A Manufacturing Strategy for 2012: Keeping Jobs & IP in the U.S.

Several weeks ago, on December 11, 2011, U.S. Commerce Secretary John Bryson set out his vision for how the Department of Commerce can best partner with the business community to support President Obama’s jobs agenda.  If the past is any indication of the future, President Obama and it senior team will do whatever they can leading into the new year to jump start the economy and get Americans back to work.

At his speech at the U.S. Chamber of Commerce, Commerce Secretary Bryson outlined his top three priorities to help American businesses “build it here and sell it everywhere,” focusing on supporting advanced manufacturing, increasing our exports, and attracting more investment to America from all over the world.  The key to emerging from the Great Recession is, of course, manufacturing.  Manufacturing jobs have left the U.S. in favor of more business friendly climates in other countries, taking with them U.S. jobs and U.S. intellectual property.  But moving into a Presidential election year will government be able to do anything that is at all likely to help?

“At the Commerce Department, we aren’t waiting to act. We have a major role to play at this critical time to support job creation in America.  We have an array of tools to help make our businesses more innovative, more efficient, and more competitive around the world,” he said. “I want to know how this administration and the Commerce Department can best help you.  From these conversations, my discussions with the president and my own personal experience, I will prioritize one simple imperative — to help American businesses build it here and sell it everywhere.”

But Bryson also acknowledged that government cannot do it alone, and made a direct appeal to the business community to hire and invest now, while also pledging to support them.  “America needs you to invest here now.  America needs you to put people back to work. I’m here to tell you that the Obama Administration and the Commerce Department will provide energetic, tireless and effective support to help American businesses compete,” he said.  Yes, the Obama Administration needs support from the business community, but is the President willing to give in order to get?

I have no doubt that the Obama Administration will do everything they can, within the limits they set for themselves, to jump-start the economy.  They will try mightily, but election strategy choices and philosophical beliefs could stand in the way of what could be a robust recovery by the end of 2012.

The conventional thinking is that President Obama will have a very difficult time getting reelected if the economy is still lethargic come November 2012.  Regardless of what Obama supporters want to believe the electoral college math does not paint a rosy picture for the President.  No State the voted for McCain in 2008 is at all likely to flip into the Obama column, meaning the President is on defense.  If you look at the polls in the so-called swing States you see that the electoral map does not look very good for the President.  Can he win?  Of course he can, but you are only kidding yourself if you think it will be easy or is a guarantee.  Much will ride on jobs and an overall improving economic outlook.

As Secretary Bryson explained, obtaining investment in America is one of the key pillars to the Obama plan.  While it is nice to talk about increasing investment coming to America from all over the world, the plans of the Commerce Department and the Obama Administration are lackluster.  The Commerce Department is touting training initiatives for 2012 whereby the Department “will train staff in 10 foreign markets… on the SelectUSA initiative.”  SelectUSA seeks to highlight the advantages of doing business and investing in the United States, which is fine, but is getting the word out about the virtues of America really going to do anything other than make people feel good?

It would be far better to allow repatriation of the more than $1 trillion held by U.S. corporations in overseas accounts.  Talk about a shot in the arm in terms of investment!  So, while attracting investment to the U.S. is laudable it is impossible for me to take serious any effort that doesn’t involve a repatriation tax holiday.  It isn’t like those funds will be coming back anyway or the U.S. will derive tax revenue from money safely stashed overseas.  So why not let it be invested in America  and spur the economy?  A real mystery.  Work so hard to attract new investment when the answer is so simple.

This leaves support for manufacturing, which is an absolute no-brainer, and the President’s goal of doubling exports.  Right now we export an awful lot, but that is an untold story you might not be familiar with.  What are we exporting?  By and large we are exporting our intellectual property so foreign companies and subsidiaries around the world can engage in manufacturing.  However, as Hank Nothhaft has eloquently and thoroughly explained in his book Great Again: Revitalizing America’s Entrepreneurial Leadership, that when manufacturing exits a country R&D funding dwindles in direct response, thereby creating an enormous problem.

Nothhaft explained it this way in a speech in January 2011 in Washington, DC at the Innovation Alliance Conference:

For 30 years now we have all been fed the carefully cultivated myth, that so long as America did the creative work, the inventing, then we can let other nations like China do the so called grunt work, the manufacturing. Simply, we would think; they would sweat. So we let manufacturing go and in so doing we lost the greatest economic force multiplier in history. For manufacturing not only supplies middle class incomes to the three-quarters of all Americans without a college degree, it also creates up to 15 additional jobs outside of manufacturing for every position on the factory floor.

Every engineer in the world knows that innovations don’t always (if ever) ramp up from the micro level to the macro level as one might predict.  So when we outsource manufacturing we are handing over the follow-on innovation that will take place on the factory floor.  This is how and why the American economy is struggling.

But we are never going to be able to compete with China and other countries in terms of manufacturing, right?  WRONG!  The unfortunate thing is that our political leaders have so far not wanted to offer a business friendly environment calculated to make America a strong manufacturing nation once again.  According to Nothhaft, “It’s the U.S. government’s myopic policy, not China’s lower payroll costs, that make our nation uncompetitive in the all-important solar and other high-tech manufacturing sectors.”

In Great Again Louis Vintro, vice president and general manager of the semiconductor product division at equipment maker ESI explains: “What we see from our data is that China has a roughly 50 percent advantage in labor costs. But since labor represents an average of only 7 percent of operating costs across all of the semiconductor sectors, that means China has a 3.5 percent overall cost advantage.”

