Investing in Our Future: Manufacturing, Innovation, and Jobs

“Caterpillar to Shift Some Production to U.S.” That’s good news for American workers: 1,000 jobs are coming home from Japan. Some lucky state will win the lottery for the factory and become home base for global sourcing of Caterpillar’s small bulldozers and mini-hydraulic excavators.

Interestingly, Caterpillar first developed these mini-machines to fix a distinctively Japanese problem. Cramped urban construction sites cried out for compact excavators. That friction brought on innovation, invention, and manufacturing.  In time, Caterpillar learned the ins and outs of producing the machines – and uncorked a fast-emerging market in North America and Europe.

Now, their manufacturing is coming home – away from the original inspiration for innovation, true. But the move is bringing jobs to America. Even better – Caterpillar is bringing back to the United States a potential cauldron of next-wave innovation that comes only from manufacturing.

That’s a reversal of trend – and a welcome change.

Top of the Agenda

Innovation and jobs – they’re on everyone’s mind these days. New York City is offering land and $100 million for a world class science and engineering campus  to rival California’s Silicon Valley. The promise made: hundreds of new companies and tens of thousands of new jobs. “Innovation Labs” proliferate on college campuses, as do “accelerator programs” in urban corridors. Boston even has signs demarcating its downtown “Innovation District,” all welcome news.

But when it comes to creating American jobs, such digital-world moves pale compared to new investments like Caterpillar’s in brick, mortar and iron.  Throughout history and now, manufacturing has proven itself a “coral reef” for prosperity: a vital component of new ecosystems for innovation and jobs.

What’s the dynamic at play? Learning by doing from scaling innovation to commercial production; discovering customer needs and making new technical breakthroughs; being in position to collaborate with customers on future product development – and all the jobs that come with it.

“A new industry,” wrote Intel’s founding CEO Andy Grove, “needs an effective ecosystem in which technology knowhow accumulates, experience builds on experience, and close relationships develop between supplier and customer.”

When the U.S. sent manufacturing of consumer electronics offshore, for example, Grove asserts those manufacturers gained insight to critical components such as batteries. They learned how to innovate fast to address the next generation of customer requirements – first for PC batteries, next for automobiles. Now, thanks to hybrid vehicles, the global demand for lithium-ion batteries is soaring. The United States is practically invisible in their production.

Innovation from Proximity

This is not some new or strange phenomenon. Economists Ralf Meisenzahl  and Joel Mokyr write that in 19th century Great Britain, for example, it was next-stage innovation by highly skilled artisan-engineer-entrepreneurs that accounted for much of Great Britain’s century-long dominance of the Industrial Revolution. Malcolm Gladwell recounts this progression powerfully:

In 1779, Samuel Crompton, a retiring genius from Lancashire, invented the spinning mule, which made possible the mechanization of cotton manufacture. Yet England’s real advantage was that it had Henry Stones, of Horwich, who added metal rollers to the mule; and James Hargreaves, of Tottington, who figured out how to smooth the acceleration and deceleration of the spinning wheel; and William Kelly, of Glasgow, who worked out how to add water power to the draw stroke; and John Kennedy, of Manchester, who adapted the wheel to turn out fine counts; and, finally, Richard Roberts, also of Manchester, a master of precision machine tooling... He created the “automatic” spinning mule: an exacting, high-speed, reliable rethinking of Crompton’s original creation.”

Then as now the ecosystem for innovation spans invention to manufacturing, and permits many to capitalize on the work of others.

Sometimes to excess. Steve Jobs once accused Microsoft of pilfering the Mac’s icons and mouse for Windows, Walter Isaacson writes in his Jobs biography. Bill Gates would have none of it.

“I think,” Gates told Jobs, “it’s more like we both had this rich neighbor named Xerox and I broke into his house to steal the TV set and found out that you had already stolen it.”

Manufacturing Goes Offshore

The decoupling of innovation from manufacturing is exactly what has happened over the past several decades, as Americans brought great ideas to light, but then left the execution – manufacturing, and jobs - to others.

The consequences have been telling.  The New York Times reported that in 2011 Apple had about 43,000 employees in the United States - but nearly 700,000 overseas making  Apple’s iMacs, iPods and iPhones. In pure jobs, that means your tax and consumer dollars to Apple support 16 overseas jobs for every 1 American.

That move offshore means it now costs orders of magnitude more for a new investment in U.S. tech firms to produce a new U.S. tech job.  Grove estimates, for example, that a decade ago it took a few thousand dollars to create a single new U.S. job. With the move of manufacturing offshore it now takes $100,000 to create that same job.

The trend has been disastrous for U.S.-based manufacturing and jobs. During the 1980s, writes Robert D. Atkinson  of the Information Technology and Innovation Foundation,  U.S. jobs grew by 19 percent; then by another 20 percent in the ‘90s. But as manufacturing left, so did jobs.  Between 2000 and the peak of employment in January 2008 U.S. jobs grew  a scant 5.4 percent - overlaying a massive decline in manufacturing jobs of 32 percent. The President’s  Council of Advisors on Science and Technology summed it up:

As a fraction of U.S. GDP, manufacturing declined from 27% in 1957 to about 11% by 2009. Manufacturing employment declined from 17.6 million jobs in 1998 to just 11.6 million jobs at the end of 2010

What has spurred on this loss? Reasons abound and are often debated, most recently this year in Foreign Affairs by Michael Spence, Robert Z. Lawrence, and Richard Katz. From global factor prices to tax rates, hard economic facts have contributed to America’s drift away from manufacturing.

But it isn’t all in the numbers.

Even more telling, perhaps, there’s a mindset that finds the hard slog of manufacturing – well, just that: a slog. And mindsets matter. As Harvard Business School’s Tom Eisenmann has said, “Entrepreneurship is all about the psychology.”

In our next post, we explore the headwinds against investment in U.S.-based manufacturing, its consequences for research and development, and the prospects for change.