2011 December 25 Sunday
Outsourced Manufacturing Hobbles Next Gen Development

An article in Technology Review looks at how outsourcing of manufacturing has reduced the ability to innovate to develop next generation products in the United States. In some cases outsourcing has even slowed the rate of technological progress.

It turns out it's not necessarily true that innovative technologies will simply be manufactured elsewhere if it doesn't happen in the United States. According to research by Erica Fuchs, an assistant professor at Carnegie Mellon University, the development of integrated photonics, in which lasers and modulators are squeezed onto a single chip, has been largely abandoned by optoelectronic manufacturers as they have moved production away from the United States. Many telecom firms were forced to seek lower-cost production in East Asia after the industry's collapse in the early 2000s, and differences in manufacturing practices meant that producing integrated photonic chips was not economically viable in those countries. Thus a technology that once appeared to be just a few years away from revolutionizing computers and even biosensors was forsaken. Economists might argue that we don't care where something is produced, says Fuchs, but location can profoundly affect "the products that you choose to make and the technology trajectory itself."

For the computer industry so far the location of factories that make the hardware hasn't have much impact on software development. But the article makes the point that for many industries where materials manipulation techniques are key to how to make better products the engineers who develop the products need access to materials fabrication facilities in order to try out ideas and to tune manufacturing processes. The problems in manufacturing are constraints on what can be designed and there is a tight coupling between product engineering and manufacturing engineering.

Outsourcing cuts labor costs. But higher labor costs are an incentive to develop cheaper ways to manufacture as well as higher value products. Plus, the proximity that manufacturing plants to engineers enable those engineers to do more innovative work.

The United States has been running trade deficits for many years. Contrary to what a confident and cocky economics econ prof taught my macroeconomics class in college, this has not self-corrected. In a very real sense we are going in hock to the world. Worse still, our outsourcing of so much manufacturing undermines our ability to develop high value products we need to sell in order to pay down our debts.

Some call for more government funding of research in universities in order to boost our innovation. But today a substantial portion of basic research done in US universities is more likely to enable Japanese, Chinese, Korean, and German manufacturing companies to develop new products. The connection between academic researchers and local industry was never that strong to begin with. But now that most of that local industry has decamped to distant locales the model of basic research feeding into industrial innovation in the same country is badly broken.

Share |      By Randall Parker at 2011 December 25 07:54 PM  Economics Trade

Abelard Lindsey said at December 25, 2011 9:19 PM:

As I've said before, it is meaningless to discuss the issue of outsourcing without considering the dramatic increase of regulation that has increased the cost and hassle of doing business, particularly manufacturing, in the U.S.

Ross Noble said at December 25, 2011 11:22 PM:

Regulations and hassle of doing business in the U.S. are small variables. Consider that an entire industrial commons has been dismantled and moved. Commons and industrial ecosystems are not easily dismantled because of simple "hassles."

We deficit spent on Vietnam in a Guns and Butter approach. This ultimately caused gold to leave our country, culminating in our going off the gold standard in 71. In the ensuing years we noticed that deficit spend dollars on our military bases, and the war in Asia, would cycle back to the U.S. and be used to buy T Bills.

The returning money tended not to buy real assets, because the foreign country wanted to keep their currency strong. Since the dollar is reserve, then easy conversion of T Bills to dollars effectively means foreign banks hold convertible dollar reserves. We now have a T Bill economy.

By taking dollars out of circulation due to conversion to T bills, the price of the dollar is held higher than it would be otherwise. Supply and demand means the dollar is higher than it should be; main street american business are hobbled because the yard stick measurment - the value of money - has been distorted.

Outsourcing has acclerated with the advent of Chinese MFN status. This legal structure assigns low risk for American business to relocate. Wall Street then finances the relocation of industry, and takes the profits of wage abritrage and also pockets the money price difference. In other words, captains of industry congratulate themselves by giving themselves large bonuses. But what they have done, is shift monetized wage differentials to themselves in arbitrage. Wall street makes profits for awhile, but eventually U.S. mainstreet gets hollowed out as jobs are lost. Even more criminally, the shifting of industry overseas ignores the reality that money is not wealth. Real wealth is process knowledge and tricky details built up over generations. That knowledge is not monetized properly, and in fact given to foreigners for a fraction of its historical cost. Comparative advantage is lost and our historical legacy passed down to us is monetized for pennies.

The world bank and IMF structures as designed at Bretton Woods encourage silo industrial development in the third world. Loans would go to coffee plantations, or extractive industries. The corollary would be the cotton industry in the Civil War South, where cotton was sold to industrial Britain. The American south would not have developed a balanced economy, but would instead have been a plantation that produced one crop in a colonial system. The U.S. post WW2 has used the World Bank to give loans, which encourage plantations. The account balances from the plantation countries, due to debt, more than pay for original loans.

Unfortunately, now the U.S. is being gamed with the low Yuan exchange rate, and a nearly unlimited supply of Chinese labor converting from farming to industry. The idea is to steal western industrial jobs and climb up the knowledge ladder in one generation. American captains of industry are only too happy to oblige, because their simple minded accounting says it must be cheaper over there as the U.S is uncompetitive. China is doing it to U.S. with their economics, but our American government is slow to recognize the post WW2 Bretton Woods game is over. The hollowing out of mainstreet has further accelerated the outsourcing trend, as deficit spending must go up in proportion to trade deficit. For each dollar of goods imported, a dollar must leave our money supply. The U.S. government and the financial sector are enjoying this power, to create new money and demand goods, but they are ignorantly damaging main street.

eggwhite said at December 26, 2011 3:58 AM:

Thanks for the information. So, it seems those coal estimates are off by almost two centuries. Well, I will hope we can somehow manage to go a few more decades without energy prices spiking a lot higher. Maybe some new technology will come online in the meantime that will allow more coal/shale/oil to be recovered. But, won't hold my breath, I'm still waiting for the Jetson style flying car I was promised.

Lou Pagnucco said at December 26, 2011 9:47 AM:

Good analysis, Ross,

The Lords and Ladies of the U.S. corporate boardrooms, the Wall Street Aristocracy and WDC have betrayed Main Street.

Won't change though - P.T. Barnum was so right.

Nanonymous said at December 26, 2011 11:39 PM:

I blame the MBA types running all large American businesses. These bean counters have zero clue of technology (engineering/science) and what it takes to have an innovative culture. So by pursuing short term profits they kill long term prospects of the companies they run. Engineers and scientists are treated as disposable peons today - that's a central problem, actually.

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