Sunday, June 26, 2011

Manufacturing in the US: What Can We Learn from Germany?

Make It In America: The Case for Re-Inventing the Economy

I came across an article by Louis Uchitelle in the latest issue of The American Prospect: Once Made in the USA. The point of the article was to highlight the opinions of Andrew N. Liveris. Liveris is the Chairman of the Dow Chemical Company and he has written a book titled Make It in America: The Case for Reinventing the Economy. From his title it is clear that Liveris is in favor of a larger manufacturing role in the US economy. According to Uchitelle:

“....he argues that the United States is at a tipping point — if manufacturing does not make a comeback soon, the opportunity to do so will slip away, and the nation will inevitably lose its status as an economic powerhouse.”

Liveris argues that the conventional wisdom that says let the simpler, more labor-intensive production go overseas while we concentrate on the high end production has a logical flaw. He contends that production and innovation go together and by eliminating our participation in certain areas we may be passing up opportunities to enhance our technology base. Presumably this is the basis for claiming we are approaching a tipping point.

Liveris faults the government for not having manufacturing-friendly policies. He is in favor of a government investment policy that would “pick winners” and support them. In other words he wants us to treat our industries more like the Chinese treat theirs. One has to assume that Mr. Liveris votes Democratic and would like to see taxes raised so that his desired efforts can be supported.

Within a few days of reading the The American Prospect article, an announcement was made by the Obama administration that they are calling for a “renaissance in American manufacturing.” This initiative will be backed $500 million. The focus seems to be a partnership between Universities and manufacturing companies.

“The administration's plan includes $70 million for a robotics initiative. It also is steering $300 million toward national security industries and $100 million for research and training to more quickly develop advanced materials at lower costs. Some of the $500 million would come from existing allocations to government agencies, but other money would require approval by Congress, where Republicans are more focused on cutting spending than approving new government initiatives.”

“The initiative Obama announced Friday is the brainchild of the President's Council of Advisors on Science and Technology. In a report issued Friday, the council warned that U.S. leadership in manufacturing is at risk. It said the United States has been losing research and development associated with manufacturing to other countries. Most importantly, the council noted, the United States is losing the manufacturing competition for products that were invented in the U.S., including laptop computers, flat panel displays and lithium ion batteries.”

With delightful timing, Obama chose two people to take charge of the effort.

“Leading the effort will be Andrew Liveris, president and CEO of the Dow Chemical Co., and Susan Hockfield, president of the Massachusetts Institute of Technology.”

This move belongs in the annals of “watch what you wish for.” One can only hope that Mr. Liveris has a bite commensurate with his bark.

There was also a very relevant article in Foreign Affairs by Steven Rattner: The Secrets of Germany’s Success: What Europe’s Manufacturing Powerhouse Can Teach America.

Rattner points to enlightened collaboration between government, industry, and labor, and wise decisions by industry on where to focus effort. Germany’s manufacturing base was helped by legislation that traded the prospect of limited wages for a promise of greater job security. For example, when business decreases a company can put workers on part time and the government will provide compensation to make up the difference in the workers’ income. This seems much more productive than “unemployment compensation.”

“Of at least equal importance was the role of the private sector, especially the innumerable small and medium-sized manufacturing firms known as the Mittelstand. These companies combine the advantages of stable family ownership with a focus on producing sophisticated goods that emerging markets cannot easily replicate. As Germans like to say, ‘We make the thing that goes inside the thing that goes inside the thing.’ Although family-owned businesses can be a mixed blessing, of course -- they are subject to familial strife and succession problems -- the overall success of these companies is widely acknowledged. The Mittelstand now employ millions of people and seem to put a higher priority on employing Germans than do publicly traded multinational giants. Many Germans believe that since the Mittelstand are privately owned, they focus more on long-term growth than short-term profits.”

“A significant portion of Germany's industrial success can be traced to two manufacturing sectors. The first, heavily dominated by the Mittelstand, includes companies that build the sophisticated machine tools that emerging markets need as they develop their own manufacturing capabilities. This might sound like selling arms to one's adversary, but it has worked well for Germany. The second sector includes Germany's marquee auto brands -- BMW, Daimler, Porsche, Audi, and the like. Automakers are, of course, central to the German economy, composing about 20 percent of GDP. In particular, high-end cars have become hot commodities for affluent consumers in booming new markets, such as China, which alone accounts for 25 percent of BMW's global profits.”

If we are to practice what we have learned from Germany we should build up a broad industrial base of small, privately-owned firms that make clever things that no one else makes, and are run by patriots. That seems simple enough. Then we should create a huge market for US made luxury and performance cars and then sell these models across the world. That one might be a bit more difficult.

Rattner points out that Germany has some advantages that the US cannot even attempt to duplicate.

“Meanwhile, the introduction of the euro in 1999 quietly brought Germany another advantage: it fused the country to others whose competitiveness, as measured by the cost of each unit of labor, had stagnated, particularly Greece, Ireland, Italy, Portugal, and Spain, but also France. Meanwhile, since 1999, Germany's competitiveness has increased by nearly 20 percent. Germany wins more business worldwide when it competes against other eurozone countries to sell its exports, and it even outperforms them in their home markets. About 80 percent of Germany's trade surplus comes from its trade with the rest of the European Union.”

“The eurozone's weak economic performance and the simmering sovereign debt crises in several peripheral eurozone countries have kept the value of the euro well below what the deutsche mark would be worth today if it still existed. (According to some estimates, if Germany abandoned the euro, its currency would immediately appreciate by 30 to 40 percent.) This gives Germany an enormous competitive trade advantage over countries with their own, more expensive currencies, such as the United Kingdom and the United States. The economic stimulus from the undervaluation of the euro has been so powerful that the biggest economic worry in Germany today is that the economy will overheat and trigger inflation.”

A small company in Germany can become an exporter by loading product on a truck and driving down the road to the next country? And Germany’s currency is as devalued as that of China?

As interesting as Rattner’s article was, I am not sure that we have learned anything about Germany that will help us. Germany has sought for effective social policies for generations. We seem intent on dismembering whatever social policies we possess. Germany seems to have also had a strong industrial base for generations, and it has used it well as times have changed. Its political and geographic locations in the world provide it with unique advantages. As for having enlightened policies, that is always a good idea. Unfortunately, enlightened policies usually require enlightened legislators to create them. They seem to be in short supply at the moment.

Let us hope that Mr. Liveris and his collaborators rise to the occasion and deliver us a ”renaissance” in manufacturing. If they do it will be because they took advantage of unique opportunities or unique capabilities that we possessed.

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