“The role of the CEO now is not to dictate but to empower,” he explained. “Because today you just can’t have all the answers anymore. I don’t know everything … The power of the people is immense—if you can challenge them and get your people working toward a common goal. I set the goal and show the road and say, ‘How you drive on that is up to you …’ I think that the old picture of the head of the company who says ‘It is my way or the highway’ doesn’t work anymore. There is no such thing as ‘your way’ anymore. There is a global way, and there are a lot of cultures that do things equally well and sometimes better. If we don’t understand that and incorporate those ideas into our business, we are going to fail because we will become insular.”
Stevenson is chairman of the Board of Trustees of Medaille College, and not only out of community spirit. Because his own company has limited funding for research and development, he depends on collaborations with the local universities to help solve problems that can keep his company at the cutting edge of technology. “What can help small businesses like ours is the ability to gather ‘intellectual capital’ from the local state colleges that our tax dollars support. We have the ability to manufacture, sell, and distribute. We have the know-how to penetrate foreign markets. What we don’t always have is access to the latest technologies that are being developed in universities today.” Stevenson says if Americans can learn how better to “tap that knowledge and create the synergy between small business and the educational institutions, we will create such energy that manufacturing will come roaring back.”
A Hand Up, Not a Handout
American manufacturing has been doing a lot more roaring than most Americans realize. Since the 1890s, America has been the world’s largest maker of manufactured goods. Only in 2010 did China overtake us, producing just over $1 trillion in 2010, when we produced just under $1 trillion. So we’re hardly out of the blue-collar manufacturing business.
In some ways our manufacturing “problem” is that we’re too adept at it. According to a 2011 report by IHS Global Insight, the economic analysis firm, the U.S. still far surpasses China in productivity, with 11.5 million American factory workers producing roughly the same value of goods as 100 million Chinese workers. That is a real positive. Because of the high level of American productivity—the result of well-trained workers leveraging more and more advanced machines, robots, and software—the value created by the average American worker is much greater than that created by an average Chinese worker, which means that an American worker can still earn far more than a Chinese worker. Rather than mass-producing relatively low-value goods, which just creates a lot of low-paying, low-skilled jobs, American manufacturing is properly focused on high-paying, high-productivity factories that make such things as aircraft, medical and scientific equipment, control systems, and specialized industrial machinery and chemicals.
In 2009, the average American manufacturing worker earned $74,447, including benefits, according to the National Association of Manufacturers. Wages alone totaled about $63,000. As long as we keep improving productivity, we can keep paying blue-collar workers decent wages.
But the drive for greater productivity requires replacing human labor with more and more sophisticated machines, operated by higherand higher-skilled workers. Therefore, if we want not only to keep advanced manufacturing in America, but to expand it—so that there will be more good blue-collar jobs for future generations—we need more people starting companies in America that manufacture things and more existing manufacturers continuing to produce in America or others coming here from abroad to do so.
According to the Bureau of Labor Statistics, the size of typical new businesses in America has been steadily declining as companies take advantage of technology and networking to do more things with fewer people. In 2000, the average new firm had 7.7 employees. By 2010, that number had fallen to 5.5.
That is why stimulating and attracting and keeping start-ups is so important. As Robert Litan, who heads research for the Kauffman Foundation, notes: “Between 1980 and 2005, virtually all net new jobs created in the United States were created by firms that were five years old or less. That is about forty million jobs.”
As we said earlier, economics is win-win. Companies today can and should take advantage of the whole globe to design, manufacture, and sell their goods and services. But not everyone will win equally, and as the world gets increasingly hyper-connected, we must make sure that American workers have access to the education, tools, and start-ups they will need to win their share. That requires something that America has long lacked—a comprehensive twenty-first-century jobs strategy.
Every good strategy starts with a vision of where you ultimately want to go. Our vision for America is simple—but not modest. We want America to be for the whole world what Florida’s Cape Canaveral was for America’s space program—a launching pad where innovators and entrepreneurs the world over want to locate all or part of their operations because our workforce is so productive; our infrastructure and Internet bandwidth are so advanced; our openness to talent from anywhere second to none; our funding for basic research so generous; our rule of law, patent protection, and investment- and manufacturing-friendly tax code superior to what can be found in any other country; and our openness to collaboration unparalleled—all because we have updated and expanded our formula for success.
We want America to be the place to dream something, design something, start something, collaborate with others on something, and manufacture something—in an age in which every link in that chain can now be done in so many places. No one should ever have to say “I am moving from America to Singapore because it is more hospitable to innovation and entrepreneurship.”
Just the opposite should be true. “You will know you’re successful,” said PV Kannan, the India outsourcing entrepreneur, “if new companies in China and Brazil and India say, ‘We want to move our headquarters to America because that is the best place in the world to do business.’”
That’s the goal—so how do we get there? The country needs a job-creation strategy based on the world in which we are actually living. Historically, Americans have not wanted their government to single out particular firms for special treatment or particular industries for taxpayer-funded subsidies. The U.S. government doesn’t pick winners. It lets the market do that.
