August 2011 08 Fall

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  Summary of Reports on U.S. Manufacturing Competitiveness
  
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    A Literature Review
    

  Yiliu Zhang

  MIT ’13

  MIT Washington Office Intern

  
  
  
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(2010) – p. 30

For the past two decades, while the U.S. manufacturing sector has seen gains in productivity in significant part through adoption of IT-based technologies, it was passed in output by China last year. The U.S., starting in the late 1960’s and accelerating since 1997, has been subject to a massive trade deficit in goods, which totaled $500b in 2008. Employment in actual production jobs has been in steady decline, reaching 11m in 2009, due to a combination of offshoring, offshore outsourcing, and productivity gains. Facing global competition from China, India, Brazil, Germany, Japan, Korea, and Taiwan, and other emerging, developed, and developing nations, the series of reports summarized below generally argue that the United States needs prompt and long-term federal policies that would retain the country’s place as the leader in advanced manufacturing.

- Does the IT-based specifications paradigm that allows separation of R&D/design from production apply to emerging new industries such as energy?

- Or do such new industries require closer integration of R&D and production?

- Will the finance model for IT (VCs) work for these new industries?

- Do we have the skills and productive capabilities needed?
MIT has a major pending study that hopes to illuminate these issues. It is summarized here to help provide and overall context for studies reviewed in upcoming sections.
In March 2011, MIT president Susan Hockfield initiated a study on the future for U.S. manufacturing, chaired by Professors Suzanne Berger, Phillip Sharp and Olivier de Weck. Participants in this project include 18 leading MIT faculty and the head of MIT Corporation, representing cross-disciplinary fields including engineering, applied science. economics, political science, and management. Six research study “modules” have been proposed for the study, entitled, “Production in the Innovation Economy” (PIE), which provide a backdrop for looking at the kinds of issues reviewed in the studies summarized in the subsequent sections.
Module 1: New manufacturing technologies (such as energy efficiency, nanomanufacturing, mass customization, supply chain efficiencies).
Module 2: Spillover effects of manufacturing: connecting manufacturing and services

- How would new manufacturing affect new value and job creation in services?

- Who benefits and how from cross-border production partnerships between U.S. and foreign investors and firms (for example, U.S.-China energy innovation and production)?

- How do companies with innovative capabilities whose profitability requires sophisticated manufacturing locate their facilities?

- How do they finance their scale up?

- In emerging industries like clean energy, biotech, and new materials, how does the structure of capital markets shape the likelihood that firms will grow in the US?

- Could we create smaller-scale manufacturing with lower volume, higher value production in closer proximity to end-users?

- What are the technological challenges of mass customization? (fro example, smaller fabs?)

- How could new logistics reduce the costs of producing close to customers and make US-based production profitable?

- What are the skills and training that the US workforce will need to meet demands of new production systems?

- How do the demands of the global economy affect the US workforce skills required?

- How can we provide these skills to different segments of the US population?

Finally, in consideration of these six research modules, what role should the federal, state, and local governments play in new manufacturing advances?

- Review existing programs at DOD, NIST, DOE, NSF, SBA and programmatic elements that could be part of a new strategy

- Consider various state-level supports for new manufacturing

[Module 2- Spillover effects of manufacturing]

[Module 3 – Cross Border Production issues]

[Module 8 – Skills and Education]

[Module 7- Policy inputs]
This paper advocates for a serious national manufacturing strategy by addressing three key questions:

1. Does the United States need a healthy manufacturing sector?

A healthy manufacturing sector is defined in this white paper “… as real manufacturing output as a stable or growing share of GDP, with no significant and chronic manufactured products trade deficit.”

2. How healthy is U.S. manufacturing at the moment and for the foreseeable future?

1. 
   Manufacturing is important for U.S. economy
   
   1. 
      Trade account balance:
      

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  Manufacturing accounted for approximately 65 percent of U.S. trade over the past decade, thus a weak manufacturing sector has contributed substantially to large trade deficits.
  
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  U.S. trade deficit in manufactured products was nearly $4.5 trillion from 2000 to 2010.
  
