| Hollow Industrial Base | | | | headquarters better protects proprietary |
| During the last decade, a hot topic in Japan and | | | | technologies. Unfortunately, here in America the |
| America has been the "hollowing out" of their | | | | outsourcing trend does not appear to be reversing |
| industrial bases. The share of Japanese-owned | | | | even in capital-intensive products. Many of the new |
| productive capacity located abroad has grown from | | | | high tech jobs are for managers to manage the |
| 8% in 1994 to 40% today. The United States | | | | outsourcing process. Microsoft, Intel, IBM and |
| currently has just over 50% of its manufacturing | | | | Motorola all have large and growing R&D centers |
| base located offshore. For both Japan and America, | | | | in China to take advantage of Beijing's cheaper pool |
| the large outflows of direct investment, especially to | | | | of talent. Given China's disregard for intellectual |
| China, have caused an uneasy feeling that both | | | | property rights, perhaps American executives should |
| countries had bleak futures as manufacturing centers. | | | | pause and reconsider the long-term costs of growing |
| Surprisingly, in Japan the pendulum is now moving | | | | outsourcing programs. |
| back as large Japanese multinationals are busy | | | | Their offshore R&D staff may very well walk |
| investing in manufacturing plants at home. Here are | | | | off with proprietary knowledge and the company's |
| just a few examples of this trend. Canon is building a | | | | future. Many Americans believe the loss of |
| large digital camera facility and plans to spend 80% | | | | manufacturing jobs is just about lower wage rates in |
| of its $7.2 billion capital budget in Japan over the next | | | | other countries but this is not always the case. One |
| three years. This is a reversal from the past ten | | | | example is Whirlpool which makes its high-end front |
| years when 80% of its capital budget was spent | | | | loading washing machines in Germany ($32/hour labor) |
| overseas. | | | | and ships them to US ($23/hour labor). The reason |
| Toshiba is building a $2 billion semiconductor facility. | | | | given by Whirlpool: trained German workforce, |
| Sharp, Matsushita and Nippon Steel are also building | | | | available capacity, and necessary technology. |
| major plants in Japan. Overall, spending on plants and | | | | Whirlpool could have produced these washing |
| equipment in Japan is rising at a 10% clip. | | | | machines at their Ohio plant and saved the $50 per |
| It's not that China is not important to Japan's | | | | unit shipping costs while creating high wage American |
| economic growth. China has passed America to | | | | jobs. |
| become Japan's largest export market. In addition, it | | | | Leverage Our Strengths |
| needs a strong presence in China to tap its rapidly | | | | Then there is America's growing annual trade deficit |
| growing consumer market as well as a low cost base | | | | that exceeds $600 billion a year with $200 billion |
| to manufacture lower tech products. For certain | | | | attributable to our trade gap with China. You have to |
| products like cars it is also likely to keep large | | | | admit that it is harder to make a strong case against |
| manufacturing bases in countries like America. For | | | | Chinese trading practices when 40% or more of |
| example, Toyota produces more than 1 million cars | | | | American imports from China come from American |
| annually at eight manufacturing plants in America and | | | | multinationals with China-based manufacturing plants. |
| has two plants under construction in Texas and | | | | Why not sell more of the stuff we make in China to |
| Tennessee. | | | | China's 1.3 billion consumers? If these markets are not |
| But for the more advanced capital-intensive products, | | | | open to American companies, let's use the leverage |
| the investment is clearly coming home. How can we | | | | of access to America's vast consumer market to |
| account for this surprising turnaround and what are | | | | bust them open. |
| the lessons for America? | | | | There are some economists and policymakers who |
| Lose Now, Lose Big Later | | | | claim a strong manufacturing base is not important. I |
| First, Japanese firms have learned the drawbacks of | | | | beg to disagree. History shows that manufacturing is |
| outsourcing. Supply bottlenecks, poor infrastructure, | | | | the foundation of all wealth and that research and |
| power shortages, uneven quality, difficult inventory | | | | development follows manufacturing rather than the |
| management and high employee turnover are just | | | | other way around. There are now more American |
| some of the problems. Secondly, even though China's | | | | workers in state and local government then in the |
| wages are about 5% of Japan's, its increasingly | | | | manufacturing sector, and manufacturing as a |
| sophisticated factory automation has lessened the | | | | percentage of GDP has fallen from 20% in 1980 to |
| importance of labor costs. For advanced high tech | | | | less than 10% today. This is not a call for isolationism |
| products it accounts for only 10-15% of total costs. | | | | or rolling back globalization, just a reminder that |
| Having manufacturing closer to home also shortens | | | | outsourcing has its downside. How about a little |
| new product lead times and increases cooperation | | | | common sense and balancing short-term cost savings |
| between R&D and production teams leading to | | | | against long-term strategic risks? |
| a crucial edge in staying ahead of its nimble | | | | Stop Accepting the Risk for Short Term Benefits |
| competitors. Supply lines of 2,000 miles can be | | | | Instead of just taking the comparatively easy step |
| problematic. | | | | of lowering labor costs by outsourcing, let's roll up our |
| Finally, and perhaps most importantly, there is the | | | | sleeves like the Japanese, improve manufacturing |
| critical issue of protecting intellectual capital. Having | | | | techniques and reap the benefits of keeping more |
| research, development and production closer to | | | | production and technology closer to home. |