“Manufacturing: Driving Growth at Home and Competition Abroad” Remarks by David Chavern Chief Operating Officer U.S. Chamber of Commerce

Manufacturing as a “Keystone Species”

It’s good to be here in Elkhart to talk to you about manufacturing—a subject that’s important to the strength of this community and to the competitiveness of our nation.

This morning I had the privilege of touring two manufacturing plants here in Elkhart—Thor Industries and the CTS Corporation. Each of them makes an important contribution to Elkhart through jobs and revenue. But, as part of the vital manufacturing sector, their work is also critical to the broader U.S. economy. 

Politicians often talk about “the economy” like it’s something out of a Looney Tunes cartoon—a big square ACME factory—with inputs going in one side and outputs coming out the other. Business people know, though, that the real U.S. economy is much more complicated. It’s more like an ecosystem than a factory; with millions of buyers and sellers continually acting, reacting, evolving, and growing… 

In nature, some species have a disproportionate influence on the health and well-being of the whole ecosystem.  These so-called “keystone species” “play a critical role in maintaining the structure of an ecological community.” To a much greater extent than other species, they shape the ecosystem. Grizzly bears and sharks are “keystone species.”

If we think of our economy as an ecosystem, manufacturing would be a keystone species. Manufacturing isn’t just another business sector—it has an outsize impact on our broader economy and influences the environment in which other business sectors operate.

It generates $1.7 trillion in value each year—equivalent to nearly 12% of GDP. It supports over 17 million U.S. jobs. About 12 million Americans—or 9% of the workforce—are directly employed in the manufacturing industry. I’m talking about laborers, engineers, and supervisors on the factory floor. They earn a good living—well above the cross-industry average. That means manufacturing is pumping a proportionately higher amount of economic activity in the markets.

And then consider the multiplier effects of manufacturing:

For every 100 direct jobs, manufacturing supports about 58 indirect jobs. Millions of Americans work in industries that supply, support, or serve manufacturers—they work in inventory management and shipping, transportation and logistics, tech support and customer service, information technology and data analysis, and even financial planning. That’s just to name a few.

The manufacturing sector also drives more innovation than any other industry. U.S. manufacturers are responsible for two-thirds of all private R&D in the country. And other business sectors derive benefits from the advancements and innovations being pioneered by manufacturers.

Based on those factors alone, manufacturing is vital to our economy.

But it’s also essential to our global standing. A colleague of mine recently said, “If U.S. manufacturing cannot compete in the world, the U.S. cannot compete.” So that’s where I’d like to focus my remarks today. What is the state of our keystone species, manufacturing? Are we cultivating an environment that will allow it to flourish and grow? Or do we risk choking it off and disrupting U.S. economic strength and global competitiveness?

Surveying the State of U.S. Manufacturing

To have a thoughtful dialogue about its role and future in both the domestic and global economy, we need to have a clear view of what manufacturing is…and what it isn’t. We need some truth-telling and some myth-debunking in a debate that is often muddled by political interests and even nostalgia. Misconceptions about manufacturing abound.

One is the myth that we don’t make anything in America anymore. Those who believe that often see the broader world as more of an economic threat than an opportunity—and that’s a mindset for failure in our global economy.

In reality, we still make a lot in America.

U.S. manufacturing output on a value-added basis actually rose by 73% between 1993 and 2011. And in 2011, at 4% growth, U.S. manufacturing output grew at more than twice the rate of the overall economy. The U.S. share of global manufacturing output has remained basically steady for the past 40 years…so don’t believe it when people say that we’re being surpassed by competitors.

The United States remains the world’s largest manufacturer, accounting for 21% of world manufacturing value added in 2010—a share greater than that of China (15%), India (2%), Brazil (1.7%), and Russia (1%) combined. And though it was hit hard by the Great Recession, in the two decades leading up to the financial crisis, U.S. manufacturers set new records for output, revenues, profits, and return on investment.  Thanks to that strong foundation, the sector has since recovered most of the output it lost.

So why do so many people think that American manufacturing is collapsing? Because manufacturing jobs have dropped – a lot. U.S. manufacturing jobs peaked at 19.5 million in 1979. But by 2010, the number of Americans directly employed in manufacturing fell to a new low of 11.4 million.

Where did those jobs go? Mostly to a country called “productivity.” Technological change, automation, and widespread use of information technologies have enabled firms to boost output even as some have cut payrolls. These advancements are also allowing us to make high-value-added products that drive growth, innovation, and competitiveness.

