NEXT ECONOMY

AD VER T ISEM EN T

Act II for American Manufacturing?

Say bye-bye to the likes of River Rouge, and hello to smaller, smarter
factories surrounded by industrial ecosystems that nourish innovation. But
the next wave of manufacturing may require government’s helping hand.
by Bruce Stokes
Thursday, December 9, 2010 | 3:25 p.m.

PATRICE GILBERT

To the untrained eye, the new-wave manufacturing at AK Steel's Lyndora plant looks a lot like the old.

LYNDORA, Pa.—Is American manufacturing dead? Those who

think so point to manufacturing’s plummeting share of the national
economy as a predictor of its eventual demise. But they likely have
never been to Butler County. Here, north of Pittsburgh, in the heart
of western Pennsylvania, basic manufacturing still drives the local
economy. It has survived around here—indeed, thrived—suggesting
that America, too, has an industrial future.
Butler County’s economy has long depended on making steel and
fashioning it into precision tools, industries that most Americans
think have largely fled overseas. To survive, companies here have
successfully adapted, using flexible manufacturing techniques that
marry computers with a skilled workforce to craft products for
international markets. And in the wake of the worst economic
downturn since the Great Depression, the unemployment rate in
Butler County stood at just 6.8 percent in September, far lower than
the national average.
The Obama administration’s hopes for a second act for U.S.
manufacturing center on high-tech, future-oriented products such
as solar panels and biotechnology. There is reason to think these
goods will play a big role. Their track record has been impressive,
and their cutting-edge nature inspires public imagination. The
wind-energy industry, for instance, is roughly a $20 billion business
and is growing by leaps and bounds. Still, these technologies’
contributions to the overall economy are statistically insignificant.
Jobs in renewable energy, broadly defined (including wind, solar,
and hydroelectricity), accounted for just 0.1 percent of total
employment in the United States in 2007, according to Moody’s
Analytics. The makers of steel, aluminum, and other primary metals
employed three times as many people.
“When it comes to new industries, it takes a while for them to
grow,” said Sophia Koropeckyj, a managing director at Moody’s
Analytics. So, for the foreseeable future, they’ll be dwarfed in
economic significance by existing manufacturing. Despite the near-
disappearance of the American textile, apparel, and shoe industries,
and the recent troubles of the auto industry, the United States
remains—if tenuously so—the world’s leading manufacturer, led by
industries that rely more on technological precision and brainpower
than on low-skilled labor—aircraft, sophisticated machinery,
medical devices, and the like. But manufacturing’s staying power is
also thanks to old dogs, such as high-end steelmakers, that have
learned new tricks.
An unlikely testing ground for the second act in American
manufacturing is in western Pennsylvania, where the first act had its
heyday. To the untrained eye, the two eras look much the same.
Showers of sparks and unspeakable heat still mark the pouring of
steel. But Andrew Carnegie would not recognize this steelmaking. To
compete in an increasingly competitive world market, even
traditional manufacturers must operate on the technological
frontier. In its Lyndora plant, AK Steel operates the world’s fastest
and most productive coating and final annealing process, which
chemically aligns grains on the surface of electrical steel so that—
when it is used in a transformer that generates electricity—the
electrons pass over it more quickly.
This is the future of American manufacturing, according to Sherle
Schwenninger, who directs the economic growth program at the
New America Foundation in Washington. “We need a broad-based
manufacturing economy to provide jobs in the United States,” he
said. And it can be done, he believes, because America’s competitive
advantage in the world market lies in “sophisticated and higher-
value-added, fundamental manufacturing—things such as earth-
moving equipment and safer mining and drilling technologies—that
can meet the needs of emerging economies.”
“This is manufacturing’s moment,” said John Engler, president of
the National Association of Manufacturers, “precisely the right time
for manufacturing to have a comeback.” A broad-based
manufacturing economy, however, may well depend on the right
policy environment: lower taxes, smart regulation, a weaker dollar,
better training for workers, and the preservation of local industrial
clusters of large and small firms that feed off one another. That, in
turn, requires the public’s recognition that manufacturing has a
meaningful role to play in America’s future and a government-
guided plan to make it happen. “Without a plan,” warned Leo
Gerard, president of United Steelworkers International, “American
manufacturing will continue to atrophy.”
SECRET TO SURVIVAL
The departures from the first act in American manufacturing may
be more than technological. The geography will change, as will its
configuration. Huge facilities with tens of thousands of workers are
out. Factories won’t look like the gigantic River Rouge auto-making
complex that Henry Ford built in Dearborn, Mich., in the 1920s.
Compact plants surrounded by clusters of small firms that service
them will likely populate tomorrow’s manufacturing landscape.
Many of the factories will be in the South, where lower wages may
help establish a new industrial heartland.
Manufacturing can also survive in the Rust Belt. AK Steel, for
example, isn’t merely surviving; it’s flourishing. With more than
1,300 employees, it is Butler County’s largest industrial employer.
The company specializes in producing electrical steel (used in power
transmission and distribution) and exports half of that. AK Steel is
in the midst of a $135 million capital-expansion program, replacing
three 1960s-era furnaces with a single, technologically advanced
furnace. This will increase the plant’s production capacity by 40
