Made in (Not America)

Your iPhone, Clothes, and other Goods Made in Asia Were
Made, In Part, By 13 Year-Olds Working 16hr A Day for $0.70/hr
Modern Sweatshops Killing First World Economies

Outsourcing The US Economy

Exploring why so many things that we buy in the USA are made somewhere else. Lets take a look at this issue of Made in (Not America) and the serious negative long term impact this is having on white collar middle class jobs in America.... 

A Boeing 777 being assembled in America :) 

What happened to Made in America? 

When I see that little golden sticker (Made in China) stuck to the bottom or Made in China printed on the box of retail goods and food items it upsets me. I know deep down there is a complex history of outsourcing that is far more intricate than the "labor costs are lower in China, Vietnam, ect" "comparative/absolute production advantage" arguments.

Classical economics do not accurately describe the kind of economic phenomenon that I observe as a person in the real world. I studied economics in college, macro and micro, and came away thinking how the scope of this material was far too limited. Something was broken in the system of information that informed my studies on economics.

iPhone Manufacturing in China at Foxconn : What you do not
see here is the Engineering and Science Jobs also Lost to China

A deep feeling of conflict exists within my heart because I am now  fully aware that the things I have been buying (Made in Not America) are produced in toxic sweatshop conditions with poverty pay. I just watched a film called "The Corporation" and read dozens of online articles and research papers about unfair trade and sweat shops in Asia. The most disturbing information that I found was that for every 70 blue collar production jobs we have lost to developing countries in Asia, we have also lost an engineering, legal, scientific, or other high paying middle class white collar job. Production of the iPhone, iPods, iPads requires a workforce of over 1 million people and more than 100,000 engineering, technical, legal, business management and other white collar jobs. China has a rapidly growing middle class as a result, and poor people from rural parts of China are flooding into big cities to take production jobs in modern sweatshops. Continue reading if you are interested in why we have lost huge portions of our economy and whole sectors of manufacturing to China and other foreign "cheaper labor" countries....

Why Amazon Can't Make A Kindle In the USA

By Steve Denning, Forbes Contributor

RADICAL MANAGEMENT: Rethinking leadership and innovation

I recently noted how conventional cost accounting inexorably focuses executives’ attention on increasing short-term profits by cutting costs. The same thing happens in economics. What economists miss is what is happening behind the numbers of dollars in the real economy of people.

How Whole Industries Disappear

Take the story of Dell Computer [DELL] and its Taiwanese electronics manufacturer.

ASUSTeK started out making the simple circuit boards within a Dell computer. Then ASUSTeK came to Dell with an interesting value proposition: “We’ve been doing a good job making these little boards. Why don’t you let us make the motherboard for you? Circuit manufacturing isn’t your core competence anyway and we could do it for 20% less.”

Dell accepted the proposal because from a perspective of making money, it made sense: Dell’s revenues were unaffected and its profits improved significantly. On successive occasions, ASUSTeK came back and took over the motherboard, the assembly of the computer, the management of the supply chain and the design of the computer. In each case Dell accepted the proposal because from a perspective of making money, it made sense: Dell’s revenues were unaffected and its profits improved significantly. However, the next time ASUSTeK came back, it wasn’t to talk to Dell. It was to talk to Best Buy and other retailers to tell them that they could offer them their own brand or any brand PC for 20% lower cost. As The Innovator’s Prescription concludes:

Bingo. One company gone, another has taken its place. There’s no stupidity in the story. The managers in both companies did exactly what business school professors and the best management consultants would tell them to do—improve profitability by focus on on those activities that are profitable and by getting out of activities that are less profitable.

Amazon can't make the Kindle in America

Decades of outsourcing manufacturing have left U.S. industry without the means to invent the next generation of high-tech products that are key to rebuilding its economy, as noted by Gary Pisano and Willy Shih in a classic article, “Restoring American Competitiveness” (Harvard Business Review, July-August 2009)

The U.S. has lost or is on the verge of losing its ability to develop and manufacture a slew of high-tech products. Amazon’s Kindle 2 couldn’t be made in the U.S., even if Amazon wanted to:

• The flex circuit connectors are made in China because the US supplier base migrated to Asia.
• The electrophoretic display is made in Taiwan because the expertise developed from producting flat-panel LCDs migrated to Asia with semiconductor manufacturing.
• The highly polished injection-molded case is made in China because the U.S. supplier base eroded as the manufacture of toys, consumer electronics and computers migrated to China.
• The wireless card is made in South Korea because that country became a center for making mobile phone components and handsets.
• The controller board is made in China because U.S. companies long ago transferred manufacture of printed circuit boards to Asia.
• The Lithium polymer battery is made in China because battery development and manufacturing migrated to China along with the development and manufacture of consumer electronics and notebook computers.

An exception is Apple [AAPL], which “has been able to preserve a first-rate design capability in the States so far by remaining deeply involved in the selection of components, in industrial design, in software development, and in the articulation of the concept of its products and how they address users’ needs.”

A chain reaction of decline

Pisano and Shih continue:

“So the decline of manufacturing in a region sets off a chain reaction. Once manufacturing is outsourced, process-engineering expertise can’t be maintained, since it depends on daily interactions with manufacturing. Without process-engineering capabilities, companies find it increasingly difficult to conduct advanced research on next-generation process technologies. Without the ability to develop such new processes, they find they can no longer develop new products. In the long term, then, an economy that lacks an infrastructure for advanced process engineering and manufacturing will lose its ability to innovate.”

The lithium battery for GM’s [GM] Chevy Volt is being manufactured in South Korea. Making it in the U.S. wasn’t feasible: rechargeable battery manufacturing left the US long ago.

Some efforts are being made to resurrect rechargeable battery manufacture in the U.S., such as the GE-backed [GE] A123Systems, but it’s difficult to go it alone when much of the expertise is now in Asia.

In the same way that cost accounting and short-term corporate profits don’t reflect the true health of corporations, the economists’ reckoning of the impact of outsourcing production overseas misses the point. Americans are left with shipping the goods, selling the goods, marketing the goods. But the country is no longer to compete in the key task of actually making the goods.

Pisano and Shih have a frighteningly long list of industries of industries that are “already lost” to the USA:

“Fabless chips”; compact fluorescent lighting; LCDs for monitors, TVs and handheld devices like mobile phones; electrophoretic displays; lithium ion, lithium polymer and NiMH batteries; advanced rechargeable batteries for hybrid vehicles; crystalline and polycrystalline silicon solar cells, inverters and power semiconductors for solar panels; desktop, notebook and netbook PCs; low-end servers; hard-disk drives; consumer networking gear such as routers, access points, and home set-top boxes; advanced composite used in sporting goods and other consumer gear; advanced ceramics and integrated circuit packaging.

Their list of industries “at risk” is even longer and more worrisome.

What’s to be done?

With such a complex societal problem, it’s hard not to start from Albert Einstein’s insight: “The significant problems that we have cannot be solved at the same level of thinking with which we created them.” Many actors will have to play a role.

• Company leaders: Business leaders need to recommit themselves to continuous innovation and the values and practices that are necessary to accomplish that. i.e radical management. As Pisano and Shih write: “Whether you’re the US firm IBM [IBM] with a major research laboratory in Switzerland or the Swiss company Novartis [NYSE:NVS] operating in the biotech commons in the Boston area, sacrificing such a commons for short-term cost benefits is a risky proposition.”

• Accountants: Accountants need to get beyond the mental prison of cost accounting and embrace the thinking in throughput accounting that puts the emphasis on how companies can add new value, rather than just cutting costs.

• Management theorists and consultants: stop rearranging deck chairs on the Titanic of traditional management (e.g. by finding new and ingenious ways to cut costs) and start understanding and disseminating management theory that is fit for the 21^st Century.

