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DISPELLING THE MANUFACTURING MYTH American Factories Can Compete in the Global Marketplace Committee on Comparative Cost Factors and Structures in Global Manufacturing Manufacturing Studies Board National Research Council NATIONAL ACADEMY PRESS Washington, D.C. 1992
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National Academy Press 2101 Constitution Ave., N.W. Washington, D.C. 20418 NOTICE: The project that is the subject of this report was approved by the Governing Board of the National Research Council, whose members are drawn from the councils of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. The members of the committee responsible for the report were chosen for their special competences and with regard for appropriate balance. This report has been reviewed by a group other than the authors according to procedures approved by a Report Review Committee consisting of members of the National Academy of Sciences, the National Academy of Engineering, and the Institute of Medicine. This work is related to Department of the Navy Grant N00014-85-J-0094 issued by the Office of Naval Research. The United States government has a royalty-free license throughout the world on all copyrightable material contained therein. Library of Congress Cataloging-in-Publication Data Dispelling the manufacturing myth: American factories can compete in the global marketplace / Committee on Comparative Cost Factors and Structures in Global Manufacturing, Manufacturing Studies Board, National Research Council. p. cm. "May 23, 1992." Includes bibliographical references and index. ISBN 0-309-04676-9 1. United States—Manufactures. 2. Competition, International. I. National Research Council (U.S.). Committee on Comparative Cost Factors and Structures in Global Manufacturing. HD9725.D57 1992 338.6'048'0973—dc20 92-21775 CIP Copyright 1992 by the National Academy of Sciences. All rights reserved. Printed in the United States of America First Printing, September 1992 Second Printing, October 1995
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COMMITTEE ON COMPARATIVE COST FACTORS AND STRUCTURES IN GLOBAL MANUFACTURING LAURENCE C. SEIFERT (Chairman), Vice President, Global Manufacturing and Engineering, AT&T, Morristown, New Jersey JAMES D. BERCAW, Manufacturing Vice President, Consumer Products, AT&T, Parsippany, New Jersey FRED C. BUHLER, Vice President, Corporate Development, Kellogg Company, Battle Creek, Michigan KIM B. CLARK, Harry E. Figgie, Jr., Professor of Business Administration, Harvard Business School, Harvard University, Boston, Massachusetts WILLIAM F. FOWBLE, Group Vice President and General Manager, Photographic Products, Eastman Kodak Company, Rochester, New York WILLIAM C. HANSON, Vice President of Logistics, Digital Equipment Corporation, Maynard, Massachusetts LAURENCE W. HECHT, President, Iacocca Institute, Lehigh University, Bethlehem, Pennsylvania ROGER N. NAGEL, Harvey Wagner Professor of Manufacturing Systems Engineering, Computer Science, and Electrical Engineering, Lehigh University, Bethlehem, Pennsylvania THOMAS M. WOODARD, Director, McKinsey and Company, Inc., New York, New York Staff VERNA J. BOWEN, Staff Assistant THOMAS C. MAHONEY, Director MICHAEL L. WITMORE, Research Assistant (until June 1991)
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MANUFACTURING STUDIES BOARD JAMES F. LARDNER (Chairman), Vice President, Component Group, Deere & Company (Retired), Davenport, Iowa STEVEN J. BOMBA, Vice President of Technology, Johnson Controls, Inc., Milwaukee, Wisconsin BRIAN E. BOYER, Vice President of Operations, Northrop Aircraft Division, Hawthorne, California GARY L. COWGER, Executive Director, Advanced Manufacturing Engineering, General Motors Corporation, Warren, Michigan CHARLES P. FLETCHER, Vice President of Engineering, Aluminum Company of America (Retired), Allison Park, Pennsylvania THOMAS G. GUNN, President, Gunn Associates, Inc., Bryn Mawr, Pennsylvania GEORGE J. HESS, Vice President of Systems and Planning, The Ingersoll Milling Machine Company, Rockford, Illinois CHARLES W. HOOVER, JR., Professor, Department of Industrial and Mechanical Engineering, Polytechnic University, Brooklyn, New York RAMCHANDRAN JAIKUMAR, Professor, Harvard Business School, Harvard University, Boston, Massachusetts J. B. JONES, Randolph Professor Emeritus, Department of Mechanical Engineering, Virginia Polytechnic Institute and State University, Blacksburg DONALD KENNEDY, Educational Representative, International Association of Machinists and Aerospace Workers, Hollywood, Maryland JOE H. MIZE, Regents Professor, School of Industrial Engineering and Management, Oklahoma State University, Stillwater LAURENCE C. SEIFERT, Vice President, Global Manufacturing and Engineering, AT&T, Morristown, New Jersey JOHN M. STEWART, Director, McKinsey and Company, Inc., New York, New York HERBERT B. VOELCKER, Charles Lake Professor of Engineering, Sibley School of Mechanical Engineering, Cornell University, Ithaca, New York
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PAUL K. WRIGHT, Professor, Department of Mechanical Engineering, University of California, Berkeley Staff VERNA J. BOWEN, Staff Assistant DANA G. CAINES, Staff Associate LUCY V. FUSCO, Staff Assistant THEODORE W. JONES, Research Associate THOMAS C. MAHONEY, Director W. L. (LARRY) OTTO, JR., Study Director, Unit Manufacturing Process Research Committee
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The National Academy of Sciences is a private, nonprofit, self-perpetuating society of distinguished scholars engaged in scientific and engineering research, dedicated to the furtherance of science and technology and to their use for the general welfare. Upon the authority of the charter granted to it by the Congress in 1863, the Academy has a mandate that requires it to advise the federal government on scientific and technical matters. Dr. Frank Press is president of the National Academy of Sciences. The National Academy of Engineering was established in 1964, under the charter of the National Academy of Sciences, as a parallel organization of outstanding engineers. It is autonomous in its administration and in the selection of its members, sharing with the National Academy of Sciences the responsibility for advising the federal government. The National Academy of Engineering also sponsors engineering programs aimed at meeting national needs, encourages education and research, and recognizes the superior achievements of engineers. Dr. Robert M. White is president of the National Academy of Engineering. The Institute of Medicine was established in 1970 by the National Academy of Sciences to secure the services of eminent members of appropriate professions in the examination of policy matters pertaining to the health of the public. The Institute acts under the responsibility given to the National Academy of Sciences by its congressional charter to be an adviser to the federal government and, upon its own initiative, to identify issues of medical care, research, and education. Dr. Kenneth I. Shine is president of the Institute of Medicine. The National Research Council was organized by the National Academy of Sciences in 1916 to associate the broad community of science and technology with the Academy's purposes of furthering knowledge and advising the federal government. Functioning in accordance with general policies determined by the Academy, the Council has become the principal operating agency of both the National Academy of Sciences and the National Academy of Engineering in providing services to the government, the public, and the scientific and engineering communities. The Council is administered jointly by both Academies and the Institute of Medicine. Dr. Frank Press and Dr. Robert M. White are chairman and vice chairman, respectively, of the National Research Council.
