Shih's Watchword: Make the US an Attractive Choice for Manufacturing

What should be done to strengthen American manufacturing? It’s the question of the hour given President-elect Donald Trump’s promise to dramatically boost U.S. manufacturing employment. Trump campaigned on rewriting trade treaties as a way to make the United States a more competitive nation and bring back factory jobs. He has not been shy about criticizing U.S.-based companies, such as Carrier, that plan to move jobs outside the country.

But during the campaign, one of Trump’s most frequent targets was Apple, the world’s most valuable corporation, which he repeatedly challenged to build its iPhones in the United States rather than China.

Willy Shih, a Harvard business professor and industry veteran, is skeptical that that will happen.

“The challenge with bringing electronics manufacturing back to the U.S. is we don’t have the supply chain,” says Shih, who in 2009 with Gary Pisano wrote the seminal work on U.S. manufacturing, “Restoring American Competitiveness” for the Harvard Business Review. In fact, he points out, many critical electronic components such as flat panel displays have never been produced in large quantities in the U.S.

Virtually all the components that go into an iPhone, for example, are made overseas. So even if Apple, or more likely a supplier such as Foxconn, were to invest in an assembly plant in the United States, the components of the phone would still be made elsewhere. Building the component factories in the U.S., says Shih, would take longer than two Trump terms in office and cost billions of dollars. He doesn’t believe that global supply chain will be recreated in the U.S.

Then there is the question of what kinds of jobs would be created in the U.S. In recent years, says Shih, many of the jobs that have moved offshore have been low-wage assembly jobs. He says the U.S. has lost the workforce that is willing to do those types of jobs. He points to Motorola’s attempt to build the MotoX phone in Texas.

“They couldn’t get people who wanted this kind of work,” he notes, “and they were good jobs.”

Americans’ attitudes toward repetitive work and the spread of automation have combined, he says, to change the “picture of what kinds of factory jobs there are in many cases.” Turning back the clock to a time of millions of assembly-oriented factory jobs, says Shih, is not going to happen.

Apple does do some manufacturing in the United States. It makes its Mac Pro desktop computers in Austin, Texas but, notes Shih, that is a relatively low-volume, high-value product. When companies such as Apple introduce a new model of their cell phones, the supply chain has to be able to move massive amounts of products in short order. “I have to be able to produce 10 million of these things,” he says.

Build on Your Strengths

Shih recommends a different focus for strengthening U.S. manufacturing.

“Before we wring our hands too much about bringing things back, I would make sure the areas we are strong in will continue to be strong for the foreseeable future,” says Shih.

Shih disputes the idea that American manufacturing is in terrible shape. “It clearly varies by sector,” he contends, pointing to strengths in sectors such as aerospace, pharmaceuticals, and advanced materials.

To build on these strengths, he explains, policymakers need to create a business environment where manufacturers want to locate their businesses and can operate competitively on the world stage.

How do you do that? Shih says there are several states where governors have provided a model. One prominent example is South Carolina, where he says Gov. Nikki Haley (who President-elect Donald Trump has selected to be U.N. ambassador) “has done a terrific job recruiting businesses” into the state.

As evidence, Shih points to the BMW factory in Spartanburg, the largest BMW facility in the world. That plant is wrapping up a $1 billion expansion that increased the workforce by 800 jobs and provided it a production capacity of 450,000 vehicles annually. Mercedes Benz and Volvo have also opened factories in the Palmetto state. These OEMs have attracted a growing cadre of auto suppliers. Over 250 companies produce auto parts in the state now.

The state also has seen its aerospace industry grow quickly since Boeing announced in October 2009 that it would establish a factory in North Charleston to assemble the 787 Dreamliner aircraft. That facility employs more than 8,000 workers.

South Carolina now has 1 in every 11 workers employed in manufacturing. Overall, state Secretary of Commerce Bobby Hitt recently noted, the state has brought in 80,000 new jobs and approximately $20 billion in capital investment over the past six years.

Shih says other states such as Texas and Indiana have also worked successfully to attract manufacturing. He acknowledges they use incentives in luring manufacturers to their states but says that providing incentives is the norm here and internationally.

“Realistically, most major production facilities have some kind of government assistance, either in infrastructure to support the factory or tax abatement or whatever,” he says.

Taxes and regulations are two areas where the incoming administration has promised to provide relief to the business community. Shih agrees that they are important pieces of a movement to attract and grow manufacturing.

“People look at corporations and tax rates and say, ‘Oh, we ought to tax them more,’” he says. “If you do that, all you do is push them to places like Ireland or Singapore.”

Along with more competitive tax rates, Shih says, the U.S. needs to simplify its regulations. He compares the Glass-Steagall Act, which was passed in 1933 to regulate banking and is 37 pages long, with the Dodd-Frank financial reform law enacted in 2010, which is some 2,300 pages. “Who really understands all those regulations?” Shih asks.

Shih says businesses are facing not only more complicated regulations but that these regulations are written by people who don’t understand the effect they will have on companies. Section 1502 of the Dodd-Frank law on conflict minerals is well-intentioned, says Shih, but the regulation “doesn’t really reflect an understanding of what the supply chain for those minerals is.”

While large companies can assign vast staffs to regulatory compliance, Shih says that is not the case for small businesses. For them, he explains, “What I can’t have is it taking it so much of my effort and so much of my firm’s resources to be in compliance.”

While a more business-friendly environment will help to create more manufacturing jobs, there is a strong countervailing force. Shih says advanced economies are increasingly investing in automation.

Germany, where automation is being driven by the automobile industry, is “quite aggressive” in its Industry 4.0 effort, notes Shih. The country is banking on its investments in the industrial internet and advanced machinery to offer mass customization and be competitive despite high labor costs.

China is also making huge investments in automation, says Shih, as it faces a future where its workforce will be shrinking. Chinese leaders, he says, “have no problem scrapping an entire line and saying, ‘We will just automate this.’”

If anything, Shih’s research suggests, U.S. manufacturers are less inclined to invest in automation. The reason: they have existing infrastructure which is working well and which is not fully depreciated. He says there is a parallel with the electrification of American factories back in the late 1910s and early 1920s.

“Electrification of U.S. factories actually went relatively slowly,” he notes, because the water wheels and other power sources of the time were “all paid for and depreciated.”

Providing manufacturers with employees with the right skills is a critical aspect of growing U.S. industry but Shih says that challenge is made more difficult by changes in the relationship between employers and employees. When employees worked most or all of their career at one company, employers had an incentive to invest in keeping their skills up to date. But in recent years, says Shih, U.S. employers have moved to a more transactional model as employment tenure has shrunk.

“I see people go to companies and switch jobs after two years or even a year. Why would a company invest in them? It’s a vicious cycle,” he observes.

While U.S. manufacturing faces serious challenges, it also benefits from substantial advantages. One is that the U.S. is still the leader in software, says Shih, an increasingly important part of design and production in manufacturing.

“If you look at where all the major operating systems used in the world are developed, they are in a 100-mile wide stretch of the Pacific coast of the U.S.,” he says.

“We still have the most valuable market in the world,” adds Shih. “My watchword is make the U.S. an attractive location choice.”