The future of manufacturing

Earlier this week the New America Foundation released a fascinating new report on Value Added: America's Manufacturing Future (click here for the PDF of full report).

While the report contains recommendations (see below), what is most important, at least in my mind, is how it looks at manufacturing:

But manufacturing is changing, and the contribution of manufacturing to the American economy makes it all the more important for the U.S. to capture the gains of the next generation of manufacturing innovation. Advanced manufacturing encompasses the wave of revolutionary technologies that includes robotics, nanotechnology, photonics, biomanufacturing, the synthesis of new materials and additive manufacturing or rapid prototyping, which promises to replace mass production with customized production in many industries. New kinds of business organization, made possible by advanced communication and information technology, are transforming the way manufacturing firms operate. Servitization is the process by which a product-centered firm adopts a product-service strategy in which revenues from services throughout the product's lifecycle are as or more important than the sale of the original product. While some companies have long pursued product-service strategies, that business model is becoming available to many more firms in industries ranging from aerospace to medicine.

As readers of this blog will recognize, this view incorporates my thoughts about the transformation of manufacturing and the fusion of manufacturing and services. I particularly appreciated the detailed discussion on "servitization" and the product-service system (PSS).

However, as I noted at a meeting on the report, I have resisted using the term "servitization." I believe it captures only part of the fusion of manufacturing and services -- specifically the output and marketing part. Servitization focuses on the sale of goods and services as a combination or the sale of a good as a service (such as the jet engine manufactures selling "Power-by-the-Hour"). I've described this process in numerous postings, most recently just earlier this week in a piece on how servitization is making inroads to defense contracting.

But the process is much more. Manufacturing is becoming more and more knowledge and intangible asset (aka "service") intensive. As I pointed out in the Athena Alliance Policy Brief--Intellectual Capital and Revitalizing Manufacturing, the transformation is changing the inputs to the production process. No longer is it simply raw materials, machinery and workers. Production inputs and factors of competitive advantage are areas that might be considered "services" if they were done by a separate organization: R&D, product design, supplier relations & supply chain management, marketing & brand management, customer relations, etc. Thus, it is next to impossible to separate out the "service" from the "manufacturing" in the inputs, throughputs (aka, processes) or outputs.

(FYI -- for another similar take on the transformation of manufacturing, see an earlier posting on a new study on Emerging Global Trends in Advanced Manufacturing.)

The report's recommendations cover a variety of areas, ranging from R&D to trade. Many of these are well known -- but worth repeating and re-emphasizing:

R&D and Technology Diffusion. Public policy needs to encourage private sector R&D, including through a permanent R&D tax credit. Public investment in R&D and support for manufacturing should be financed in part by new federal development banks and federally-favored municipal bonds. Breakthroughs in R&D must be followed by development at scale and the diffusion of new transformative technologies across sectors, with the help of government procurement, credit and technology extension programs.

Infrastructure and Energy Strategy. In addition to these forms of direct assistance, infrastructure and energy policies can indirectly retain or onshore manufacturing in the U.S. by lowering the costs of energy and chemical feedstocks and by reducing bottle-necks in the transportation and communications infrastructures. In addition to lowering the costs of manufacturing, the energy sector, revitalized by natural gas, and the construction of new, more efficient transportation and communications systems can provide sources of demand for domestic manufacturing firms.

Tax and Regulatory Reform. Tax policy should encourage investment in American manufacturing by foreign and domestic firms alike. Legacy regulatory systems need to be updated as cutting-edge technology blurs or destroys the boundaries among kinds of manufacturing or between manufacturing and services.

Training Workers for Advanced Manufacturing Jobs. Rapid technological change in manufacturing means that the U.S. needs a new social contract in education which rationally allocates responsibility for learning and upgrading skills among government, employers and individuals.

Promoting Mutually Beneficial Rather than Adversarial Trade. The U.S. needs to do a better job of defending its industries against predatory policies by mercantilist nations, without sacrificing the benefits of access to foreign markets and foreign talent.

I would add three policy ideas not included in the report:

First, while the report touches upon government procurement as a mechanism for technology diffusion, more can be done to encourage manufacturing innovation through the procurement process (for an example, see earlier posting).

Second, the report also discusses regulation but with a focus on reducing regulation as a barrier to innovation. As I have noted before, regulation can be an innovation forcing-function to spur innovation - including innovation in manufacturing products and especially processes.

Finally, the report talks about R&D in technology areas but not about research in other areas, such as organizational studies. Since much of the inputs to an intangibles-intensive manufacturing process will be non-technological, it makes sense for the R&D enterprise to ramp up efforts in these areas. An example is DARPA's famous "Red Balloon" challenge that was a research project on mechanisms of harnessing social networking. More can be done to fund research on and demonstration of new business methods and organizational mechanisms.

Thus, I have a few picky points with the report. But overall, it is a major step forward in helping foster advanced manufacturing in the United States. I hope it will be widely read.