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Acknowledgments Over the course of the study, the committee received input from a wide variety of sources. We would like to express our gratitude to all the individuals who briefed us on conditions in their industries. From the consumer electronics industry, we heard from Gordon Bricker of RCA, Wayne Garret of Thomson Consumer Electronics, and Kinichi Kadono of Toshiba. On the complexities of semiconductor manufacturing, Richard Dehmel of Sematech, Dean Toombs of Intel, and William Howard were very helpful. Finally, from the automobile industry, we thank George Eads of General Motors. Two individuals deserve special recognition. Vernon Dyke, Vice President and General Manager, Kodak Park, Eastman Kodak, and Walter Bonin, Manufacturing Planning Manager for Digital Services, Digital Equipment Corporation, provided valuable insight into the decision-making process in their industries and companies. Their experience, knowledge, and hard work were critical assets in the committee's deliberations. Finally, the committee acknowledges the work of the staff of the Manufacturing Studies Board. This report would not have been possible without the hard work and patience of Tom Mahoney, Mike Witmore, Ted Jones, and Verna Bowen.
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Preface The Committee on Comparative Cost Factors and Structures in Global Manufacturing began its deliberations in the fall of 1989. With the generous support of the U.S. Department of Defense, the committee undertook an examination of manufacturing costs in domestic and offshore factories to provide insight into the factory location decision-making process. There was at the time, and continues to be, considerable discussion of the concept of a "level playing field" in international trade—that is, the idea that foreign manufacturers and offshore factories have inherent cost advantages relative to U.S. manufacturers for a number of reasons: not only are labor costs lower, but factors such as health benefits, pensions, environmental compliance, and liability insurance pose far less of a burden to foreign manufacturers than they do to their U.S. counterparts. The committee's objective was to review these various costs in a number of industries that face strong foreign competition to determine the extent to which different cost factors and structures in different locations affect manufacturing costs. Such an objective proved to be too ambitious. Information on production costs simply is not available on a sufficiently disaggregated basis to perform the broad-based analysis intended by the committee. Consequently, the committee relied heavily on the data that were available and focused on the factors that determine factory site location decisions. Its analy-
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sis of international cost differentials in consumer electronics is based on internal corporate data provided by AT&T and Toshiba. The committee's examinations of the semiconductor and automobile industries are based more on the committee's experiences in and knowledge of those industries than on actual cost data, which were not available. Because little actual cost data were available from these industries, these analyses describe the factors that determine manufacturing efficiency and factors other than cost, such as trade barriers and local content requirements, which often determine where production is done. In all the industries examined, the committee found that, with effective management of the total manufacturing system, manufacturing in the United States can be cost competitive with offshore production and, further, can provide significant advantages in staying abreast of and responding rapidly to changing customer demands. The committee recognizes, however, that other factors besides cost drive site selection decisions and that globally dispersed production facilities offer U.S. manufacturers advantages in learning new practices, gaining access to new technologies, and responding to foreign customers effectively. In Chapter 4 the committee describes a decision model that captures its findings in a general context. Many factors determine the attractiveness of different countries for manufacturing. They range from external factors such as exchange rates, trade barriers, and government subsidies to internal variables such as the labor intensity of the manufacturing process, location of suppliers, and relations with the firm's other plants. Site selection becomes a complex decision, typically unique in each case. Both managers and government policymakers need to recognize this complexity and strive to make the United States an effective base for manufacturing. Laurence C. Seifert, Chairman Committee on Comparative Cost Factors and Structures in Global Manufacturing
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Contents Executive Summary 1 1 Introduction 9 The Strategic Business Decisions Model, 11 Report Structure, 17 2 Consumer Electronics 21 The AT&T Experience, 22 The Toshiba Experience, 36 Conclusions, 41 3 Semiconductors 45 Background, 46 Importance of Process Control, 49 Location Decisions, 54 Conclusions, 56 4 Automobiles 61 Background, 62 International Movements of Production Capacity, 64 Manufacturing Costs, 68 Effect of Fuel Economy Regulation, 71 Summary, 73
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5 Conclusion 77 What Attracts Manufacturers?, 77 Abandoning Myths, 80 After Myths: Rethinking Costs, Competitiveness, and Attractiveness, 86 Toward a Desired State, 94 Recommendations, 97 Bibliography 101 Index 105
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DISPELLING THE MANUFACTURING MYTH
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