American Competitiveness: Forfeit or Win?

On September 9, President Obama named Ron Bloom, a veteran of Wall Street and the labor movement, to be the new special adviser on manufacturing. As manufacturing represents an 11 percent share of the GDP, down from 30 percent in the 1950s, presumably the hope is that a Manufacturing Czar will be able to reverse this trend.

Aggressive denial does not qualify as a strategy. Basic economics has driven companies of all sizes toward establishing factories in emerging markets, exploiting cheap labor and, increasingly, ready customers. U.S. free trade policies have driven down costs of consumer goods across the board — witness the growth of Walmart to become the world’s largest company. It seems unlikely that Bloom will be the architect of a revolution to increase production costs. Denial, as they say, is a river in Egypt.

Simply put, what can Bloom do? It seems that he could forfeit the game by imposing tariffs, admitting that the U.S. simply cannot manufacture profitably and penalizing everyone in the process. Consumers facing higher prices for toasters, computers and Dora the Explorer sheets might not be so happy about this — especially in a recession, when cushy retirement accounts and home equity lines of credit have nearly vanished.

On the other hand, the nation could follow the “Blue Ocean” model of W. Chan Kim and Renee Mauborgne. Their best-selling book described novel ways of thinking about competition, moving from the red ocean of bloodthirsty competition to blue oceans, creating new ways of thinking about cost structures and offering value. (Their classic example is Cirque du Soleil — it presents the acrobatics of the circus with theatrical sophistication, but it is neither circus nor theater.)

The U.S. will not be able to compete on large-scale manufacturing again, but it can still continue to unlock value in its capacity to innovate. Instead of a forest dominated by a few large trees, it will be nurturing a garden with many small flowers.

What would such a competitive strategy entail? It would have four tall tent poles.

1. Fund Innovation

The America COMPETES Reauthorization Act of 2010, discussed articulately by Jeffrey Mervis in Science Insider, represents a good start, with US$84 billion authorized for research, education and innovation programs.

It was passed by the House this spring; too bad it now lies in Senate limbo, probably until the elections. Without initiatives like this, key research and development efforts will be stymied, unable to cross the finish line. (Note that this was proposed by President George W. Bush and has since been endorsed by the Obama administration.)

2. Educate for Competiveness

The U.S. must aggressively train its students. Recently, a friend in the defense industry told me that he would no longer recruit at a world-class local university because U.S. citizens were simply not interviewing for technical positions. I have seen the same in 10 years of interviewing entry-level engineers at mid-sized technology companies. There is a complete lack of qualified American candidates, and the rare qualified few lack the hunger of their foreign-born counterparts (more on this below).

Can this be changed? You bet: The Business Higher Education Forum reports that moving from a teacher in the 50th percentile to one in the 85th percentile increases a student’s performance on standardized mathematics tests by 7 percent in a given year.

Talk about compounding annual returns — imagine what could be done with this level of improvement propagating through the system.

3. Tax Incentives for Small Companies

A November 2009 report by the Ewing Marion Kauffman Foundation shows that as recently as 2007, companies less than 5 years old created nearly two-thirds of net new jobs. Kevin A. Hassett and Glenn Hubbard wrote on September 10 of the beneficial effects of the proposed tax cuts. It’s far better to offer the carrot of tax incentives than the stick of tariffs.

4. Retain Foreign Talent

The movement of labor and capital that sent manufacturing overseas has also brought innovators to us. Unfortunately, regulation like the recent increase in visa fees drives away the very people who can help transform the economy.

The proposed Startup Visa Act of 2010 attempts to mitigate this by offering visas to immigrants able to raise $250,000 in capital, but many of the companies that create jobs are not “ready for prime time” in the finance arena. Are the U.S. really retaining its talent?

The risk is not that large-scale manufacturing will leave the United States; that train left the station 20 years ago. This is the last chance to stop the innovation train from departing as well.