Can Industry Keep Surprising Greenspan?

Alan Greenspan was talking about Microsoft and General Electric, Texas Instruments and Honeywell, Intel and Wonderware, a small software firm in Irvine, when he said last week that information technologies have made the U.S. economy more productive.

The Federal Reserve chairman didn’t use company names, of course. But he was referring to a remarkable change in the production of goods and operation of factories that has occurred in recent years. And those companies, among others, are on the cutting edge of that transformation.

Simply put, manufacturing lines that used to mass-produce single items in monotonous quantities now turn out great varieties of products without stopping to shift gears, all at lower costs because of operating systems from Microsoft; microprocessors from TI, Intel and Motorola; and adaptable production systems from General Electric, Honeywell and other engineering firms around the world.

Human operators get involved through software that allows them to shift work seamlessly from one product variety to another at the touch of a computer screen. The software simultaneously sends information on the production process throughout the firm, from management offices to factory floor.

The key is that the software and processing power is “embedded” in the machines, to use industry jargon, meaning digital controls have been incorporated into them, replacing mechanical controls. The result is a system that reduces costs by economizing on materials, production times and inventory while allowing flexibility such that goods can be manufactured almost to custom order. Many Mercedes-Benz cars and Procter & Gamble products are beginning to be made that way. And more goods will be made to order in future as machines run their own manufacturing processes.

That sounds like science fiction, but in fact it’s a rapidly growing business. Embedded microprocessors now bring in more than $3 billion a year of Intel’s revenue, roughly 10% of the total. Embedded software and the NT (for New Technology) operating system account for more than $2 billion of Microsoft’s annual revenue. Software and adaptable factory systems are the fastest-growing parts of GE’s $10-billion-annual-sales industrial division and Honeywell’s $2.5-billion-sales industrial controls operations.

GE, Honeywell, the Allen-Bradley division of Rockwell and major electrical equipment companies around the world--Asea Brown Boveri of Switzerland, Invensys of Britain, Siemens of Germany and Hitachi of Japan--are all developing factory operation programs to work compatibly with Microsoft’s Windows. That open system approach means that the world’s producers of everything from autos to perfume now have much greater flexibility and efficiency in production.

Business is growing rapidly in Europe--including Eastern Europe--and in Latin America, reports Allan Reaburn, vice president of Honeywell’s Phoenix-based industrial division.

Indeed, we’ve come a long way in a few years, Greenspan said in his speech Thursday, from the time when companies piled up inventories and made “judgments on information that was hours, days, even weeks old.”

But a question arises: Why were the experts surprised by the economy’s success? Even Greenspan admits the economy has been largely unpredictable.

They were surprised because nobody was looking at what small companies were developing for industry. Consider Wonderware, founded in Irvine in 1987 to develop a computer panel that would allow a machine operator to control production by touching a screen. Wonderware put its software product on Microsoft’s Windows NT operating system.

Microsoft showed the capabilities of such programs to suppliers and users of factory equipment, big companies that spend hundreds of millions each year on production processes. Demand for the software increased, embedded technology in manufacturing became a growth business, and productivity rose in U.S. manufacturing.

Wonderware developed other programs for what it calls a factory suite package on Windows, including one that allows a company “to keep track of 4,000 individual parts and move them into position as needed for a specific product,” explains Don Allen, Wonderware vice president for business development.

With increased demand from big companies, hundreds of small companies arose with innovative software and hardware products. The big companies tried the products and often acquired the small companies outright as a way of adding technological know-how.

Wonderware was acquired in early 1998 by Invensys, a British engineering company with $4 billion in annual revenue. Today the Irvine firm is thriving, with more than 400 employees and more than $100 million in annual revenue.

Other small companies are finding backers. Leading Orange County entrepreneurs John Tu of Kingston Technologies and Tom Yuen of AST Research have invested in Glenmount International, a $30-million industrial technology fund. Glenmount, which is led by engineer Robert Forbes, a veteran of Ford, Nortel and other companies, seeks to invest in small companies and help expand their operations.

Thus, thanks to information technologies, U.S. manufacturing has become efficient and its advances are spreading worldwide.

That such success came as a surprise to the experts holds lessons for all who work or invest or think about business.

One is to challenge misconceptions. At one time, words like “automation” were equated with unemployment. But factories have modernized, and U.S. unemployment remains at a three-decade low while job creation continues at a brisk pace--234,000 new jobs in April alone.

And even those Labor Department statistics need better definition. According to the figures, the manufacturing industry “lost” 24,000 jobs last month. But 51,000 jobs were added in the category “business services.” Well, that’s misleading because the software that Wonderware and Microsoft and other companies produce for manufacturing is counted in business services, not manufacturing.

To be sure, Greenspan added a note of caution last week. How long can a strong economy avoid wage and price pressures when labor is in short supply, he asked. Technology has done a good job of making labor more efficient, but there probably is a limit, he suggested.

Maybe there is a limit, but it’s not easy to predict--just as the current economy’s strength was not predicted. Meanwhile, business investment in technology continues at a brisk pace here and abroad because companies see benefits.

Bottom line is that asking how long good times can last is surely a problem of prosperity--a nice problem to have.

James Flanigan can be reached at jim.flanigan@latimes.com.