Build It In The Back Yard: Why We Need American Manufacturing

12/14/12Follow @bpqhimself

[Editor's Note: This post was co-authored by Brian Patrick Quinn, Patrick Connelly, Patricia Hurter, John Condon, Peter Mueller & Joshua Boger of Vertex Pharmaceuticals.]

American companies, in recent years, have developed a massive appetite for foreign labor. The shirt you’re wearing, the cell phone you’re using, and even the medicine you’re taking might have been designed in Massachusetts or California, but odds are that they were made, in part or in full, by low-cost labor in emerging countries. This “offshoring” of manufacturing is widely known throughout the government, academic, and business sectors. Apart from scattered outcries when American factories go dark, the practice is widely tolerated, and at times celebrated as a paragon of modernization. Public policy has rarely stepped in to restrain it.

However, for most people, “manufacturing” brings to mind the low-skill labor of armies of workers in vast, loud factories. This stereotype belongs to the 19th century, not the 21st – but, dangerously, it is allowed to guide policy even today. To the contrary, modern manufacturing is often a high-precision, highly-skilled process that Charles Dickens or Sinclair Lewis would have a hard time recognizing. It serves as the sharp tip of our innovation economy – not only by incarnating ideas as products, but also by generating important ideas of its own that filter into the rest of the economy. For the private sector, then, strengthening manufacturing in America is smart business. For the public sector, it would prove farsighted and beneficial to society.

Offshoring does have immediate allure and, in some cases, makes good sense. The case of low-skill, high-volume labor is an obvious example, but high-tech manufacturing – of consumer electronics, solar panels, pharmaceuticals, batteries for hybrid cars – is now commonly offshored as well. One of greater Boston’s most technology-intensive industries, pharmaceuticals, illustrates how this comes to be. Simple attention to the bottom line is sometimes what prompts companies to consider a move offshore: if we can outsource our manufacturing to foreign suppliers that cost a fraction of the competition in America, well, why wouldn’t we? However, according to some seasoned pharmaceutical executives, price is not the only factor driving a manufacturing decision – or even the most important. A foreign manufacturer may offer a lower price, but the pharmaceutical environment is so vigorously regulated that the overseas company’s service and quality need to be competitive with those of American firms as well. Increasingly, they are – and the foreign firms get more business as a result.

In addition, offshore manufacturers have become not only more desirable in recent decades, but also easier to access. The drastically greater breadth, increased penetration, and reduced cost of both telecommunications and transportation have allowed businesses to avail themselves of the choicest manufacturers from around the globe. Increasingly, these manufacturers are located outside of the United States, frequently in Asia.

We caution, however, against taking this approach to its logical extreme. A future in which no manufacturing happens in America is a risky one for business and society alike. Carefully considering the state of manufacturing in high-tech industries – focusing here, because of our specialized expertise, on pharmaceuticals – argues strongly in favor of a more balanced approach. Continuing to draw on sophisticated manufacturers overseas, while also nurturing domestic capacity, is an approach that maximizes not only value in the present, but also the likelihood of capturing value in the future.

Perhaps the most valuable trait of the manufacturing sector is its capacity for supporting innovation. In fact, experience shows that innovation and manufacturing processes are too interdependent to work well when they’re separated; the direct feedback loop between the two disciplines creates a competitive advantage for both. A number of firms, recognizing this interrelationship, are concentrating their R&D operations in new facilities built in the shadow of their factories. This, by itself, is a good decision: discoveries that emerge during manufacturing often provide valuable “in-process learning” that circulates back to R&D’s drawing board and improves the finished product.

This widespread creative potential of manufacturing also means that, as a rule, innovative discoveries could happen anywhere. They could happen in central China or they could happen in an industrial park in New Hampshire. Companies in need of manufacturing services can’t predict these sudden upwellings of creativity, but if their business would benefit from that innovation, they had best be ready to capitalize on it. Being thus prepared requires not flexibility – arguing in favor of flexibility is pointless since few businesspeople would argue for less – but, rather, a diversified approach to manufacturing.

Maintaining flexibility allows a business to reconfigure itself to chase an important new innovation; it’s reactive. But having a diverse supply chain already in place gives a firm the chance to be proactive. It maximizes the option value of manufacturing. The importance of diversification is best seen by analogy to one current economic model, that of the Santa Fe Institute. Although hotly debated in academic circles, the Santa Fe model is a useful heuristic for thinking about manufacturing. According to this model, the economy is a complex adaptive system – that is, a network of multitudinous agents (here, individuals and firms) that interact and display several emergent properties, which is to say, properties that the system as a whole displays without being intended or even observed by any of its participants. Capitalizing on a system with emergent properties requires keeping as many options open as possible. In manufacturing, a diversified supply chain – one that relies on domestic as well as overseas manufacturers – provides just this type of strategic advantage.

