I apologize, but must strongly suggest that readers first have a look at part I of this review. There I explained Fingleton’s thesis that the information and service industries can never be the basis of our national prosperity and that the only way to achieve this is through advanced manufacturing.
Let’s continue with the story. Quantitative data are as of the late 90’s when this book was written, but have not since changed in ways relevant to this discussion.
Advanced manufacturing is the only large section of the economy that can sustainably pay good wages to ordinary employees with average IQ’s and no college degrees. What is advanced manufacturing? It concerns products that are genuinely difficult to make and thus not feasible to produce with $5/day peasant labor in Guandong, China.
Here’s a partial list to give an idea; I make this motley recitation to make clear that advanced manufacturing is not just a matter of computers and the opportunities are vast for a nation that will make the effort to capture them.
1. Flat-panel displays for laptops, TVs and other devices, which require perfectionist manufacturing because a single bad pixel renders them unsalable. They are not made for civilian purposes in the US in significant quantities.
2. Steel-alloy pipes for transporting oil, which sound primitive but are in fact very sophisticated due to the subtle corrosion-resistant alloys involved and the difficulty of making them in the large sizes that require the least final assembly.
3. Photolithographic steppers, the machines used to turn the designs of silicon chips into actual chips.
4. Synthetic fibers. Although sewing clothes is low-tech, turning a barrel of crude oil into convincing synthetic silk is not.
6. Textile-making machinery like ultra-fast modern looms.
7. Laser diodes, like in CD players.
8. Nickel hydride batteries, the tiny high-quality ones that are vital for cell phones, camcorders, and similar devices.
9. Robotics, an industry that buttresses other manufacturing industries.
10. Bearings, ball and otherwise, are a classic seemingly old and dull product that has quietly adapted with the times to become frequently very high-tech.
11. Cameras, both conventional and digital, still and motion.
12. Machine tools, which are, of course, the ultimate key to making other manufactured goods.
14. Watch movements.
15. Ship engines. How do you think all those imports get here?
16. Photocopiers, especially their key electro-optical components.
17. Electric power generators, which are unseen but expensive and ubiquitous.
18. Carbon fiber, an emerging material that is replacing metals in key applications.
19. Titanium, an emerging metal.
20. Construction equipment.
21. Medical equipment, one of the few bright spots for America, thanks to the fact that we are one of the few nations not to have totally strangled our medical system with socialism.
22. Computer chips.
Note that much advanced manufacturing involves products – fibers, pipes, bulldozers – that one would not think of as advanced. In fact, many things that the media does depict as advanced, like dot-coms that sell cat toys, are not advanced at all, as these companies merely string together advanced technologies produced by others while contributing no new technical know-how.
The value of advanced manufacturing as an economic base has certainly been noticed by some nations. Japan has been the most systematic about its cultivation, but other nations, like Germany and its hangers-on Austria and Switzerland, and Japan’s imitators Taiwan and Korea, have also explicitly pursued it as a path to economic growth.
Americans are not used to the idea that we have something to learn about economics from foreigners, but the key fact we have to face, sooner or later, is that our own economy is no longer the most successful in the world. As Fingleton writes:
"For those who believe in the superiority of the U.S. postindustrial strategy, the 1998 edition of [the OECD economic yearbook] makes distinctly chastening reading. It shows that, with a per capita income at last count of just $27,821 a year, the United States trailed no fewer than eight other nations. These include Japan, Denmark, Sweden, Germany, and Austria, all of which devote a larger share of their labor force to manufacturing than the United States."1
Worse, examining growth in per-capita income reveals similar bad news for America and good news for nations more devoted to manufacturing. He records,
"Yet with almost no exceptions, manufacturing-oriented economies have outpaced the United States in income growth in the interim. Take the sixteen-year period to 1996, the last year for which full OECD figures are available as this book goes to press. In that time, the United States boosted its per capita income at current prices – that is, before adjustment for inflation – by a total of 134 percent. Although at first sight this growth seems impressive, it was bested by no less than twelve other OECD nations. In order of income growth, these were South Korea, Japan, Portugal, Ireland, Luxembourg, Austria, Italy, Spain, Denmark, New Zealand, Germany, and Switzerland. And with the single exception of tiny Luxembourg, all these nations boasted a greater commitment to manufacturing employment than the United States."2
The long-term consequence of this in an inexorable degradation of the American standard of living. And of course these international income differentials will shoot way up in proportion to the coming slide of the American dollar.