percent while improving productivity and quality. It will also give
AK Steel the flexibility to make various steels, depending on
customer demand.
A few miles away, in downtown Butler, Wise Machine is helping AK
Steel become more productive. Workers at Wise are adapting one of
AK Steel’s continuous casters to resolve routine maintenance
problems in hours, rather than days. Wise’s two-dozen workers are
traditional machinists who may soon be outfitted with iPads to boost
their productivity.
In the nearby town of Cabot, Pa., more than 500 machinists at Penn
United Technologies turn out a variety of precision parts, some for
instruments used by orthopedic surgeons, others for the armature
that reads computer hard drives. Thanks to automation, one person
—instead of four—now operates four machines that load, monitor,
and spot-check the quality of each machine tool to produce more
widgets, with no defects, for customers worldwide.
The secret to Butler County’s manufacturing success is not only a
willingness to adapt but also the presence of an industrial ecosystem
of sorts: a local network of companies and resources that help one
another survive. At its core is AK Steel, which stayed in business
while countless other steel mills in the Rust Belt succumbed to
foreign competition. As a result, smaller businesses—such as Wise—
that build parts and perform repairs for AK Steel have also
survived. These companies are hothouses of innovation, spawning
entrepreneurs who spin off to form their own firms. This, in turn,
has preserved a skilled, local workforce.
Industrial ecosystems are important both in preserving traditional
manufacturing and in developing cutting-edge, renewable-energy
technologies, such as solar and wind. “Renewables have the benefit
of being the new kid on the block,” said Bruce Sohn, president of
First Solar in Tempe, Ariz., the world’s largest manufacturer of
thin-film solar modules. “But finding the ability to compete and
manufacture in the United States will be an ongoing challenge even
for us, unless we make significant changes in our public policy.”
NO. 1, BUT …
Measured as an engine for employment or as a chunk of the
economy, American manufacturing has been retreating for two
generations. The economy has shifted steadily from generating
wealth by making things to counting on finance, insurance, real
estate, and other white-collar activities to fuel growth. In 1947,
manufacturing accounted for more than 25 percent of the nation’s
gross domestic product, while finance, insurance, and real estate
produced less than 11 percent. (See graphs on p. 14.) By 2009,
manufacturing had shrunk to 11 percent of the economy, while those
other activities’ share had doubled to 21 percent.
Moreover, the profile of American manufacturing has been
transformed. Labor-intensive, low-value-added production has all
but disappeared. The textile, leather, and apparel industries, which
in 1977 accounted for nearly 7 percent of all manufacturing activity,
shrank to less than 2 percent by 2008.
Increasingly, U.S. manufacturers have focused on producing
capital-intensive goods: computers, electronic products, chemicals,
and, soon, energy technologies. “The nuclear business has come
alive again,” said Eric Garrard, president of Wise Machine, whose
shop is making coils for a nuclear reactor. “[It] may be the saving
grace for a lot of the manufacturing firms.”
But the new American manufacturing sector employs far fewer
workers. Only 11 million people now make things in the United
States, the lowest number since World War II.
Before the recent recession, however, the value of U.S.
manufacturing output had reached an all-time high. The United
States still hosts the world’s mightiest manufacturing economy,
producing 21 percent of all goods made globally. Japan is a distant
second, at 13 percent. China, at 12 percent, ranks third.
The reason that the United States has remained the world’s
manufacturing leader while in relative decline is, in a word,
productivity. U.S. manufacturers are the most efficient in the world.
AK Steel, for instance, produces more steel today than in the 1970s,
with a third of the workforce. This productivity has also helped fuel
the rest of the economy. For every dollar that manufacturers spend
directly, they foster another $1.40 in economic activity—a multiplier
larger than for any other sector.
Manufacturing remains critical to American economic success.
Exports of goods account for three-fifths of all U.S. sales abroad,
paying the bill for imports of consumer products and oil. Without
them, the U.S. trade deficit—at record levels before the recession—
would be even worse.
Despite the recent boom in exports of goods, the nation’s share of
the world’s manufacturing trade has been shrinking. China is
predicted to overtake the United States next year as the world’s
leading producer of manufactured items measured by value. And
the future looks bleak. From 1989 to 2001, the United States
recorded a trade surplus in advanced-technology products,
including biotech. Those are the same capital-intensive goods that
economists have long argued would naturally be Americans’
domain, as the production of labor-intensive wares, such as apparel,
moved overseas. Since 2002, however, the U.S. has run a deficit in
advanced-technology trade.
Other hindrances may lie
ahead. Workers can produce
only as much as their plant and
equipment permit, and until
recently, U.S. industrial
production capacity had grown
robustly—through good times
and bad. In the past decade,
however, companies have
shown a reluctance to invest in
new capacity, which has grown
at a third of its 1990s pace.
When the economy eventually
rebounds, this may limit U.S.
manufacturers in satisfying
domestic and foreign demand.
Manufacturers are also an
important source of
innovation, accounting for more than two-thirds of all research and
development conducted in the United States. Since 1999, however,
American manufacturers have increased their research-and-
development investments outside the United States three times as
fast as at home.
Manufacturing wages also bolster the economy. Manufacturing
workers get higher pay and more generous benefits—20 percent