But the evolution of high-tech, automated manufacturing has shifted the industrial labor market. And our efficiency gains have fundamentally altered the concept of a “good manufacturing job” in America. For earlier generations, unskilled workers or those without a college education could count on making a stable living at a factory. They could enjoy a solid middle class lifestyle and support a family with an assembly line job.

Today, though, the opportunities for unskilled workers on the factory floor are quickly disappearing. Factory jobs are wonderful and we want a lot more of them in the U.S., but we need to understand that in the future most will require advanced skills or training. Put simply, the U.S. manufacturing sector is never again going to be a guaranteed source of unskilled employment …nor can it be considered a fail-safe cure-all for underperforming public schools or our general inability to get kids ready for the world of work.
So when our leaders in Washington yammer about bringing back “good manufacturing jobs,” they should also be honest about what those jobs entail and will require in a competitive economy and a global environment. And they also should talk about what we need to do to improve the investment climate in the U.S. and really provide a boost for manufacturing-driven jobs.

I’ll talk about what we can and must do to bring our workers and our education system up to par in a minute. But let me first touch on another closely related concept that is often misunderstood and frequently demagogued—offshoring.

First, we’ve got to consider why companies decide to locate facilities or operations overseas. A major factor is market access or market building. In some instances, locating a factory overseas is the best or only way to get a product to customers in certain markets. And what’s made abroad, stays abroad. More than 90% of the production of foreign affiliates of U.S. multinationals is sold outside the United States. It isn’t replacing U.S. production.

Offshoring can help companies patch into global supply chains or build highly customized products that meet the needs of a local culture and market.

And, of course, the choice to locate a facility offshore often comes down to simple cost-savings. That’s one of main reasons that we don’t make the same things in the United States that we used to. Some of things, like t-shirts and other very basic consumer goods, are low-value and labor-intensive. Those kinds of products will never be made here again.

So, yes, we’ve lost some jobs in low-value manufacturing industries because it’s too costly to produce those goods here.

However, it is important to note that the numbers of U.S. jobs that have gone overseas have been greatly exaggerated. Survey data consistently show that less than 1% of layoffs can be attributed to offshoring. And statistics show that offshoring as a traditional cost-cutter is trending downward … particularly as wages in countries like China continually increase.

Some companies are responding by extending supply chains deeper into remote areas of Southeast Asia or inland China, where wages remain low.

But logistical inefficiencies, gaps in the supply chain, and longer lead times for product development can easily wipe out any cost-savings from lower wages.

So the offshoring threat is generally mischaracterized and oversold as a threat.

We must also bear in mind, though, that there are legitimate dangers to too much offshoring—and there are certain things that we must continue making in the United States no matter what—particularly high-tech, high-value products. Sometimes even if the bottom-line looks better in the short-term, the long-term consequences of offshoring our knowledge can be far costlier in the end.

Unfortunately, we have more than a few examples of what happens when we cede our core competencies to our competitors. Let’s take the semiconductor industry as an example. Though it started in Silicon Valley, many of the world’s chips are now made in Asia. Many U.S. consumer electronics manufacturers decided to move production to Asia because the labor cost differential was so great.

At the time, it didn’t seem like a big deal to offshore some consumer electronics production because it wasn’t considered “knowledge work.” We know now that a lot of innovation is created through commercialization—often on the factory floor.

Because we shipped much of our chip fabrication overseas, we forfeited our lead in silicon-processing skills from semiconductors. As a result, we let go of a lot of the electronic supply chain and lost out on emerging technologies including flat-panel-display, solar panels, and energy efficient lighting.

Who here uses a Kindle? The key technology behind the Kindle was developed in the United States at M.I.T. But guess what? You can’t manufacture the full device in America. We no longer have the capability to build a key component—the screen.

When you allow manufacturing in emerging industries to completely leave the U.S., it is very hard to get those capabilities back; no matter what changes in relative economics over time, like labor costs. It turns out that in order to keep the knowledge about designing some complex things, you also need to make them or at least be physically close to where they are made.

One of the great engineers and entrepreneurs of our time, Andy Grove, cofounded Intel and is considered a leading pioneer in the semiconductor industry. Based on lessons he learned at Intel, he warns companies that if they undervalue the role of production in technological evolution, they will find themselves locked out of tomorrow’s emerging industries.