• Investors: Investors need to realize that the companies of the future are those that practice continuous innovation as Apple [AAPL], Amazon [AMZN] andSalesforce [CRM], as compared to companies practicing traditional management, such Wal-Mart [WMT], Cisco [CSCO] OR GE [GE]. Investors need to realize that short-term financial gains are ephemeral: the companies that will generate real value are those that do what is necessary to continuously innovate.

• Government: Government has a role to play in protecting and promoting fields of expertise or what Pisano and Shih call “the industrial commons”. Thus: “Government-sponsored endeavors that have made a huge difference in the past three decades include DARPA’s VLSI chip development program and Strategic Computing Initiative; the DOD’s and NASA’s support of supercomputers and of NSFNET (an important contributor to the Internet); and the DOD’s support of the Global Positioning System, to mention a handful.”
• Politicians: At a time of poisonously divisive political debate, in which candidates recite anti-government mantras and call for “getting government out of the way of the private sector”, it is time for serious politicians to step up and examine which parts of the private sector are fostering, and which parts are destroying, the economy of the country. They must stop embodying e.e. cummings definition of a politician as “an ass upon which everyone has sat except a man.”
• Economists: Economists need to realize that merely adding up the numbers is not enough. They have to look at the meaning behind the numbers. When they trumpet their finding that “Chinese goods are only 1% of the U.S. economy”, it’s akin to saying “we kept the house but gave away the keys.”

Does It Really Matter That Amazon Can't Manufacture A Kindle In the USA?

If another country is able to manufacture at a lower cost companies such as Dell are doing absolutely the right thing to outsource to a foreign manufacturer. I would rather that the US focus on high-value work such as design, marketing and sales.

This notion of attributing the shifting of industries to foreign countries to cost accounting, management short-sightedness is absolutely flawed.

Here is an optimistic view of where the US should be and IS focusing:  Marc Andreesen in the Wall Street Journal, Why Software Is Eating The World.

The view that the migration of mature manufacturing industries away from developed countries like the USA is just part of the healthy natural process of economic evolution that allows resources to be redeployed to new, higher potential businesses is certainly widespread.

It is however mistaken. As Pisano and Shih point out in their HBR article, “It ignores the fact that new cutting-edge high-tech products often depend in some critical way on the commons of a mature industry. Lose that commons, and you lose the opportunity to be the home of the hot new businesses of tomorrow.”

For instance: once silicon-processing and thin-film deposition capabilities are gone, it’s hard to become a major player in solar panels. (Thus President Obama can go on talking about solving the jobs problem in the USA by investing in solar, but what his advisors don’t always grasp is that most of the jobs created will not be in the USA.)

Is software the answer?

Marc Andreessen’s article in the Wall Street Journal, Why Software Is Eating The World, is certainly right to point out that software development is a huge part of both the present and the future economy.

The successful firms that I frequently cite, such as Apple [AAPL], Amazon [AMZN] and Salesforce.com [CRM], are certainly firms that have exploited software and the Internet as key parts of their success, while those that are struggling, like GE [GE] and Wal-Mart [WMT], have been slow to respond to the opportunities.

But software per se is not the solution. The firms that I cite were successful in seemingly mature sectors like music, books and mobile phones. Saying that “software is the solution” is like saying that the winning firms of the early 20^thCentury were successful because of electricity. The difference wasn’t electricity. The difference was more imaginative management that took advantage of the opportunities that electricity presented.

In any event, the idea that software development is immune from the experience of being undermined by disruptive innovation from low cost producers is a comforting but dangerous illusion, particularly in fields where software and hardware development is intimately intertwined.

Similarly, the idea that the USA has a perpetual lock on software development is as solid as the idea that Detroit owns auto manufacture or that the IBM [IBM] owns the PC. The reality is that “ASUSTeKs” of the software world are already beginning to emerge.

The issue is not hardware or software. The issue is how the firm is managed. Traditional management is killing both the firm and the economy. The statistics of the decline are well-documented.

There is another way. Unless we diagnose the problem right, we are not going to find it.

It is true that software firms are often better placed to practice radical management, because most of them have some experience with the subsets of radical management known as “Agile” and “Scrum”. But for all the successful examples of Agile being extended to the whole organization, like Salesforce.com, there are many more examples of traditional management effectively killing Agile and Scrum. Understanding the kind of management that is adapted to the needs of he economy of the early 21^st Century is key to the future.

Is cost accounting the problem?

One reader (“justin431”) wrote:

I think it’s a bit shortsighted to say the issue is cost accounting. Dell’s problem wasn’t that it’s method of attributing cost was flawed, it was that it’s business model wasn’t globally competitive anymore. If they didn’t take the cost savings from ASUS, competitors like Gateway, HP, Lenovo, etc., would have and Dell would have lost market share until they lowered cost or exited the marketplace.

This comment is in fact an illustration of the mental guide-rails generated by cost accounting. There is an automatic assumption that when faced with a market challenge the way to be more competitive is to cut costs. The possibility of adding more value is unconsciously eliminated.

It would be wrong though to say that cost accounting is the main cause of these problems. But it is a contributing factor. With decisions and thinking and values based on cost-accounting and short-term profits, Dell’s fate was sealed. If decisions and thinking and values had been based on how could Dell deliver more value to customers sooner, the outcome would not have been predetermined, as Apple [AAPL] has shown.

Did Dell do the right thing anyway?

Another reader (“dismayed”) wrote:

The real challenge, in my mind, is that outsourcing is rational. If Dell hadn’t done it, they would have lost market share sooner to competitors that did outsource. Yes, I suppose that Dell could have focused more on great hardware design to become the Apple of PC’s. But that could be copied by the companies that outsourced.

I agree that there was no easy course for Dell. (I never promised that radical management was easy.) It involves a wholly different mindset, and in effect different lens for understanding and interacting with the world. That lens will tend to suggest that short-term financial gain at the expense of core capabilities is a very dangerous way to go if the company wants to survive.

Amazon & Kindle Part 3: It's Not Just Manufacturing!

The main thrust of the article is the decline of management. Outsourcing and the loss of whole sectors of the economy are the consequence of anachronistic management in the Fortune 500 that is ill-adapted to the needs of the modern economy.

The decline is also occurring in software

Thus it’s not just manufacturing. it’s every sector of the economy, including software.

For instance, in an interesting video, Jeff Sutherland describes the pressure to outsource software development overseas when he was working at Patientkeeper, a Boston-based firm that delivers solutions that enable doctors to get information about their patients on mobile devices.

Our board wanted us to do outsourcing at Patientkeeper for years, As long as I wasn’t outside the company running around, I could prevent it. But then one time, I was teaching Scrum in Europe and our VP of Engineering was holding down the fort. He agreed to do it.

So we sent a couple of million dollars to India to a team doing software [in the traditional bureaucratic fashion]. But he kept careful track of what happened.

He found that at the end of a couple of years, that if Indian software developers [doing software in the traditional fashion] cost 10% of an American developer using Scrum, the firm would break even. But they didn’t. They cost 30% of what the American developers were costing. So he had sent $2 million dollars to India and he had to pay $6 million to get it back. In a venture-funded company, that’s a pretty dumb thing to do. When we showed the board that data, they agreed. It was really stupid. They stopped all outsourcing.

Distributed software development can be productive

This doesn’t mean that all outsourcing of software development is uneconomic. As Jeff goes on to explain in that video, a Dutch firm, Xebia, has successfully grown hyper-productive teams using Scrum that are geographically distributed.

But Xebia’s teams, some in The Netherlands and some in India, are set up in a counter-intuitive way: instead of having complete teams in each country, each team is split between the two places, with half its members in The Netherlands and half in India. The dispersed teams were at least as productive as colocated teams and sometimes more productive than the teams located wholly in the Netherlands.

Apparently splitting the teams geographically forced more conversations among the team about what the client really wanted. Being forced to explain to the developers in India each day what the client wanted helped everyone get clearer and so the teams as a whole tend to become more productive.