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  U.S. trade balance in advanced technology products ran a $81 billion deficit in 2010, the largest in its history. From January 2002 to December 2010, a there was a $427 billion total deficit in advanced technology products. The trade deficit in renewable energy products increased by 1,400 percent to nearly $5.7 billion from 2004 to 2008
  
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  U.S. share of global high-tech exports dropped from 21 percent to 14 percent from 2005 to 2010, while China’s share grew from 7 percent to 20 percent, as China replaced the United States as the world’s leading high-technology exporter.
  
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  U.S. is currently running significant trade deficits across many categories of manufactured products (Figure 4)
  

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  “To balance trade through increases in non-manufactured goods exports would require them to grow at a 23.7 percent rate over the next decade, whereas they grew at a 11.1 percent rate over the past decade. However, to balance trade by 2019 with only manufacturing exports, they would have to grow at a compound annual growth rate of 9.4 percent, compared to their growth rate of 6 percent over the prior decade. In other words, manufacturing has a ‘shorter road to hoe’ in terms of the increase in exports required of it to balance the trade deficit.”
  

1. 
   Manufacturing Job Multiplier; Skilled workforce
   

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  Manufacturing jobs have a robust employment multiplier of 2.90, compared to 1.63 in business services or 1.66 in transportation (data from Economic Policy Institute). Multiplier may be significantly higher in advanced technology sectors
  
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  Another estimate: Every job created in manufacturing leads to 2.5 jobs created in other sectors (data from June 2009 Milken Institute report, Manufacturing 2.0)
  
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  Manufacturing has a substantial impact in terms of output: additional $1.40 in output from other sectors being generated for every $1.00 in final sales of manufactured products
  
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  51 percent of the workforce demand in manufacturing is currently for skilled production workers, 46 percent for scientists and engineers, and only 7 percent for unskilled production workers
  
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  Education/skills gap: 47 percent of U.S. manufacturing workers have not completed education beyond high school (with about 36 percent of the U.S. manufacturing workforce having high school but no college education and 11 percent not having completed high school)
  

1. 
   R&D and Innovation Activity
   

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  “Manufacturing firms perform approximately 70 percent of U.S. industry R&D, despite the fact that manufacturing [as measured at the production stage] accounts for only about 11 percent of the economy. Services industries, despite the fact that they account for over 80 percent of GDP, perform only 30 percent of industry R&D”
  
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  Only 9 percent of surveyed U.S. businesses were active innovators from 2006 to 2008 (NSF 2008). Thus a comparatively small segment of U.S. industry leads innovation efforts.
  

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  “Individual industries with the highest rates of innovation were found almost entirely in manufacturing industries. For example, 45 percent of computer/electronic products firms reported product innovations and 33 percent process innovations; 41 percent of chemical companies reported product innovations and 34 percent process innovations; and 37 percent of electrical equipment/appliances/components subsector firms reported product innovations.”
  

1. 
   Interdependence of manufacturing sectors – energy example
   

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  The migration of semiconductor foundries to Asia has caused a sharp decline in silicon-processing and thin-film-deposition capabilities in the United States. But now that thin-film-deposition turns out to be a critical process in manufacturing photovoltaic solar cells, the United States increasingly risks falling behind in the manufacture and development of solar cells.
  

1. 
   National security concern
   

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  In 2008, there were 9,356 incidents of counterfeit foreign products making their way into the Department of Defense supply line, a 142% increase over 2005 (Bureau of Industry and Security)
  

2. 
   U.S. manufacturing sector is in transition and relative decline
   
   1. 
      Job loss, not necessarily high productivity:
      

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  From 1987 to 2009, increases in the output of non-durables (industries like food, chemicals, apparel, and petroleum products) added just 2.55 percent to overall GDP growth. This is well under half of the approximately 6 percent they should have added to GDP had they contributed their “fair share” to U.S. GDP growth, (e.g. the level needed to not shrink as a share of the economy.)
  

2. 
   Output Growth in U.S. Manufacturing Sectors is Overstated (Figure 5)
   

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   While the consensus has been the U.S. manufacturing output remains strong, based largely on one statistic, that the inflation adjusted value added output of U.S. manufacturing has been stable at around 11.5-12% of GDP, this overlooks the fact that (see figure 5) manufacturing lagged overall economic growth and that the majority of U.S. manufacturing sectors have seen absolute declines in real output over the past decade. The apparent growth in manufacturing output comes from overstating and overinflating the value of output from two industries – computing/electronics and the oil industry, through a misreading of Commerce data on these sectors.
   

