Forget the Vaunted Service Economy: Manufacturing Can Revive U.S. Industry
Conventional wisdom now ordains that the U.S. industrial economy has fallen into a deep, perhaps irreversible, decline. Yet in reality, the nation’s manufacturing sector, far from dying, is in the midst of an entrepreneur-led restructuring that could reinvigorate the U.S. economy in the 1990s.
Over the past few years, for example, industrial productivity and capital investment in plant and equipment, declining in Europe and Japan, have been rising in the United States. And while as many as 30,000 positions were lost on post-crash Wall Street, industrial employment has soared since June by as many as 300,000 jobs--despite continuing weakness in the automotive sector. Spurred by the weak dollar, manufacturing exports have been increasing at more than a 15% annual rate.
If these trends continue, the late 1900s could be remembered for a dramatic shift in the economic paradigm from a financial ethos to one centered around actual production of goods. This new model represents a major departure from the recent accepted axiom on Wall Street--and in many corporate board rooms as well--that manufacturing amounts to, in John Naisbitt’s phrase, “a declining sport” best left to the Japanese and other Asians. The New York Stock Exchange, in a 1984 proclamation, echoed this view, stating, “a strong manufacturing sector is not a requisite for a prosperous economy.”
Today Wall Street is reaping the reward of such folly. Without thinking out the connection between production and wealth, U.S. business was caught by surprise by the new muscle of Asian companies--particularly in banking, securities, real estate and insurance--who were free to spend the wealth accumulated through their proficiency at Naisbitt’s “declining sport.” Only two years after issuing its anti-industrial pronunciamento, for instance, the total value of shares traded on the New York Exchange fell to second place behind Tokyo’s. Japan’s banks, none of which ranked in the top 50 only three decades ago, now control as many as eight of the world’s 10 largest banks.
Unfortunately, Wall Street’s anti-industrial prejudice also helped undermine much of the U.S. manufacturing economy. Pressed by analysts demanding short-term profits, many corporations, including such giants as U.S. Steel, eschewed the necessary investment in plant and equipment. Other firms, such as RCA Corp., sold away rights for their own technology to competitors overseas, with licenses to Japanese alone reaching $19 billion by 1980.
As a result of this transfer--what one business consultant described as “the greatest fire sale in history”--U.S. firms frittered away the leadership of such industries as consumer electronics to the Japanese, South Koreans and other foreigners. Similarly, many Fortune 500 companies surrendered their industrial birthright, with firms such as General Motors, RCA and Chrysler Corp. handing over large portions of their basic product line to their fiercest competitors.
Politicians and pundits have rightly criticized such corporate policies as self-defeating. Yet when addressing the issue of national reindustrialization, the elites of both political parties almost invariably call for either protectionism or tax breaks for the likes of firms such as GM and Bethlehem Steel, or greater industrial planning conducted by big government, high finance, big business and, sometimes, big labor--the very forces that most contributed to the current crisis and seem to have learned so little from it.
In the process, the national debate has all but ignored the entrepreneurial companies that, increasingly, represent the driving force behind the nation’s industrial revival. Between 1974 and 1984, for example, large companies shed themselves of some 1.4 million factory jobs, but during that same period 41,000 new industrial companies created enough new jobs to virtually offset those losses. As a result, companies with fewer than 250 employees now account for 46% of the manufacturing work force, up from 42% a decade ago. If the trend continues, small-scale manufacturing should pass the 50% mark by the 1990s.
There are many explanations for the rise of these smaller industrial firms, ranging from their greater flexibility and ability to address niche markets to, in many cases, their lack of unions and willingness to incorporate the latest technology. But perhaps most of all, these firms have retained that crucial industrial spirit which played such a crucial role in America’s earlier economic ascendancy.
For instance, virtually all the newly prominent U.S. firms in the microelectronics industry--including Cypress Semiconductor, AST Research, Dell Computers and Compaq--have bucked Wall Street criticism and invested heavily in on-shore manufacturing. Largely as a result, these companies have been successful in fending off Japanese, South Korean and other foreign competitors in their niches while others, more reliant on off-shore production--such as Corona Data Systems--have either been absorbed by a foreign company or have fallen by the wayside.
Nor is this merely a phenomena of the “high-tech sector” of the economy. While giants such as U.S. Steel have disdained new investment in steel making and changing its name to an anonymous USX Corp., smaller niche-oriented “minimills” invested in the latest European and Japanese steel-making technology. Now numbering close to 50, these firms have increased their share of the U.S. steel market from virtually nothing in the early 1970s to close to 20% today.
This pattern of entrepreneurial achievement is being repeated in a score of other “low tech” industries. One 1987 study by David I. Birch of the Massachusetts Institute of Technology showed that of all new businesses, nine of the 10 most likely fields for high growth were in manufacturing--ranging from building electronic components and communications products to such mundane activities as basic steel, pharmaceuticals and plastic products.
This record of success is perhaps the best guarantee that the trend towards a resurgent, and more entrepreneurial, industrial America will continue in the years to come. Given the proper atmosphere for growth, these companies could lay the basis for a new American prosperity, one that can help the nation recover from more than a decade of shortsightedness and economic folly.