Xebia manages the process of dispersion carefully. It grooms the entire team in Netherlands first. It is only when the team is working well that they send half the team back to India. Achieving high productivity in such circumstances requires highly sophisticated team management.

Learning from Xebia: the centrality of the customer

We can learn several things from the Xebia example:

• The problem in outsourcing to India at Patientkeeper wasn’t that the team was Indian. The problem was that the team in India was being managed in a traditional hierarchical bureaucratic fashion, rather than using the radical management practices of Scrum.
• When the Indian team is also managed with the radical management practices of Scrum, as demonstrated by Xebia, it can also become highly productive.
• What can’t be easily outsourced is knowledge of the customer. The intimate understanding of what the customer wants and needs depends upon on-the-ground familiarity with the world of the customer. (For instance, when Toyota was designing the Lexus, it had to bring its engineers to the USA to live with the customers for extended periods so that they would have some understanding of what the customers might need or want in a car.)

Developed economies and their companies will always lose out to the emerging economies and their companies if the battle is fought on the basis oflowering cost (which is where traditional management generally tries to compete.)

Developed economies and their companies can only win in the long run if they compete on the basis of adding more value, through superior understanding and mastery of the world of the customer (which requires aradically different kind of management).

Is Apple a counter-example of outsourcing?

This finding helps us respond to the question raised by another reader (“tomh”) who wrote:

I am missing the point of Apple as an exemplar of Manufactured in the USA. Apple outsourced the manufacture of iPhones and iPads to Foxconn (China). How is this fundamentally different from the Dell model? To the extent that the “chain reaction of decline” cited by Pisano and Shih is correct, what is the basis of Apple’s exemption?

As Pisano and Shih point out in their classic HBR article, Apple [AAPL], “has been able to preserve a first-rate design capability in the States so far by remaining deeply involved in the selection of components, in industrial design, in software development, and in the articulation of the concept of its products and how they address users’ needs.” (emphasis added)

But beware! The difficulties of mastering design while outsourcing all production to other countries are not to be underestimated. As the Dell experience, among many others, shows, familiarity with the intricacies of production can be a key source of innovation in design, that enables the outsourcee to out-innovate, and ultimately destroy, the outsourcer.

It’s not just the USA

Another reader suggested that my article was “jingoistic” by suggesting that the USA needs to give more thought to the implications of shipping key industrial sectors to other countries.

However the article doesn’t just apply to the USA. I had similar conversations in Germany recently, and another reader noted the applicability of the arguments to the UK.

Still another reader (“barmonster”)  noted a similar phenomenon in Russia:

Here in Russia we had similar problem with electronics manufacturing for awhile. Dispute having all critical equipment made entirely on domestic production facilities (which are modern, but expensive to use compared to China), consumer electronics production shifted mostly to China.

What we are talking about is the process by which companies and economies—wherever they are located—advance or decline. In a globalized economy, the challenge for all—wherever they are located—is to keep on innovating.

The USA-a high cost producer–has begun falling behind because the prevalent approach to management in large companies—hierarchical bureaucracy—is badly anachronistic and is not adapted to the economic environment of the early 21^st Century, where delighting the customer through continuous innovation is needed to survive, let alone thrive.

We need different management

Hierarchical bureaucracy is constitutionally unable to innovate on a continuous basis. Despite what many professors in business schools and writers in management journals say, hierarchical bureaucracy cannot be “mended” to generate continuous innovation.

One hundred years of history have shown that hierarchical bureaucracy can’t be adjusted with a fix here or there. It has to be dumped. It has shown itself remarkably resistant to any and all attempts to adjust it. It bends a little but triumphantly springs back to its original shape, with ease.

What is needed is radically different management that has continuous innovation built into its DNA, with a different goal (delighting the customer), a different role for managers (enabling teams), a different of coordinating work (dynamic linking) and different values (continuous improvement and radical transparency) and different communications (horizontal conversations). A single fix is not enough: we need systemic change.

What about the worker?

This finding is relevant to the concern of another reader (“mamamich”) who wrote:

Where in this article are we addressing one of the key factors (IMHO) in many companies outsourcing or moving wholesale overseas: the American worker. I managed up to 75 employees for over 15 years and the lack of work ethic in our employee base is astonishing (and not getting better with the younger generation I might add).

The statistics about the role of workers are well documented and deeply shocking: only one in five workers is fully engaged in his or her work. It may well be true that some workers are inherently poorly motivated. But it is also true that decades of top-down command-and-control management in which the talents and the creativity of the workers are routinely ignored or crushed, management has to accept responsibility for creating work environments that inspire low motivation.

The evidence is that when management inspires workers to contribute their talents, through radically different management, most workers respond positively, as the experience of Intuit [INTU] or Salesforce.com [CRM] shows. Those workers who don’t respond will need to move on and take lower paying jobs elsewhere, if they can find them.

Will everything all work out anyway?

Some Panglossian readers still harbor the hope, despite what they see on a daily basis in the newspaper and the financial markets, that everything will work out anyway. As a result of cheaper and better products becoming available, people will be better off as a result of all this innovation and firms will appear to be making profits.

What they are overlooking is that if the short-term profits destroy the firm, as at Dell, and if the process of outsourcing involves the irreversible destruction of the huge areas of the economy, the end result will be not just the inevitable death of those firms but also the impoverishment and joblessness of consumers who will no longer be able to afford to buy even cheap products.

For instance: once silicon-processing and thin-film deposition capabilities is gone, it’s hard to become a major player in solar panels. President Obama can talk about investing in solar as a way of addressing USA’s critical problem of lack of jobs. What his economic advisors don’t always grasp is that, because of the traditional management practiced in this country, most of the jobs created in solar are unlikely to be in the USA.

Hence the type of management being practiced in the economy and its consequences become legitimate subjects of fundamental economic public policy. This however will require deeper and wider understanding than the economists of Federal Reserve Board of San Francisco have so far demonstrated.

Amazon & Kindle Part 4: Some Good News (Finally)!

Now for some good news!

Emily Maltby has a wonderful and timely article in this morning’s Wall Street Journal, Where the Action Is. She points out that seven cities across the USA are already fostering the kind of industrial commons that have been disappearing so fast. “Across the country,” she writes, “new industry hubs are drawing entrepreneurs and investors—and offering start-ups support and safety in a turbulent economy.”

Contrary to popular mythologies that “the earth is flat” or that ‘geography is dead,” some public and private sector leaders have grasped the modern implications of the ancient truth: location matters. Being close to one’s peers makes a huge difference. Forward-looking cities are nurturing entrepreneurs with funding, mentors and facilities so that they can flourish even in the teeth of a bleak economy.

1. Indianapolis: Life Sciences

Indianapolis—a quintessential Rust Belt city—is now the center of a statewide boom in the life-sciences business. It’s home to Eli Lilly & Co. [LLY] and WellPoint [WLP], the largest health plan company in the Blue Cross and Blue Shield Association. Indiana has added over 8,000 jobs in the life sciences in recent years. Over 800 medical-device companies, drug manufacturers and research labs are located there.

Big firms are leading the transformation, but they’re also helping smaller companies get started, by spinning off businesses and by investing in start-ups. Eli Lilly has contributed roughly $60 million to seed and venture funds that support entrepreneurs. Firms help each other, with employee referrals, work space suggestions and tax and financial ideas.

Maltby quotes Ron Ellis, CEO of Endocyte Inc., a 65-employee firm that’s testing a cancer treatment: “We have access to companies in Indiana where we can outsource functions like toxicology, analytics and clinical supply.”

2. San Antonio TX: Cyber-security

Jeffrey Logsdon moved his cyber-security firm from Phoenix to San Antonio five years ago and saw revenue double within three years of the move. Logsdon told Maltby: “I’d attribute a lot of our success to the location. I think the availability of cyber-security talent and the low cost of doing business here has helped us. And because there are so many different cyber-security companies, we have improved each other’s business through partnerships.”