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  The reality is that fifteen manufacturing sectors that made up 79% of U.S. manufacturing output produced less in 2009 than in 2000, despite U.S. GDP growth of a total of 15%, and the sectors that made up the remaining 21% have been systematically overstated through a misleading inflationary factor.
  
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  Thus, U.S. manufacturing decline is considerably more acute than generally understood.
  

1. 
   Manufacturing decline is not normal, growth is observed in other developed countries (see report data)
   

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  From 2000 to 2009, capital investment abroad by U.S. manufacturing firms and majority-U.S.-owned affiliates was on average 16 percent higher than manufacturing investment at home
  

3. 
   Reasons U.S. needs a national manufacturing strategy
   
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      Other nations have a national strategy, U.S. lack thereof places our manufacturers at a disadvantage
      

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  Casestudy: Advanced battery technology – other nations are accelerating energy innovation investments:
  
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    Japan: over ¥25 billion ($275 million) in funding for lithium-ion battery research over the six-year period from 2007 to 2012 and has committed to a twenty-year advanced battery research program
    
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    Germany: government is providing a total of €1.1 billion ($1.4 billion) over ten years to applied research on automotive electronics, Li-ion batteries, lightweight construction, and other automotive applications
    
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    China: Innovation 2020 strategy intends to invest $1.5 trillion over the next decade in seven areas that it considers to be strategic, including alternative fuel-based vehicles. Moreover, China has set a goal of becoming the world’s largest manufacturer of Li-ion batteries sometime between 2015 and 2020.
    
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  IP theft and standards manipulation
  
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    Theft of U.S. intellectual property is estimated to top $250 billion annually and cost the United States approximately 750,000 jobs (U.S. Commerce Department)
    
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    Foreign countries’ standards manipulation hurts U.S. firms because the cost of complying with country-specific technical standards can add as much as 10 percent to the cost of a product for manufacturers and in some cases keeps U.S. firms out of markets altogether
    
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  Beneficial spillover effects
  
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    The rate of return from a study of twenty prominent innovations and found a median private rate of return of 27 percent but a median social rate of return of a remarkable 99 percent, almost four times higher
    

1. 
   If the U.S. loses the advanced manufacturing industry, it would not be able to regain it
   

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  “A central reason why countries need a manufacturing strategy is that if they lose key industrial sectors of an economy, those sectors are likely to be gone for good. For example, if a country loses its aerospace or computer chip industries to foreign competitors, that value similarly disappears as the industry’s supply chains, knowledge base, and industrial commons are hollowed out.”
  
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  The value-added per worker in the aviation industry is among the highest of any U.S. industry, at $133,000 per year. In contrast, the value-added by the average U.S. job is $103,000 per year. Furthermore, an aerospace engineer is less likely to pursue equal value level job if Boeing dismisses him, thereby decreasing his income and standard of living.
  

4. 
   Effects of a U.S. national manufacturing strategy
   
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      Restore U.S. competitiveness in the international manufacturing stage
      
   2. 
      Policies and regulations are designed to make U.S. conducive to advanced manufacturing, including domestic and foreign investments: 4 Ts (technology, tax, trade, talent)
      

It is time for a comprehensive national manufacturing strategy to renew the sector.

[Module 1- New manufacturing technologies]

[Module 2 – Spillover effects of manufacturing]

[Module 6 – Skills and Education]

[Module 7- Policy inputs]
The Administration has set a goal to provide Americans with well-paying manufacturing jobs in the December 2009 Report: “A Framework for Revitalizing American Manufacturing.” This outlines, with certain assumptions, key manufacturing cost factors that government could affect: labor, business practices, equipment, location, and transportation, access to markets, and taxation and regulation. This report advocates an active government role in creating a competitive business climate.
Key Facts and Assumptions:

1. 
   The manufacturing sector generates significant benefits for society
   

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  70 percent of all research and development spending performed by U.S. industry
  
