Reviving U.S. manufacturing
That was my first thought listening to a presentation by Suzanne Berger at last week’s Crossroads 2014 hosted by the MIT Center for Transportation & Logistics. Berger is a professor of political science, co-chair of the new Production in the Innovation Economy project at MIT and the author of Making In America. She wrote the book following a multi-year research project into U.S. manufacturing conducted by a team of 20 MIT faculty members and a number of graduate students. Their report was released last fall.
As Berger explained, the project began by asking a few simple questions, but at its core, the group was looking at what level of manufacturing do we need to do in the U.S. in order to reap the benefits of innovation in this country. Do we even need to manufacture in order to innovate? The group conducted more than 265 interviews and spoke to high tech startups coming out of MIT as well as Main Street manufacturing firms.
While much has been written about outsourcing, trade deficits and a shortage of talent, Berger and her colleagues drew some conclusions that are counter-intuitive to the usual narrative. Here were a couple of my key takeaways.
There’s plenty of cash, just not for manufacturing: For all the political chatter about the need to invest in American manufacturing, the investment community isn’t willing to put its money at risk. That’s not to say that there isn’t lots of private capital for start ups. Berger’s group looked at 150 startups launched between 1997 and 2008 with MIT licensed technology. Over 50% of them received venture capital funding, many getting second and third rounds after five years. The average investment was $75 million. So far so good. Yet, almost none of them could get the capital to scale up for production in the US. “These companies had everything going for them,” Berger said. “Yet they ended up producing overseas.” That represents a loss on several fronts, not just U.S. manufacturing jobs. For starts, 85% of the research that led to the formation of those companies was funded by U.S. taxpayers. What’s more, the lessons learned as these companies scaled up for production were lost because their manufacturing activity ended up overseas. “That makes is less likely that innovation will take place here,” she said.
Are we really unlocking value? As Berger pointed out, Main Street manufacturers have challenges as well. She used the example of Timken Steel, which was under pressure from the investment community to separate its specialty steel and bearing businesses. Investors call this unlocking value. Berger argued that valuable synergies are often lost in the process. At Timken, for instance, the specialty steel and bearing businesses worked closely together on new products and processes. Those important ties may be lost in the future.
Is there a skills gap? Much has been written about the skills gap, with stories about manufacturers who simply can’t find employees with the skills or work ethic needed for the job – or employees who can pass criminal background or drug tests. Based on a survey of 1,000 respondents, Berger said “this doesn’t seem to be true.” Her group asked companies one simple question: How long did it take to fill your last vacancy? “Seventy five percent said they fill the position in less than a month,” Berger said. When asked about the skills companies did need, Berger said the bar was “frighteningly low.” The real issue, she suggested, is that many companies were offering paltry wages which engender little loyalty.
We’ve lost our manufacturing ecosystem: This was the bullet that really caught my attention. Prior to the 1980’s, the economy was dominated by a few dozen companies with an industrial ecosystem – starting with research and development all the way through to manufacturing, distribution and logistics. When these companies created a new product in their R&D labs, such as when DuPont developed nylon, they had the supply network, factories producing raw materials, workers and the access to capital required to commercialize a product and bring it to market. “That’s much harder to do today,” Berger said, because those big industrial giants were broken up to focus on their core competencies. “In the process, they created holes in the industrial ecosystem,” she said.
In fact, the most important takeaway to me was one of Berger’s final points. Noting initiatives like the public/private partnership that created a center of excellence for additive manufacturing in Ohio, she said the country is in a moment of opportunity. We can rebuild the capabilities in the industrial ecosystem and raise the rate and speed of innovation. Otherwise, we may not get the wind back in our manufacturing sails.