There are now more than 80 information-technology and cyber-related businesses in San Antonio, and that figure is increasing rapidly, according to the city’s Chamber of Commerce.

“The quantity of people here allowed us to show more discernment in our hiring,” says Logsdon. “It was the best place for us to find qualified and certified cyber-security professionals.”

3.   Albany NY: Nanotechnology

Albany now has more than 4,000 people in the nanotechnology industry, centered on the College of Nanoscale Science and Engineering at the University at Albany. The school doubled in size during the recession to its current 800,000-square-foot complex. Dozens of nanotechnology companies have established a presence there to take advantage of research facilities and business incubators; since 2008, nearly 50 new start-ups have launched within its walls.

The development was part of a state plan to revive the economy in upstate New York. Financing came partly from the state and partly from corporations like IBM [IBM]. which now have offices there alongside entrepreneurs. Companies share the cost of equipment and labor—and start-ups get to associate themselves with big names.

“The prestige of being here and the credibility is amazing, which helps when you are talking with VCs and investors and large companies,” Primal Fernando, CEO of Resource Management Technology Systems Inc told Maltby. “And the equipment available here is not available elsewhere.”

“Venture capital has been growing to feed the innovation,” Alain Kaloyeros, a physics professor and senior vice president of the college told Maltby. “Suppliers and law firms are moving to the region to support this ecosystem, so it will be quite an exciting venture to watch.”

Maltby’s article goes on to describe similar developments in

• 4. Kansas City: Information Technology
• 5. Asheville, N.C.: Beer Brewing
• 6. Nashville, Tenn: Health Care
• 7. Ogden, Utah: Outdoor Sports

Maltby writes: “All in all, these clusters can be ideal spots for an entrepreneur in the field. Being there means getting access to a much wider range of suppliers, customers, employees and industry experts. What’s more, industry peers are often willing to support each other as they get off the ground, sharing recommendations about staffers, potential sales leads and attractive office space, or giving each other guidance and insight about the industry.”

Who would have thought? Being there actually matters. Duh!

Even more important is the recognition that the problems of manufacturing and economic growth in the USA are soluble. Decline and decay are not inevitable. A different future is possible if we do what is necessary to grasp it.

Taking advantage of location

Location matters, but then, so does management. These regions are flourishing because of the focus on innovation. If the firms in these locations ever succumb to the traditional management preoccupations of efficiency, cutting costs and the outsourcing death-spiral, these promising industrial hubs will die as quickly as they have been born.

Fortunately we now know what’s involved in the kind of radical managementthat fosters continuous innovation at firms like Apple [AAPL], Amazon[AMZN] and Salesforce [CRM] and Intuit [INTU], just as we now know why traditional management is failing at famous old firms like Wal-Mart [WMT] orGE [GE]. Knowing how to manage in the 21^st Century is not any more a question of finding out how. We know what to do. It’s an issue of having the courage to get on and do it: setting aside 20th Century management thinking and moving into the future.

Public sector leadership is also needed for these hubs to flourish. Politicians, instead of spending their energies on scoring political points, attacking the public sector as a matter of principle, and devising wedge issues to divide the electorate, need to spend more time doing what leaders in these cities have done: understanding the key role that the public sector has to play in nurturing the economic future of the country.

Their economic advisers at agencies like the Fed also need to spend more time understanding what’s behind the numbers and begin to comprehend the people-related issues that will determine the economic fate of the country.

Amazon/Kindle Part 5: Is Outsourcing A National Security Issue?

In a spirit of optimism, Tim Ferguson of Forbes offered, “As long as Taiwan remains a center of this technology, and as long as Taiwan retains economic and political freedom, the world is a net winner.” Others argued hopefully that “a country does not need to manufacture anything in order to be a world power”, apparently undismayed by the loss of jobs and knowledge in the economies of many developed countries.

What were those managers thinking?

The balance of opinion in developed countries was however mainly concern at the loss of whole sectors of once-vibrant economic activity. Many readers asked: What were these managers thinking?

Where did the leaders of these companies think we would end up after 30 or 40 years of gutting manufacturing? What about companies that moved operations to China and were forced to give up technology as a price of entrance? After giving up the technology, what did they think was going to happen? (“mattw0699”)

Retaining “the secret sauce”

The answer as to what these managers were (and still are) thinking has been supplied by other readers. They explain that the managers believe that they are retaining “the secret sauce”, which protects their competitive edge:

Hard drive manufacturing is a prime example. The bulk components such as platters, circuit boards and cases are made and assembled in various Asian countries (Malasia, China, Singapore, etc.). But the drive suspension (a very precise part of the drive head) is still made in the US.

The magic is all in the drive head and by withholding that from outsourcing the majority of the world wide hard drive market is still held by Western Digital and Seagate. The FoxConns, Asus and Abits of the world can’t go directly to Best Buy because someone had the foresight to keep the secret sauce in a US kitchen. ( “motytrah”)

Another reader writes that the outsourced items are “little do-hickeys” with low value and so don’t really matter in the overall scheme of things:

A lot of component manufacturing does take place overseas. For many elements this is because they have become an extremely commoditized enterprise. The majority of the little do-hickeys you see on a circuit board are worth pennies or less and have next-to-no margin. That being said, those components are often being integrated into products and onto circuit boards that are designed by Americans and American companies. These components only have value in application. The design (and productization) is what gives the components value, so these makers are entirely reliant on someone coming up with ideas on how to use them. (“Amco”)

Sliding down the slippery slope: Dynamic RAM

But other readers are less hopeful about the ability to retain “the secret sauce” and so avoid following Dell down the slippery slope to irrelevance. Those “little do-hickeys” might seem cheap in themselves, but the lessons to be learned in improving their manufacture in the end could turn out to be highly valuable. (In cost accounting and economics, which usually don’t explicitly value knowledge, this loss is invisible and so doesn’t get taken into account.)

Outsourcing thus has some resemblances to a performance-enhancing drug with apparent short-term gains but disastrous long-term consequences. Like other drugs, once you start taking it, it’s hard to stop.

Thus one reader gave the example of failed efforts to retain “the secret sauce” in the case of dynamic RAM.

I remember seeing the beginning of the end, and remarking on it at the time. Dynamic RAM is boring. It’s just the same structure over and over and over. Plus it isn’t profitable. Everybody wants a lot of it, so they don’t want to pay much per increment. The semiconductor companies sent their dynamic RAM manufacture overseas, while assuring their employees and stockholders that high-value chips like microprocessors would continue to be made in the US. That’s where the expertise was!

It happened just as you describe. As the overseas manufacturers ramped up their dynamic RAM capability, they discovered and developed techniques for manufacturing that made them cheaper and more reliable — techniques that weren’t shared with the American companies.

Of course, process technology is applicable to anything made by that process. Improved process technology for dynamic RAM also made better, faster, more reliable microprocessors with higher yields, and the American companies that weren’t keeping up with process improvements couldn’t continue to compete. More and more ICs manufacturing moved overseas, until we reached the situation we’re at now — almost no no semiconductors are made here in the US.

