How Innovation Breeds Success in Manufacturing

Workers at a Siemens gas turbine factory in Berlin, Germany, in January 2010. Sean Gallup / Getty Images

Ever since the financial crisis hit, policymakers around the world have been talking about how to "rebalance" their national economies. In rich nations, this mostly entails reducing debt. But it also involves reassessing the mix between the service sector, which represents about 70 percent of the U.S. economy, for example, and manufacturing, which makes up just 11 percent. In the U.S. and the U.K. in particular, there's a sense that overreliance on dodgy financial services is no way to create decent jobs for the masses or to build a more stable economy. In these and many other countries, like France and Germany, influential voices are calling for a return to the business of producing real goods.

Of course, that involves competing not only against nimble, highly skilled, and cheaper labor giants like China, but against a raft of other developing nations in Asia, Africa, and Latin America that want to become factories to the world. Still, a new report issued in late June by the Council on Competitiveness and the consultants Deloitte Touche Tohmatsu should give America and some European nations like Germany reason to hope they can stay in the global game.

The report surveyed 400 global CEOs, tallying their views on the key factors that drive manufacturing competitiveness. The most surprising finding is that it's innovation, not how cheap or expensive labor is, that determines whether a country will be successful in manufacturing. Contrary to conventional wisdom, manufacturing has not become a race to the bottom. That's why the U.S. still ranks as the fourth-most competitive nation after China, India, and South Korea, despite vastly higher labor costs. Germany, Japan, and Singapore also hold positions in the top 10. The skill levels of their workers more than offset their costs (U.S. workers are twice as productive as those in the next 10 leading manufacturing economies). Skills are particularly critical in the lucrative high-end manufacturing sector, which accounts for about half of all new innovation within an economy. "Talent will be the oil of the 21st century," says Council on Competitiveness president Deborah L. Wince-Smith.

On the other hand, oil is also the new oil—cost of energy and materials ranked third, right after talent and wages, as a determining factor in where to locate manufacturing operations. That's bad news for America. Unlike China and many nations in Europe, the U.S. has no coherent national energy policy, and has yet to spark a green-jobs revolution. The international CEOs surveyed believed that America would drop a spot in the competitiveness rankings within five years.

There are measures the United States can take to shore up its position, though predictably, they aren't easy. While it's not politically correct to suggest that perhaps every citizen shouldn't aspire to a university degree, high-end technical schools that can turn a $16,000-a-year dishwasher into a $60,000-a-year welder may in fact deserve as much private and public money as mediocre four-year liberal-arts colleges churning out students with relatively useless degrees. That idea has worked in Germany, though the Germans have also done a good job producing top-level engineers—another area where the United States lags. A much stronger K–12 focus on math and science would help the U.S. greatly.

Immigration policy can also play a key role in ensuring competitiveness. As Secretary of Commerce Gary Locke points out, "So many firms that we view as American icons were actually started by immigrants." It's an oft-quoted fact, but one worth remembering as the Obama administration struggles to push through meaningful immigration reform. (This writer is for stapling a green card to the diploma of every foreign student who obtains a Ph.D. in the States.) After all, the most talented people in the world now have other places to seek work—namely their own countries, which will be the source of the majority of the world's new jobs in the foreseeable future. If talent really is the new oil, it will pay to keep it here.