higher in 2007—than Americans in nonmanufacturing jobs,
although wages have recently been growing slowly, if at all.
“If you give up on manufacturing,” New America’s Schwenninger
cautioned, “you give up lots of future productivity gains—and gains
in the standard of living.”
HOW TO INNOVATE
The conventional wisdom is that the United States can thrive simply
as a place for research and development—that the country no longer
needs to actually make things. But this assumes that new products
spring full-blown from the minds of laboratory scientists. The
reality is that in most industries, the manufacturing process itself is
a critical factor in developing radically new products.
In Butler County, the presence of multiple manufacturers has been
self-reinforcing. “People don’t understand how much
manufacturers feed off each other,” said Diane Sheets, the business-
development manager of the Butler County Community
Development Corp. That symbiotic relationship is vital, she said, in
prompting innovation and an entrepreneurial spirit.
For one thing, creating and sustaining a network of competitive
manufacturing entails day-to-day interaction between suppliers and
customers, which allows each to learn from the other. “The
knowledge underlying emerging technologies requires person-to-
person contact among manufacturing industries and between
manufacturing and services,” said Gregory Tassey, a senior
economist at the National Institute of Standards and Technology.
That interaction is harder when a company’s supply chain stretches
around the world.
New manufacturers also rarely emerge in a vacuum. They typically
morph from existing businesses, when coworkers who think they
can build a better gadget than their current employer go out on their
own. In the 1970s, the founders of Penn United did just that,
spinning off from Oberg Industries, another precision-tool firm
down the road. This was history repeating itself: Oberg Industries,
too, got its start when its founder left a larger local company in the
late 1940s. If U.S. manufacturers move abroad, foreign
entrepreneurs create these start-ups.
Consider what happened when the U.S.-based manufacturing of
semiconductors and flat-panel displays for computers and
televisions moved to China more than a decade ago, as Harvard
Business School professors Gary Pisano and Willy Shih have
recounted. At first, American economists saw no cause for concern,
arguing that these weren’t part of the core manufacturing capability
that the United States needed. The experience that the Chinese
gained in making computer chips and screens, however, taught
them how to process ultrapure, crystalline silicon into wafers and to
apply thin films of the silicon onto large glass sheets. By so doing,
they created a solar panel industry that has become a major
international player.
“The United States cannot continue to rely on outdated economic-
growth strategies that fail to understand the complexity of industrial
technology and the synergies among supply chains,” economist
Tassey said.
MEANS OF REVIVAL
During the past couple of years, a national preoccupation with Wall
Street’s meltdown and the ensuing recession has crowded out any
serious debate about how to revive American manufacturing. So has
the customary aversion to government-directed industrial policy,
often demeaned as “picking winners and losers.”
These attitudes, however, may be changing. Despite the distrust of
government that Americans displayed in the November
congressional elections, four of five Americans support a national
manufacturing strategy, according to a poll that the Alliance for
American Manufacturing conducted last spring. Proponents of a
government-led strategy say that it needs to be comprehensive, with
tax cuts, helpful regulations, and interrelated efforts to preserve and
rebuild core industries, the small companies that cluster around
them, and their skilled managers and workers.
So far, the specter of such a strategy hasn’t raised the tea party’s
hackles or provoked a political furor over government’s proper role.
Indeed, political antagonists have found points of agreement.
Recommendations issued in November by a bipartisan budget
commission suggest growing sentiment that the corporate tax rate—
among the highest in the world—ought to be reduced to encourage
companies to base their operations in the United States.
Similarly, Democrats as well as Republicans support a tax credit for
research and development, which lapsed a year ago for the 14th
time in the past three decades. The United States accounts for about
a third of the world’s R&D spending, far more than the second-place
Europeans. Still, relative to the size of its economy, America’s
spending on research and development ranks eighth among major
industrial economies.
But R&D isn’t enough. “An R&D policy should not be confused with
a manufacturing policy,” First Solar’s Sohn warned. “The worst
thing would be for us to tap into the ingenuity of our engineers and
come up with products and manufacturing processes, and then go
and put [them] overseas because that is the only place that it makes
sense to make things.”
Manufacturers gravitate to societies that show they want them, said
Sohn, whose company operates factories in Germany, Malaysia, and
Perrysburg, Ohio. “We were attracted to Malaysia,” he noted,
“because of their focus on manufacturing. It starts with a tone in the
country. Politicians and businessmen there have acknowledged the
utility and value of having manufacturing as a base, and they have
established a set of policies that were attractive,” including lowering
taxes and providing access to low-cost capital.
Subsidies can dry up, of course, and tax benefits can be withdrawn.
Manufacturers also look for stable—preferably growing—domestic
demand. That’s one reason First Solar built a factory in Germany
and is expanding it. German utilities are required to buy electricity
produced by consumers’ roof-top solar panels
at a price set high enough to enable them to pay for its installation.
Giving every consumer a chance to earn money as an electricity
producer has sent German demand for solar panels skyrocketing.