The big element was that giving up dynamic RAM manufacture meant giving up both control and knowledge of the process technology, and the end was inevitable from there. (riclocke)

Once you adopt the cost-cutting mindset, readers argued, it will eventually seem to make sense to outsource even the secret sauce:

Eventually (according to the bean counters)  it ‘makes sense’ to increase profit at the risk of losing the store. I’ve seen it done in both small electronic engineering companies as well as a Fortune 500 steel company – for both of which I contributed its technical “secret ingredient”. In the end, that too was outsourced. (“threejeeps”)

Separating design from manufacture is problematic

Thus some readers argue that although outsourcing might have made sense in the static environment of yesteryear, in today’s world with its requirement of continuous improvement for survival, outsourcing production to a foreign firm 12,000 miles away inherently entails significant risk:

Manufacturing is an important part of security and innovation for a company. Outsourcing creates an environment where seamless communication with manufacturing is very difficult and probably not in the best interest of the manufacturer. This is not good for the quality and continuous improvement of the product. This loop is critical to the competitiveness of products in the marketplace where performance, quality, and cost are intertwined. (“elvis2u”)

Other readers argue that the loss of knowledge is even more important than the loss of jobs:

Exporting the manufacturing work erodes the knowledge and experience that makes innovations, improvements and future competitiveness possible. In the long run, losing the process engineering knowledge seems more important than any near-term loss of jobs and profits. US businesses are not just moving the work; they’re losing the know-how. We have reached or will soon reach the point where domestic manufacturing will never recapture the business, even if we were to regain parity in things like labor costs. That’s what is most important and threatening to our domestic economy. (“mojomojoman”)

The analogy to performance-enhancing drugs

Outsourcing manufacturing can thus produce an apparent gain in terms of short-run profits, but with significant long-term consequences. The analogy of a firm outsourcing manufacturing to an athlete taking performance-enhancing drugs to get a short-term boost in performance is striking. The fact that it might be legal doesn’t make it wise. The activity may appear to make sense from a limited short-term perspective, but as an overall strategy, it often accelerates the death of the enterprise as well as that sector of the economy.

“Investment bankers made us do it”

Readers also point to the role of investment bankers in pressuring firms to outsource. For instance:

I used to work for a Fortune 500 corporation whose decision to go to China was driven almost exclusively by the analysts, who told management they couldn’t support a buy recommendation if the company had no plans to be in China. But since the executives who make the decision are compensated with hefty stock options, it wasn’t long before corporate was offering Mandarin lessons. I think these people understand the long term implications of these decisions perfectly well, and they’re very sympathetic to the poor b—-ds who will come after them and have to sort this mess out – after those options have been exercised, of course.

The unholy alliance between the analyst community and executives heavily incentivized by stock options – given cover by the simplistic apologia of cost accountants who coo about labor savings in China but forget about the six-figure travel expenses – helps explain why manufacturing has left. (“hamilcar35”)

In an earlier article, I noted the suggestion of The New Yorker that activities of investment bankers sometimes resemble those of “slumlords in pin-stripe suits”. But if the critics of outsourcing are correct, the situation is worse. If outsourcing is like taking a performance-enhancing drug, then investment bankers can be seen as drug dealers in pinstripes. They are engaged in it for the precisely the same reasons as real drug dealers: because it makes extreme amounts of money. Better still, it’s legal.

What is the government thinking?

Other readers (such as mattw0699) wonder about the role of government. What is government thinking as it watches the phenomenon? Is the government asleep at the wheel?

Why for instance don’t they notice the lack of a level playing field? Or worse: why don’t they realize that it isn’t a playing field at all? Why don’t they realize that the other people on the field aren’t playing a game? Why don’t they see that the system is being deliberately rigged. For instance:

It isn’t just a business decision about where to manufacture, sometimes it has been crafted by the coordinated policies of suppliers and manufacturers and even governments in these countries.  It’s not a coincidence or a simple business dollar-driven decision.

For instance, in some cases there are key components which are plentiful in supply if you manufacture within their borders, but suddenly become constrained, completely unavailable, or absurdly priced if you want the same component exported so you can manufacture in the US.  We’re talking 300 to 500 percent of the price.  Who can afford that?  It’s a coordinated action between the suppliers of components and manufacturers in these countries, and sometimes government policies or tariffs. Simply put, you can’t buy the parts out of country, so you have no choice. Ironically, the in-country manufacturer can get you all it wants and at a fraction of the cost.  They’ve carefully rigged the system.

Not everyone in government has been asleep at the wheel. Senator Carl Levin of Michigan is quoted in an excellent article this week in the New York Timesby John Gertner:

Our companies are not competing with those companies in Korea and Japan. They’re competing with those governments that are supporting them. It’s naïve to believe that we just have to let the markets work and we’ll have a strong manufacturing base in America.

Are there national security risks?

Are readers being paranoiac when they take the next logical step and point to the national security risks in the situation? One reader poses a hypothetical example:

Consider this: Boeing, aircraft manufacturing, needs a new flight computer for its new aircraft it is designing. Unfortunately, the US company that made the whizzbang flight computer decided it was more profitable to outsource the manufacturing and subsequent design upgrades to Country X. Now, suppose we go to war with Country X, where are we going to get the flight computer for both military and commercial aircraft? (“threejeeps”)

Another reader is concerned that the situation is not just hypothetical:

Boeing is already proceeding down this path. With commercial aircraft manufacture, the single most difficult and exacting task is the construction of the wing and other airfoils.  Boeing is farming out the manufacture of the wing to companies in Japan and Korea and losing its ability to manufacture aircraft.

Still another reader writes:

Does anyone remember the last recession, more than twenty years ago? In Houston, big oil fell on its nose. Masters-level geologists were flipping burgers for minimum wage — if they were lucky. The problem wasn’t just oil, or recession: it was the lack of diversity. A large town had become a one-trick pony. The problem with a one-trick pony is that it can’t get its own feed or paw its way through ice on the water tank. It doesn’t wear its hooves down and needs to be shod. So the pony has to farm all these services out. And God help the pony, if somebody refuses to serve him. He might get pretty hungry.

Anybody given any thought to what happens if China no longer ships products to us? What if we are so dependent upon them that we lose our independence, a la Mid East oil? What if we can’t afford to alienate them, and readily work with governments whose human rights platforms appall us? Oh, wait, that’s already happening!

Global interdependence may create big financial gains, but it weakens the ability of governments to negotiate major shared issues — like war, climate change or natural disasters. And government’s job is supposed to be to protect us, or at least, that’s the campaign promise. (“rjtaylor”)

National policy implications

So here’s the picture that some readers see emerging:

• Companies are taking the performance-enhancing drug of outsourcing for short-term profits, while undermining the future of their own companies as well as the sector.
• Investment bankers are pushing the performance-enhancing drug of outsourcing, urging it on companies so that they too can join in the short-term profits.
• Cost accountants are administering a measurement system that ignores the real long-term costs of loss of knowledge and production capacity.
• Economists at the Fed and elsewhere are producing studies that show that there really is no problem at all.
• Countries hosting the outsourcing are doing their utmost to encourage more consumption of the drug of outsourcing for as long as possible.
• The governments of developed countries, facing loss of jobs and declining economic growth, are borrowing vast amounts to finance their own large deficits from the very countries that produce the drug of outsourcing. It’s as if the police decided to dip into the profits made by those producing the drug of outsourcing.
• In the process, large sections of the economy have already been lost.  Many more sectors are at risk, including areas that appear to be of high strategic importance.

Where is the national interest?

Even those who recognize the importance of “one-world” thinking and the value of free global trade are dismayed at apparently trusting the future entirely to the kindness of strangers, particularly when the interest of those strangers lies in continuing a phenomenon that appears to be at odds with the national interest.

Why, they wonder, are these seemingly intelligent, highly educated people going about their business as if this is a perfectly normal and healthy state of affairs?

The answer is not hard to find. As Upton Sinclair remarked: “It is difficult to get a man to understand something when his salary depends on his notunderstanding it.”

The process is driven forward inexorably by the monetary incentives for the “producers”, the “dealers” and the “police”, as well as the “consumers” of the performance-enhancing drug of outsourcing. Meanwhile it’s the jobs, the economy and the future of the country that are put at risk.

Solving the problem

The key to solving the problem is first understanding it. Thus as explained inpart 3 of this series, it’s not just a problem of the decline of manufacturing. The root cause of the problem is the decline of management itself: it affects software as well as manufacturing. Outsourcing and the loss of whole sectors of the economy are only one of the negative consequences of anachronistic management practices of Shareholder Capitalism, i.e. the idea that the be-all and end-all of a company is making money for its shareholders. Once a firm adopts short-term profit-making as its goal, the company and everyone in it are inexorably drawn into a set of activities with negative long-term consequences like outsourcing.

