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Chapter 1
The Rise and Fall
In 2007, in a secretive Silicon Valley research facility known only as Lab 126, engineers and designers successfully developed a new product with the potential to revolutionize the way we read books like this one. It was called the Kindle, and it would represent Amazon's first attempt at selling a product of its own.
What was special about the device was not just that it was a portable library of books, but that it used an innovative electronic ink. Unlike the pixels of a standard computer screen, the tiny capsules of electronic ink change what appears on the screen without illuminating it, allowing the Kindle to simulate a printed page and to be read even in direct sunlight.
The team at Amazon was excited about the potential of their product and began to search for a U.S. company that could manufacture it. To produce the special ink beads, Amazon partnered with a Massachusetts-based company, appropriately named E-Ink. The company had been started by researchers working at the MIT Media Lab and was now one of the only manufacturers in the country capable of producing electronic ink devices.
But E-Ink did not have the technology to build the Kindle screen itself. For Amazon to build the entire product, the company would have to partner with an additional manufacturer.
That search began in the United States; but it did not end there. The production technology required to build the screen was similar to what's used to make LCD televisions. Amazon needed a manufacturer with experience in that field. But there was a problem: Amazon couldn't find one in the United States. Though the LCD television was originally the product of American research and development (R&D), the entire industry had been ceded to Asia in the 1990s, when Asian countries offered U.S. television manufacturers a business environment too attractive to resist. By 1995, not a single LCD panel was being manufactured in the United States.1
As a result, Amazon was forced to look overseas to find a manufacturer with the expertise and capability to make the Kindle screen. Eventually, Amazon turned to a Taiwan-based company. The irony was a painful one for U.S.-based Amazon. Though its innovative new product had been developed in America, it would notâcould notâbe built in America. Today, as Harvard Business School professor Willy Shih has said, when a Kindle is purchased by an American consumer, it adds to our trade deficit.
Not long after Kindle production began, the Taiwanese manufacturer, Prime View, realized that it could make the Kindle at a lower cost if an ocean wasn't separating the building of the screens from the creation of the ink. As a result, Prime View bought E-Ink and moved its headquartersâand the electronic ink industryâto Taiwan.
The story of the Kindle is not unique. On the contrary, it is becoming a defining experience of the U.S. manufacturing sector.
Over the past several decades, the United States has watched entire industries disappear from its shoresâonly to reappear abroad. Industries from solar panel technology to highly advanced computer circuitry, from wind turbines to smart phonesâindustries that were born in the United Statesânow exist predominantly elsewhere. Between 2001 and 2010, U.S. companies were forced to shutter more than 42,000 factories. A third of all manufacturing jobsâa full 5.5 millionâhave disappeared. The entire sector is hemorrhaging.
Today, instead of manufacturing making up 28 percent of GDP, as it did in the 1950s, it makes up just 11.5 percent. Instead of exporting billions more than we import, the United States now faces a half-trillion dollar trade deficit.
As Richard McCormack, a leading thinker on manufacturing issues, has noted in The American Prospect, the furniture industry lost at least 60 percent of its production capacity in the United States between 2000 and 2008. By 2009, the U.S. auto industry was in shambles, requiring a federal bailout to survive. The Chinese are now the global leader in auto manufacturing; in 2008, they made half a million more cars than the United States. General Motors, once America's largest manufacturer, now plans to build cars in China and export them back to the United States. Wages in textiles, textile products, and apparel are expected to be cut in half by 2018.
Perhaps the most telling statistic of all: In 2008, 1.2 billion cell phones were sold worldwide. Not a single one was built in the United States.
How We Fell Out of Love with Manufacturing
How did a nation that once defined and distinguished itself by the things it built, a nation whose economic engines were driven by manufacturing, end up ceding its identityâand its futureâto other nations?
The United States used to be the world's greatest manufacturer. After World War I, U.S. manufacturing ability made the country an economic leader among nations. After the Great Depression, it was manufacturingâspecifically, the manufacturing of war materielâthat led the United States out of the depths of economic despair. In 1953, General Motors alone generated 3 percent of U.S. gross national product. For the 30 years after World War II, America experienced a post-war boom driven by manufacturing that helped build a vibrant middle class, not just in the United States, but around the world. Between 1947 and 1973, family incomes doubled. According to the State Department, gross national product grew 50 percent between 1940 and 1950 and another 67 percent between 1950 and 1960.
From the time of America's founding, manufacturing growth defined the nation's economic strength. That changed in the mid-1970s. In 1975, we were still exporting more goods than we were importing. But that was the last time we did so. In the 35 years since, the United States has consistently been burdened with a trade deficit.
Other major world powers had fully rebuilt their manufacturing bases after World War II, thanks largely to the Marshall Plan. That led to increased competition abroad. The United States signed onto multiple free trade agreements, reducing the barriers to importation. Cheap products from China and India, from Taiwan and Brazil, began flooding the U.S. marketplace.
