This I Believe

Balkrishna - Bangalore, India
Entered on October 3, 2006

Rational Exuberance and Revival of the U.S. Automotive Industry—Part I

In this era of globalization, a robust U.S. economy influences economic workings of the rest of the world in one way or another. With the dot com boom being a relic of the past and real-estate showing signs of flagging, there is a need for another boom to galvanize consumer spending in America. In this vein, the feasibility of inducing such a boom in the manufacturing sector should be mulled over by the U.S. government. Manufacturing comprises the quintessential aerospace and automotive divisions together with all other industries, such as pharmaceuticals, semiconductors and computers that use its operations.

This sector has been the backbone of the erstwhile industrial revolution in America and has greatly contributed to America’s superpower status. It accounted for about 14 % of the U.S. GDP and 11 % of total U.S. employment as of 2003 down from 22 % of total employment in 1977. The global lead maintained in the past by the U.S. manufacturing sector has resulted in a pool of workers with enhanced productivity. In fact, the labor productivity in manufacturing doubled during the 1977-2003 period. Therefore, considering the excellent infrastructure and manpower residing in this sector, it might be possible to tap into its potential for a bright future. China’s graying population is another incentive enabling a successful comeback for American manufacturing in the near future. Manufacturing is also a giant in terms of inciting immense activity in a wide variety of other areas that span from raw materials right down to healthcare and finance with this boom being distributed across the width and breadth of America. And as we proceed with the 21st century, progress in manufacturing will be of import because of its commercial applications and use in many scientific endeavors. Considering its past profitable performance, a properly resuscitated manufacturing sector should be able to account for about 20 % (or even more!) of U.S. GDP which is close to Japanese and German manufacturing’s share of total GDP in 2004.

Is it possible to stimulate the manufacturing sector with the U.S. already reigning the realm of services industry? Much of this sector is sagging under the burden of health-care and pension outlays they owe to their current and retired work force. This sector could compete with its Asian and European counterparts on an even keel by allowing the government to fork up these expenditures. Absence of legacy costs will help manufacturing companies enhance innovation for getting involved in cutting-edge technologies for coping with the looming energy and environmental crises. Ergo this will counterbalance the run-of-the-mill manufacturing operations outsourced to Asian countries. Freedom from these stupendous liabilities will allow manufacturing companies, with emphasis on the automotive division, to concentrate on another serious issue “quality” which has bedeviled entrepreneurs since the Japanese forayed into the manufacturing sector.

Moreover, the size of the U.S. manufacturing sector makes it an apt candidate for a pilot program to test the efficacy of a subsidized pension and healthcare plan for improving both its work culture and intrinsic value. A possible rebound in the manufacturing sector will boost the U.S. economy paving the way for a national pension and healthcare system covering other sectors of the U.S. economy.

According to researchers at McKinsey Global Consultancy, globalization is prodding businesses in the developed countries to encourage workers with innovative skills. With routine chores being outsourced to emerging economies, companies, including those in the manufacturing sector, need to nourish “tacit” (innovative) workers and encourage the transformation of low-skilled laborers into the innovative realm. This can be achieved easily in the manufacturing sector by relieving its member companies of their legacy costs. The special training programs for elevating the low-skilled workforce will do well to the community in general allowing companies to score in terms of a social context. In this regard, the Ford Motor Company’s recent initiative to adopt innovation is noteworthy considering the financial woes troubling the automotive sector. A model for innovation that could be followed by the manufacturing sector is that of 3M. It has been very successful in developing, and continues to develop, a wide array of new products by encouraging its workforce to think outside the box. In this era of globalization, prescient adoption of disruptive technologies by developed economies would neatly balance the routine tasks outsourced to a global workforce in the rest of the world.

Over and above the shoring up of manufacturing efficiency through innovation and quality-consciousness, absence of legacy costs can facilitate the expansion of the work force and improve their wages. The underwriting of this massive expenditure by a cash-strapped U.S. government might be termed as “rational exuberance”. But this exuberance might just jump-start an ailing, but important, sector of the U.S. business enterprise that will keep the economy rolling.