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Executive Summary Over the past three decades, U.S. manufacturers have lost market share in several industries they once dominated. A common explanation has been that the United States is no longer a competitive location for manufacturing: wages and benefit costs are too high, American workers are too inflexible (with respect to work rules and production practices), and capital costs too much for U.S. manufacturers to invest as much as their foreign counterparts. The Committee on Comparative Cost Factors and Structures in Global Manufacturing was formed to examine the relationship between manufacturing costs and global factory site selection decisions. The study was motivated by the argument that the United States has become—or is destined to become—a high-cost environment for manufacturing and therefore must specialize in high-value products. Although the committee recognizes that all the activities that comprise the product realization process—design, engineering, purchasing, production, marketing, distribution, and sales—determine the full costs of bringing a product to market, manufacturing costs incurred in the factory are typically what affect decisions to shift production offshore. These costs are, therefore, the focus for the committee's analysis. This “high-cost environment” argument has become common wisdom because it is partially based on fact and historical precedent. It is true that a variety of direct-labor-intensive
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manufacturing processes—typically assembly operations—were moved offshore in the 1960s and 1970s because they could be done less expensively. In the 1980s, however, the rationale for offshore manufacturing began to change. Access to lower-cost direct labor continues, but its importance is waning—first, because direct labor is declining as a proportion of total manufacturing costs and, second, because manufacturers are finding that other factors besides cost affect their competitiveness. Manufacturers have begun siting factories offshore to gain access to markets, as well as access to manufacturing processes, skills, technologies, or components unavailable in the United States. Today, effective onshore/offshore location decisions are part of an integrated business strategy designed to maximize total business potential. Location is assessed not just in terms of cost reduction but also for opportunities to increase business. A variety of variables are considered, many of which do not show up on a profit-and-loss statement (see Figure 1-4, strategic business decisions model). Determinants of cost-competitive production have as much to do with process control, product quality, supplier and customer relations, and time to market as with wage rates and capital costs. These new considerations in site location decisions reflect two key developments, one in manufacturing, the other in the market. With respect to the former, effective manufacturing is managed as an integrated process. Product and process design, the transformation of materials and information into products, customer service, product support, and marketing are treated as interconnected functions in a cycle that must be continuously improved. Manufacturers are put at a disadvantage if management focuses solely on minimizing input costs defined in narrow accounting terms (e.g., minimizing labor costs by seeking low wages). Instead, today's manufacturer must consider how site selection decisions will affect its ability to improve cycle time, to drive down defects, and to add value in new ways that respond to or create customer demand. The appearance of these changes in manufacturing coincides with the appearance of a new kind of customer. Consumers now demand products of superior quality that are introduced and delivered in a timely way. Further, it is increasingly
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essential that products be tailored to unique or changing customer preferences. To satisfy these new demands, manufacturers must consider whether a prospective site will give them direct access to customers so that they can respond to changing demands quickly. The ability to link a site to other operations and to suppliers is important, too, since the total manufacturing enterprise must be carefully coordinated if cycle time and quality defects are to be driven down. The committee's analysis of three industries illustrates how site location decisions are affected by changing technology, customer expectations, and sources of competition in manufacturing businesses. In consumer electronics, semiconductors, and automobiles, manufacturers must consider a wide range of variables when deciding where to manufacture.1 For example, the AT&T data described in Chapter 2 shows that the costs of materials—not labor—are the primary driver of onshore/offshore cost differentials for the products studied. Further, the Toshiba study demonstrates that the United States is actually a "low-cost" manufacturing location compared to Japan at recent prevailing exchange rates. Perhaps more importantly, the Toshiba study confirms that market access, almost regardless of manufacturing costs, is typically what draws foreign manufacturers to the United States. While the consumer electronics industry demonstrates that labor costs are not the primary consideration in manufacturing location decisions, the semiconductor industry analysis (Chapter 3) illustrates the relative insignificance of input cost differentials in the face of other factors, such as cycle time, throughput, and yields. The significant competitive factor in semiconductor manufacturing is not the comparative size of the initial outlay for a facility (which is huge and growing but similar throughout the industry), but a firm's ability to maximize the returns on that investment through capacity utilization. Skilled workers, good designs, and high-quality equipment and materials are prerequisites for the necessary level of process control, but effective process management is essential. Consequently, the main criteria for site selection of wafer fabrication facilities are (1) market access—there must be sufficient demand to justify expensive capacity expansion and a need to locate near demand centers, for quick response or
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to overcome trade barriers, and (2) access to skills to ensure that the investment in plant and equipment is justified by rapid product realization and rapid progress in yield improvement. Finally, the automobile industry analysis (Chapter 4) demonstrates that the United States remains an attractive location for effective manufacturing and illustrates the rapid changes taking place in understanding and managing manufacturing costs in a traditional high-volume mass production environment. Lean production, the new approach to high-volume manufacturing pioneered by Japanese firms, is a systemic approach to manufacturing that reduces total costs and cycle time while increasing quality and flexibility.2 Lean production emphasizes continuous improvement in the total manufacturing system. Instead of focusing on traditional accounting categories such as labor cost and number, materials cost, or overhead, lean producers concentrate on other cost drivers, such as minimizing work in process, inventories, and materials waste. Continuous improvement in the manufacturing system is achieved through worker empowerment, essentially recognizing that workers themselves know the best way to perform their jobs and that they will be innovative in applying improvements if unconstrained by strict work rules. This approach to manufacturing represents a fundamental change in the nature of mass production work and therefore is not easy to implement. Lean production, however, has been successfully implemented in the United States by both American and Japanese producers. It is, therefore, a completely "portable" competitive advantage. The automobile industry analysis demonstrates that cost competitiveness can be more a matter of managing costs effectively than of finding environments where local cost structures offer an input cost advantage. Depending on a firm's business and market strategy, different factors will influence where it locates its manufacturing facilities (i.e., it will find different attributes attractive). These attributes can be divided into three categories: Access to low-costs Access to skills, technology, and capabilities Access to markets
