RESEARCH & IDEAS

Why America Needs aManufacturing RenaissancePublished: October 17, 2012Authors: Gary P. Pisano and Willy C. Shih

In their new book, Producing Prosperity:Why America Needs a ManufacturingRenaissance, Harvard Business Schoolprofessors Gary P. Pisano and Willy C. Shihdiscuss the dangers of underinvesting in thenation's manufacturing capabilities. Thisexcerpt discusses the importance of the"industrial commons."

Editor's note: In their new book, ProducingProsperity: Why America Needs aManufacturing Renaissance, Harvard BusinessSchool professors Gary P. Pisano and Willy C.Shih argue that reinvesting in America'smanufacturing prowess is necessary not onlyfor creating jobs, but also for maintaining thecountry's lead in innovation.

"R&D is a critical part ofthe innovation process, butit is not the whole thing"In this excerpt, Pisano and Shih discuss the

concept of the "industrial commons." In the pasta commons—a shared farming pasture—wasthe foundation of the local agriculturaleconomy. Manufacturing commons are "webs oftechnological knowhow, operationalcapabilities, and specialized skills" thatunderlie many industries, universities, and thegovernment.

Also, see Professor Jim Heskett'sconversation with his readers on the need for amanufacturing renaissance.

Excerpt: The Erosion of theIndustrial Commons

From, Producing Prosperity: Why AmericaNeeds a Manufacturing Renaissance

By Gary P. Pisano and Willy C. Shih

In times past,farmers and localtownspeople wouldbring their livestockto the commons—alocal pasture thateveryone could use.The commons was acritical communityresource because itnourished thelivestock thatprovided a

foundation for the local agricultural economy. Ifthe commons fell into disrepair—either throughoveruse or neglect—everyone suffered.Although taking care of the commons was noindividual's responsibility, it was in everyone'sinterest to do so because all benefited from ahealthy commons.

Modern industries have commons as well,although they are infinitely more complex thanthe simple town greens of centuries past.Today's industrial commons consist of webs oftechnological knowhow, operationalcapabilities, and specialized skills that areembedded in the workforce, competitors,suppliers, customers, cooperative R&Dventures, and universities and often supportmultiple industrial sectors. Although industrialcommons are largely supported by privatefor-profit entities, the knowledge produced bythese entities flows across businesses throughmovements of people from one company toanother, supplier-customer collaborations,formal and informal technology sharing, andoutright imitation of competitors.

Although there is much talk these daysabout the world being "flat," in fact, know-howand capabilities are often highly local. Thismeans that industrial commons can have a localcharacter as well. As a result, companieslocated in some places have advantages overothers by virtue of their access to theappropriate set of workers, engineers,managerial talent, suppliers, and universities.The solar PV industry discussed earlier is anexample. Throughout this book, we willdocument how the presence of an industrialcommons can exert a powerful gravitationalpull on the location of industries and innovation

(and conversely, how the absence of anappropriate commons creates a chasm).

View a table of industrial capabilities thatare gone or at risk in the US.

The rough and tumble of internationalcompetition means we should expect industriesto come and go. Even if this is sometimespainful, it is, in fact, a healthy process by whichresources flow to their most productive uses.When a commons erodes, however, itrepresents a deeper and more systematicproblem. It means the foundation upon whichfuture innovative sectors can be built iscrumbling. When the semiconductor productionbusiness moved to Asia in the 1980s, it broughtwith it a whole host ofcapabilities—electronic-materials processing,deposition and coating, and sophisticated testand assembly capabilities—that formed anindustrial commons needed to produce a wholehost of advanced, high-valued-added electronicproducts such as flat-panel displays, solid-statelighting, and solar PV. In this book, we willexamine the dynamics that underlie both therise and decline of commons, and theconsequence of those declines. Our argument isbuilt around three core themes.

Theme 1: When a Country Loses theCapability to Manufacture, It Loses the Abilityto InnovateInnovation and manufacturing are often viewedas residing at the opposite ends of the economicspectrum—innovation being all about the brain(knowledge work) and manufacturing all aboutbrawn (physical work). Innovation requireshighly skilled, highly paid workers, andmanufacturing requires low-skilled, low-paidworkers; innovation is a high-valued-addedspecialty, and manufacturing is alow-value-added commodity; innovation iscreative and clean, and manufacturing is dulland dirty.

"The unraveling of acommons is a viciouscircle"Such a view of manufacturing is a myth and

is based on a profound misunderstanding ofhow the process of innovation works and the

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link between R&D and manufacturing. R&D isa critical part of the innovation process, but it isnot the whole thing. Innovation is about movingthe idea from concept to the customer's hands.For some highly complex products (flat-paneldisplays, PV cells, and biotechnology drugs, toname a few) the transfer from R&D intoproduction is a messy affair, requiringextremely tight coordination and the transfer oflearning between those who design and thosewho manufacture. If you do not understand theproduction environment, you have a harder timedesigning the product. In these settings, thereare strong reasons to co-locate R&D andproduction. It is a lot easier for an engineer towalk across the street to the plant or drive downthe road than to fly halfway around the world totroubleshoot a problem. This helps to explainwhy the American company Applied Materials,a leading maker of equipment formanufacturing semiconductors and solar panels,moved its chief technical officer from theUnited States to China. Because most of itslarge customers are now in China, Taiwan, andSouth Korea, it makes sense for the company todo its research close to the factories that use itsequipment. Applied Materials is now movingmuch of its manufacturing operations to Asia aswell. In chapter 4, we will offer a frameworkfor determining when it matters whether R&Dand manufacturing are located near each andwhen it does not.