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  Manufactured goods represent 69 percent of exports, which is particularly important as increasing exports is critical to reducing our trade deficit and supporting economic growth
  

2. 
   Overall costs drive manufacturers’ location choices
   
3. 
   The environmental impact of manufacturing activities creates both responsibilities and corresponding regulatory costs but also can generate new economic opportunities, for example in the new energy sector
   
4. 
   Productivity growth is essential for maintaining high wages
   
5. 
   U.S. total manufacturing costs are internationally competitive in certain sectors
   

American manufacturing’s major strengths and challenges

1. 
   Power of U.S. manufacturing
   

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  High productivity: Between 1987 and 2008 manufacturing productivity increased at a 3.4 percent annual rate, as compared to only 2.2 percent for nonfarm business as a whole (Figure 1). At this rate, workers can produce twice as much in manufactured goods per hour roughly every two decades.
  

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  Manufacturing is also responsible for 90 percent of all patents.
  
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  In 2008 manufacturing produced $1.4 trillion in national income, making it one of the largest sectors in the American economy. If it were an economy, American manufacturing would be the 9th largest in the world – roughly the size of the entire Canadian economy.
  

2. 
   Evidence showing that the manufacturing sector provides good jobs
   

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  Hourly total compensation in the manufacturing sector averages more than $32.00, approximately 22 percent higher than average compensation in service industries.
  

3. 
   The manufacturing workforce is diverse and educated
   

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  Since the 1980s, women have comprised about one-third of the manufacturing workforce, while African American workers comprise roughly 10 percent, slightly below their share of the population. Hispanics account for 15 percent of the manufacturing labor force.
  
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  Over half of current manufacturing workers have some education beyond high school (Figure 3)
  

4. 
   Adverse impacts of job losses in manufacturing on workers and communities
   

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  High-tenure manufacturing workers displaced from their firms suffer long-term earnings losses 15 years or more after they lose their jobs. The wage loss is even greater for those who are not subsequently re-employed in manufacturing.
  
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  Displaced workers have higher mortality rates than their counterparts. Furthermore, there is disturbing evidence that the consequences of job losses persist across generations: the children of displaced workers have been found to have lower earnings as well.
  

Administration policies and initiatives (7 components) [note: policies largely overtaken by events since 2009]

1. 
   Provide American workers with opportunities to obtain skills necessary to be highly productive.
   

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  Invest in community colleges
  
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  Invest in high-quality job training
  
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    The 2010 Budget and the Recovery Act contain substantial Federal investment in job training and career pathway programs, which help individuals of varying skill levels enter and pursue rewarding careers in high-demand and emerging industries.
    
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  Provide training and mentoring to entrepreneurs
  
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  Expand education and training support for unemployed workers
  
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  Make a historic investment in college affordability
  
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    The Recovery Act increased Pell grant scholarships by $500 to $5,350 and created a new $2,500 tax credit for college costs.
    
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  Create a New College Access and Completion Fund
  
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    In his 2010 Budget proposal, President Obama included a five-year, $2.5 billion fund to build federal-state-local partnerships aimed at improving college access and completion, particularly for individuals from disadvantaged backgrounds.
    
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  Improve America’s math and science education
  
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    The Recovery Act provided funds to be used as a down payment toward the goal of tripling the annual number of the National Science Foundation’s (NSF’s) Graduate Research Fellowships.
    
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    The President has also proposed more funding for NSF’s Advanced Technological Education Program, which focuses on two year colleges and supports partnerships between academic institutions and employers to promote improvement in the education of science and engineering technicians.
    
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  Strengthen K-12 schools
  
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    Through investing in the Innovation Fund, the Administration will support the efforts of school districts and non-profit organizations with track records of success in raising student achievement.
    

2. 
   Invest in emerging technologies and business practices.
   

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  Government must focus on advanced research without immediate commercial application, especially since the private sector is likely to under-invest in that area
  
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  Double the R&D budgets of key science agencies
  
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    In his FY2010 Budget, President proposed to double the research budgets of three key science agencies (the National Science Foundation, the Department of Energy's Office of Science and the National Institute of Standards and Technology’s laboratory programs).
    
