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Supply Chain News: Manufacturing Offshoring is Ruining the Current and Future US Economy, University of Michigan Professor Says


Skills, Investment, Innovation Follow Where Goods are Actually Made, as US Tax Payers Often Fund Products Later Moved to Offshore Production

Nov. 26, 2019
SCDigest Editorial Staff

The damage to the US economy from offshoring manufacturing to low cost countries generally and China is far greater than almost anyone understands.

So say Dr. Sridhar Kota and Tom Mahoney in a powerful opinion piece recently published in the Wall Street Journal, based on an article they wrote in the Fall 2019 issue of the journal American Affairs. Kota is a professor at the University of Michigan and executive director of MForesight, an independent, federally funded public-private research consortium on advanced manufacturing. Mahoney is associate director of MForesight.

Supply Chain Digest Says...

Kota and Mahoney argue that government programs must be developed that focus on ensuring that hardware innovations are manufactured in this country. .

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A fundamental mistake many observers make is that the US can maintain economic strength by designing technology hardware and other products domestically, and then offshoring the lower value-add work of actually manufacturing the goods.

"Instead of manufacturing domestically, the thinking goes, US firms should focus on higher-value work: 'innovate here, manufacture there,'" Kota and Mahoney wrote.

But that is dangerous thinking, they add, saying that just how dangerous is starting to be understood by politicians, academics, labor leaders and more.

"There is a growing recognition that we can no longer afford the outsourcing paradigm," Kota and Mahoney say.

Why? Because, they say, once manufacturing departs from a country's shores, engineering and production know-how leave as well, and innovation ultimately follows. "It's become increasingly clear that 'manufacture there' now also means 'innovate there,'" they say.

For example, a 2015 study by the consulting firms Strategy& and PwC found that US companies across sectors have been moving R&D to China to be closer to production, suppliers and engineering talent - not just to achieve lower costs and gain access to China's market. In fact, an estimated 50% of overseas-backed R&D centers in China have been established by US companies.

The bottom line: innovation in manufacturing and design gravitates to where the factories are.

Kota and Mahoney say it is clear that applied research and engineering necessary to introduce new products, enhance existing designs and improve production processes are best done near the factories themselves. And as more engineering and design work has shifted to China, many US companies have a diminished capability to perform those tasks domestically.

The authors also say that while offshoring can arguably be said to have all told benefited large multi-national companies, the overall impact on US manufacturing has been decidedly negative.

(Article Continued Below)



"It is increasingly clear that offshoring has devastated the small and medium-size manufacturers that make up the nation's supply chains and geographically diverse industrial clusters," Kota and Mahoney say.

The data tells the tale: the number of such small and medium manufacturers in the US is down nearly 100,000 since the 1990s and by 40,000 just in the last decade.

Perhaps most compelling position of all, Kota and Mahoney says billions of US tax dollars are going in the end to fund offshore manufacturing.

"Many foreign companies many participate in federally funded university research centers and then use what they learn in their factories abroad," they note, saying LG, Sharp and Auo were partners in the flexible display research center at Arizona State University funded by the US Army, but they do not manufacture displays in America.

What to do?

Kota and Mahoney argue that government programs must be developed that focus on ensuring that hardware innovations are manufactured in this country.

The idea, they say, is not to recover lost industries but to rebuild lost capabilities.

"The US needs to leverage its dominance in science and technology to create future industries, to provide us with first-mover advantages and reclaim American leadership in manufacturing," Kota and Mahoney write.

To see that and other policies moved forward, they also call for a new Cabinet-level federal agency responsible for the health of US manufacturing, which they say might be called something like the National Manufacturing Foundation.

They also would make rules that ensure any licensee of federally funded research results should be required to manufacture at least 75% of the value added in this country, with no exceptions and no waivers.

Kota and Mahoney conclude that "Such steps are essential to generating a strong return on the US taxpayer's enormous investments in science and technology. For too long Americans have suffered from the self-inflicted wound of hollowing out our industrial capacity.

The full article, with subscription, is available here: Innovation Should Be Made in the U.S.A.

Any reaction to Kota and Mahoney's position? Let us know your thoughts at the Feedback section below.


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