Theme 2: The Industrial Commons Is aPlatform for GrowthThe industrial commons perspective suggeststhat a decline of competitiveness of firms in onesector can have implications for thecompetitiveness of firms in another. Industriesand the suppliers of capabilities to the industriesneed each other. Kill a critical industry, and thesuppliers probably will not survive for long;other industries in the region that depend onthose suppliers will then be jeopardized. Whenthe auto industry declines, it causes an atrophyof capabilities (such as casting and precisionmachining) that are also used in industries suchas heavy equipment, scientific instruments, andadvanced materials.

The unraveling of a commons is a viciouscircle. As capabilities erode, it is harder forcompanies that require access to stay inbusiness. They are forced to move theiroperations or their supplier base to the newcommons. As they move, it is harder for

existing suppliers to sustain themselves.Ultimately, they must either close shop or movetheir operations.

Even worse, the loss of a commons may cutoff future opportunities for the emergence ofnew innovative sectors if they require closeaccess to the same capabilities. Four decadesago, when US consumer electronics companiesdecided to move production of these "mature"products to Asia, who would have guessed thatthis decision would influence where the mostimportant component for tomorrow's electricvehicles—the batteries—would be produced?But that is what happened. The offshoring ofconsumer electronics production (oftencontracted to then-little-known Japanesecompanies such as Sony and Matsushita) led tothe migration of R&D in consumer electronicsto Japan (and later to South Korea and Taiwan).As consumers demanded ever-smaller, lighter,and more powerful (and power hungry!) mobilecomputers and cell phones, electronicscompanies were pushed to innovate in batteries.In the process, Asia became the hub forinnovation in the design and manufacturing ofcompact, high-capacity, rechargeable, lithiumion batteries, a technology that was invented inAmerica. This explains why Asian suppliershave become the dominant source of the lithiumion battery cells used in electric vehicles.

Theme 3: There Is Nothing "Natural" AboutErosion of the IndustrialCommons—Management and Policy MatterThe erosion of the industrial commons in theUnited States is the result not of the "invisiblehand" of markets but rather the "visible hand"of managers and policy makers. The skills,know-how, and capabilities underpinning anindustrial commons accumulate over time. Bothgovernment policies and the investmentdecisions of private enterprises determine whatcapabilities are fostered where. Decisions byUS companies to outsource a growing array ofincreasingly complex processes (includingproduct R&D) and to reallocate resources awayfrom long-term research have played a centralrole in the erosion of the US industrialcommons.

As we shall discuss, each of these individualdecisions, when viewed in isolation, may looklike it makes perfect sense. Cumulatively andcollectively, however, they have seriousconsequences for both a country and individualcompanies.

Consider outsourcing. For many companies,it was simply far too attractive to shutter theirproduction in the United States and have Asiansuppliers make the products. Many companieshave even decided to buy their R&D fromsuppliers in Asia as well. (For instance, mostlaptop computers are designed andmanufactured by a small handful of Taiwanesecompanies.) In the short term, such outsourcingcould dramatically lower the costs of goods andsupercharge earnings, which is tough logic tocombat. Yet, as each company makes such adecision, it becomes increasingly difficult forexisting suppliers to stay in business. Investingin new technologies or training workersbecomes less economically feasible. This lackof investment in technological and humanresources leads to further erosion in competitiveperformance, which makes it even moreattractive for other companies to move theirsupply base overseas. The process looks like anatural reaction to market forces, but, in fact, itwas driven by some very specific managementdecisions.

Government policy, too, plays a huge role,even in highly market-oriented economies likeAmerica's. There was nothing natural about thecreation of the United States' strength inscience-based industries. Government policyplayed a critical role. After World War II, theUS government began to implement a policy ofmassive support for basic scientific researchthrough newly created agencies such as theNational Science Foundation (NSF) and theNational Institutes of Health (NIH), and throughexisting agencies such as the Department ofDefense and Department of Energy.Cumulatively, these investments established thebasic sciences that laid the institutionalfoundations for innovations in semiconductors,high-speed computers, computer graphics,broadband communications, mobile telephony,the Internet, and modern genomics-basedmethods of drug discovery. Reversing thedecline of the US industrial commons willrequire both effective management andgovernment policy.

Reprinted by permission of HarvardBusiness Review Press. Excerpted fromProducing Prosperity: Why America Needs aManufacturing Renaissance by Gary P. Pisanoand Willy C. Shih. Copyright 2012. All rightsreserved.

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