On Business: Maintaining a competitive edge

The plight of the US illustrates the folly of outsourcing advanced manufacturing to low-wage economies.

by Eamonn Fingleton, World Business
Last Updated: 23 Jul 2013

The Washington Post's British-born economic commentator Sebastian Mallaby recently opined that corporate America is now enjoying a "golden phase". Golden phase? There is evidently a flourishing market in the US capital for wishful thinking. Mallaby may be too young to remember, but corporate America once enjoyed a real golden age - in the 1960s. It was a time when ambitious young executives everywhere aspired to work for US employers.

The awe in which American business was held in those days was not misplaced.

Corporations such as IBM, Xerox, Boeing, General Electric, Motorola, Texas Instruments, Hewlett-Packard, Eastman Kodak and General Motors luxuriated in the knowledge that though American wages were two to five times those in western Europe and east Asia, no European or Asian rival came close to challenging US leadership in advanced manufacturing.

Pace Mallaby, things look very different today. Concerning the travails at Xerox, Texas Instruments, General Motors et al, the less said the better.

But even IBM, Boeing, and GE are far more precariously positioned than is generally understood. These corporations are so heavily dependent on outsourcing from Asian and European rivals that they have lost control of their industries' enabling technologies. It was on such control that their former world leadership was built.

Perhaps the most telling example is that of Boeing. Consider the 747 jumbo jet: manufactured in the largest building ever built, the 747 defined America's position in the global industrial pecking order. Though this was rarely explicitly stated at the time, the plane was 98% US-made. Not only were all Boeing's top suppliers based in the US, but so were these suppliers' suppliers and these suppliers' suppliers' suppliers. Down to virtually the last nut and screw, the plane was made in the US, using high-wage American labour.

Contrast that with the 787, the high-tech plane to be launched by Boeing in 2008. The plane's US content is officially said to be 35%, but even this meagre figure is probably overstated. What is clear is that the plane will be at least as much Japanese as American. In particular, the carbonfibre wings - probably the most advanced feature - will be made in Japan by Mitsubishi Heavy Industries. Boeing's leadership in wing-making was once considered the jewel in its crown. Indeed, up to the late 1990s, Boeing's top executives vowed that they would never outsource the wing-making function.

What's wrong with outsourcing? Nothing, if it is used merely to delegate non-essential functions to low-wage nations. But when a US company outsources to Japan, it is tacitly admitting that Japan has now decisively passed the US in industrial productivity. The point is - though you could never tell this from the way the Japanese economy has reported in the last 15 years - factory-floor wages are now 10%-30% higher than in the US.

We have been told that advanced nations no longer need to look to manufacturing for their comparative advantage. Supposedly, services now provide them with more attractive opportunities - and allegedly no nation is better at services than the US. This is the sense in which people such as Mallaby claim to see only American success. Unfortunately, America's trade record is screaming that post-industrialism is not enough. At 6.3% of gross domestic product, the US's current account deficit last year represented the worst performance of any major nation since Italy in 1924.

Although economics is notoriously prey to canards, there has probably never been a more absurd canard than the idea that manufacturing is now worthy only of low-wage economies. In reality, manufacturing offers far better opportunities than services for a high-wage nation to maintain and enhance its competitive edge. Why? Because modern advanced manufacturing is highly capital-intensive, whereas services are generally labour-intensive. Modern advanced manufacturing typically requires a vast amount of proprietary knowhow, which, unlike the publicly available knowhow involved in services, can be withheld from would-be competitors for years or even decades. Advanced manufacturing plays directly to the strengths of a rich, highly organised nation.

Where is all this leading? For any ambitious young executive with a global view, the implications are quite profound. Barring a total about-face in American policy-making, the US can be written off. Manufacturing-oriented nations such as Japan, Germany, Switzerland and, of course, China will define economic leadership later in this century.

There is now literally no exchange rate for the dollar, no matter how low, at which the US can balance its trade. In the long run, the dollar is toast. It is no more reasonable for a once-wealthy nation to live on credit forever than it is for, say, a redundant executive. Sooner or later, there will be a reckoning.

- Eamonn Fingleton is the author of Unsustainable: how economic dogma is destroying American prosperity (Nation Books, 2003).

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