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Based on its examination of siting decisions in the three industries chosen, the Committee found that access to low labor costs should be a primary consideration only in a limited number of decisions. Most of the decisions studied by the committee were driven by other factors, such as access to markets, lower cost of materials, specific product or process technologies, and proven capabilities in high-quality production by suppliers. This is not surprising. Because of changes in both the nature of manufacturing and the demands of consumers, it is essential that a firm consider access to markets, proximity to customers, and the benefits of competing against world-class competitors, as well as access to worker skills, components, or technologies, when siting a facility. The committee finds that the U.S. manufacturing environment offers several of the features that competitive manufacturers find particularly attractive. The large market of relatively affluent consumers, the pool of skilled workers, a strong base of technologies and components, and a national tradition of innovation are all highly attractive attributes. Further, innovative management systems such as lean manufacturing can flourish in this country. This environment will likely continue to attract manufacturers in all three of the industries studied. There are, however, aspects of the U.S. manufacturing environment that deserve attention from government and industry alike. The industrial infrastructure—the supplier base, technology base, and work force skills—must be enriched continuously if the United States is to remain attractive. Protectionist policies must not be allowed to undermine the vibrancy of the United States as a "state-of-the-art market"—one in which a variety of world-class foreign and domestic manufacturers compete for the business of highly demanding consumers. Such a market is a spur to improvement for U.S. firms and a magnet for foreign ones, as well as a fundamental condition for long-term growth in the American standard of living. To ensure that the U.S. manufacturing environment remains attractive, the committee offers several recommendations to both industry and government. Industrialists should: Accept responsibility for losses in competitiveness instead of blaming them on exogenous cost factors. Managers
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must understand that they have the power to stimulate dramatic improvements in manufacturing effectiveness. External cost factors need not have a significant impact—in most instances—on a firm's ability to produce competitively. The cost advantages of offshore locations can often be offset by strong, effective management of a skilled work force keeping appropriate manufacturing process technology in tight control. Understand that global competition has raised the performance standards required for manufacturing success; thriving firms need to perform as "best in class" in their respective markets. To do so, firms must not let outdated notions of cost drive business decisions (i.e., focusing on labor), they must collaborate with and learn from domestic and foreign competitors, and they must educate and train managers and production workers so they can achieve lean production. Take advantage of natural U.S. advantages: (a) a large and relatively open market comprising innovative, creative, risk-taking manufacturers and (b) an excellent university system capable of achieving tremendous intellectual advances and providing highly skilled personnel for world-class manufacturing. Constantly strive to provide customers with higher value-added—embracing both technological and methodological sources of value. This means opening markets at home and abroad so that new technologies and methodologies can be accessed and R&D costs can be amortized. U.S. firms can push new value frontiers only if they do it globally. Government, on the other hand, must do its part in fostering the conditions necessary to ensure that the United States remains an effective location in which to manufacture. Of particular relevance to companies' decisions regarding where to produce is the knowledge that markets will be open to U.S. exports and that necessary skills will be available for competitive production. Policymakers should: Foster a favorable environment in the United States for competitive global manufacturers, foreign and domestic, by maintaining the macroeconomic conditions necessary to sustain a state-of-the-art market. The strong competition and healthy demand needed for such a market require stability and pre-
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dictability in prices, tax regimes, and trade policies to allow confidence in decisions with long time horizons. Avoid restrictions on foreign direct investment, joint ventures, and other sorts of interfirm cooperation or technology flows that would inhibit U.S. manufacturers' access to skills, knowledge, and technology, whatever the source. Fight similar restrictions abroad where they limit U.S. exports, direct investment, and technology access. Encourage and support work force education and skills mobility. A skilled, educated work force is a critical component of a state-of-the-art market. The United States must maintain the necessary investment in its educational infrastructure to ensure that the supply of courses, materials, and instructors is sufficient to meet demand, not just for new graduates but for much of the existing work force. Resist pressures from the business community to protect the status quo. U.S. business failures are not necessarily market failures requiring government remediation. Given appropriate incentives, skills, resources, and management of manufacturing as an integrated system, U.S.-based production can be not only cost competitive but also competitive in quality, features, and timeliness. Both American and foreign-owned companies have proven it. NOTES 1. These industries were chosen because they have been central to the debate on U.S. competitiveness and because data were available. While important lessons can be learned from these industries, the committee recognizes that its analysis may not apply to other manufacturing industries with widely varying cost structures. 2. Lean production is defined and discussed by James P. Womack, Daniel T. Jones, and Daniel Roos in The Machine That Changed the World (New York: Rawson Associates), 1990.
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