If we continue to send our core competencies overseas we’ll wind up offshoring for the worst reason of all—we’ll have to locate manufacturing plants overseas because that’s where the skills, knowledge, innovation will be. Not here in America.

We can’t let that happen.  We need to set the terms and conditions that will make the United States the best place in the world to make things, so that we can (i) re-expand the number of jobs in manufacturing and related sectors, and (ii) maintain our leadership in the next generation of critical technologies.
In order to do that, we have to have a serious public policy conversation about what is really required to make the U.S. the very best place to make things.

Misconceptions, exaggerations and demagoguery won’t fill the bill. Politicians who stomp their feet about the need for “good manufacturing jobs” and the evils of “offshoring,” without seriously discussing what we have to do to really improve ourselves, make the problem worse, not better. 

We need to do something very unusual for Washington—we need to be serious, thoughtful and focused on doing hard things. If we do that, however, we should have every expectation of winning in the world and driving a new era of American manufacturing dominance.

Propelling Manufacturing Forward

So what, then, do we need to do to propel our manufacturing sector forward and strengthen our global competitiveness?

It comes down to the three Ps—People, Perspective, and Policies.

People. The manufacturing industry needs a workforce with the advanced skills and training needed on today’s technology driven factory floor.

It’s not just important to our domestic economic health—it’s critical to our global competitive standing. It’s counterintuitive that in a period of chronically high unemployment one of America’s most vibrant sectors has 600,000 vacant jobs.

Yet, there are major shortage of machinists, craft workers, and technicians. And in advanced manufacturing, employers struggle to find workers with expertise in “mechatronics”—a combination of mechanical, electronic, computer, systems design, and software engineering. Without qualified workers in these jobs, manufacturers can’t expand operations or improve productivity.

The labor shortage in manufacturing is a symptom of a malignant skills gap in America. Broadly, we need to fix our public K-12 education system, which is failing to produce students with the math and reading skills needed for college or skilled employment.

We need to emphasize the critical disciplines of science, technology, engineering, and math (STEM). That means recruiting the best instructors and encouraging our students to pursue those fields. We must also reform our irrational immigration system, which is currently holding us back in the global race for talent.

More specific to manufacturing, we can do a much better job of preparing young people for today’s “good manufacturing jobs” by adopting customized certification programs and working with trade schools and community colleges.

The Manufacturing Institute estimates that there are 450 separate skills sets in modern manufacturing—and the non-profit organization has spearheaded a promising effort to equip workers with those skills. The institute, an affiliate of the National Association of Manufacturers, has developed a manufacturing skills certification system that is being deployed nationwide. This practical, private sector-driven system will equip current and prospective workers with industry-recognized credentials and provide clear pathways to employment.

This is only one example of a leading effort to bridge the skills gap in manufacturing. It will take a commitment by all the stakeholders—public and private—to solve America’s systemic skills gap, boost our competitive strength, and provide manufacturing with the people they need.
To boost manufacturing and competiveness, we also need the right perspective. And that perspective must be global. Policymakers can never forget that they have the central responsibility to set the terms and conditions that will allow our businesses and our economy to compete and thrive.

Too often, politicians think our economy ends at our borders. The government can do whatever it wants in terms of tax policy or regulatory policy—and businesses here should just keep growing and adding jobs here no matter what other countries do. Instead, the administration and Congress should embrace the idea that the U.S. should be the very best place in the world to do business—and they must advance policies that will make it reality.

Germany is a prime example of a country where the government has taken on this responsibility. And they’ve created one of the most globally-competitive, high-wage economies on earth. In fact, even “socialist” France and “communist” China have comprehensive national strategies for aligning the needs of business and government.

Whether or not you agree with how they do it (and we often don’t), the French and the Chinese governments are at least committed to the idea that their home country businesses should be internationally competitive and successful in global commerce. Is ours?

That brings me to the final element. We need the right policies.

Many of our standing policies have done fundamental, long-term damage to our manufacturing sector. NAM estimates U.S. policies related to taxes, regulations, health care, the tort system, and energy drive manufacturing costs up 20%. Manufacturers have done relatively well in spite of this. Think of the potential for growth if we were actually cultivating a strong business environment through good policy.

A strong business environment starts with a competitive tax system. But our tangled tax code is anything but competitive. We have the highest corporate tax rate among OECD nations, and we must bring it down to at least 25% in order to compete. We must also lower tax rates for individuals. Nearly 70% of manufacturers are pass-through entities and pay income taxes at the individual rate. We must adopt a territorial system so our businesses aren’t taxed twice on revenue they earn overseas.

