The Future of Manufacturing: Driving innovation in the ‘new world’

The morning after the State of the Union, the National Association of Manufacturers delivered its report, "U.S. Manufacturing Innovation at Risk." Jerry Jasinowski, president of the Manufacturing Institute, which sponsored the report along with the Council of Manufacturing Associations, said he wasn't sure if the release of the report a day after the State of the Union was initially a good idea.

By Bob Vavra, Editor March 1, 2006

The morning after the State of the Union, the National Association of Manufacturers delivered its report, “U.S. Manufacturing Innovation at Risk.” Jerry Jasinowski, president of the Manufacturing Institute, which sponsored the report along with the Council of Manufacturing Associations, said he wasn’t sure if the release of the report a day after the State of the Union was initially a good idea.

“An awful lot of success has to do with timing,” Jasinowski said on Feb. 1. “The comments the president made about competitiveness makes this report even more important.”

Innovation is not an innovative concept in American manufacturing. From the steam engine to the assembly line to the microprocessor, the world has always looked to America for the latest revolutionary idea.

In today’s new global economy, the world is now looking everywhere for those ideas, leading to growing concern that the United States has lost its edge in innovation. With the U.S. lagging behind China, India and Korea in educating engineers and with jobs being lost in America to manufacturing consolidation, there is concern over how America can regain that historical edge.

President Bush’s discussion of the topic at the 2006 State of the Union Address on Jan. 31 raised the debate to a new level. Recent studies on the topic from inside and outside of manufacturing are getting a fresh look, and are being viewed in a new light.

A research study released by Accenture at the end of 2005 highlights the need for global flexibility in the industrial products sector, and pointed to ways American companies were growing and thriving at home and overseas. While the report studied large players in this market, Accenture North American industrial practice managing partner Paul Loftus was quick to note, “Our research has suggested that scale is seldom, if ever, the primary determinant of high performance. Much more important is one of four key building blocks of high-performance: distinctive, difficult to replicate capabilities.”

In other words, innovation.

Spanning the globe

Loftus said the report also highlights that manufacturing is a growth industry that needs to be viewed in the context of the global marketplace.

“There is growth in this sector at home and abroad,” he said. “In fact, our research also shows there a group of elite companies that are opening the door to unprecedented growth opportunities in this sector.”

One key, Loftus said, is for U.S. manufacturers to embrace the idea of a global economy, supported by a global customer base and a supple, integrated and extended supply chain.

“Companies that have the ability to flex their global operations can take maximum advantage of regional efficiencies and capitalize on growth opportunities in emerging markets.” First you heard a lot about Mexico, then Asia and now China,” Loftus said. “In order to grow and compete globally, you have to be near your global customers to know them well. This new model means that innovation is happening everywhere.”

Several competitive manufacturers highlighted in the Accenture study — companies such as American Standard, Cooper Industries and Finland-based KONE Corporation — have gotten their arms around ways to build local marketing and sales forces and local manufacturing centers wherever the markets emerge. “These companies think globally, they have centers of excellence globally. They drive product delivery sooner. Following the sun allows innovation to take place 24 hours a day.

Some of what is needed, Loftus contended, is an industry mind-shift about how to achieve high performance.

Work to do at home

None of that suggests that there aren’t serious barriers to a truly harmonious global manufacturing economy. The NAM has campaigned long for an end to Chinese currency manipulation and for an easing of tax and productivity burdens on U.S. manufacturing that the NAM contends adds 22% to the cost of operations.

Its latest report, though, points to other reasons for lagging innovation in manufacturing:

  • In the current recovery, manufacturing growth is lagging. Manufacturing has grown 15% in this recovery or half the rate of past rebounds

  • Manufacturing capacity is underutilized, even at a time of dramatic increases in productivity

  • The U.S. share of global trade has dropped from 13% in the 1990s to 10% in 2004. The U.S. share of global trade in machinery and equipment is also declining

  • New workers are not entering the market because of fears of job instability. This is especially a problem in the area of skilled workers

  • Money spent on research and development has stalled. While the total dollars spend on R&D is still highest in the world, the growth of that spending is up just 1% per year since 2000.

    • It is to this last point that Dr. Joel Popkin, the study’s author, was most emphatic. “Though the U.S. accounts for 40% of all R&D spending in the industrial world, we cannot become complacent about this leadership position,” Popkin said. “The rapid growth in overseas manufacturing is creating new global centers with the critical mass necessary to build their own innovative machines.”

      Room for optimism

      Other industry experts studying U.S. manufacturing come to somewhat brighter conclusions.

      Accenture’s study notes that growth in both U.S. and global gross domestic products have spurred a growth in durable goods orders in the U.S. A sector that was in decline in 2001 was up more than 10% in 2004. North American GDP was up 4.4% in 2004.

      Accenture’s study contends there are four pillars to achieving operational excellence:

    • Global flexibility — Developing an integrated supply chain that is aligned with your global customer segments

    • Innovation and pricing power — Customer insight that powers product innovation, and ultimately commands a premium price

    • Productivity plus — Operational excellence combined with business efficiencies that drive continuous improvement across a consistent operating model

    • People performance — Commitment to a set of core values and developing organizational capabilities to achieve higher levels of performance

      • While Accenture’s study focused on larger manufacturers, Loftus said those pillars can be adapted to companies of any size. “There is a misconception that your overall size defines whether you’re a high-performance company. If you look at the financial results, companies with the highest returns aren’t the ones with the most revenue,” Loftus said. “Controlled growth is one of the key elements. It’s about very deliberate growth, growth that is well thought out — what are the sectors of growth, what are the opportunities, what is needed to successfully execute.

