1.6 trillion to GDP and employs 11 million workers
   
2. 
   Manufacturing firms account for ~70%of US industry R&D and employes 64% of scientists/engineers
   
3. 
   High-tech workers paid substantially more than service workers and a number of the most technology intensive industries are in manufacturing
   

4. Significant majority of world trade is in manufactured products – increasingly in complex, high-value manufactured goods

   
   
5. 
   High-tech service jobs are growing but are not a panacea
   
   1. 
      These jobs are increasingly “tradable” – they are in a global market
      
   2. 
      30 nations have policies in place to promote service exports
      

However, domestic manufacturing suffers from serious problems. The U.S. trade balance in manufacturing has been in deficit for more than three decades and has grown considerably worse since 2000. In 2007, before the recent recession, the deficit in manufactured goods exceeded $500B. A major reason is the fact that the national R&D intensity is the same as it was in 1960, while other competitive economies have steadily increased their intensity – defined as R&D spending relative to GDP (see chart below). Moreover, although domestic corporate R&D spending increased relative to GDP for most of this period, this ratio has begun to decline. A major reason is that U.S. manufacturing firms have dramatically shifted their R&D investments strategies during the last twenty years toward an increasingly global scope. Today, their R&D spending outside the U.S is growing at nearly three times the rate of their domestic spending. U.S. manufacturing firms have also progressively shifted the composition of their R&D portfolios toward shorter-term development objectives. In other words, the so-called “valley-of-death” (barriers between investment in radical or breakthrough new technologies, which have the greatest long-term potential, and development) is widening.

• 
  Over 50 years (1957-2007), manufacturing’s share of GDP has shrunk from 27% to <12%
  
• 
  For most of this period (1965-2000), manufacturing employment remained constant at 17 million
  
• 
  Value of manufacturing shipments in constant dollars continued to grow due to productivity growth but, in the last decade, 3.8 million jobs have been lost (falling to around 12 million) and constant-dollar shipments remained flat (2000-2007)
  

• 
  The manufacturing sector’s average R&D intensity (industry-funded R&D compared to annual sales) began growing slowly in the mid 1980’s from approximately 2.5% to the current rate of 3.7%
  
• 
  The increase has been a response to globalization, but
  
  • 
    More the result of offshoring low R&D-intensive industries than to absolute increases in R&D spending by remaining domestic industries
    
  • 
    Overall industry R&D intensity pales compared to truly “R&D-intensive” industries, whose ratios range from 6-22% - sectors such as semiconductors and pharmas
    
  • 
    Most of the global economy’s $1.1 trillion annual R&D spending is targeting manufacturing technologies
    
  • 
    U.S. manufacturing firms increased offshore R&D at three times the rate of domestic R&D spending, as noted above.
    

Traditional R&D funding policies have done little to lessen the impact of these trends. Federally funded R&D relative to GDP has declined steadily for decades. Moreover, the traditional pattern of government R&D is to provide funds through mission-oriented agencies with the expectation that resulting technologies will diffuse (“spin-off”) into broader commercial applications. At the federal government level, 91 percent of all R&D funding is through these mission agencies, whose primary objective is not economic growth. While spin-offs into unrelated commercial markets certainly do occur, the process is slower and less efficient than if the commercial connection was more conscious—a problematic strategy in today’s highly competitive $1 trillion global R&D economy. Funding for next-generation and breakthrough manufactured technologies has been particularly constrained, as indicated by the fact that the physical sciences portion of the federal S&T research budget (the “R” in R&D) has grown only 1.1 percent per year in real terms over the past 20 years and has actually declined in this decade.

• 
  U.S.-headquartered firms still account for 48% of global semiconductor sales and remain technological leaders
  
• 
  Fabless/Fab-lite firms-evolved out if necessity due to inability to capture economies of scale in manufacturing
  
• 
  U.S. domestic share of global semiconductor manufacturing capacity
  
  • 
    1980: 42%
    
  • 
    1990: 30%
    
  • 
    2007: 16%
    
• 
  Global 300mm semiconductor wafer (the most advanced )manufacturing capacity:
  
  • 
    U.S. share sunk by 50% in the last decade (36% to 18%)
    
  • 
    80 % of new 300mm plants are outside the U.S.
    

• 
  Supplies components used in tens of thousands of products – this is a pervasive component
  
• 
  U.S. industry shrunk from $11 billion to $4 billion during the 2000s
  
• 
  Production Process
  
  • 
    Once relatively labor intensive, which led to its offshoring
    
  • 
    Now highly automated, but other countries have automated
    
• 
  Majority of the global industry remains in Asia near he next tier in the electronics supply chain (assembly)
  

The United States has been the “first mover” and then lost virtually all market share in a wide range of materials and product technologies including:

• 
  Oxide ceramics
  
• 
  Semiconductor Memory Devices
  
• 
  Semiconductor Production Equipment such as Steppers
  
• 
  Lithium-Ion Batteries
  
• 
  Flat Panel Displays
  
• 
  Robotics
  
• 
  Video Cassette Recorders
  
• 
  Digital Watches
  
• 
  Interactive Electronic Games
  

The chart below indicates the growing and declining sectors in U.S. manufacturing; it also illustrates the much stronger growth rates of key sectors in the 90’s period compared to the current decade:

In summary, manufactured goods will continue to dominate U.S. (and world) trade for the foreseeable future, the global services sector, while growing, is not close. Because of this continuing disparity, a “just do services” strategy will be inadequate; the U.S. needs to undertand the problems facing the manufcturing sector and act to resolve them. Moreover, co-location synergies exist between manufacturing and services, thereby adding a second long-term strategic imperative. In otherwords, advanced firms are joining services and manufacturing into a combined business model – so the U.S. needs to continue to do both. However, the domestic advance and utilization of manufacturing technology is being constrained by a number of barriers. The critical barriers are structural in nature and, therefore, are significantly different than the business-cycle problems currently receiving high levels of attention.

• 
  R&D is not undertaken in a vacuum – it fits within types of production tiers
  
• 
  At a single tier in high-tech supply chain, coordination is required (i.e., horizontal integration, is required whether it is virtual or organizational) – true for both:
  
  • 
    Product design and process-technology development
    
  • 
    Process-technology development and commercial-scale operations
    
• 
  Vertical distribution of R&D in a supply chain requires greater amounts and types of collaboration
  

• 
  In the traditional OEM (the Original Equipment Manufacturer)-led supply chain the OEM conducted majority of R&D and controlled component design
  
• 
  Increased pace and complexity of technological changes leading to changes: the “value stream” supply chain
  
  • 
    R&D is backward distributed
    
  • 
    Much more collaboration (including virtual vertical integration) among the supply chain’s tiers req’d
    
  • 
    This backward integration of R&D increases need for more “open innovation”
    
• 
  Co-location (of R&D and mfg.) still essential for tacit knowledge transfers in early phases of technology’s development
  
  • 
    Key issue is maturity of technology – can separate as technology matures
    
  • 
    Note – integrated global supply chain management without co-location very difficult process: Boeing and Airbus new airliners are examples of the difficulty
    

• 
  Step 1: Manufacturing with small accompanying amount of supporting R&D:
  
  • 
    Assembly-China
    
  • 
    Components-Taiwan, Korea
    
• 
  Step 2: Host country (for assembly or component) gains some R&D experience and extends R&D infrastructure to capture synergies at the relevant tier in high-tech supply chain
  
• 
  Step 3: Host country then begins to integrate into design and into adjacent tiers in supply chain to capture higher value added
  
  • 
    China-is reaching Backward to components (from assembly)
    
  • 
    Taiwan-is reaching Forward to electronics circuits (from components)
    
  • 
    Korea-is reaching Forward to electronic products (from components)
    
• 
  Step 4: Some hosts eventually begin to integrate forward into services and backward into stronger R&D
  
• 
  Step 5: Co-location synergies are captured
  

How should the U.S. respond to this model? An integrated technology-based growth policy is proposed that addresses the entire technology life cycle. Such a framework is centered on two traditional policy instruments— government funding of breakthrough generic technologies and tax incentives for company- funded applied R&D—plus an increased emphasis on R&D-efficiency enhancers such as infratechnologies and standards and greater use of the total innovation ecosystem concept embedded in technology cluster models.

This integrated public-private approach for an advanced technology-based industry is illustrated below, with federal role in blue and industry role in blue (compare to the traditional “Black Box” chart above):


Thus, the overall policy goal is to coordinate public- and private-sector funding and facilitate the diffusion of the resulting technology elements to innovating companies more effectively. This goal requires three major policy adjustments:

1. 
   Increase the average R&D intensity (R&D % of annual revenues) of the domestic manufacturing sector as a whole to 6 percent. This approximate 50 percent increase would still be below the R&D intensities of a number of high-tech manufacturing and merged technology-service industries, but it would enable the breadth and depth of innovation to increase significantly across the entire sector.
   
2. 
   Adjust the composition of national R&D to emphasis more long-term, breakthrough research and increase the amount sufficient to fund a diversified portfolio of emerging technologies commensurate with the size of the U.S. economy. This will require a reversal of the long-term decline in government funding of manufacturing-related research relative to GDP. It will also mean the establishment of a federal innovation policy infrastructure to identify optimal research portfolios, conduct underinvestment analyses, and promote the use of the most efficient policy instruments.
   
3. 
   Improve the efficiency of R&D performance and subsequent technology diffusion by increasing the number of science parks and regional technology clusters (which offer co-location and improved tacit knowledge transfer) and the use of research portfolio and stakeholder management techniques in order to facilitate person-to-person knowledge exchange so critical to innovation, particularly at early stages.
   