A vibrant American market for R&D alone won’t assure a

manufactured goods will be harder to future for American
achieve, given the likelihood of continual manufacturing.
slow growth. The 2009 economic-
stimulus package sought to encourage
the market by requiring that projects it funded include substantial
U.S.-made content. Many economists and foreign governments
decried the provision as inefficient and jingoistic. Yet it enabled
United Streetcar in Clackamas, Ore., to begin the first production of
streetcars in America in more than half a century. “The buy-
America provision took the risk factor out, so we could make the
start-up investment,” said Chandra Brown, United Streetcar’s
president.
Foreigners, too, can be lured into making in the United States more
of what they sell to Americans and to the rest of the world. Because
of the recent decline in the dollar and the slow growth in American
wages, it’s become cheaper in many cases to manufacture in the
United States than in Germany or Japan. As a result, Volkswagen is
building a plant in Tennessee, and BMW’s factory in South Carolina
has become the largest exporter of U.S.-built cars. The federal
government might also attract and keep manufacturers by matching
the investment subsidies and tax breaks that China and Singapore
offer.
Lowering the value of the dollar would preserve and expand the U.S.
manufacturing base by making homemade goods a better buy for
Americans and foreigners. The dollar is estimated to be overvalued
against the Chinese renminbi by at least 20 percent. Reducing that
to zero, according to the Peterson Institute for International
Economics in Washington, would create about a half-million well-
paying American jobs, mainly in manufacturing.
THE SKILL, THE DESIRE
But something more is needed to assure a vibrant future for
American manufacturing: a skilled workforce. That’s a scarce
commodity these days, even in Butler County. “Every kid who grows
up here wants to go to college and work on Wall Street,” said Wise
Machine’s Garrard, “not follow their fathers into AK Steel.”
Butler High School has a highly regarded vocational education
program that teaches the latest in manufacturing techniques.
Almost all of its graduates find jobs. But there are only 43
participants—more students choose training to become beauticians
than machinists. “If we want to replicate the highly skilled German
workforce,” said Scott Paul, executive director of the Alliance for
American Manufacturing, “we need a seamless four-year program
that starts in high school and goes through community college or
technical schools that prepare students for manufacturing jobs.”
That proposal costs money. Butler County Community College
conducts extensive training programs for local manufacturers, but
demand is down, partly because of cuts in the state funding that
picked up much of the cost. Nationally, only 0.17 percent of
America’s GDP is invested in worker training. Germany spends
nearly five times as much.
If skills are an obstacle, more money can help. But if it’s desire
that’s lacking, all bets are off. In the past few decades, as
manufacturing’s share of the American economy and workforce has
slipped precipitously, the perception has grown that U.S.
manufacturing has no future. No doubt this has contributed, in
turn, to the Butler County youths’ tepid desire to pursue a
manufacturing career.
Yet in Butler County, where the surviving manufacturers are
showing some spunk, these fears seem premature. “There will
always be a manufacturing sector in the United States—there has to
be one,” said Frank Vargo, NAM’s vice president for international
economic affairs. “The question is what kind of manufacturing. And
that is a matter for policymakers to shape.”
In any event, there is reason to hope. “The future is still in our
hands,” said Kent Hughes, director of the program on America and
the global economy at the Woodrow Wilson International Center for
Scholars in Washington, “if we don’t sit on them.”
The author, a senior fellow at the German Marshall Fund, is a
contributing editor to National Journal.
AD VER T ISEM EN T

Copyright 2010 by National Journal Group Inc. • The Watergate 600 New Hampshire Ave., NW Washington, DC 20037
phone 202-739-8400 • fax 202-833-8069 • NationalJournal.com is an Atlantic Media publication.