One reason the importance of advanced manufacturing is underestimated in America is that it often centers on key components of consumer products rather than the products themselves. Many consumer products consist of technically-advanced components surrounded by a commonplace plastic package that is easy to make. This has created two very dangerous illusions:
1. Americans turn over a fax machine, see "made in China" on the bottom, and conclude that fax machines are easy-to-manufacture knick-knacks that any Third World nation can produce. They conclude that therefore we should be quite happy to lose this obviously lowly and low-paying industry. But in fact, only the final assembly, which can be done with $5/day sweatshop labor, happens in China. The crucial electro-optical components, which actually read the outgoing documents and print the incoming ones, are made in highly sophisticated plants in Japan with skilled $50,000/yr. Japanese labor. But because these components make up most of the cost of the fax machine, most of the money goes to the Japanese company and its workers.
2. Americans see "Hewlett-Packard" on the outside of a laser printer and think "Made in USA." But those HP printers undergo final assembly in various nations in Asia (formerly Singapore, more recently Malaysia3) and depend on print engines (the part that actually puts ink on paper) made in Japan by Canon. This is just one typical example. Huge areas of American industry are now utterly dependent on Japanese components. Our vaunted Boeing, for example, produces aircraft like the 777 that are now 30% imported4 in terms of the value of their components, and our dependence on foreign parts that no American firm can supply is one of the dirty little secrets of our war machine.
This makes American companies both a smokescreen for our industrial decline and a political Trojan horse for aggressively-exporting nations like Japan, who instead of having to openly lobby Washington can send the American companies that are dependent on them for components to do it. This has been a key part of Japan’s strategy to blunt American political pressures to open her markets, and other nations play similar games to a lesser degree.
The other great beauty of producing components, from the Japanese point of view, is that it enables them to cherry-pick the high-value-added parts of the products for their own workers while minimizing foreign resentment of their market penetration. People in Michigan actually resent seeing Toyotas on the street, but they don’t resent seeing Dodge Neons that are produced using metal presses imported from Japan, because they don’t know. Compare this with America’s strategy in exporting McDonald’s and Starbuck’s, which puts most of the value-added activities overseas, where they provide no income to American workers, while maximizing foreign resentment with highly-visible brand names.
Japan, of course, pretty much has the consumer-electronics market locked up with a few competitors, which brings us to Fingleton’s other point: the value of monopoly industries. The fact is that some industries, which enjoy monopoly or near-monopoly status, are in a position to charge their worldwide customers premium prices that can be passed along to their workers’ wages. A nation that aspires for its citizens to enjoy an above-average standard of living must have industries that enjoy these strong competitive positions. Industries that lack these strong, near-monopoly, positions will have their prices pounded down by their competitors, resulting in their simply not having the money to pay their workers well.
Monopoly industries are what they are because they have strong competitive positions compared to their competitors in other nations. That is to say, they have advantages that cannot easily be matched. Things like proprietary know-how built up through advanced research and long experience. Things like a skilled workforce it would take years, and a lot of money, to train from scratch elsewhere. Ownership of technological standards, as Microsoft and Intel have today and IBM used to have. The cost to someone else of duplicating these advantages is so high that it is uneconomical and no-one tries.
It is important to make two distinctions here:
1. Monopoly industries are not the same as monopoly companies. There are a number of Japanese car and consumer electronics companies, for example. Even governments which understand the uses of properly-supervised cartels as a bulwark of advanced manufacturing, like Japan’s, are well-aware of the dangers of pure monopoly.
2. Monopoly industries are frequently a matter of degree, not just of kind, particularly in the period of decades it can take for one nation’s industry to establish its dominance. The dominant nation’s industry may simply be stronger than the other’s, i.e. able to charge higher prices, expand its market share, set technical standards, afford advanced research and development, expand its workforce, and gradually drive the weaker one into its grave.
The key insight here is that the basic unit of success and failure in international economic competition is not the national economy as a whole or specific companies, but industries, an insight for which the fundamental credit must be given to Michael Porter of the Harvard Business School and in particular to his book The Competitive Advantage of Nations. If the industries that make up the nation’s economy are strong, the economy as a whole will be strong. From the point of view of America’s economic well-being, it is a matter of indifference whether company X or company Y prospers. It is not a matter of indifference whether the German or Japanese widget industry prospers at the expense of our own.
Part III of this review will consider structural aspects of the American economy that are hindering our ability to cultivate the advanced manufacturing industries we need.
1. Fingleton, In Praise of Hard Industries, p. 7. From OECD in Figures, 1998 edition, published by the Organization for Economic Cooperation and Development.
2. Fingleton, In Praise of Hard Industries, p. 8.
4. William Grieder. One World, Ready or Not.