A Growth Strategy: The race to the next technology life cycle is increasingly occurring on a global scale. As part of their efforts to win that race, a number of national economies in Europe and Asia have implemented growth strategies similar to those described in this paper. In these economies, government, industry, and a broad infrastructure (technical, education, economic, and information) are evolving into increasingly effective technology-based ecosystems. Should the U.S fail to follow suit, its manufacturing firms will continue to compete largely as independent entities against these national economies. That is a race we cannot win.

[Module 3 – Cross border production issues]

[Module 6 – Skills and Education]

1. 
   Context
   
   1. 
      U.S. is missing the energy technology wave, not working toward energy independence
      
   2. 
      Manufacturing is the largest domestic consumer of energy
      
   3. 
      Decline in the manufacturing sector is not natural or inevitable, result of inadequate policy
      
2. 
   Energy Independence
   

Background:

• 
  U.S. Manufacturers consume one-third of all energy in the country
  
• 
  60% of petroleum and 34% of energy used by the United States come from foreign imports
  
• 
  U.S. Transportation uses virtually 100% of imported oil
  

• 
  New traditional sources: advanced coal, nuclear power plants
  
• 
  New alternative sources: wind, solar, biomass
  
• 
  Energy Infrastructure: upgrade national electricity distribution grid
  
• 
  Sustainable Manufacturing practices
  

3. 
   Trade
   

Background:

• 
  Trade deficit with China accounts for 50% of total U.S. trade deficits
  
• 
  Trade deficits illustrate that an increasing amount of U.S. domestic consumption is being satisfied with imports instead of domestic production. In 1990, domestic manufacturing met 93% of domestic demand; by 2006 that figure dropped to 74%
  

• 
  Free trade with major partners, especially East Asian exporters
  
• 
  Control currency manipulation
  
• 
  Protect intellectual property
  

4. 
   Workforce
   

Background:

• 
  81% of respondents to a recent survey by the National Association of Manufacturers stated that they could not find enough skilled production workers and 65% said not enough scientists and engineers available
  
• 
  Success and failure in the manufacturing is increasingly determined by the correct combination of “soft” and “hard” skill
  

• 
  Worker training and retraining programs
  
• 
  STEM education
  
• 
  Manufacturing industry developmental grants
  

5. 
   Domestic Structural Costs
   

Background:

• 
  Intense global competition puts manufacturing through a cost-price squeeze, more so than other sectors. 45% of all U.S. manufactured output is traded internationally, compared to just 3% for other sectors.
  
• 
  At 40%, U.S. has the highest corporate tax amongst major trading partners with the exception of Japan
  

• 
  Tax reform:
  
  • 
    Restructure Alternative Minimum Tax (AMT) to allow for accelerated depreciation for key produced goods
    
  • 
    Make permanent the capital gain tax, the federal R&D tax credits (to offset liability), and the Subpart F active financing exception
    
  • 
    Eliminate inheritance tax [adversely affects small mf’ing firms]
    
• 
  Revise Family and Medical Leave Act
  
• 
  Reform Healthcare comprehensively to reduce employer costs
  

[Module 7 – Policy inputs]

• 
  Producing 21% of global manufactured products,
  
• 
  Accounting for 11.2% or 1.6 trillion dollars of U.S. GDP
  
• 
  At 15% of global manufactured goods, China is in second place, followed by Japan at 12%.
  
• 
  U.S. manufacturing alone would be the 9th largest economy in the world.
  

Manufacturing contributes to the U.S. economy with high paying jobs.

• 
  Manufacturing supports an estimated 18.6 million jobs in the United States, about one in six private sector jobs [note: actual mfg. production jobs: 11m]
  
• 
  Average U.S. manufacturing worker earned $74,447 annually compared to $63,122 annually for average non-manufacturing worker in 2009.
  

In terms of productivity

• 
  U.S. manufacturers are the most productive workers in the world, twice as productive as workers in the next 10 leading manufacturing economies.
  

U.S. manufacturers drive more innovation in the country than any other sector, performing 2/3 of all R&D in the nation.

Attract foreign investment:

• 
  Reduce corporate tax rate to 25% or lower
  
• 
  Implement fair tax policy on a U.S.-based company’s foreign income
  
• 
  Permanently lower tax rate for small businesses
  
• 
  Reject new federal regulations that dictate rigid work rules, wages and benefits and that introduce conflict into employer employee relations
  
• 
  Reduce legal costs associated with manufacturing, such as special-interest legislation that incentivizes and subsidizes litigation against manufacturers
  

Innovation and R&D:

• 
  Increase and make permanent R&D tax credits
  
• 
  Defend American IP rights, currently valued at $5 trillion
  
• 
  Attract foreign talent by sponsoring more work visas
  

Exports

• 
  Promote open-market trade policies that “reduces regulatory and tariff barriers and reduces distortions due to currency exchange rates, ownership restrictions”
  
• 
  Reduce dependence on foreign oil by developing domestic oil and natural gas supply
  
• 
  Invest in infrastructure
  
• 
  Invest in STEM education