January 1, 2005

Where’s Your Value?

When you think about it, many of the industries in the worst competitive shape have received the most direct assistance in terms of quotas, trade protection and the like. Beyond the policy Band-Aid, two criteria that will guarantee the success of the American manufacturing sector are innovation and cost competitiveness. Both, in turn, are inexorably linked to investment in technology, nurturing talent, and research and development.

The IT sector has grown from relatively nothing on the world stage to 8% to 10% of the global GDP. However, investment in the non-technology manufacturing sector has declined since 1997. Companies have been brutal in extracting value from their supply chain relationships. Support hasn't been there, and now the supply often isn't there, either.

At the same time, investments in domestic plants have been stagnant for almost 10 years. Next year will be a good year for business investment, as there will be disproportionate investment in this sector to compensate for past inequities.

Global outsourcing is a relatively new phenomenon for the American service sector, which is learning to deal with greater competition. Cross-border activity is becoming a more prominent portion of global economic activity.

You can't compete head-to-head based solely on cost. You have to compete on quality and increasingly on customer service. My favorite example: Mexican cement company Cemex has developed a core competency in “just in time cement delivery.” It has developed a logistical capability that allows distributors to deliver cement to construction sites within two hours of when it's needed. Is Cemex a manufacturing or logistics company? Very few companies can offer a whole new value proposition for customers, but that's what needs to be done in American manufacturing.

Strengthening the principles behind our economic success is far more powerful than any policy action. In the last 18 months, a lower dollar has been helpful to manufacturing. Now, productivity gains can drop to the bottom line because they're not being offset by overvalued currency. That certainly does level the playing field. Tax cuts can help, but fundamentally, the gaps are so wide that they can only be closed using technology and more capital. When confronted with offshore competitors that pay, at times, one-tenth of the accepted North American wage, then you have to employ 10 times more capital to reduce your labor input.

Because other countries have lower labor costs, we think we can't compete, and that's just wrong. We have the most skilled workforce, access to a terrific logistics structure, and an unparalleled degree of market freedom. Part of what we demand as a modern and wealthy society is a safe, healthy environment, excellent health care and certain degrees of government regulation. This is not the price but the benefit of a mature society. With that said, there are better ways to achieve energy efficiency, environmental standards, and health care availability. We need to make the same investment there as in other parts of the economy.

Today, value is not in the product but in the eyes of the customer—that may be better logistics, more information and greater durability. The economy has become a business of intangibles, and that's antithetical to how people want to think and to how engineers are trained to think. Increasingly, we provide services, not products, and the biggest challenge is to define where the value is.

You have two choices: Function in a very lucrative niche and operate there, or, if you're going to operate to any degree of scale, you have to answer the fundamental strategic question: Where can you add value? There's no government policy that will answer that question for you.