Solving the problem thus requires a recognition that we are now in the Age of Shareholder Capitalism, as explained by Roger Martin in his classic HBR article. In effect, traditional management focused on short-term money-making has to give way to radical management where the goal becomes that of delighting the customer with continuous innovation.

Once continuous innovation becomes the be-all and end-all of the firm, outsourcing can be seen in its true light as a dangerous performance-enhancing drug that risks undermining the firm’s, and the country’s, long-term future.

Investors are already playing a role in the transition, as they value more highly the companies of the future that practice continuous innovation such as Apple[AAPL], Amazon [AMZN] and Salesforce [CRM], as compared to companies practicing traditional management, such Wal-Mart[WMT], Cisco [CSCO] ORGE [GE]. Investors are increasingly realizing that short-term financial gains are ephemeral: the companies that will generate real value are those that do what is necessary to continuously innovate.

Why Amazon Can't Make A Kindle In The USA: Part 6: The Video

Watch in on youtube:) 

http://www.youtube.com/watch?v=pzUbzb26p1Q&feature=player_embedded

Amazon/Kindle Part 7: The End Of The Road For Outsourcing?

In the comments on my series of articles,Why Amazon Can’t Make A Kindle In the USA, there were many stories of individual firms pursuing outsourcing for dubious reasons at the cost of American jobs, even at a time when the public debate is all about creating “jobs, jobs, jobs”. The following horror story is typical:

I’m late on the comments because I am helping a major US corporation once again ship a perfectly running, extremely profitable manufacturing operation overseas. By all means of evaluation, it makes no sense to ship it away. This operation meets all cost targets, highest yield requirements and etc.

It is moving because someone has a burr that says we can make it cheaper overseas.

Just wait until yields drop, requiring throughput to increase, and increased part costs due to the additional wasted parts that will be bought.

Couple that with the fact that 85% of the product has to be shipped back to N. America.

All this is because some accountant cannot put real numbers together and have the cajones to present them as fact to upper management.

Oh, and it is just another 100 jobs, engineers, technicians and operators that are disappearing

The current CEO and corporation mantra is quarterly earnings at all costs, “we owe it to the shareholders”, (and to upper management bonuses), and are beholden to market analysts to pump the immediate stock value at the expense of long term profitability. [kingklanman10 ]

What’s interesting about this example is that the outsourcing decision isn’t really being justified by the numbers. It’s driven by a “seat of the pants” belief that it must be possible to make it cheaper overseas.

Outsourcing cost-savings are disappearing

When we broaden the perspective to the whole array of companies pursuing outsourcing, we can see why decisions are less and less based on the numbers: the cost savings of outsourcing are proving increasingly elusive. As industry analyst, Charlie Barnhart reports:

The underlying costs in most of the current so called low-cost regions are going up and in some including China by as much as 1 ½ percent per month. The reasons are many; inflation, monetary exchange, adoption of new environmental, regulatory and labor policies. Nor is this just a manufacturing-value-add issue as these escalating costs impact the entire supply-chain which has concentrated in these very same regions.

Finding alternative new low-cost labor sources is proving difficult. As theOutsourcing Navigator Council reported to its membership:

Contract manufacturers such as Foxconn, which also counts Dell, Hewlett-Packard and Nokia among its clients, are moving parts of their manufacturing to inland Chinese cities or other emerging markets.

The next even lower-cost geographies, far out over the horizon, are more pipe-dream than viable alternatives, as they lack the infrastructure, resources, capabilities and political stability to replace the current solutions.

To deal with these pressures, Asian manufacturers imagine a massive shift towards robots. As Lee Chyen Yee and Clare Jim in Reuters reported on August 1, 2011:

Workers’ wages are increasing so quickly that some companies can’t take it longer… Taiwan’s Foxconn Technology Group, known for assembling Apple’s iPhones and iPads in China, plans to use more robots, with one report saying the company will use one million of them in the next three years, to cope with rising labor costs.

Foxconn’s move highlights an increasing trend toward automation among Chinese companies as labor issues such as high-profile strikes and workers’ suicides plague firms in sectors from autos to technology.

Extraordinary levels of risk

In addition to the rising cost of labor and the erosion of the supposed rationale for outsourcing, the risks of the current situation are extraordinary. Among the risks noted by evertiq, the news network for the Electronics Design- and Manufacturing Supply Chain) are:

• The tension between shortening demand cycles and long supply chains
• Loss of institutional continuity and expertise
• Unpredictable and unstable capital markets
• Geopolitical unrest and instability
• Overtaxed infrastructure in low cost regions

• Extreme geographical concentration. Outsourcing Goliaths like Foxconn now dominate the availability of components and global manufacturing capacity. If something that big has a hiccup, the whole world is going to feel it.  (Does anyone remember AIG?)

• Increased research and development investments by ODMs

There is also aggressive protection of intellectual property. Some companies, such as Hon Hai patent their innovations at three times the rate of IBM when measured on a per employee basis. Most of their patents are filed in the US, Taiwan and China.

The end of the road for outsourcing?

Recently, the Outsourcing Navigator Council in a report to its membership concluded:

[Out-sourcing] supply-chain management while economically expedient has proven incongruent with global economic and geo-political realities.

In other words, the level of risk is currently so high it is no longer just selected outsourcing projects that are at peril but perhaps the entire outsourcing industry…

Throughout the supply chain, each link has been stretched to the breaking point.

The “outsourcing dividend” has long been spent.

We are thus reaching the end of the outsourcing road. But once the expertise is gone overseas, there is no simple way to go back. The problem is that the road is one-way. And at the end of a road is a cliff.

Why don’t leaders see this?

Yet by and large, top management still doesn’t see the risks. Outsourcing still proceeds at full-speed towards the cliff. According to the Outsourcing Navigator Council, the developments are “beyond the experiential discernment of the C-level suite.” Even in those few cases where the risk was perceived at mid-management level and passed up the chain-of-command, “the message generally went unheeded.”

This lack of experiential discernment is aggravated by the mainstream media. According to evertiq:

The mainstream industry and financial press, the primary source of insight for the C-level suite, had yet to recognize the pace or depth of change taking place in the global outsourcing industry and were stubbornly focused on the debate surrounding the status of the economy.

Wall Street is also part of the myopia.

By and large, Wall Street is not able to accurately assess manufacturing strategy.

Can the situation really be this bad?

Barnhart concludes, “Yes, actually it is.”

It is now apparent that these firms have not merely outsourced production. They have actually outsourced their future.

Dealing with the root cause of these problems

As noted earlier in the series, the root cause of these phenomena is the traditional-management pursuit of short-term profits. The lemming-like rush towards the cliff will continue so long as management is living within the mental prison of 20th Century management. The true bottom line of a 21^stCentury firm lies not in its ability to generate short-term profits, but rather in its ability to delight its customers through continuous innovation. Once the firm focuses on continuous innovation, it finds that it no longer makes sense to outsource major functions 12,000 miles away for short-term gain. Happily, once the firm achieves true customer delight, it finds that it makes more money than if it focused on short-term gain.

What is needed thus is radical management that has continuous innovation built into its DNA, with a different goal (delighting the customer), a different role for managers (enabling teams), a different of coordinating work (dynamic linking) and different values (continuous improvement and radical transparency) and different communications (horizontal conversations). A single fix is not enough: we need systemic change.

Fortunately we now know what’s involved in the kind of radical managementthat fosters continuous innovation at firms like Apple [AAPL], Amazon[AMZN] and Salesforce [CRM] and Intuit [INTU], just as we now know why traditional management is failing at famous old firms like Wal-Mart [WMT] orGE [GE]. Knowing how to manage in the 21^st Century is not a question of finding out how. We know what to do. It’s an issue of getting on with doing it. It means setting aside 20th Century management thinking and moving into the future.