Generally, we think that approach is correct. We oppose corporate handouts. But we do favor hand-ups—ways in which every local and state government and the federal government can give a hand up to entrepreneurs who want to start new businesses in America and manufacture here—and then let the market sort the businesses out. Just assuming that a rising economic tide alone will bring in more blue-collar jobs—as we are doing now—is not a smart strategy. It is not a strategy at all.
“While a robust economic recovery is a foundation for job growth, a cyclical rebound in GDP growth alone is unlikely to put enough Americans back to work,” McKinsey & Company analysts observed in a June 2011 study entitled An Economy That Works: Job Creation and America’s Future. “Job creation must become a national priority, not a by-product of other policy decisions.” McKinsey’s report concludes that a job-creation strategy has to include a variety of initiatives, which echoed what we heard from policymakers and entrepreneurs: addressing the growing mismatch between the needs of employers and the skills American workers get in school and in the job market; finding ways to make globalization a better source of job creation in the United States; stimulating innovation and new company start-ups; and simplifying regulatory procedures that create obstacles to job creation.
Listening to politicians browbeat employers for not hiring more American workers, you wouldn’t know that there is a need to harmonize what people are studying in school with what the workplace is looking for in the way of skills. McKinsey noted that “despite rising educational attainment and $18 billion spent annually by the federal government on job training, employers say they cannot find workers with specifi
c skills. Meanwhile, students lack a clear picture of which jobs to prepare themselves for.”
McKinsey found that 30 percent of the companies it surveyed said they have had positions open for six months or longer because they could not find the right people for them, and nearly two-thirds reported that they routinely have openings that are difficult to fill. At the high end of the labor market, the most difficult occupational categories to fill were in science and engineering, followed by those in computer programming and information technology. Next are jobs for statisticians and mathematicians who can manage new “big data” systems that use vast amounts of information to drive a range of business activities. But “skill shortages are not just confined to Ph.D. engineers, scientists, and computer programmers,” McKinsey found. “Our interviews reveal a broad set of fields at all levels of education—welders, nursing aides, nutritionists, and nuclear technicians—in which employers cannot find qualified workers.” For that reason, McKinsey argued that American business needs to become more involved “in developing curricula in community colleges and vocational schools, and a national jobs database would provide the basis for informed decisions about majors and training programs.”
You hear this complaint in every major city. “We see it right here in Kansas City with the local engineering and manufacturing firms,” said Robert Litan. “A lot of them are facing huge retirements in their labor force, and they can’t replace [those workers]. Where are the kids who will come in who know this stuff?”
In that spirit, we, the authors, our tongues partly in cheek, offer one specific proposal: a tax of $15,000 a year on the tuition for law school or business school, combined with a $15,000-a-year tuition subsidy for students pursuing graduate degrees in engineering, science, or other specific vocational studies. Somehow we have to find a way to get our best and brightest back to starting companies that make things that improve people’s lives and away from devising complicated financial products for Wall Street to make money from money. As Vivek Wadhwa, the expert on business and immigration, likes to say, “Friends don’t let friends get into finance.”
As for harnessing globalization to drive investment in America, the McKinsey study argued that “despite the recent financial crisis, the global economy is booming and American companies have mostly adapted and thrived in it. However, the same cannot be said for American workers. The United States needs a national conversation on how to ensure that its workers—not only its companies—win ‘market share’ in the growing global marketplace.” One idea is to seek out more foreign direct investment in the United States to finance brand-new start-ups, not just to buy existing firms. America should present itself as the world’s biggest and safest emerging market, and we could underline that, McKinsey suggested, by creating a special “business visa” that makes it painless for potential investors to come scout, purchase, and negotiate with businesses in America. Why leave that to China? We should be looking for ways to give incentives to companies that have outsourced work to India or China—where wages have been rising in the biggest markets—to bring it back onshore. With today’s high-speed telecommunication networks, it can be just as efficient and almost as cheap (without any language issues) to locate a call center in Bangor, Maine, as it is to go to Bangalore, India. With a rising global middle class, tourism is another industry that has huge room to grow in America, and is a big employer. As McKinsey notes, foreign visits to America fell from 26 million in 2000 to 18 million in 2003 before recovering to 24 million in 2009. That is a lot of hotels, amusement parks, transport vehicles, and restaurants not built, and a lot of service jobs lost.
Any jobs strategy also has to include leveraging the balance sheets of state and local governments to stimulate more start-ups. “Innovation, new industries and new company creation are essential for strong demand growth and job creation,” McKinsey noted. “An important first step will be to restart the flow of financing to start-ups and growing young companies.”
