How the United States can win back its manufacturing mojo

Donald Trump speaking at CPAC 2011 in Washington, D.C. Gage Skidmore from Peoria, AZ, United States of America (2011)

This article is brought to you based on the strategic cooperation of The European Sting with the World Economic Forum.

Author: Sadasivan Shankar, Associate, Harvard, Harvard School of Engineering and Applied Sciences

Not all inventions end up being useful to humanity. Ideas need to be translated into reality before the world recognizes and benefits from innovation. The US, historically, has excelled at this – with countless examples of successful translation of ideas to practice. Carnegie’s steel-processing using rolling mills; Bell Labs in telephones and communications; George Mitchell’s horizontal drilling technology applied to fracking; the combination of microprocessor and software leading to the ubiquity of the personal computer.

But America is starting to lag in translating ideas to practice and in scaling them up into widespread adoption by consumers. This is despite the predominance of US education institutions (the US makes up the majority of the top 25 world universities) producing a large portion of current cutting-edge research.

Why are native companies under-represented in innovations/manufacturing in the US? Why is research not translated into manufacturing plants? Perhaps because we have forgotten that the translation process is equally important as invention itself. Several problems are currently hindering us:

1. Insufficient basic research for enabling practical applications

2. Prioritizing of short-term profitability over investment for long-term research and development (R&D)

3. Flattening or reduction in government-sponsored support for research

4. Segregation of manufacturing and the innovation ecosystem from R&D

Outside the software, semiconductor, computer and internet industries (SSCI), American preeminence in research does not seem to translate to the industrial sector. Since 2008, the total number of patents filed by US-based companies has fallen below 50% of all patents filed in the country. Meanwhile, the number of manufacturing jobs in the US has decreased from 17.9 million to 12.3 million. Although some of these job losses can be attributed to automation and increases in productivity, this trend of fewer people making new things in the US is unmistakable.

While the total profits (after tax) reported by US companies have increased by 7.1 times from about $1 trillion billion to $7.1 trillion from 1960 to 2012, the US R&D budget from both federal government and businesses has increased by just a multiple of 2.9, from $152 billion to $436 billion. What’s more, the federal contribution to R&D has fallen from 41% to 29%.

Since 2006, US corporations have been displaced from the top of R&D spending, especially outside SSCI. There have been a few recent improvements, due to the lower cost of energy in the US and tentative government efforts. But this reduction in our future R&D potential comes at the same time as accelerated global competition. Out of 94 semiconductor manufacturing plants, only 17 are now in US. In 2016, with the announcing of the new indigenously made Tianhe-2, China now holds the top two world rankings in supercomputers.

High-tech industries do not operate in isolation, and need research and manufacturing ecosystems in materials, chemicals, process equipment, hardware, software etc. The history of the smartphone perfectly illustrates the complex pathway from invention to product. It needed numerous scientific and engineering breakthroughs at many levels – such as the microprocessor, lithium ion batteries, the touchscreen – before it was introduced to market in 2007. The key concepts were developed across dozens of cities and institutions spread across the US and Europe. Basic research played a critical role, but applied engineering was also essential. There were contributions from government and non-government agencies, universities and non-university entities. Corporations also played a pivotal role, but many of the breakthroughs did not have immediate business needs. All of these bodies contributed concerted efforts over many years. They were dependent on research, inventions, engineering, and most importantly the ecosystems that allowed these things to interact with each other.

How can we begin to foster these intricate conditions again in the US? In 2012, I had discussions with Andy Grove, former CEO of Intel, and Robert Burgelman, Professor of Strategy in Stanford University, about this conundrum. Their premise was that R&D does not unilaterally drive innovation. Manufacturing is an essential component of making R&D effective and efficient. They also maintained that “scaling up” needs multiple creative ideas to harmonize in design, engineering, automation, because products need to be manufactured cost-effectively. As Dr Grove pointed out, Intel successfully demonstrated this thinking in bringing newer technologies to scale over the past four decades. R&D and manufacturing should drive each other in synergy. The physical proximity of invention and manufacturing is critical for sustaining a continuous feedback process to sustain innovation.

In the short term, research is often not immediately profitable. Corporate and federal budgets must invest to take risks today that may never benefit the bottom line, but may pay dividends in future. An innovative ecosystem needs all its components to thrive and interact: we need science and engineering, universities and industries, R&D and manufacturing, start-ups and scale-ups, laboratories and assembly lines. Even in the electronics industry, it has become increasingly clear with the advent of complex design that close collaborations with advanced manufacturing are necessary. Meanwhile in Asia, Original Design Manufacturers have absorbed manufacturing of advanced designs of multiple US-based and western companies. By doing so, they capture and apply the feedback to the learning process. This provides them with the opportunity to eventually develop their own branded products that compete with the originals. This is obvious from the continuing growth of Taiwan and China from geographical outsourcing locations for low-cost manufacturing into research powerhouses. In order to be cost-effective and coupled to scale, corporations benefit from having their manufacturing close to these innovation centers, rather than low-cost outsourcing operations – even if it means lower profits in the short term.

In order for the US or any nation to be more effective at realizing its innovations, all parts of the ecosystem must be stimulated and sustained by coordinated regulations, investments, taxes and entrepreneurship: back to the future for the US. A few steps on the part of the government could facilitate this:

1. Sharply increasing government-supported research to US universities/national laboratories. There are several estimates, but we propose at least doubling academic research across the board in five to 10 years. Expanded funding will continue to nucleate ideas and collaborations among researchers for possible future innovations – and help foster a skilled workforce.

2. Use policies to subsidize the translation process rather than merely R&D: ie a tax credit for translating R&D to sustainable manufacturing in the US. This would incentivize industry to focus on scaling-up. In addition, policies to encourage the workforce’s continuing education will help in retraining current employees to keep up with the automation and digital-technology revolutions

3. Subsidize R&D-to-manufacture-bridging initiatives led by entrepreneurs within and outside corporations.

The advent of industrial revolution, electrification and the subsequent growth of world economies saw the growth of such interwoven ecosystems. This led to local industries thriving in communities and cities. Examples of this include Manchester in the UK, Rochester in New York, Detroit in Michigan and Silicon Valley in California. The interdependencies led to a circular type of economy, where all components of the ecosystem fed long-term growth in inventions, translation to manufacturing, and wider use: a positive feedback effect.

We need organic initiatives from top management in the US, avoiding the temptations of short-term profits in favour of a deeper understanding of the translation process and the innovation ecosystem that enables it. With our collective efforts across these all-important areas, we will continue to demonstrate US leadership not only in our universities, but also in our ability to bring innovation to the world.