Part 8: Will You Soon Be Able To Make Amazon's Kindle At Home?

In the first six articles of this series,Why Amazon Can’t Make A Kindle In The USA, I explained how companies chasing short-run financial gains through outsourcing in Asia have devastated large sections of industry in the USA and other developed countries.

In part 7, I explained how even theshort-run economics of outsourcing are being transformed by rising costs in Asia and the extraordinary risks of an extended supply chain that is far from the ultimate customer. The “outsourcing dividend” is long gone, even though companies still chase it.

Now, in an excellent article in strategy+business, A Strategist’s Guide to Digital Fabrication, Tom Igoe and Catarina Mota explain how the economics of manufacturing are being further disrupted by rapid advances in manufacturing technology which point the way toward a decentralized, more customer-centric “maker”.

The revolution in how we make things

For example:

At a research meeting in late 2010, a primatologist studying monkey genetics took a tour of a university’s digital fabrication shop. She mentioned that her field research had stalled because a specialized plastic comb, used in DNA analysis of organic samples, had broken. The primatologist had exhausted her research budget and couldn’t afford a new one, but she happened to be carrying the old comb with her. One of the students in the shop, an architect by training, asked to borrow it. He captured its outline with a desktop scanner, and took a piece of scrap acrylic from a shelf. Booting up a laptop attached to a laser cutter, he casually asked, “How many do you want?”

20^th Century management was built on economies of scale. To make a single unit of a thing typically cost a lot more to produce than 10,000 would. The price per unit goes down even more as the numbers increase.

In the foreign outsourcing of manufacturing, managers chased these economies of scale, often overlooking the additional costs of transport, inventory management, quality control, sales, marketing and distribution of large production runs, as well the risks involved in such extended supply chains. They paid scant attention to the long-run costs of losing knowledge and the opportunity to learn. They also ignored what Toyota and other firms had learned, namely that even with conventional manufacturing, short production runs could often be more efficient than long production runs, when you include the total costs of actually making a sale.

Now the economics of large-scale production runs carried out overseas are about to be further undermined by the possibility of making, selling and delivering millions of manufactured items one unit at a time, right next to the customer.

Igoe and Mota point out that digital manufacturing is beginning to do to manufacturing what the Internet has done to information-based goods and services. Just as video went from a handful of broadcast networks to millions of producers on YouTube within a decade, a massive transition from centralized production to a “maker culture” of dispersed manufacturing innovation is under way today.

As operations, product development, and distribution processes evolve under the influence of this new disruptive technology, manufacturing innovation will further expand from the chief technology officer’s purview to that of the consumer, with a massive impact on the business models of today’s manufacturers and the lives of customers.

Two kinds of tools

Igoe and Mota note that digital fabrication devices fall into two categories.

• programmable subtractive tools, which carve shapes from raw materials. These include laser cutters (which cut flat sheets of wood, acrylic, metal, cardboard, and other light materials), computer numerical control (CNC) routers and milling machines (which use drills to produce three-dimensional shapes), and cutters that use plasma or water jets to shape material.
• additive tools, which are primarily computer-controlled 3-D printers that build objects layer by layer, in a process known as fused deposition modeling. They work with a wide variety of materials: thermoplastics, ceramics, resins, glass, and powdered metals. Technically known as “additive rapid manufacturing” devices, 3-D printers also use lasers or electron beams to selectively shape the source material into its final form. Because additive devices require little setup time, they make possible the production of any quantity at the same cost per unit, and also allow easy, rapid switching between products. In some cases, a 3-D printer can fabricate in a single piece an object that would otherwise have to be manufactured in several parts and then assembled. And because it composes objects bit by bit, instead of carving them from larger blocks, additive manufacturing considerably reduces the waste of materials.

Prices plummet while capabilities advance

Igoe and Mota point out that the price of additive technologies is plunging exponentially while capabilities are growing, in a fashion similar to Moore’s Law in computing. In 2001, the cheapest 3-D printer was priced at $45,000. Today a professional 3-D printer costs less than $10,000, and a desktop do-it-yourself kit costs less than $1,500.

Thus far, no digital fabrication device, professional or personal, can efficiently produce a complex multi-material product such as a Kindle or an iPhone. Nonetheless, even these early forms of digital fabrication will be highly disruptive to conventional manufacturing practices.

Lessons for Large Manufacturers

Igoe and Mota have the following suggestions for manufacturers:

• Prepare now for the capabilities you’ll need when some of your products are digitally fabricated. By 2020 if not sooner, every auto dealership and home improvement retailer will have a backroom production shop printing out parts and tools as needed. Manufacturers that figure out how to make their wares out of printable composites, investing now in the requisite changes in materials, could have a considerable advantage.

• Establish a hybrid product line that mixes complementary mass-production and individual-production items. For some objects, digital fabrication will allow you to shorten product life cycles and make rapid improvements.

• Counter reverse engineering with open innovation. Digital fabrication will inevitably enable amateur enthusiasts to knock off and alter commercial products in their garages. Manufacturers now face a choice between engaging in eternal court battles with their own customers or assimilating this new culture of sharing and remixing it into their design and production processes.

• Help in the development of new and better materials for fabrication. Independent fabricators are eager for materials, and they are experimenting fervently. Forward-thinking manufacturers can form powerful partnerships by making their scrap materials available for experimentation.

Will you soon be able to make a Kindle at home?

In one sense, to ask whether you will soon be able to make Amazon’s Kindle or Apple’s iPod at home with this new technology (you won’t) is to ask the wrong question. This is like people asking when they discovered the mechanical power whether it would be possible to make a mechanical horse and cart. The result of that kind of thinking was an impractical device like this, conceived by the American inventor Oliver Evans in 1794.

It took more than a hundred years before we thought through the possibilities of mechanical power and developed comfortable and convenient transportation devices (cars) that were unlike any horse and cart we had ever seen.

Similarly, with digital manufacture, the important question is not whether we could make a Kindle in this fashion, but rather: what can we do with this new technology that we couldn’t even dream of doing before?

What are the new possibilities?

Taken as a whole, digital fabrication creates whole new possibilities for the manufacturing sector that has been devastated by foreign outsourcing. As the economics of foreign downsourcing collapse, the potential of a distributed manufacturing ecosystem to rebuild lost capacity is significant.

The possibility to have large numbers of geographically dispersed “factories”, of having manufacturing in close proximity to local customers, of getting direct feedback from customers and making changes on the spot, of customizing products on demand, of making drastic reduction or elimination of inventory and of reducing or even eliminating transport costs, will dramatically disrupt the design, finance, and management of the supply chain.

• Transforming the supply chain: The original rationale for foreign outsourcing was cheap labor. Changes in manufacturing processes have reduced the labor content to a small proportion of the total cost of manufacture and foreign labor costs are rapidly rising. Most of the cost of those “little do-hickeys” that US manufacturers lost interest in making lies in inventory, distribution, transportation and quality control. The ability to reduce or eliminate major aspects of those costs will further undermine the economics of foreign outsourcing even these little do-hickeys.
• Taking back manufacturing capability: Just as huge sections of manufacturing were lost to Asia by a successive process of Asian firms nibbling away at capabilities, initially at the low end of manufacture, like plastic toys, and gradually working up to more complicated uses, so the return of manufacturing is unlikely to take place by spectacular high-cost politician-ribbon-cutting high-risk investments in factories at the high end, as has happened in solar energy at Solyndra. Instead, manufacturing is likely to return by working from the low end, segment by segment, rebuilding the capability and expertise to make things, and gradually moving up the chain towards the high end.

