Solutions for the China Challenge

By : Jim Pinto,
San Diego, CA.
USA

It is well known that China is grabbing significant manufacturing market share in US and world markets, and is already moving strongly into high-tech. Here we'll discuss ways and means for America to maintain its leadership against China and other emerging global competitors.

This article was published by:

Automation.com, February 2005

My previous article (Automation.com, January 2005) was about "The China Challenge" - that China is grabbing significant manufacturing market share and is already moving strongly into high-tech. Here we'll discuss ways and means for America to maintain its leadership against China and other emerging global competitors.

China – the looming threat

For the U.S., the benefits from business with China are enormous. The cheap cost of Chinese goods has kept inflation low in the US and fueled a consumer boom that helped weather a recession. By outsourcing components and hardware from China, US companies have sharply boosted profits and return on capital.

But, in the meantime, America's industrial base has eroded to a dangerous level, not only in the old segments, but in more advanced tech-industries. China is adding state-of-the-art capacity in cars, specialty steel, petrochemicals, and microchips. These plants are aimed at meeting seemingly insatiable demand from China's growing middle-class. But if China's growth stalls, the resulting glut will turn into another export wave and disrupt American industry. Prices for Chinese manufactured goods are typically half of comparable U.S. products. This will cause serious disruption of domestic markets.

So, what can and should America do to remain competitive in the face of the China syndrome?

Morley's Meditations

Dick Morley is inventor of the PLC, chair of National Center for Manufacturing Sciences and co-author of the book, “The Technology Machine – how manufacturing will look in the year 2020”. He suggests that the remedies require significant social change, a modification of the mind-set that America has drifted into.

Dick points out that during the early days, engineers like Henry Ford, Thomas Edison and Steinmetz were treated as heroes in America. But today, in television dramas, the hero is the scrubby squatter who fights to close down the big factory. And the villains are corporate people – there are usually no well-dressed heroes. All movies seem to have business as the enemy. Today, our society admires sports-figures and movie stars, not engineers and manufacturing people.

This mind-set has to change. Pay scales must change, to encourage the brightest and best to become engineers and innovators. Kids must "feel" that their engineer-dad is working at something significant. Manufacturing people must be considered professionals. Heroes of engineering and manufacturing must be recognized and lauded.

Dick Morley says he has learned good lessons from his work as an "angel" investor and venture capitalist – he helped start 110 companies . He explains that new technology startups are responsible for creation of almost 30-50% of new jobs. Over 80% of venture capital – realistically about $ 30 billion per year – comes from the two U.S. coasts. This culture and attitude must spread to become a nationwide priority.

Here are Dick Morley’s proposed solutions for the China syndrome:

The prevailing wisdom of lower-cost, higher-volume manufacturing is clearly wrong. The U.S. should stick to high-value, non-commodity items.
Stop the thinking that innovation is high-cost and high-risk. America has a significant level of entrepreneurship and talent which should be encouraged and stimulated.
Mini-enterprise zones should be developed - micro-China locations supported on a national basis. The country should own them and they should be leased to meet the needs of engineering and manufacturing talent. This could be much like national parks – manufacturing and innovation needs care and protection.

America must beat China, and other competing countries with its best assets – innovation, and quick response. The recent spate of bigger and bigger mergers to consolidate results through elimination, is at a dead-end. Large companies don't foster innovation. Hewlett Packard acquired Compaq, and three years later the results are poor; the architect of the merger, Carly Fiorina, has just been ousted for poor results.

Another problem is college textbooks and business books - many of them spout old-century opinions from academics that have no real-world experience. Does lean-manufacturing really work? How valuable is "value engineering" when compared to the investments made? How much is an MBA really worth? Start rewarding the innovators - not the managers.

On balance today, America is still the world's premier producer of high tech and growth services: Semiconductors, Internet, Energy, Transportation, Finance, Food, Retailing – and on and on. Morley insists that extrapolating those trends will be part of the solution.