An example from our own experience is the technique of spray-drying, a manufacturing process that starts with a drug that isn’t soluble in water and converts it into a form that is. (The trouble with water-insoluble drugs is that they don’t dissolve enough in the gastrointestinal tract to be absorbed into the bloodstream, so they’re less likely to reach their intended target when a patient takes them.) The process was developed and perfected, independently, by several manufacturers – including one in Europe and one in the United States. The employer of several of our authors, Vertex Pharmaceuticals, took an interest because spray-drying was an important step forward, at the time, for several of Vertex’s candidate drugs. Vertex has long taken a broadly global approach to manufacturing. It was, therefore, relatively straightforward for us to take our spray-drying process, developed internally at a small scale, and contract it out at development and commercial scale for our first two FDA-approved drugs, telaprevir (Incivek) and ivacaftor (Kalydeco).

The innovative potential of manufacturing has another consequence, too – one of broader, even societal concern. Innovation-driven economies can generate tremendous amounts of economic activity – and create significant numbers of jobs – but they do this only when an innovation is actually made and used. Current American attitudes, reflected in public policy as well as public discourse, celebrate innovation in its many forms as the centerpiece of a thriving, 21st-century economy. This analysis isn’t wrong – but it is incomplete. Innovation does lead to jobs and economic activity, but not, to any great extent, during the discovery of the generative good idea. Real economic benefits, like jobs and wealth creation, accrue during the scale-up, commercialization, and manufacture of products that emerge from research and development. Commentators are starting to notice this. Even Andy Grove – who, as a founder of Intel, is one of the great technology innovators of our day – has argued in BusinessWeek that scaling up a good idea does more for the economy around it than the idea itself ever could.

In fact, the single most efficient way to create jobs and expand economic output is by nurturing the manufacturing sector. In a recent book, Andrew Liveris, CEO of Dow Chemical, argues that for every $1 of manufactured goods that an economy produces, it also creates $1.40 worth of output from the nearby producers, suppliers, and service providers that support and sustain the manufacturing effort. This multiplier effect is more pronounced for manufacturing than for any other endeavor. (It is, for instance, several times greater than for the service sector. The economic collapse of Flint, Michigan is an example of this that has been well

documented elsewhere.) The benefits for the wider economy can be profound. Liveris cites the example of Germany, which went from a trade deficit of $5.9 billion in 1998 to a surplus of $267.1 billion ten years later. Germany shifted the balance of trade so profoundly by investing in manufacturing – especially advanced, technology-intensive manufacturing. Manufacturing makes up 20 percent of the German economy, and as a result, this country with 1.2 percent of the world’s population holds 17 percent of global market share in manufactured goods.

As a public concern, therefore, manufacturing is an appropriate interest of governments as well as private companies. Michael Porter (a Harvard Business School professor and expert in corporate strategy), among others, is right to criticize the outdated notion that government and business play a zero-sum game. It is imperative that leaders of both government and business pause in their negotiations – not always amicable ones – over taxes and incentives and regulations and recognize that, in a substantive and non-trivial way, they’re playing on the same team.

Re-building the American manufacturing sector is not, however, a responsibility that the government can shoulder alone. No amount of government support could, or should, sustain a manufacturing sector that is not world-class in quality. Business, therefore, needs to respond as well – not just in its short-term self-interest, although the right incentives would promote that too, but also out of far-sighted motivations that could make American firms competitive for decades to come.

Both constituencies in the private sector – the buyers and the sellers of manufacturing services – have to do their part. The buyers are the companies that bring manufactured goods to market – whether they produce these goods internally, outsource production to wholly separate firms, or some of both. Like any company, the manufacturing buyers are subject to the often overwhelming pressure of quarterly financial targets. However, as Michael Porter argues, the days of surviving by stringing together three-month time horizons are over. In a January 2011 article in the Harvard Business Review, Porter suggests, instead, an idea of “shared value” – an effort to “[expand] the total pool of economic and social value.” The goal of creating shared value, in Porter’s conception, is to “enhance[s] the competitiveness of a company while simultaneously advancing the economic and social conditions of the communities in which it operates.” The approach “opens up many new ways to serve new needs, gain efficiency, create differentiation, and expand into new markets.” In other words, nurturing one’s customers, suppliers, and employees is sustainable, growth-promoting, and utterly logical in the long term.

Manufacturing buyers cannot change the industry by themselves, however. They may commit themselves to creating shared value, and governments may give generously of their resources, but manufacturers themselves – from independent providers to the production divisions of vertically-integrated firms – have to make good on the opportunities that this cooperation offers them. The unwelcome truth is that a company’s decision to move its manufacturing offshore is not usually a venal pursuit of cheaper goods. Cost is often a deciding factor, but, as noted earlier, foreign manufacturers are capable of more than winning business on price alone. Customers of manufacturers in China, in particular, speak admiringly of these firms’ adaptability and nimbleness and drive. The competition, in short, is real. To stay in the game, American manufacturers will need to be as adroit and determined as their rivals overseas – and to be innovators themselves.