• Customizing products: The possibility of customizing products on the spot will transform the marketplace. We will no longer see the toy store or the jewelry store, or the shoe store being the last step in a 12,000 mile supply chain, with all the problems of having the right product at the right time for the particular customer. Now the physical store will be a miniature factory, where the child designs and manufactures his or her own toy on the spot exactly to taste. The same with shoes, jewelry and other basic products.
• Spare parts: There are huge costs involved in maintaining large varieties of spare parts. Why bother with all that when you can manufacture the part on the spot with a digital printer?
• Medical manufacture: It wasn’t so long ago that a dentist had to send a crown molding away to a specialized factory and the patient had to return in a couple of weeks for the finished product. Now the job is done on the spot with a 3D printer and the patient gets the job done with one visit. In future, all forms of one-off production like dental work or orthopedic implants will be done on the spot.
• Exploiting time as a competitive weapon: Just as a Kindle enables readers to buy and and read a book instantly, 3D printing will enable customers to make things instantly, which they would otherwise have to go to the store to buy. This will help put the forgotten competitive weapon – time—back on the management agenda.

• Enhancing innovation: The potential to experiment very cheaply in close proximity to customers offers huge promise for enhanced innovation. For example, Thogus Products Company is a company that was founded in 1950 and is headquartered in the heart of the “rust belt” near Cleveland, Ohio. A few years back, the CEO, Matt Hlavin, saw that the firm wouldn’t be able to sustain itself on commodity work in high volumes. As a result, he decided to get out of the commodity business and instead focus on developing innovative solutions for metal to plastic conversion, working closely with the large chemical companies, specializing in highly engineered materials, with custom solutions in small volumes. It uses rapid prototyping and tooling technologies to take the cost out of the development cycle and expedite development. Hlavin sees the firm as an incubator of manufacturing ideas. The focus is on the next greatest invention, the next greatest idea. Hlavin says, “We are creating an environment where anyone can come in and sit down with our people and together develop the concept and manufacture a part for them in a day or two for a minimal fee.”

• Rediscovering the joy of making things: Perhaps the most important aspect of the transformation will be the effect it will have on us–the social impact of digital manufacture. Over the last century, we have gotten used to having everything made for us. Even repairing a car has become so computerized that only a licensed repair shop can attempt it. As Matthew Crawford pointed out in his wonderful book, Shop Class as Soulcraft: An Inquiry Into the Value of Work, we have become alienated from the things around us, because they were made by someone else and have become foreign to us. Where computers enslaved us, now is it possible that they might liberate us? In the same way that personal computers have turned us all into amateur computer technicians and software administrators, so digital manufacture has the possibility of turning us all into amateur engineers who rediscover the joy of making things.

Why Knowledge Is More Important Than Jobs: The Solyndra Story (Part 9)

Against the background of my series on the disastrous consequences to the economy of foreign outsourcing , where Amazon can’t make a Kindle in the USA even if they want to, I have been pondering what to make of the Solyndra kerfluffle.

Solyndra: A juicy political story

It’s a juicy political story. Republicans are doing their utmost to turn Solyndra, the bankrupt solar company, into the poster child of a failed administration while Democrats defend a bold multi-company program to protect yet another entire industry from being outsourced to China.

Solar energy was invented in the USA. As the manufacture of solar panels in the USA has fallen from 40% of the market a few years ago to around 5% today, the fossil-fuel-lobby is quick to suggest that the whole idea of the government supporting a dying solar energy industry is misguided, while the administration defends the program in a sector that is growing at 20% a year and recommits to its continuance as critical for the country’s economic future.

While Republicans are quick to suggest political influence and possibly deliberate wrongdoing, the administration contends that the investment was simply one of forty investments, some of which are bound to fail. No big deal. In fact, if there were no failures, it would mean that the administration was taking no risk and hence there was no need for the intervention.

Welcome to the Washington DC Freak Show on 24 hour cable television!

What was the administration thinking?

Solyndra was identified during Bush’s administration as a promising applicant for support. Energy Secretary Steven Chu pledged during his Senate confirmation hearing to speed the approval of applications for the federal backing. Boldness was the essence of the solar program.

Solyndra received the Energy Department’s first loan guarantee after President Obama took office.  Solyndra is interesting because it offers a solution to the problem that photovoltaic cells encounter, namely, no easy way to store the electricity until it is needed. The loan was given conditional approval in March 2009 and the award became final that September.

Yet the unit costs were high and the viability of the whole approach looked increasingly problematic, as the cost of photovoltaic cells plunged. Earlier in 2011, the administration agreed to provide additional support and subordinate its loan to other investors, in order to keep the concern going.

What could have led the administration to provide such large support in a company at a time when the risk of the firm failing was significant? Warning signs were flashing, and yet the administration went ahead. Why? What were they thinking?

Secretary Chu: It’s a jobs program

One clue comes from the statement of Secretary Energy Chu on September 9, 2011 upon the finalization of a $90.6 Million loan guarantee to Cogentrix of Alamosa, LLC to support a Colorado solar project.

“On Thursday, President Obama spoke about the need to continue creating the jobs of the future,” said Secretary Chu. “And that’s exactly what today’s investment does—putting Americans to work right away and helping position us to win the global race for the clean energy industries of tomorrow.”

Wrong focus: Saving knowledge is more important than jobs

Secretary Chu is presenting the investment as part of a program to generate jobs, when he should be looking at it as a program to save knowledge in the USA. In a sector where the technology is unsettled and change is rapid and unpredictable, the generation of large numbers of reliable jobs is unlikely. Although job creation may be the highest political priority overall at this time, for this particular program the benefit of creating jobs is supplementary at best. At worst, it distracts the administration from the principal goal of fostering knowledge and innovation.

In a rapidly evolving field like solar panels, in which the share of  the market manufactured in the USA has fallen from 40% to around 5%,, the sector is in danger of leaving the USA entirely. If that happens, it will be difficult if not impossible for US firms to compete in this rapidly growing market.

The Department of Energy should have its focus on fostering an industrial commons in solar energy, preserving knowledge and nurturing innovation.

The technology being explored by Solyndra is interesting because it offers a possible solution to the problem of how to store electricity from solar energy. However it was never going to be viable unless its costs could be reduced. It might have warranted a small investment to explore whether costs could be reduced. Instead, a large investment was made prematurely to launch it on a commercial basis while also creating 1,100 jobs. It was no real surprise that it failed.

The desperate need for rapid innovation

Succeeding in the solar panel industry won’t be easy. At a time when China is investing heavily both in solar panel manufacture and in companies that will use solar panels, the industry is growing at 20% a year and the price of solar panels will probably continue to fall.

American firms must innovate rapidly if they are going to compete. At a time when Chinese firms are being massively assisted by the Chinese government ($30 billion in 2010), US firms will need all the help they can if they are going to thrive.

Gary Pisano and Willy Shih have documented how the private sector has already lost whole sections of the economy through foreign outsourcing, including:

“Fabless chips”; compact fluorescent lighting; LCDs for monitors, TVs and handheld devices like mobile phones; electrophoretic displays; lithium ion, lithium polymer and NiMH batteries; advanced rechargeable batteries for hybrid vehicles; inverters and power semiconductors for solar panels; desktop, notebook and netbook PCs; low-end servers; consumer networking gear such as routers, access points, and home set-top boxes; advanced composite used in sporting goods and other consumer gear; advanced ceramics and integrated circuit packaging.

Given this history, I believe that those who argue that we should just leave industry to the private sector are mistaken. Once gone, these sectors are very difficult, if not impossible, to bring back. The knowledge simply isn’t here any more.

The argument that manufacture in the USA can’t compete with China because of low labor costs there also appears misguided, because labor is only a tiny portion of total costs and in any event, labor costs in China are rising rapidly, resulting in  major changes in the economics of outsourcing. Costs of solar panel are declining  rapidly in China, principally because China is investing heavily in the future.

Unless private sector and government work closely together in the USA, the manufacture of solar panels will be the next sector to leave the country, probably forever.