Research and development is key to the strength of U.S. manufacturing, but many fear that recent trends are impairing R&D efforts. Is the country’s technological preeminence at risk?

Research and development efforts play an integral role in U.S. manufacturing, keeping it competitive in the face of rapid globalization. And evidence supporting the importance of R&D is plentiful. Many innovations that bolster U.S. manufacturing—including bar codes, CAD & CAM, fiber optics and the Internet—are all fruits of the public-private partnerships organized by government-sponsored research initiatives, most prominently the National Science Foundation (NSF). What’s more, R&D efforts are not only important economically but militarily as well, proving significant in World War II and decisive in the war against Iraq.

However, many industry and government leaders fear that the U.S. will lose its technological preeminence because of current R&D practices. In particular, they worry that innovation will emulate production and take place increasingly outside of the country. In fact, a recent “Manufacturing & Technology News” article says that offshore manufacturing has hampered innovation. The story cites a report from the Pentagon’s Advisory Group on Electron Devices (AGED), which purports: “Offshore movement of intellectual capital and industrial capability, particularly in microelectronics, has impacted the ability of the U.S. to research and produce the best technologies and products for the nation and the warfighter.” The report goes on to point out that the Defense Department is now seeking the most cutting-edge technology from overseas because the U.S. has let its leadership in electronics and semiconductors slip.

While these concerns are not new, they have recently gained in urgency. In the past, when faced with competition from “Asian tigers” such as Japan, Taiwan and South Korea, U.S. producers were able to strengthen their advanced manufacturing leadership by utilizing the new technological abilities of these up-and-coming economies. Moreover, industry and government leaders agreed that U.S. manufacturers would only farm out low-skilled, low-paying production jobs while hanging on to high-paying engineering and design—along with finance, sales and marketing—positions. However, anxieties have started to mount again due to China’s aggressive entry into manufacturing—particularly into the semiconductor industry—and its forceful approach to stimulating manufacturing growth. Moreover, a U.S. manufacturing downturn has caused many to wonder anew: Is the industry and the government adequately supporting high-level manufacturing innovation?

The answer is a resounding no, according to reports from the National Association of Manufacturers (NAM) and the National Coalition for Advanced Manufacturing (NACFAM), both headquartered in Washington, D.C. The reports contend that the U.S. has let its preeminence in several key industries falter along with its market share. Furthermore, high-skilled jobs and pioneering research are moving abroad. And the implications of these developments are even more serious this time, with China in the picture. While wages in Japan, Taiwan and South Korea increased as these countries developed, the NACFAM report points out that China’s huge population will sustain its labor surplus, keeping wages low and U.S. manufacturers on their toes for many years to come.

Particularly disturbing is the potential loss of the semiconductor industry, which is integral to sustaining the country’s manufacturing and military might. In fact, the sector’s declining competitiveness has raised concerns for many years. In 1989, for example, Robert B. Reich, then a professor at Harvard University’s Kennedy School of Government, asserted that between 1984 and 1988, U.S. share of the world market dropped from 50% to 37%. And it’s descended further since then. In May, a National Academy of Science (NAS) report stated that U.S. share of global semiconductor production is approximately 20-25% and claimed that it’s still continuing to fall.

The U.S. semiconductor industry is faced with fundamental challenges, including its falling revenue growth rate, the skyrocketing cost of manufacturing semiconductors as features approach atomic levels, and the mounting cost of developing devices. As a result, U.S. semiconductor businesses are choosing to outsource manufacturing to countries such as Taiwan, which has already claimed two-thirds to three-quarters of the world’s foundry work. But this semiconductor business model, which disengages product development from manufacturing, has implications on innovation. Randy Isaac, vice president of strategic alliances for IBM Corp.’s Technology Group in NY questions if U.S. companies can successfully manage R&D while farming out manufacturing. He notes that R&D and manufacturing are becoming more intertwined as the technology advances. “Feedback from manufacturing experience is vital to R&D, while new innovation needs to be implemented in manufacturing very quickly,” he explains.

Disconnecting manufacturing from R&D is not only problematic for the semiconductor sector, but for the entire U.S. industry, says economist Joel Popkin in his recent study for NAM. His research contends that manufacturing is crucial to innovation at all levels. And he says, manufacturers account for almost two-thirds of all private sector R&D. “Manufacturers’ investment in physical and human capital, R&D and productivity are intertwined and together provide substantial economic benefits,” Popkin explains. “This is the method by which innovations become an integral part of the economic process and lead to widespread improvements in productivity.”

Increased productivity is only one benefit of keeping manufacturing and R&D linked together within U.S. borders, says John A. McFarland, president and CEO of Baldor Electric Co. in Arkansas. He believes that keeping the two closely integrated has enabled his company to better serve customers, allowing Baldor to offer extremely short lead times as well as higher-quality and more economical products—as R&D has boosted product design and thus delivered substantial product cost improvements. What’s more, uniting manufacturing and R&D supports product variety. “At Baldor, the R&D function sits right next door to the plant,” he says. “We can design a new motor in the morning, test it in the afternoon and have it in production the following day. With globalization, it is very tempting to think that long production runs of a small number of products will satisfy the market. That’s not the way our customers buy.”

Those on the opposite side of the debate, however, believe that manufacturing and R&D do not have to be geographically close to each other to stimulate innovation. For example, Power-One Inc. of California has sales, manufacturing and R&D dispersed across China, the Dominican Republic, Ireland, Norway, Slovakia, Switzerland and the U.S. The power conversion equipment vendor’s most significant R&D initiative—its maXyz product—was outsourced and has generated more patents in the last 12 months than the company has developed in the past 25 years.

These examples illustrate that there are no easy answers in this heated debate. U.S. manufacturers face tough questions. While Popkin’s research purports that geographic proximity amplifies the benefits of R&D, U.S. companies must still address the wide disparities in global wages when deciding whether to retain U.S. production capacity or not. Furthermore, U.S. manufacturers must figure out if they can hold on to their lead in high-technology manufacturing if they let both production and R&D migrate to other countries. Finally, the role of the government in supporting manufacturing innovation must be addressed. Indeed, only one thing is certain: how these questions are tackled will determine the future of U.S. manufacturing.

Source: Fearing R&D’s Flight
John Teresko
Industry Week, August 1, 2003
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