Our own experience offers one look at a future much different from the present. In the pharmaceutical industry, the majority of drug products (that is, the tablet you take or the solution you inject) are manufactured in foreign countries. Greater Boston, where we’re located, benefits from an extraordinarily diverse and well-serviced pharma and biotech cluster, but ultimately that final, critical step of manufacturing tends to happen somewhere else. Those overseas facilities offer more favorable labor and production costs, but rely on an increasingly old-fashioned manufacturing technique called batch processing. Vertex recognized that a domestic manufacturing operation could compete with these overseas sites not on cost, but on technological sophistication and easy communications with the research lab next door. To that end, the company started constructing its own internal drug-product facility, one built around an efficient and innovative procedure called continuous processing. This facility will be used for development-stage drugs and, potentially, for commercial manufacture. In either capacity, it will be greener and more efficient than a conventional drug-product plant, using less power, water, and space; it will also enable Vertex to develop higher-quality drug-production processes and generate the final product in a fraction of the time and cost needed for batch processing. The technical complexities involved are considerable, but Vertex is engaging with the FDA – which encourages innovation in pharmaceutical manufacturing – to ensure that the facility meets the highest standards for quality.

In addition, Massachusetts already provides a compelling model of public-private cooperation that aims to expand local biotech-related manufacturing. The Massachusetts state government has funded a 10-year, $1 billion life sciences initiative administered by the Massachusetts Life Sciences Center. The Center has publicly expressed its support for the development of a full-service drug manufacturing facility like the one just described.

In conclusion, supporting local manufacturing – in the context of a globalized manufacturing strategy – is good for business and good for society. But, on that last point, why should businesspeople even care how America is doing? Some might say they’d be well within their rights to treat the social prosperity and economic stability of any one country as just another externality. The private sector is a competitive world in which the weaker competitors do not survive. And if America, economically and socially, is flattened by other countries’ growth – well, they might say, so what? Obviously the others deserved to win. America needs its businesses, these objectors would say, but business doesn’t need it, and any suggestion to the contrary is pointless, jingoistic fist-pumping.

These objectors are sorely misguided. They assume that economic competition among countries is like competition among companies. They assume, in other words, that someone can win. But when China surpassed Japan as the world’s second-largest economy last year, Japan didn’t disappear; it didn’t go the way of Betamax or HD-DVDs. The “victory,” in this sense, is meaningless. What matters is the competition itself.

Anyone who believes in capitalism knows that strong competition makes everyone play their best. If Porter is right in his assessment of creating shared value, then the strongest societies will be those that support their businesses, and the strongest businesses will be those that support their societies. This is true across the American political spectrum. Whether you believe that the highest purpose of government is to show restraint and stay out of the way of the most successful, or to show compassion and ensure opportunities for the less successful, a government with a stronger fiscal position and a healthy, employed, productive population will be better at doing its job.

Manufacturing – as many others have argued – is vital to many strong businesses and to all strong societies, even in the 21st century. It is incumbent on the public and private sectors to do their part to strengthen manufacturing in America. Along the way, we mustn’t mistake this faith in business for conservatism, this faith in government for naïveté, or this faith in original thinking for anarchy. Being a strong competitor in the world of the next hundred years will take all of that faith – as well as the public trust, to be earned by those who seek to do the public good.

Brian Patrick Quinn researches and implements new R&D programs, strategic plans, and external partnerships at Vertex Pharmaceuticals in Cambridge, MA. Follow @bpqhimself

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  • http://www.reshorenow.org Harry Moser

    The author links Michael Porter’s work on companies sharing value
    with society with the impact of offshoring manufacturing. The Reshoring Initiative is developing a
    software to help companies estimate the societal impact of their offshoring and
    reshoring decisions.

    Much of the offshoring occurred because companies looked only at
    wages or prices and not total cost. The Reshoring
    Initiative’s free Total
    Cost of Ownership software helps corporations calculate the real P&L
    impact of reshoring or offshoring.
    Current research shows most companies can reshore about 25% of what they
    have offshored and improve their profitability.

    About 10% of the approx. 500,000 manufacturing job growth since
    the low in January 2010 is due to reshoring.
    Based on the 309 published reshoring articles in our Reshoring Library http://www.reshorenow.org/resources/library.cfm,
    we calculate that at least 50,000 manufacturing jobs have been reshored.

    I was one of the business experts in Pres. Obama’s Jan 11, 2012 Insourcing
    Forum. I emphasized, and the assembled
    executives supported, the need for companies to more consistently utilize TCO
    analysis instead of price variance in making their sourcing decisions.

    You can reach me at harry.moser@reshorenow.org
    for help using our tools for sourcing decisions and when selling.