The Case for Making It in the USA

Like it or not (I don’t), we need a manufacturing policy to stay competitive

In a recent front-page story, the New York Times detailed how Apple’s iPhone ended up being made outside the U.S. In describing the various forces at work—cheap labor, abundant engineers, quick turnarounds—the Times wrote about the Apple executives who visited a factory in China to see if it could cut the glass precisely for the phone’s touchscreen. When the Apple team got there, the factory owners were already constructing a new plant. “This is in case you give us the contract,” the owners explained. How could they afford such an extravagant gesture? It turns out, the Times noted, that they received subsidies from the Chinese government.

The story caught my eye because it is part of a pattern. President Obama spoke forcefully in his Jan. 24 State of the Union address about the importance of reviving manufacturing in America. Economists tell us it’s a complex matter involving tax, trade and regulatory policy, exchange rates and educational skills. It is. But when you move from high-level policy to specific cases, you will often find one element that is rarely talked about: a foreign government’s role in boosting its domestic manufacturers with specific loans, subsidies, streamlined regulations and benefits. In effect, these governments— many in Asia, though some in Europe as well—have a national industrial policy to help manufacturers.

In 2009, when Bridgelux, a light- emitting-chip manufacturer, was searching for a new factory site, the company considered the cost of building in the U.S. or elsewhere. The government of Singapore offered to pay half the setup cost of the plant. “Why can’t we do that here in the U.S.?” CEO Bill Watkins asked. “The rest of the world is chewing us up alive.”

Andrew Liveris, CEO of Dow Chemical Co., has also been arguing for a national policy aimed at reviving manufacturing. Companies cannot compete with countries, he notes in his book, Make It in America.

Liveris argues that not only would a manufacturing policy produce good long-term jobs, it would also upgrade the work skills that are crucial to keeping innovation alive. “Innovation doesn’t just happen in laboratories by researchers,” he told me. “It happens on the factory floor. The process of making stuff helps you experiment and produce new products. If everything is made in China, people there will gain the skills, knowledge and experience to innovate. And we will be left behind.” He worries that with tablets like the iPad and Kindle being made mostly in Asia, the next generation of these products could well be imagined there.

Take solar energy, an industry largely invented in the U.S. but in which the manufacturing has mostly moved to China. The CEO of Evergreen Solar, Michael El-Hillow, decided that he had to move one of his plants to China to reduce costs. “In December 2008, we were approached by a Chinese company, Jiawei, which was impressed with our wafer technology,” he recounts. “The Chinese government agreed to support a loan that would cover two-thirds of our expansion in China.” The subsidies offered by the Massachusetts government, by contrast, covered about 5% of the cost of the company’s U.S. plant. Last year Evergreen filed for bankruptcy, having unquestionably been undone by cheap Chinese competition. But Evergreen’s Chinese factory will continue to operate, with Jiawei inheriting all its technology and know-how.

Or consider wind turbines. China’s biggest windmill makers, Sinovel Wind Group Co. and Xinjiang Goldwind Science & Technology Co., have received more than $15.5 billion in credits from state-owned banks. As a result, despite many concerns about quality, they won their first major foreign orders in the past year. They plan to establish plants abroad, including China’s first in the U.S. Over time, they will gain experience, improve quality and further reduce costs. In industry after industry, the same pattern emerges.

In theory, I am deeply skeptical of government industrial policy. Government doesn’t know how to pick winners and losers, it will make mistakes, and the process will get politicized. All this is true. And yet when I look at China and South Korea and also Germany and Japan, I see governments playing a crucial role. They do make mistakes— their versions of Solyndra— but they seem to view them the way venture capitalists would. Their role is to seed many companies, only a few of which will succeed. Once these companies are identified, government helps them compete against big U.S. multi nationals. There used to be a joke about Marxist economists who would say of a deviation from pure communist economics: “It might work in practice, comrade, but it doesn’t work in theory.” That’s what industrial policy looks like these days. The theory doesn’t make sense, but it’s hard to argue with the result.