Manufacturing Matters
No country can pay its way without a strong industrial sector.
By Eamonn Fingleton

(FORTUNE Magazine) - We have long been told that more and more manufacturing jobs are destined to migrate to the Third World. This view was popularized in the 1980s by such authors as John Naisbitt and Kenichi Ohmae, and it continues today to be the subtext of much economic commentary.

But not everyone has bought into the program. Take Canon (Research), the Japanese camera and copier company, which has more than doubled its workforce in high-wage Japan in the past two decades. Since 2002 it has added 6,000 Japanese jobs--at the same time it has boosted profits by 156%, to a record $3.1 billion.

Canon's story deserves more attention, for it shows that the alleged collapse of First World manufacturing is a myth. Manufacturing not only survives in the First World but also--at least in industries that lend themselves to advanced production techniques--continues to thrive.

A strong manufacturing sector is crucial for any advanced nation that aspires to pay its way in the world. With few exceptions, America's postindustrial businesses are weak exporters. This helps explain why, measured against gross domestic product, America's current-account balance has gone from a surplus of 0.8% in 1965 to a deficit of an estimated 6.3% in 2005. In the same period, manufacturing's share of nonfarm employment went from 23% to less than 12%. America's trade last year, measured as a percentage of GDP, was the worst of any major nation since Italy's in 1924.

Some postindustrial prophets sold the new economy as a path to rising incomes. But measured at market exchange rates, the U.S. is outclassed in per capita income by six nations--Denmark, Iceland, Ireland, Luxembourg, Norway, and Switzerland--all of which have a larger percentage of industrial workers. These nations also compare well on many measures of consumer welfare: They all score better in infant mortality and, with the exception of Ireland and Denmark, in life expectancy.

America's most important economic competitors, Japan and Germany, rank slightly lower in overall per capita income. But even though they boast higher factory-floor wages than the U.S., they remain hugely successful in export markets, thanks to heavy investment in manufacturing. Japan recorded a current-account surplus of $172 billion in 2004, the largest of any nation in history and a threefold increase over the great Japanese boom year of 1989. As for Germany, it passed the U.S. in 2004 to become the world's largest manufacturing exporter. Not bad for a nation with less than one-third of America's workers.

True, in labor-intensive industries such as garment making, First World nations find it ever harder to compete. But not all industries are labor intensive. The secret of the world's most advanced exporting nations is that their key industries are highly capital intensive. And of course the more capital a worker works with, the greater his output is likely to be. The First World's edge is further enhanced by superior production know-how. Particularly in industries where even minor flaws in processes can ruin an entire production run, a smarter, more capital-intensive way to make something can boost worker productivity by ten times or more.

All this brings us back to Canon, which boasts a clear lead in many production technologies. Canon chief executive Fujio Mitarai has a rule that any production process in which labor accounts for more than 10% of total costs should be outsourced to a low-wage nation like China. But this still leaves plenty for workers in Japan, where 80% of Canon's three-year worldwide capital-spending program is being deployed. A plant Canon built a few years ago to make ink cartridges for computer printers cost $700 million yet employs only 1,000 workers. That's an investment of $700,000 per job, and it's not surprising that Canon chose to locate the plant in Japan. Keeping the work at home helps the company withhold its productivity secrets from foreign competitors.

While we hear a lot these days about China's success in making consumer goods, less is written about how China's factories would grind to a halt without advanced components, materials, and capital equipment. Most such goods are supplied by rich nations that outclass the Chinese in productivity.

Japan is full of illustrations of that. Take Shin-Etsu. Formerly a maker of farm fertilizers and all but unknown abroad, Shin-Etsu is now a world leader in advanced materials, in particular the purified forms of silicon needed for computer chips. Or consider: Sharp at the high end of the liquid-crystal-display business, Nichicon in mobile-phone components, and Matsushita in tiny high-performance batteries.

Here are some other examples of how manufacturing continues to thrive in the First World:

* Germany is known for its leadership in the car industry, but its real edge these days is in making capital equipment--everything from newspaper presses to electricity-generating plants. Two German companies, Siemens and ThyssenKrupp, built China's proudest piece of infrastructure, Shanghai's high-speed maglev railroad. Carl Zeiss leads in the production of the huge lenses that are the key components in so-called steppers, the optical devices that imprint circuit patterns on computer chips. Even in household appliances, Germany is no slouch. Although its wages are nearly 50% higher than U.S. levels, the German factory of the American appliance maker Whirlpool is so efficient that it exports washing machines to the U.S.

* Ireland owes its economic rise largely to a government-led program to develop increasingly advanced manufacturing businesses. Apple makes its G5 Mac there, and Intel some of its cutting-edge microprocessors. Now Glen Dimplex has established itself as the world's largest maker of electrical heating products, dominating the European market for everything from electric kettles to room heaters. The company makes many of its most advanced components in Ireland, where one-quarter of its 8,000 workers are employed.

* With some of the highest wages in the world, Denmark boasts many leading manufacturers. F.L. Smidth, for instance, claims more than half the global market in cement-manufacturing equipment. Vestas Wind Systems and LM Glasfiber are leaders in the booming market for wind-power systems.

Of course, the U.S. still has some famously advanced manufacturers. But there is often less there than meets the eye. Take Intel (Research). Yes, it leads in microprocessors--but only for personal computers. It lags behind Japanese competition in the considerably faster microprocessors used in computer-game machines. And Intel is a disappointing U.S. exporter because it makes many of its chips abroad. As for General Electric (Research), it has become increasingly dependent on East Asian and European sources for advanced components, not least those used in its jet engines.

Americans should have little difficulty appreciating what a hierarchical business manufacturing is. Think of all the American companies that once dominated manufacturing categories worldwide and did so despite paying wages many times those of foreign competitors: Singer in sewing machines, Remington in typewriters, Goss and Linotype in newspaper-printing equipment, DuPont in nylon. The pattern continued into the 1950s and 1960s with IBM in mainframe computers, Polaroid in instant photography, Xerox in plain-paper copiers, AT&T in transistors, and Texas Instruments in pocket calculators.

It is past time Americans rediscovered the ultimate principle on which their nation rose to economic greatness: Manufacturing matters.

EAMONN FINGLETON, who lives in Japan, is the author of Unsustainable: How Economic Dogma Is Destroying American Prosperity. Top of page