Today, many people are looking to high technology sectors — like alternative energy — to be the growth engine that revives the U.S. economy and gets it back on track. They're in for a shock. During the boom years, when all seemed well, capabilities that underpin innovation in a wide range of products were continuing to deteriorate.
As my Harvard Business School colleague Willy Shih and I described in "Restoring American Competitiveness," a recent article in the Harvard Business Review, the U.S. has lost or is in the process of losing the ability to manufacture many of the cutting-edge products it invented. These include the batteries that power electric and hybrid cars, light-emitting diodes (LEDs) for the next generation of energy-efficient lighting, critical components of solar panels, advanced displays for mobile phones and new consumer electronics products like Amazon's Kindle e-reader, and many of the carbon fiber components for Boeing's new 787 Dreamliner.
The culprit is the outsourcing of development and manufacturing work to specialists abroad. The result: a damaging deterioration in the collective capabilities that serve high tech. This industrial commons includes not just suppliers of advanced materials, production equipment, and components, but also R&D know-how, advanced process development and engineering skills, and manufacturing competencies.
Making matters even worse is something that has been largely ignored: In addition to undermining the ability of the U.S. to manufacture high tech products, the erosion of the industrial commons has seriously damaged the country's ability to invent new ones.
The prevailing view of the past 25 years has been that the U.S. can thrive as a center of innovation and leave the manufacturing of the products it invents and designs to others. Nothing could be further from the truth.
This logic is predicated on utterly false assumptions about the divisibility of R&D and manufacturing and basic competitive dynamics.
In many cases, R&D and manufacturing are tightly intertwined. Unless you know how to manufacture a product, you often cannot design it. And, to understand how to manufacture it, you have to have manufacturing competencies and experience. The notion that you can design a product in the serene world of the R&D laboratory without any knowledge of the rough and tumble world of production is ridiculous.
To innovate, you need great two-way feedback. You need to transfer knowledge from R&D into production, but you also need to move knowledge from production back to R&D. The act of production creates knowledge about the process and the product design.
Yes, there are some instances where R&D and manufacturing are separable. But these are the exceptions. In the vast majority of high tech products (and even some low-tech products like apparel), knowledge about manufacturing helps you design products and get them to market quickly. What this means is that when manufacturing capabilities migrate from a country, design and R&D capabilities eventually follow. That's exactly what's been happening in many high tech industries in the U.S. over the past 20 years.
Now let's turn to a dangerous misconception of competitive dynamics that proponents of outsourcing propagate. Here's what they would have us believe: You focus on R&D and turn over the low-margin commodity manufacturing to contractors in Asia. You make out like a bandit because you have the intellectual property and your contractors have so much competition they cannot afford to charge you more. Markets are great.
Wait a minute. All this assumes your manufacturing partner is content to subsist on your table scraps. But what if they have their eye on the prime rib, too? Well, once they have learned to manufacture your product (and your ability to manufacture has eroded), they are in a much better position to move up the food chain into manufacturing and designing more sophisticated components and subsystems and, eventually, the entire product.
This is exactly what has happened in high tech industry after high tech industry. Unless business executives operating in the U.S. recognize the importance of manufacturing and grow wiser about outsourcing, the industrial commons — and the country's economy — will continue to decline.
Thursday October 1, 2009
by Gary P. Pisano