Through the 1980s and 1990s, the United States continued to manufacture more goods than any other country. But competition from developed and developing countries alike was putting a strain on manufacturers across the board. By the 1990s, the fall of Communism ushered in a new era of free markets. Even China, which many believed might keep its economy closed, turned its engines full-tilt toward capitalism of a distinctly Chinese variety. In 2001, China joined the World Trade Organization. By opening up its economy and breaking down major trade barriers, the Chinese could rival the United States as the highest-producing manufacturing nation in the world.
The rise of the Internet, too, marked a major turning point for global manufacturing. It allowed businesses to communicate and partner more easily with foreign suppliers. It made the world smaller, more interconnected. It lowered the barriers of entry into emerging markets and made it cheaper to operate a far-reaching global supply chain.
For many businesses, these opportunities brought levels of success previously unimaginable. As companies entered emerging global markets, they found not just those who could produce their goods, but those who could consume them.
This free flow of global capital gave businesses a greater choice of where to build a new factory or plant. It encouraged countries to aggressively compete for foreign investment, knowing that if they could attract new business, they could build their economies. In addition to offering cheap labor, countries offered businesses lower tax rates and easier-to-navigate regulatory regimes, among other incentives. When manufacturing companies assessed their financial position, it started to make more sense for them to move jobs offshore than to continue to operate in the United States.
And so they did. And today, as a result, the entire U.S. manufacturing sector is in crisis. The scaling processâthe process of taking an idea out of the lab to mass productionâis barely happening here anymore. Ideas born here are getting built elsewhere.
At the same time, America shifted its focus from manufacturing to the service sector. In some sense, this was to be expected. Our current generation of business and political leaders grew up, for the most part, in the post-war period. This was a time not only of economic stability, but of sustained prosperity. Many of the children of that time period had parents who worked on the assembly lineâand hoped for a life for their children outside the factory. Perhaps a white-collar job, a position in management. Or a professional degree and a career as a lawyer, a doctor, a banker. This was the great era of upward social mobilityâalways a proud feature of American life, and never more so than in the boom years of the 1950s and 1960s. Indeed, the prosperity of that period allowed millions of young Americans to get a better education than their parents, and, ultimately, to get a better paying, higher valued job.
This was all a uniquely American success story. But it had unforeseen consequences, some of which are only now becoming clear. These consequences were cultural and economic. What happened was that somewhere along the way, a leadership class emergedâin the public and private sectorâthat no longer valued the manufacturing sector. Yes, they were grateful for the sacrifices their parents had made on their behalfâbut they had come to see manufacturing as merely a phase of economic development, something that a nation eventually outgrows, just as they had. So we populated the corporate world with service professionals, and filled Congress and the White House with lawyers and lobbyists, leaving manufacturers on the margins of our public dialogue.
As the manufacturing sector slowly sunk into a sustained crisis, there weren't enough people in positions of leadership who truly understood its importance, who truly appreciated the risks we faced if we let the sector erode.
What ultimately happened to the manufacturing base in the United States, then, was not the product of fate. It was the product of choices we made as a nation.
The Multiplier Effect
Most politicians and business leaders acknowledge that manufacturing is an important part of the economy. They travel the country, particularly traditional manufacturing areas, and talk in front of crowds at manufacturing outfits. Let us assume that these people are sincere when they proclaim their fidelity to manufacturing and manufacturing jobs. However, what they fail to recognize is that the loss of American manufacturing is going to be felt far beyond the streets of working-class Rust Belt communities. It is going to affect far more than the families who have lost jobs, and the towns that have lost entire companies. It's going to affect almost everyone. Because without manufacturing, the U.S. economy cannotâand will notâsufficiently grow.
Let me explain why:
Manufacturing, more than any other sector, creates jobs outside its own sector. These jobs range from construction and mining to jobs in fields like packaging and telecommunications. Even in 2009, a year when manufacturing was experiencing its sharpest decline to date, the sector still supported nearly 7 million nonmanufacturing jobsâjobs outside the plant. Those are jobs along an extensive supply chain.
We call this the multiplier effect. A new manufacturing facility will create demand for raw materials, construction, energy, supplies, and services. According to the U.S. Bureau of Economic Analysis, of all sectors, manufacturing has the biggest multiplier effect. As the Manufacturing Institute notes, âevery dollar in final sales of manufactured products supports $1.40 in output from other sectors of the economy.â Compare that to the service sector, which, according to the National Association of Manufacturers, supports just half as muchâ$0.71âin output for every dollar in final sales. These are high paying jobs that we lose every time we move a plant offshore.
Consider the iPhone. Open the box of a brand new iPhone and you will read this proud statement: âDesigned by Apple in California.â Now look at the back of the device and you will find, in letters so small they are difficult to read, this admission: âAssembled in China.â That's a story we know all too well.
But what if, instead, the back of the iPhone read, âDesigned and Assembled in Californiaâ? What would be the difference for the U.S. economy? If Apple were to open their factory next to their R&D facilities in the Silicon Valley, instead of Shenzhen, it would create jobs in California for an entire supply chain.
Businesses from packaging and office equipment to telecommunication services and building maintenance would have reason to hire new workers. Companies that mine raw materials would have reason to increase production. Local restaurants would have new customers. Local malls would have new patrons. The plant would become a new economic engine, leading to thousands of new jobs in town. The iPhone would create a mini-ec...
