Automation can make manufacturing more competitive in the United States, but it can do the same in other regions as well, points out Dick McAllister, an ABB senior vice president and a 30-year veteran of industrial automation technology. According to McAllister, there are four basic factors that govern the choice of manufacturing location—energy costs, labor costs, financial capital, and intellectual capital. Each has played a role in the development of worldwide trends in automation.
In a recent conversation with Gary Mintchell, Automation World’s editor, McAllister provided his insights and perspective on the topic.
McAllister has led strategic, development and management efforts in engineering, sales, service and marketing organizations, including design and specification of several major automation systems.
During the past five years, he has been responsible for ABB’s worldwide Control and Production Management business in the Automation Technologies Division, and is currently responsible for Business and Product Development for that business area.
AW: You recently spoke about automation as the “Great Equalizer.” What do you mean by that statement?
DM: Think about conversations and presentations at the ARC Advisory Group Forum in Orlando in February. The direct interest of this primarily U.S. audience was about how manufacturing companies are moving offshore and how we can be more competitive here. Certainly automation can make U.S. manufacturing more competitive, but it works both ways. There are attributes of automation that work to increase desirability of manufacturing in other countries, as well.
AW: How so?
DM: Let’s look at automation in a broad sense. Not just control and manufacturing processes, but also IT and business processes. From the manufacturing point of view, there are four things that drive choices and decisions. Energy costs are very important, and much effort has been directed, especially in Europe where energy costs are relatively high, to reducing them. Another major manufacturing cost is labor, which is the point of concern voiced at the ARC meetings. Capital availability and quantity is another driver. Then, there is intellectual capital. This is big because to be successful, one must have knowledge of manufacturing processes.
Let’s look at this situation globally. It seems to me that some locations have advantages in some of these things and other locations have different advantages. The important business decision is to apply automation to capitalize on the inherent advantages. We have been applying automation to reduce labor, energy or capital required. If all those become equal, then decisions of where to locate a manufacturing plant would be driven not by low cost but by other, harder to quantify factors such as proximity to market, proximity to raw materials or suppliers, and socioeconomic or political climate.
Companies must understand how to use automation to be more competitive in labor or energy, and then think about these other factors. It may be that in most cases, the model of manufacturing in one location and shipping to the world may not be viable any longer. Proximity to the market may be very important.
AW: What about the advantage of local intellectual capital?
DM: Intellectual capital has usually been an advantage for U.S. companies, but automation and communication advances have done a lot to reduce the need for local intellectual capital. For example, ABB has done a lot of work with Dow Chemical with our IndustrialIT system. Dow has plants around the world. Suppose someone in a plant in Europe devises a better automation strategy for a process. That is a piece of intellectual capital. The company would like to spread that idea to other similar plants. A good communication strategy makes that possible, often without flying people around the world. Some years ago, lack of intellectual capital in a geographic area would be why a plant wouldn’t be located in an area. Now, automation has contributed in a lot of ways to help that.
AW: Any other examples?
DM: Think about Saudi Arabia. It started out as an exporter of crude oil. There really wasn’t the local intellectual capital to design or operate more advanced processing plants. Over the years, there have been refineries and petrochemical plants built and operated, because automation has reduced the need for local intellectual capital. Other drivers became more important, in this case proximity to raw materials and economics of shipping higher value product.
This development has an effect on the United States, in that we are not building new refineries here. So automation is an equalizer in the sense that the dominant driver lies outside direct manufacturing cost, but rather with transportation factors.
Another focus is energy costs. In Europe a major driving focus of automation is to monitor and control uses of energy. These costs are not significant in Saudi Arabia.
In the United States, we focus on labor costs. Manufacturing moves because of high labor costs—and we’re not as high as in some places. Remember the term, “lights-out manufacturing?” Here, we were substituting capital for labor. Well, there are very few lights-out locations, but the increased productivity and use of automation systems to accomplish that objective caused most of the price reductions of the 1990s.
Another factor reducing labor costs is the whole idea of maintenance. Automated collection of dynamic data, optimization of predictive and preventative maintenance, and frequency of maintenance all drive down manpower requirements.
Automation as a productivity enhancement doesn’t stop at manufacturing. It has enhanced productivity in business systems such as order handling, inventory control, cost analysis and so on. If all this had not happened in the ‘90s, a lot more manufacturing would have left the United States.
AW: So automation can equalize labor as a driver?
DM: Yes. Look at the entry of Japanese automobile manufacturing into the United States. Because of automation, labor costs were not a significant factor. Japanese intellectual capital involving manufacturing processes was easily transferred, so other drivers such as proximity to market and political considerations took precedence. The business model could no longer be a Japan export model, but Japanese manufacturers remained competitive by using their intellectual capital.
Financial capital is another driver that automation makes more effective so that labor costs can be equalized. In many cases, automation has allowed for less capital-intensive process designs by removing many intermediate steps and storage requirements. Look at the steel industry, for example. Automation techniques implemented in mini-mills allowed the United States to be a player again. This is a different business model that requires less capital.
AW: You mentioned earlier that automation can be used for business processes beyond manufacturing. How would this work?
DM: This is a more indirect way of using automation. It would be a business model of reducing manufacturing as the key component cost. Executives must change their way of thinking. Before, it was, “How can I equalize all the elements that make me productive?” Now maybe I need to ask myself, “Can I change the business model to reduce that entire part?” As the United States becomes more of a service economy, we should look at a strategy of service based on manufacturing.
If my business strategy is to make hammers, 100 percent of the business strategy is on the cost of the hammer. But if I also sell a service for using the hammer, then the relative cost of making the hammer declines. Take GE jet engines, for example. They don’t just sell jet engines, but they sell hours of service. They still manufacture the jet engine, but service, maintenance, upgrades and so on means that the overall cost of manufacturing in the business model is less. IT, automated test, maintenance and service are now bigger cost drivers than manufacturing. So you could use automation technology to implement an entirely different sort of business strategy.
Manufacturing doesn’t change rapidly, but change is constant. We aren’t seeing any landslide changes in manufacturing today, but we do see much more integration of IT functions such as business processes and practices with engineering, control and automation. More and more companies understand this. They are implementing this change either by moving responsibility to one place or by building teams.
PROFILE:
Dick McAllister has more than 30 years experience in the industrial automation arena; he has led strategic, development and management efforts in engineering, sales, service and marketing organizations, as well as design and specification of several major automation systems.
During the past five years, he has been responsible for ABB’s worldwide Control and Production Management business in the Automation Technologies Division, and is currently responsible for Business and Product Development for that business area.
He understands global automation market issues and provides insight into the merging manufacturing automation and enterprise IT areas.
