A Formula for Rebuilding America’s Manufacturing Base and Competitive Electronics Manufacturing Industry

There’s a lot of discussion and speculation today about what’s wrong with the US economy, and what to do about it. It is generally agreed that part of the problem is that America’s manufacturing jobs have been outsourced to cheap labor markets overseas, and that reviving manufacturing in the US, with a healthy export trade, is part of the solution. How to achieve this, though, is the subject of much debate. With price pressure from these foreign markets making American goods less than competitive, how could we succeed?

In the electronics manufacturing industry, a truly global market, US-based manufacturers are in a quandary. The once-robust American electronics manufacturing and assembly industry has been gutted; most consumer electronics are assembled and manufactured in Asia. For example, cellular or wireless phone electronic components are produced almost exclusively in factories in China, Taiwan, Vietnam, and others. But it isn’t merely inexpensive or cheap consumer technology being produced there, but in fact highly complex and sophisticated electronics. This is actually an exception of sorts; generally we assume that high-volume, cheap consumer item manufacture is outsourced, while the lower-volume, more complex or difficult products are produced here. That’s not the case with electronics.
Our company, EI, is a printed circuit board fabricator based in the Chicago area. At one time, there was a robust PCB fab industry here in the US, much of it located in Southern California. But now, US-based PC fabricators are less numerous, in large part due to price pressure from overseas and pressure from environmental regulations and compliance requirements. The nature of our industry is such that it involves metals, chemistries, plating baths, and the generation of waste that must be properly treated or disposed of, something that is unfortunately not as much of an issue in countries where such regulations are lax or nonexistent. Compliance, though necessary, is still one factor that impacts cost, which in turn affects price competitiveness with PCBs produced overseas.

In terms of the US manufacturing industry as a whole, there is a way to turn things around. A good example to follow – not easy, but one that has worked – is the model that Germany has developed, sometimes referred to as the “BMW Model.” It must be working; in August of last year, The Observer’s Ruth Sunderland called the bounce-back of German manufacturing “… a testament to a business culture that has respect for manufacturing, and where exporters such as BMW or Bosch do not rely on a cheap currency to sell goods abroad but on the excellence of their products.” Sunderland calls Germany’s so-called Mittelstand – its small and medium-sized firms – “the backbone of the German economy,” adding they have “proved their durability and resilience.”¹

And it’s more than that. Germany is a country where the revival of manufacturing is increasingly successful, and as a result they have brought unemployment down sharply to its lowest point in 20 years. Part of the secret has been to keep high-tech, high-capacity manufacturing at home, which keeps quality engineers in the country; they stay because these high-level jobs earn top wages. This keeps the brain trust at home, where it builds products considered the best in quality on the world market. Germany has invested in its people, and works constantly to support technological advancement and keep it in the country. To achieve this, it has continually invested in such things as training and internships, with the goal of keeping skills and knowledge within the country. It also forged successful cooperative associations with universities and educational institutions. The teamwork between government, industry, and institutions of training and higher education was a formula for success in terms of investing in people and providing the tools needed to fill the positions required by demanding technology.

It has been frequently said that America's best industry is producing Ph.Ds and highly educated people, but the problem is that once they have completed their education, they leave. We're losing our brain trust, because the people we educate, often from countries such as China, take that knowledge and return to their homelands, using their new skills to enhance the competitiveness of their domestic industries and economies against the US. In many instances they will help found companies that compete directly with US-based companies where they completed their internships or worked for a year or more!

High-technology, high-end manufacturing jobs pay well and attract the best candidates. They don’t need to be jobs at massive global corporations; in fact, some of the most innovative, forward-thinking, and prosperous companies are the American equivalent of Germany’s Mittelstand: small or mid-sized, established firms that invest in development and innovation. We need to invest in people – knowledge and training – and orient our efforts more toward those industries that demand a high level of knowledge and competence. Currently, we use only 22% of our total economic capacity here in the US for manufacturing; we are primarily a service sector economy. We can’t grow the US economy based solely on service. The German model is a bit different, where about 30% of the economy is industry and 70% is in the service sector. Remarkably, this is only about a 10 percentage point disparity, but in practice it constitutes a world of difference. Judging by the German model, if we shift only 10 percentage points of our resource capacity into manufacturing, perhaps a little more, we can go a long way to turning around the economy within a decade or two. Remember that economic growth is based on the GDP. The GDP in turn is based on earnings. High tech jobs require greater skills and training, and as a consequence, those jobs command better rates of pay. This contributes to boosting the GDP.

American industry has an ace in the hole, so to speak, that can help this turnaround, and also serves as an argument against outsourcing, and that is US infrastructure, manufacturing and transportation. Many people considering outsourcing don’t realize all the costs involved in sending work overseas. More than merely the costs of shipping, there are costs associated with lost time and risk factors that only become apparent once the process has begun. Developments in US infrastructure, begun during the Eisenhower years, have made the US the most cost-effective and reliable place to manufacture and deliver product. The logistics system within this country’s infrastructure is very efficient. Transportation in the US is still more efficient and cost-effective than anywhere else in the world. The lower risk factor associated with shipping goods within the US is a major cost consideration and incentive for manufacturing here.

Earlier we mentioned how high-volume, inexpensive consumer products for many industries are outsourced for manufacture in China, for example, while many high-reliability products continue to be manufactured here – in many cases. Yet, in the printed circuit board and electronics sector, this formula has been turned on its head. More complex printed circuit boards are being made overseas and shipped here for assembly, while low-tech circuitry, the type of technology that is been around for 20 years and more, is being produced here in the United States – the country that invented PCB technology! In fact, the majority of complex printed circuit boards assembled in the US are fabricated in Taiwan and China. The recipe for success for American electronics is to reverse this trend, so that the low-tech boards are being produced overseas, and the highly complex circuit assemblies and boards are being manufactured and fabricated here in America. It sounds like a simple solution, but it is not an easy one to implement; in PCB fab, for example, price pressure from overseas is high and margins are slim. It will take better machines, better technology, and more skilled engineers to boost the capability – not capacity – of electronics manufacturers here. That’s investment – and where is it to come from? If a US PCB fabricator can invest in greater capability; e.g., smaller features, lines, and connections on PCBs, to compete with overseas suppliers, we can resume advancing technology here and compete globally, sinking money into innovation and technology development.

Banks and finance institutions will need to provide needed financial support, such as low-interest loans, so they can invest in new equipment and move up to the next level of development. But I suggest this would take five or six years minimum. We know the recipe, but we don't quite know how to get there. We need a roadmap, and the roadmap begins with some sort of financial support to promote development in the circuit board industry, so that we can bring higher technology manufacturing back to the US to support growth and jobs. If these PCB manufacturers can expand their capabilities, the growth will follow and high-tech American products will be sold competitively in the world market.

There is a ripple-effect benefit as well. Electronics contract manufacturers and assemblers, also known as EMS providers, will grow too, and be more competitive, because they will have more local sources for boards for more complex products. The ripple effect will be felt across many associated industries, and have a direct benefit on the national economy. Too many US-based EMS companies buy their bare boards from overseas because fabricators in the US do not offer many products or even the capacity or capability to provide them.

We should focus on doing what we need to make our economy more lean, more efficient, more productive, and more complex, with a greater range and diversity of manufacturing. This will begin to reverse the tide of outsourcing and thereby grow the national economy while we enhance the prospects for our own businesses.

References
1. Ruth Sunderland, “German Business Culture Should Be a Model for Our Own,” The Observer, Aug. 14, 2010.

Pratish Patel is president and CEO of Electronic Interconnect (EI).