krebscycle

During the worst of the financial crisis when the Obama administration was rescuing the auto companies and the UAW in the teeth of bitter Republican opposition, Robert Reich, as usual, was there to offer an assist to the Republicans: “ The answer is not to bail out GM. It is to smooth the way to a new, post-manufacturing economy.”. Like many paper wizards, he has no idea how the economy works or why manufacturing is the difference between prosperity and Detroit.

In Reich’s MBA world, there are decision makers, what Reich calls “symbolic-analysts”, and drudges.

A growing percent of every consumer dollar goes to people who analyze, manipulate, innovate and create. These people are responsible for research and development, design and engineering. Or for high-level sales, marketing and advertising. They’re composers, writers and producers. They’re lawyers, journalists, doctors and management consultants. I call this “symbolic analytic” work because most of it has to do with analyzing, manipulating and communicating through numbers, shapes, words, ideas. http://www.guernicamag.com/blog/1058/robert_reich_the_future_of_man/

That’s why we lead the world in powerpoint presentations. This is in contrast to the dumb stuff blue collar workers did in the old economy, according to Reich.

We should stop pining after the days when millions of Americans stood along assembly lines and continuously bolted, fit, soldered or clamped what went by. Those days are over.

Because machinists, carpenters, plumbers, and so on, in the MBA world do not “innovate and create” they just bolt, fit, solder, or clamp. Only “management consultants” and “lawyers” and such innovate and create. And a growing percentage of every consumer dollar goes to these people in high level sales and marketing and other symbolic analysis jobs because .. well because they add more value. When workers in China go on strike and their wages shoot up, I wonder what Reich thinks could have made that happen? Did their symbolic analysis abilities suddenly increase? It’s as if the entire machinery of global trade and international enforcement of intellectual property rights was just part of the natural world and not a result of political and military power. As if the costs of shipping were low axiomatically. Reich doesn’t see much depth to manufacturing itself as he says of the symbolic analysts:

Whatever they need to learn about manufacturing can usually be discovered online.

And certainly Reich does not understand how manufacturing fits into the rest of the economy

When a factory closes, it creates a vortex that has far-reaching consequences. The Milken Institute estimates that every computer-manufacturing job in California creates 15 jobs outside the factory. Close a manufacturing plant, and a supply chain of producers disappears with it. Dozens of companies get hurt: those supplying computer-aided design and business software; automation and robotics equipment, packaging, office equipment and supplies; telecommunications services; energy and water utilities; research and development, marketing and sales support; and building and equipment maintenance and janitorial services. The burden spreads to local restaurants, cultural establishments, shopping outlets, and then to the tax base that supports police, firemen, schoolteachers, and libraries. http://www.prospect.org/cs/articles?article=the_plight_of_american_manufacturing

Here’s what’s actually happening.

For American manufacturers, the bad years didn’t begin with the banking crisis of 2008. Indeed, the U.S. manufacturing sector never emerged from the 2001 recession, which coincided with China’s entry into the World Trade Organization. Since 2001, the country has lost 42,400 factories, including 36 percent of factories that employ more than 1,000 workers (which declined from 1,479 to 947), and 38 percent of factories that employ between 500 and 999 employees (from 3,198 to 1,972). An additional 90,000 manufacturing companies are now at risk of going out of business. Long before the banking collapse of 2008, such important U.S. industries as machine tools, consumer electronics, auto parts, appliances, furniture, telecommunications equipment, and many others that had once dominated the global marketplace suffered their own economic collapse. Manufacturing employment dropped to 11.7 million in October 2009, a loss of 5.5 million or 32 percent of all manufacturing jobs since October 2000. The last time fewer than 12 million people worked in the manufacturing sector was in 1941. In October 2009, more people were officially unemployed (15.7 million) than were working in manufacturing. http://www.prospect.org/cs/articles?article=the_plight_of_american_manufacturing

Here’s Reich’s explanation.

What happened to manufacturing? In two words, higher productivity. As productivity rises, employment falls because fewer people are needed. In this, manufacturing is following the same trend as agriculture. A century ago, almost 30% of adult Americans worked on a farm. Nowadays, fewer than 5% do. That doesn’t mean the U.S. failed at agriculture. Quite the opposite. American agriculture is a huge success story. America can generate far larger crops than a century ago with far fewer people. New technologies, more efficient machines, new methods of fertilizing, better systems of crop rotation, and efficiencies of large scale have all made farming much more productive. Manufacturing is analogous. In America and elsewhere around the world, it’s a success. Since 1995, even as manufacturing employment has dropped around the world, global industrial output has risen more than 30%.

In contrast, this is what the CEO of General Electric said in 2008.