Government policy changes needed

It is significant that science and engineering professionals are dangerously absent from all levels of policy and decision-making in the U.S. Somehow, we have allowed lawyers and professional politicos to take over everything by default. As a result, government is manipulated by lobbying interests and the business climate becomes a political football. Among other ills, this has become a direct threat to our jobs and innovation tendencies.

While Chinese and many foreign governments welcome US manufacturers with big grants and tax benefits, US manufacturing is penalized with high taxes, strict zoning regulations and infinite bureaucracy. We are losing the aluminum business because new aluminum plants cannot be built, and the old ones cannot be updated. Few refineries can be built because few towns or cities want them around. Well-intended but job-inhibiting laws are disincentives for employers to create jobs.

America needs to recognize that its historical strengths are technology and innovation. The manufacturing-based middle class is the nation's backbone. It's important to keep investing in jobs to upgrading factories, to be competitive in a global market. This doesn't mean replacement of the old-style, labor-intensive manufacturing jobs; those have disappeared in the last century – like farming (which used to be some 30% of the population at the start of the last century, and is now less than 2%). No, what is needed is new job creation with high-tech, high innovation.

The short-term financial mind-set must change. Business needs to realize that continual quarter-to-quarter increases in revenue and profits cannot be sustained with manipulation of work that is done elsewhere. Wall Street must stop manipulating company value by demanding short-term, quarterly financial performance. The media covers high paying jobs, seldom paying attention to society contributions. The US has the highest ratio in the world of pay for CEO-levels vs. workers; this must be controlled by board-of-directors oversight.

Shift from the old industrial mind-set

Perhaps the primary problem is the thinking of people who want to go back to the good old days of full employment, high wages, overtime and traffic jams – the old industrial mindset.

In the old "factory production" days, "full capacity" was when 3 shifts were running, and new labor was expensive (too much training was needed). It caused the familiar wage-price spiral which no one wants to repeat. The problem is that "capacity" and "production" are outdated, industrial-age terms.

In the new techno-driven age, it cost's almost nothing to make another copy of software. The high costs of pharmaceuticals are in research and FDA approvals, not factory production. The incremental cost of another music download is zilch; sending another email costs virtually nothing. Once the equipment is in place, it costs the telephone companies very little to accommodate more telephone calls. So cellular service providers must look for new ways to get people to spend more money – with video downloads, on-line chat, news services.

Even service businesses have plenty of capacity. FedEx and UPS handle the Christmas rush, with excess "capacity" the rest of the year. Wal-Mart and COSTCO can easily multiply their shopping aisles with new buildings. Harry Potter and Bill Clinton books can sell a million a week, without depleting stock. Stock exchanges can handle hundred billion share trading days without straining "capacity". Bankers have very little to do to process another loan – witness the growth of on-line banking. Most movie theaters are multiplexed – there is a 24-theater AMC near my home, staffed by a handful of people.

In the knowledge age, there can never be an "output gap". And when knowledge sources (research, design, engineering) is available somewhere else in the world, at cheaper prices, the center-of-gravity of the old industrial world shifts. As the century progresses America and China, and all the advancing countries, will have similar shifts taking place. It's NOT just a question of "manufacturing" jobs.

Solutions summary

The significant, long-term problems we are facing in the new century need major shifts in mind-set, with steady societal adaptation.

First of all, the problems must be recognized. In this new global century, nations and regions are engaged in a fight - albeit peaceful -that will impact many generations to come. It's a war of ideas and innovation, of agility and tenacity. China is just one of many countries that will compete with new tools and new ideas. It will take new thinking to stay ahead.
When off-shore resources are utilized for short-term benefits, we are also giving away our intellectual property, our knowledge. We must start thinking of longer-term advantages.
We must innovate, or lose. Whoever makes things better, cheaper, faster – wins! America must continue to be the leader, or slide backwards into mediocrity.

America needs to have its entrepreneurs and home businesses succeed. This brings us to some good statistics. According to a recent (2004) Bureau of Labor household survey, during the same period that some 2 million manufacturing jobs were lost, 3.25 million new jobs were created. In other words, millions of people simply did not report to work. They were becoming entrepreneurs and starting new businesses. Perhaps that is America's best response to the China challenge.