But with that 3.5 percent cost advantage comes uncertainty.  The United States still offers a solid rule of law and there is not the political unrest here that could (and likely will) emerge in China as the rising middle class wants more and demands freedom.  But even this 3.5 percent advantage can be closed, as Nothhaft explains: “If you take as a guide the roughly 30 percent tax that Intel has paid in recent years on 10 percent operating profit, that would mean a 3 percent lower cost of operating a plant here. Add in an enhanced, permanent 20 percent R&D tax credit equal to what other nations offer… and China’s advantage drops to 1 to 2 percent.”  At 1 to 2 percent advantage is it worth the headaches of doing business in China?  A proactive manufacturing policy is what the United States needs, but will it be what the United States gets?

This is what the Department of Commerce says it is doing in its effort to support manufacturing:

  • Manufacturing Policy: Earlier this month Secretary Bryson was named by the President to co-chair the White House Office of Manufacturing Policy, along with Gene Sperling.  The Office will determine policy and help coordinate all the different manufacturing efforts across the Administration.
  • AMP: Commerce will soon establish a national program office at the Department to coordinate and help implement the President’s advanced manufacturing partnership (AMP), which brings together industry, universities, and the federal government to drive investments in emerging industries like information technology, biotech and nanotechnology.  The Office will be lead by Mike Molnar, who is currently the Chief Manufacturing Officer for the Department’s National Institute of Standards and Technology (NIST).  Molnar recently joined NIST after a 25-year career in advanced manufacturing.
  • Investment: In the last two years, the Department of Commerce’s Economic Development Administration (EDA) has been making investments to support the formation of regional clusters and technology hubs, and has already invested over $75 million in 68 competitive, job-creating projects across the country to support advanced manufacturing.  And next year, the Department of Commerce’s National Institute of Standards and Technology (NIST) will invest nearly $90 million in advanced manufacturing, much of it in new research areas like smart manufacturing technology and new materials discovery.
  • Protecting Intellectual Property: Signed into law earlier this year, the America Invents Act, represents the most significant reform of the Patent Act since 1952, and will help American inventors, entrepreneurs and companies, many of which are also manufacturers, that have suffered costly delays and unnecessary litigation as part of the patent-approval process, focus on innovation and job creation.

I’m a fan of doing whatever we can to assist manufacturing, but blue ribbon panels and new Offices within the White House are not likely going to cut it, although they are at least something.  For the first time in recent memory we have both political parties talking about the importance of a resurgent U.S. manufacturing society.  Republican Presidential candidates openly talk about a pro-manufacturing strategy, most notably former U.S. Senator Rick Santorum.  Santorum is stuck at the bottom of the polls, as shown by the Real Clear Politics data, and the Obama Administration response doesn’t seem to embrace either a repatriation tax holiday to spur manufacturing or a long term R&D tax credit or any kind of tax holidays.  Failure to embrace tax policy to spur manufacturing is one of those election strategy choices that will get in the way of a robust economy by the end of 2012.

The final pillar in the Commerce Department strategy is to further increase U.S. exports.  In this regard the Commerce Department initiatives include:

  • National Export Initiative (NEI):  Launched in 2010, the NEI has already helped U.S. businesses expand exports 17% in 2010 and 16% so far this year. That puts the initiative on track to meet President Obama’s goal of doubling U.S. exports by 2014.
  • Global Buyers Initiative: The Global Buyers Initiative (GBI) is a new partnership between Commerce and FedEx to identify and assist foreign manufacturers that are looking for U.S. suppliers.  This new initiative will be piloted over the next two months in France, Canada and Korea and, if successful, is expected to expand worldwide in 2012.
  • Restructuring the Foreign Commercial Service: To intensify focus on markets where U.S. exports have the best potential for continued growth, including China, Brazil, Indian, Saudi Arabia and Turkey, the Department of Commerce is reallocating and repositioning resources to markets identified as priorities under the National Export Initiative (NEI).

Again, all good, but wouldn’t the best way to increase exports be to revitalize the manufacturing sector?  Unfortunately, believing that manufacturing can rebuild the American economy without an associated tax strategy is a fools errand.  With class warfare seemingly being the 2012 strategy selected by the Obama Administration as the path to victory it doesn’t seem likely to me that we will get any kind of thoughtful tax reform even though targeted tax breaks to spur the manufacturing sector would undoubtedly create jobs, which everyone knows is a prerequisite to an acceptable recovery.

Manufacturing is the linchpin to turning around the U.S. economy in both the short term and for the long term.  U.S. manufacturing can create American jobs and will keep U.S. intellectual property working for us domestically.  Done properly a manufacturing strategy can and will lead to more blue-collar and more white-collar jobs, spurring the technology sector and rebuilding the U.S. economy from the ground-up from within.


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Join the Discussion

2 comments so far.

  • [Avatar for Chinese Bulgarian]
    Chinese Bulgarian
    December 27, 2011 10:01 am

    Here in the US, each state competes with the others to attract new industry by giving tax breaks, provided the company meet certain investment and employment benchmarks. Why not do that with the repatriation of the offshore profits? If you bring that money home and start new manufacturing that meets certain benchmarks (I don’t have a specific suggestion here, other than to look to the states to see what was successful for them.) then the money comes back tax free, or at a low rate.

  • [Avatar for Dale B. Halling]
    Dale B. Halling
    December 26, 2011 06:38 pm

    We could also repeal SOX, Dodd Frank, AIA, the publication requirement, lower corporate tax rates, rationalize our tax system, and demand that regulations meet some sort of cost and effectiveness strategy. Finally, we could quit bailing out Wall Street and either get rid of the Federal Reserve or repeal legal tender laws.