I believe that a popular, thirty-year notion that the U.S. can evolve from being a technology and manufacturing leader to a service leader is just wrong. In the end, this philosophy transformed the financial services industry from one that supported commerce to a complex trading market that operated outside the economy. Real engineering was traded for financial engineering. In the end, our businesses, our government, and many local leaders lost sight of what makes a nation great: a passion for innovation. http://www.ge.com/ar2008/letter_5.html

Reich’s theory was embraced recently by Boeing. The top “symbolic analysts” moved to Chicago to innovate and so on in 2001, and they left some engineering teams and assemblers in Washington State, but they wanted to recast the company

Boeing announced on March 21 a series of changes to its corporate structure that included plans for a leaner headquarters staff located separately from its existing businesses. The headquarters staff, which is expected to number fewer than 500 people, will focus on developing global growth opportunities and creating shareholder value http://www.spaceandtech.com/digest/sd2001-19/sd2001-19-001.shtml

They didn’t have to sit next to the frankly demoralizing factory

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Bob Hess recalls Boeing’s years in the bushes of Washington state, when the company’s headquarters was located next to one of its assembly plants on a street at King County Airport named—you couldn’t make this up—East Marginal Way South. “You couldn’t have told Boeing a number of years ago,” Hess says, “that where they were located didn’t impact their ability to attract the talent they needed to run a headquarters operations of a global company.”

That blockbuster talent freed from proximity to that drab factory could create shareholder value to their heart’s content – as you can see from the stock chart with the green line showing values after shedding that grubby factory location and the red line showing the company struggling under the weight of a highly skilled unionized engineering and skilled labor force in the bad old days. This level of success was only possible due to some out-of-the-box corporate thinking on value enhancing strategies – the big picture that only symbolic thinkers can do.

When Boeing wanted to streamline the amount of time it took to build its new 787 Dreamliner, it had to totally rethink how it built planes. In the past, Boeing relied on dozens of suppliers to provide it with the parts and systems for the planes, and then Boeing would assemble everything itself. It took a long time. But Boeing came up with a plan where its suppliers would design and build major sections of the planes, and then the suppliers would ship the sections to Boeing for final assembly and testing. Boeing’s plan was to cut the construction time down to a three-day period. To do that, it had to improve how it collaborated with key suppliers all over the world. http://www.bnet.com/blog/intercom/how-boeing-revamped-its-supply-chain-to-build-its-787/141

By getting rid of the low value stuff that Reich mentions Boeing was able to “move up the value chain” (without corporate-speak and weighed down with unions and the dead weight of factory workers, how did companies function in the old days?)

Moving up the “value chain”-and taking selected suppliers along for the ride “Offloading.” That’s what The Boeing Company (Chicago) calls it. Whatever the terminology-we’ll go with outsourcing-it’s a big trend in the aerospace industry. Boeing and other OEMs are not only farming out a big chunk of machined and sheetmetal parts production, but also expecting vendors to supply large aircraft subassemblies and even design expertise.

Things worked brilliantly

A brief history of the 787 project: April 2004 – Boeing’s board approves the project and all Nippon Airways order 50 planes. Deliveries are set for summer of 2008. June 2006 – Boeing announces that bubbles are found in the composites on a prototype section. April 2007 – Sales exceed 500 planes and Boeing looks to accelerate production. June 2007 – They find that the cockpit section is out of line with the fuselage. June 2007 – An industry-wide shortage of fasteners causes production problems. October 2007 – Boeing delays first deliveries by 6 months. October 2007 – Michael Bair, GM of the 787 program, is replaced, saying suppliers of major components of the 787 have fallen short of Boeing’s expectations. December 2007 – CEO Scott Carson says there will be no further delays in the 787 program. Then a 3-month delay is announced in April. September 2008 – Installation of improper fasteners and a union strike pushes deliveries into first quarter of 2010. June 2009 – Designers find that reinforcements are needed where the wing joins the fuselage, which will further delay the first deliveries. August 2009 – Boeing discovers microscopic wrinkles in the fuselage skin and has to install a composite patch over the area. August 2009 – Boeing orders Italian supplier, Alenia Aeronautica, to halt production of fuselage sections. August 2009 – Boeing announces a $2.5 billion charge to third quarter earnings and pushes deliveries to the 4th quarter of 2010 – 2 years later than the original schedule. […] Control – The old way of manufacturing the parts with U.S. vendors gave Boeing a lot of control over the supply chain with many controllable alternatives. In the new outsourced model, natural disaster, political unrest, and financial problems on Tier 3 suppliers can prevent a fuselage section from being delivered – which stops assembly. This model turns over most of the control of production to foreign suppliers. So far the only solution that Boeing has used as an alternative is to buy the supplier. http://www.manufacturing.net/News/2010/07/Featured-Articles-The-Boeing-Supply-Chain-Model/

And now they’ve had to buy plants that duplicate the work that they used to do in house because …