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  Improve coordination of manufacturing-related R&D such as nanomanufacturing, robotics, and information technology
  
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  Explore new options to stimulate innovations and technological breakthroughs (prizes and reverse auctions as a complement to grants, tax credits and other mechanisms currently used to spur innovative technologies)
  
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  Make the research & experimentation tax credit permanent
  
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  Spur innovation in manufacturing by Increasing the Technology Innovation Program (TIP)
  
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    TIP is slated to grow from $60 million in FY09 to $100 million in FY15.
    
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  Pursue structural reforms that support innovation and production (e.g. public-private partnerships)
  
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  Protect intellectual property rights
  
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  Double the Manufacturing Extension Partnership (MEP)
  
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  Streamline and Enhance Delivery of Government Services to Businesses
  
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  Create an Office of Innovation and Entrepreneurship and a National Advisory Council on Innovation in the Department of Commerce
  

3. 
   Encourage business investment through developing stable and efficient capital markets
   

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  Provide access to capital for new businesses
  
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  Ensure access to capital for exporters
  
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  Create a financial regulatory system that works
  
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  1603 cash grants in lieu of tax credits
  
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    ARRA allows renewable energy generation projects to receive a 30 percent cash grant in lieu of the Production Tax Credit. The program has already supported over 1GW of renewable energy projects.
    
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  DOE 1703 and 1705 loan guarantees
  
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  Section 48C manufacturing tax credit
  
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    Supports the building and equipping of new, expanded, or retooled factories that manufacture the products needed to power the green economy. The program covers a wide array of clean energy technologies, including renewable energy, energy efficiency, advanced transportation, and advanced transmission. The Recovery Act included $2.3 billion in tax credits that will support over $7.5 billion in total capital investment.
    
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  Advanced Vehicle Manufacturing Loan Program
  
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    Through the $25 billion Advanced Technology Vehicles Manufacturing Loan Program, the Administration is supporting competition to produce the most cost-effective solutions to reduce oil dependence.
    

4. 
   Assist workers and communities in transition from manufacturing to other jobs
   

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  End the rush to plant closures
  
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  Support the creation of competitive communities by promoting regional innovation clusters
  
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  Expand adjustment assistance
  
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  Target assistance for auto manufacturers’ workers
  

5. 
   Invest in an advanced transportation infrastructure
   

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  Invest in our nation’s roads, bridges, and mass transit
  
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    The Recovery act provides $36 billion for infrastructure projects to improve our nation’s highways and mass transit systems.
    
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  Continue to Advocate for a National Infrastructure Bank
  
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  Support batteries and electric drive components for transportation electrification
  
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    In early August 2009, the Administration announced $2 billion in grants to 30 factories producing advanced batteries and electric drive components. The ARRA Transport Electrification program is also providing $400 million in cost-shared grants to 8 projects deploying over 4,000 electric vehicles and the infrastructure to support them. An additional nine grants are helping universities prepare the workforce and consumers for the new industry.
    
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  Invest in Clean City Infrastructure
  
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    In August 2009, the DOE awarded nearly $300 million in grants to 25 Clean Cities coalitions.
    
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  Modernize the Electric Grid
  
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    The Recovery Act provides $4.5 billion to support the Smart Grid, including development of technologies to enable greater energy efficiency, customer demand response, energy storage, and other components of the “Smart Grid.”
    
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  Fulfill a new transportation vision with high-speed rail ($8 billion investment in Recovery Act)
  
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  Develop the next generation of air traffic control
  
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    FY2010 Budget provides $865 million for the Next Generation Air Transportation System in the Federal Aviation Administration
    
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  Expand access to broadband
  
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    Recovery Act provides $7.2 billion for broadband expansion and the 2010 budget includes $1.3 billion in USDA loans and grants to increase broadband capacity and telecommunication service.
    
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  Support research for next-generation information and communication technology
  

6. 
   Ensure (foreign) market access and a level playing field against foreign producers in domestic markets
   

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  Open markets abroad and promote U.S. exports
  
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  Enforce our trade agreements, regulation, and intellectual property rights
  

7. 
   Improve business atmosphere, especially for manufacturing
   

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  Replace tax breaks for overseas investment with tax cuts for businesses creating jobs in America
  
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  Pass comprehensive energy and climate legislation that will jumpstart the American clean energy sector.