And we need to make the vital R&D tax credit permanent so manufacturers—again, who conduct two-thirds of private sector research—can continue to drive innovation.

A strong business environment doesn’t burden manufacturers with overregulation and a broken tort system. A recent study commissioned by the Manufacturers Alliance for Productivity and Innovation found that, over the next ten years, regulations will suppress output by 6% and drag down U.S. competitiveness. And that study doesn’t even account for the regulatory tsunamis of the health care law and Dodd-Frank. Those laws alone could layer hundreds, if not thousands of new regulations on business over the next two years.

We need a rational regulatory regime that balances costs and benefits, avoids redundant and duplicative rules, and eliminates needless regulations. We also need legal reform to bring down litigation costs and reduce precautionary expenses related to tort risk. If we continue to drive up the costs of manufacturing on U.S. soil through overregulation and the constant threat of lawsuits, more companies will take a hard look at offshore options.

A strong business environment opens markets and embraces trade opportunities around the world. Even though U.S. manufacturers are the most productive in the world, we are not exporting at the rate of our top competitors. We have been replaced by China as the world’s leading high-tech exporter.

We’re falling behind, in part, because of timid trade policies. Of the 300 free trade agreements around the world, the United States is only in 14 of them.
Now consider this: the United States has run a $100 billion trade surplus in manufactured goods with our FTA partner countries over the past three years… and a trillion dollar deficit in manufactured goods with everyone else.

If you’re concerned about our trade deficit, FTAs aren’t the problem — they’re the solution. We need to aggressively pursue new FTA partners and trade and investment opportunities around the world.

And we must be willing to enforce those agreements. We must hold our partners accountable for anti-competitive behavior. If they fail to play by the rules, we can’t be shy about calling them out.

A strong business environment will be interconnected through a modern and well-maintained infrastructure system. If we refuse to make the needed investments in infrastructure, and commerce can’t flow efficiently, American manufacturers will be at a major competitive disadvantage globally.

Finally, a strong business environment will have access to abundant and affordable sources of energy. And this is where we can really get a leg up on the competition. American manufacturers consume one-third of U.S. energy output—and falling energy costs could put U.S. firms at a significant competitive advantage.

The shale gas revolution stands to boost U.S. manufacturing. It’s estimated that shale could lower energy costs for manufacturers by up to $12 billion annually and create 1 million manufacturing jobs by 2025. The Chamber’s Energy Institute has been a leading voice in the shale debate and just released a study with staggering findings.  Shale development has added 1.75 million jobs over the past few years and will add $200 billion to our economy in 2012 alone.

Our global competitors are already feeling the effects of these game-changing resources. European manufacturers are reportedly paying almost twice as much for electricity and three times as much for gas as American companies. As a result, some European companies with operations in the United States are diverting investment here because the energy costs are so much more competitive.

Any policies that hold back our tremendous energy potential on are wrongheaded and detrimental to our economic strength and global competitiveness.  And ANY policies that are corroding the business environment, disrupting our economic ecosystem, or threatening the vitality of manufacturing—our keystone species—must be fixed, now.

We simply can’t compete otherwise.

Conclusion

Let me end on an optimistic note. With a thriving manufacturing sector driving growth in our economy and sharpening our competitive edge, there’s no reason America can’t reemerge as an undisputed global leader.

And we don’t need to fear the competition. In fact, the international arena represents much more of an economic opportunity than a threat. We can, and should, win in the world.

Why? Just look at our competition. If you look at the fundamentals of long-term economic competitiveness, who would we rather be?

How many countries have better access to natural resources, including energy and water?  Not many. How many countries have better demographics? Certainly not China, Europe, or Japan. How many have a better history of entrepreneurship and risk-taking?  Exactly none.

The truth is, that if we want it, there is no reason why manufacturing in the United States can’t grow by leaps and bounds – employing millions of additional workers, in knowledge-based jobs that drive expanding prosperity for the middle class and for our nation.

The question is, are we willing to tear down the hurdles of our own making? Are we willing to tackle the policies that hold us back and drag us down? Fundamentally—are we willing to get out of our own way?

If the American business community has anything to do with it, we can—and we will. 

I hope that you will not only support the Chamber’s efforts to revitalize this dynamic sector … but also those leaders who are willing to make the hard choices and do the right things needed to ensure the future of manufacturing—and the strength and competitiveness of our great country.