Boeing (BA), frustrated with repeated delays on its 787 Dreamliner jet, dropped the other shoe on July 7 and said it would spend $580 million to purchase a Vought Aircraft Industries plant in South Carolina. The big planemaker just last year bought the outfit’s stake in a joint venture with an Italian company, Alenia Aeronautica, that helps in construction of the 787, which was unveiled to the public two years ago but has suffered an embarrassing series of manufacturing missteps since then. The move helps seal Boeing’s control over the delay-hampered assembly process for the mostly carbon fiber plane. Boeing executives recently announced a sixth and so far indefinite delay in the plane’s first flight. The company says the Vought acquisition in South Carolina should speed up production efforts. “Integrating this facility and its talented employees into Boeing will strengthen the 787 program by enabling us to accelerate productive and efficiency improvements as we move toward production ramp-up,” Boeing Commercial Airplanes CEO Scott Carson said in a company statement. http://www.businessweek.com/bwdaily/dnflash/content/jul2009/db2009077_590474.htm

People who actually understand the manufacturing process know that

The research-to-manufacturing process is not sequential in a single direction, but rather results from and R&D-manufacturing “ecosystem”…where design, product development, and process evolution all benefit from proximity to manufacturing, so that new ideas can be tested and discussed with those working on the ground…locations that possess both strong R&D centers and manufacturing capabilities have a competitive edge http://www.whitehouse.gov/sites/default/files/microsites/ostp/pcast-04-itreport.pdf

As for those symbol-analysts:

The continuing shift of manufacturing to lower-cost regions and especially to China is beginning to pull high-end design and R&D capabilities out of the United http://www.prospect.org/cs/articles?article=the_plight_of_american_manufacturing

Of course, from Reich we know that they’ll always need American lawyers, advertising experts (to craft messages to sell to the invaluable marketplace of unemployed, broke people, I suppose), and management consultants (do you think mere Chinese can come up with expressions like “move up the value chain” ?). Andy Groves, one of the founders of Intel explains how this ecosystem and proximity requirement works by example.

It has taken years and many false starts, but finally we are about to witness mass-produced electric cars and trucks. They all rely on lithium-ion batteries. What microprocessors are to computing, batteries are to electric vehicles. Unlike with microprocessors, the U.S. share of lithium-ion battery production is tiny (figure-E). That’s a problem. A new industry needs an effective ecosystem in which technology knowhow accumulates, experience builds on experience, and close relationships develop between supplier and customer. The U.S. lost its lead in batteries 30 years ago when it stopped making consumer electronics devices. Whoever made batteries then gained the exposure and relationships needed to learn to supply batteries for the more demanding laptop PC market, and after that, for the even more demanding automobile market. U.S. companies did not participate in the first phase and consequently were not in the running for all that followed. I doubt they will ever catch up. http://www.businessweek.com/magazine/content/10_28/b4186048358596_page_3.htm

( this is why I think the Obama administration investment in battery factories is more important and interesting than financial regulation) Another good example is in the electronics world. It’s still possible in some US centers of electronics to come up with an idea, find a contract house that specializes quick design turn around, take the design to a company that does short production runs, test the product, iterate, and then go to mass production. But it won’t be possible for long.

Without a printed circuit board (PCB) industry, for instance, a country cannot expect to have an industrial foundation for high-tech innovation. But the domestic PCB industry shrunk from $11 billion in 2000 to $4 billion in 2008, a period during which the industry was growing globally. U.S. PCB manufacturers accounted for only 8 percent of global production in 2008, down from 26 percent in 2000. China’s share of the global PCB market in 2008 was 31.4 percent or $16 billion, four times larger than the U.S. industry. Asia now controls 84 percent of the global production of printed circuit boards, which are used in tens of thousands of different products. Today, the U.S. PCB industry is in free fall. For the first nine months of the year, U.S. shipments were down by 25.5 percent over the same period in 2008. “The industry has been crippled beyond repair,” says Doug Bartlett, chairman of Bartlett Manufacturing, the oldest PCB company in the United States until it went out of business in June 2009. http://www.prospect.org/cs/articles?article=the_plight_of_american_manufacturing

Back to Reich – and it’s worth considering the complacency that underlies this passage.

Whatever they need to learn about manufacturing can usually be discovered online.

The people who run China don’t have the same theory. In fact, they are importing the knowledge for another leap of manufacturing productivity.

Mr. Salvendy’s achievements at Tsinghua suggest that China will increasingly realize its productivity potential. His department has cycled more than 1,500 Chinese managers through its executive training programs, and thousands more are being minted by the 200 industrial engineering programs that have sprung up around China in imitation of Tsinghua. Every year, more of Mr. Salvendy’s disciples fan out across the country, spreading the lessons of lean manufacturing, quality circles and supply-chain management–techniques that have powered industrial success since the time of Henry Ford. Sooner or later, world leaders will have to wake up to this revolution, because its impact on flows of goods and capital is bound to be global. Mr. Salvendy and his followers are set to transform a country that has more than 100 million factory workers–double the total number employed in manufacturing in the G7 club of rich economies combined. http://www.cfr.org/publication/23351/chinas_new_guru_of_productivity.html

Professor Salvendy was lured to work in China from the USA. Meanwhile, experts like Robert Reich keep explaining what the Obama administration is getting wrong and telling us to think up clever ideas for slide transition effects in the Power Point deck.