        Another study by Pricewaterhouse Coopers pointed to increased growth and investment in manufacturing in the coming year. Among the study’s findings, released Jan. 31:

      • Manufacturers expect 7.7% growth over the next 12 months

      • One roadblock to that growth could be the increase in energy prices. Even so, while 65% see energy costs as an issue, that figure is down from 80% in the third quarter of 2005

      • Capital investments are also on the rise, with 57% of manufacturers expecting to make capital purchases

      • Mergers are also on the increase, with 48% of those surveyed expecting merger activity in the next year.

        • “Industrial manufacturers expect to maintain a steady, profitable growth pace, with a higher level of major new investments,” said Jorge Milo, head of Pricewaterhouse Cooper’s U.S. industrial manufacturing practice. “And, after years of caution, they now appear ready to add workers for the growth they envision.”

          Getting education involved

          Whether workers will be ready for the jobs is another issue. Much of the call for innovation has centered on improving education. With U.S. engineering degrees down in recent years (and with many of the engineering students foreign-born) the concern that there is a knowledge drain has prompted calls for action at every level.

          U.S. universities have seen the same trend up close, and are moving to address it. The National Coalition for Manufacturing Innovation was formed in 2005 to bring America’s top engineering universities together in a partnership with industry and the federal government to address some of these issues.

          The roster of universities that have signed on to date is impressive: the University of Texas, Michigan State, Arizona State, the University of Kentucky, UCLA, Rutgers, Alabama, Lehigh and the Illinois Institute of Technology, which initiated the Coalition.

          The Coalition has set five goals as it begins its partnership efforts:

        • Assist U.S. manufacturing

        • Conduct joint research on manufacturing issues

        • Collect worldwide data for analysis by manufacturers

        • Educate qualified engineering students for U.S. industries

        • Promote entrepreneurship.

          • “The NCMI was established based on the recognition that innovation remains the key for the United States to maintain technological and economic leadership in the world,” the Coalition’s strategic plan states. “The challenge to our nation today is to unleash our innovation capacity to drive productivity, standard of living and leadership in global markets.”

            While in its early stages, the Coalition seeks a real partnership that provides funding to universities, which will produce students ready to bring innovation to manufacturing. “Currently, within the engineering programs across the country, there are limited opportunities for the students to learn innovation and entrepreneurial thinking,” said IIT professor Dr. Jamal Yagoobi, who chairs the Coalition. “NCMI will make innovative thinking a solid part of engineering curricula. The Coalition member institutions will jointly determine the best way to achieve this goal.”

            Beyond just graduate-level students, the consortium sees a time in which experienced manufacturing workers will be able to go back to school, either on campus or through distance learning, to get the kind of training on innovation that will benefit their current employers.

            Yagoobi said the direct involvement of manufacturers in this effort is crucial to success. “The Coalition needs to hear from the manufacturers. Receiving feedback will help us move in the right direction,” he said. “The Coalition is going to have a workshop soon and representatives from industry will be invited to participate.” Interested participants can contact Yagoobi at to participate.

            The Coalition’s success will come from bringing together all of the bright minds in U.S manufacturing to affect change. “The Coalition will be successful if the industry finds it valuable,” Yagoobi said. “Examples of sustainable success and outcomes are providing innovative products and processes, generating jobs, having spin-off small companies, and of course educating engineers with innovative minds.”

            Studying the future

            So if you view the glass as half-empty, there are jobs being lost in a shifting global economy. It you see it as half-full, it is an opportune time to drive change in the manufacturing landscape. Accenture’s study takes a look at the glass itself.

            “We team with our clients across multiple industry segments to determine what it takes to achieve high performance,” Loftus said. “As a manufacturer’s customer base changes they need to respond accordingly. This requires a manufacturer to rethink their strategy and execution model for the next three to five years.”

            If Loftus had to pick one kind, the glass would be half-full — if not a little better. “There’s going to be continued growth in the manufacturing sector. Some segments will be better than others due to the cyclical nature of the industries in the sector,” Loftus said. “The U.S. will continue to be the leader in manufacturing and innovation, driven by globalization. That trend will continue for many years.”

            The world is moving in new directions every day, and U.S. manufacturing sees its role changing and evolving. Champion it or curse it, but you need to realize a new business model has evolved, Loftus said.

            “We are part of a global economy now. Manufacturers need to look at the global marketplace and their own capabilities in a global marketplace,” he said. “Leading companies embrace that concept. To be global is not a question any more. That fuels growth globally — inside the U.S. as well as outside the U.S.”

            The U.S. share of the world’s exports have fallen in the past few years, dropping from 13% to 10% of the total. That puts the U.S. behind Germany, and closer to China and Japan.

            Economic growth has been steady over the past four years, with U.S. GDP increasing by about 30% from 2003 to 2004.

            Demand for U.S. durable goods, which plummeted in 2001 and 2002, have shown a strong rebound in the last two years.

            For more information about the studies cited here, go to: