Leland Teschler • Executive Editor
[email protected]On Twitter @ DW_LeeTeschlerTeschler on Topic
The recent round of tariffs on $
billion-worth of imports from China
rocked markets because it will mostly
target popular consumer products such
as cellphones, laptops, apparel, and
toys. Unfortunately, the politics of tariffs
can obscure the rationale underlying
tariff wars: the need for a strong
domestic manufacturing base. To really
understand that rationale, it is good to
consult a non-political source.A few years ago, MIT professor
Suzanne Doris Berger penned How We
Compete, summarizing the results of
a five-year study by the MIT Industrial
Performance Center. The study looked
over 500 international companies to
figure out what business practices are
succeeding today.
Berger says there is no question
Chinese imports led to a drop in
U.S. manufacturing jobs. Chinese
imports accounted for about 33% of
manufacturing job declines between
1990 and 2000 and 55% between
2000 and 2007. And the deck is
stacked against entrepreneurs
with ideas for new manufacturing
companies but no money. Venture
capital is strongly concentrated in IT
and telecom where firms can scale
up relatively quickly, Berger says. VC
investors are less likely to invest in
areas where it takes longer to developproducts. As one CEO in the study put
it, “The VC model does not work for
manufacturing companies. VCs cannot
make any money on something that
costs $100 million and takes at least 10
years to build.”
It’s also evident that companies are
more likely to lose their technological
edge when they develop technology
in the U.S. but chose to manufacture
it elsewhere. The process by which
technology scales from pilot to
commercial production creates
opportunities for learning by building,
says Berger. When the learning takes
place outside the U.S., it is likely to lead
to innovations outside the U.S. as well.
Berger says the phenomenon
manifested itself in the R&D trajectories
of U.S. optoelectronics firms, some of
which moved production overseas.
Within a few years, the technological
paths of those remaining in the
U.S. diverged from those that had
moved offshore. New optoelectronics
technologies that integrated functions
on a single IC flourished only in the
firms staying in the U.S. Those that had
moved production were generally stuck
optimizing the discrete chips of the
previous generation.
Though high-tech manufacturing
gets headlines, medium-low-tech
manufacturing firms account for
almost eight times more value added
in production. Berger likens them to
the weight-bearing foundations of the
U.S. economy. It turns out that manyof these manufacturing firms are integral
to U.S. innovation, but not in ways that
can be measured in terms of patents and
high-profile products.
Instead, superior performance
seems to come from collocation,
Berger says. Proximity to other firms
and suppliers helps innovators handle
problems that take special skill sets,
unfamiliar equipment, and different
kinds of experience. She explains that
being across the street from suppliers
was critical during the early years of
manufacturing companies as they moved
their ideas toward prototypes and into
pilot production.
Specific instances illustrate these
effects. An example is the contrast
between Raleigh-Durham and Greenville,
N.C. Both places host pharmaceutical
companies. But Raleigh-Durham
also hosts related industries such as
medical devices and is the home of
universities and community colleges
with research programs. With these
additional resources nearby, Berger thinks
it’s no surprise that Raleigh-Durham
employment growth in pharmaceutical
industries far outstrips that of Greenville.
And that is the goal of adding tariffs
to imports. The complementary activities
that can produce high rates of growth
and job creation can only happen if
those activities take place here. That’s
something to keep in mind if you find
yourself paying a little more for your next
cellphone. DWTariff tango? A reminder why
domestic manufacturing matters
6 August 2019 http://www.designworldonline.com DESIGN WORLDLee Teschler Column 8-19_V1.indd 6 8/5/19 1:41 PM