Jennifer Granholm, who served as governor of Michigan from 2003 to 2010, has been a pioneer in this activity. “In Asia, government is not the enemy, and we can’t afford to treat it that way here,” Granholm told us. “We have to make targeted smart investments that leverage private money going into competitively emerging companies”—in what are clearly going to be strategic industries. “If we don’t have the policies that create both the supply and demand for advanced manufacturing here, we are going to be a has-been country,” she added. “We are playing on a global playing field today. The board has enlarged so much. You cannot just cut taxes to fix all the problems.”
For industries such as clean energy, surely the next great global industry, said Granholm, “we need a federal policy that creates a national market and gives predictability to investors and manufacturers, to be confident that their output can and will be sold here.” This involves not picking winners but planting seeds. In 2009, the federal government created a competition for start-up grants—$2.4 billion worth—for electric battery and storage companies. Through that process, seventeen Michigan-based start-ups won grants, which the state of Michigan then augmented with smaller stipends.
“This enabled them to get off the ground and attract private capital,” said Granholm. “It also enabled us to build an entire battery cluster in Michigan, with the whole supply chain. It led to $5 billion worth of investment from the private sector and 63,000 jobs. None of this would have happened without federal policy. We could never have done it as a state alone. States don’t have the resources in tough economic times. We are not picking winners. Those companies will now live or die on their own, but we helped them get started. They are not looking for giveaways. They just need access to capital to get started. Every Asian country is doing this … The electric car is going to be a trillion-dollar industry. It is going to be the most technologically advanced massproduced product in the world.”
The electric car will resemble an iPad on wheels. It will spin off a huge applications industry as well, Granholm added. “So we have to decide: Are we going to be in that industry or not? If we are, we need to seed that garden and get these plants growing here—otherwise they will grow somewhere else.”
These incentives do matter, especially times of slow growth. Paul Otellini, the CEO of Intel, told us that barely a month goes by without some country’s leader contacting him and offering the likes of $1 billion in tax credits and other incentives if he will open an Intel plant and create jobs in that country. “I can build a factory anywhere on earth but here and get a $1 billion discount,” said Otellini. “If we said that we are going to put in place a policy whereby we will give five years of federal and state tax relief to anyone on earth, American or foreign, who puts up a factory in a U.S. state that creates jobs—and we will only start taxing you five years from now—it costs the country nothing.” The jobs and taxes would not have existed without the factory, and five years down the road the factory and its jobs will be producing tax revenue and creating other jobs for local suppliers, truckers, restaurants, lawyers, accountants, and barbers for years.
K. R. Sridhar, the principal co-founder of Bloom Energy, which employs 1,000 workers in California plants making a fuel-cell technology that helps power Google and other Silicon Valley firms, knows a lot about the trials and tribulation of innovating and manufacturing in America. The most important thing that government can do to help accelerate the development of new technologies and industries, he says, is to use its buying power and standards-setting power to help budding manufacturers get across what he calls “the second valley of death.”
This is an important but little understood problem in start-up manufacturing. In the lexicon of Silicon Valley, “the valley of death” refers to the point at which someone has invented something that works beautifully in a laboratory but is still unproven as a product that can become commercially viable and offer customers economic value. The difficulty of getting inventors across that first valley of death is why God created venture capita
lists. They build a team, fund it, and show that whatever the invention is, “you can do it outside the lab,” explained Sridhar. “That is where the maximum risk is and that is where the maximum return is. The government should not be involved there with taxpayer money.”
Many of the bits-and-bytes companies (i.e., software, services, or dot-coms) that manage to get across the first valley of death then proceed to “manufacture” their products in the least-cost, highest-productivity locations in the world. Because those products can be digitized, the work assembling them can be done anywhere at relatively low cost. So the jobs these bits-and-bytes innovators create are not very “sticky,” says Sridhar. Companies such as Facebook (2,000 employees) and Twitter (400 employees) “create a lot of wealth but not a lot of jobs.”
That is usually not the case with new inventions that involve bending metal—such as fuel cells for cars or the big electric cutting tools that Eastman makes. These require big investments in factories and production equipment—things that cannot easily be moved. These companies typically have a “second valley of death” that they have to cross before they reach profitability, and here state and local governments and the federal government can play important roles, without picking winners.
“Let’s say that you have proven the value proposition for your product—you are across the first valley of death,” said Sridhar. In order to get your business to take off and gain market share, “you need scale manufacturing, because the cost of a new technology will only come down with scale manufacturing.” And if you have scale manufacturing, you will also get access to more investors and better bank loans, which you need in order to drive and expand your business.
What government can do to help manufacturers achieve this kind of scale is shape the market. It can do that with tax holidays and cheap capital for the building of plants, of the kind Intel and Governor Granholm suggested. It can do that by offering to be the first buyer of a proven product—energy-efficient windows for government offices, solar water heaters for the military, electric cars for the post office. Or it can do that by creating legislation that raises standards—the way Mike Biddle proposed for recycling plastics—which immediately creates scale demand for a new American-made technology.
That Used to Be Us: How America Fell Behind in the World It Invented and How We Can Page 38