In today’s global markets, whoever produces cheaper, faster and better wins. It’s a war of ideas and innovation, of agility and tenacity. It will take new thinking to stay ahead.
For several decades now, the assumption has always been that the United States and other industrialized nations will keep leading in knowledge-intensive industries, while underdeveloped and developing countries focus on lower skills and lower labor costs. That’s now changed. Many countries around the world now compete both with low wages and high tech, plus far-sighted government subsidies and incentives.
There’s a key human factor involved—“asymmetric motivation.” In advanced regions such as North America and Europe, salaries are high and the motivation to work long hours is limited to those few who have natural drive. By contrast, in developing countries, the drive for upward mobility is greater motivation. In China, manufacturing people work diligently for comparatively low wages and government-provided housing; working fixed hours in a clean factory beats pulling rice from mud. This asymmetric motivation results in huge productivity differences.
Engineering and manufacturing are not particularly prized professions in the United States. Most manufacturing jobs still suffer from the old “factory worker” syndrome. The solution is not replacement of the old-style, labor-intensive manufacturing jobs; those have disappeared in the last century. What’s needed is new job creation with high-tech, high innovation. The new-age factory should be a clean, motivating place to work, with competition for interesting, high-paying jobs.
In the global environment, there’s yet more asymmetry that’s causing financial investment shifts. Today’s world has three business/technology models:
U.S. businesses develop products with 60 percent to 70 percent gross profit margins, and target revenue growth of $100 million to $1 billion. U.S. investment is simply not available for products with smaller margins and markets. Because of this, products developed in the United States are more complex and are targeted for large markets that can justify high investment and subsequent high overhead.
Developing countries other than China are growing rapidly through products that have intermediate complexity with smaller revenue growth and medium (40 percent to 50 percent) gross-profit margins. In India, there are exciting technology companies growing to $5 million to 10 million within three to five years with medium complexity products, quickly developed. This level of success attracts high levels of investment.
China is unique in that it is government controlled, with target gross profit margins of only 5 percent to 10 percent (margins that are considered too small anywhere else). The government’s primary objectives are local employment and market share. As a result, China has become the undisputed world leader in low-cost manufacturing of high-volume products. And it’s not just labor-intensive manufacturing; there’s significant investment in automation and related software.
Further, China mandates disclosure of all intellectual property, demonstrating its long-term perspectives. By contrast, outsourcers are giving away intellectual property and knowledge for short-term financial gain.
The remedies require significant attitude changes. Our society must recognize that manufacturing and job creation are not just political or business manipulations, but the building blocks of society. The manufacturing-based middle class is the nation’s backbone. It’s important to keep investing in jobs, to upgrade factories, to be competitive in global markets. Entrepreneurship and talent should be encouraged and stimulated to thrive in the manufacturing sector.
The short-term financial mind-set must change. Business needs to realize that continual quarter-to-quarter increases in revenue and profits cannot be sustained with work that is done elsewhere in the world. Wall Street must stop manipulating company value by demanding short-term, quarterly financial performance.