Dream the American dream

US manufacturing growth continues to race ahead of the UK, says Douglas Friedli. The key is collaboration in research and development, and serious investment in the hard technology and skills of the future

Good times in the manufacturing industry have gone on for eight years now, and there are few signs that things are slowing down. Not in the UK, unfortunately, but the US, where the productive sector of the economy has recovered from old-fashioned working practices and cheap overseas competition to enjoy a boom which has made the country richer than ever. How has the US manufacturing sector managed to outstrip the UK – which has had average growth rates in the same period of about one per cent per year – so dramatically?

Many explanations are given for the differences – such as the different types of technology that companies use in each country, the macroeconomic climates or levels of investment and research expenditure.

But there is a common theme: what the US did yesterday, the UK will usually do tomorrow.

According to Gordon Richards, economist at the National Association of Manufacturers, based in Washington DC, computers are the key. `If you wanted to sum it up in one phrase, it would be faster technological advance. More computers were manufactured, which fed into the figures for durable manufactured goods,’ he says. `Whether a country specialises in the production of computers or imports them actually makes a big difference.’

Furthermore, some of the increase in US output is based on the premise that an increase in computer quality corresponds with an increase in production. Real year-on-year increases in the number of American-built computers and peripheral devices, combined with improvements in technical specification, have further boosted the figures.

US companies collaborate

Non-computing sectors have also benefited from the IT revolution, for example, in CAD applications, automated plants and CNC machine tools.

The result, says Richards, is a virtuous circle in which increased output of computers generates a productivity increase, which in turn generates higher domestic demand. This then feeds back to create more demand for other kinds of manufactured goods. As long as the economy remains fairly prosperous there is increasing demand.

Dougie Peedle, deputy chief economist at the UK’s Engineering Employers Federation, agrees. `They have a larger IT sector in the US and are able to take advantage of that. Some research suggests that virtually all their productivity growth has come from the production of computers. We wouldn’t go that far, but you can’t deny the fact that they are further ahead in the IT revolution,’ he says.

The growth of the computing sector in the US emanates from three major centres – Silicon Valley in California; Boston, Massachusetts and the area around northern Virginia; and southern Maryland. These areas are examples of `clusters’, groups of companies which cooperate with others in related industries nearby.

One theory, advanced by the UK’s Institute for Manufacturing, is that US firms are more likely to form clusters, and so benefit more from shared information and practices. Michael Porter, a business theorist, identifies more than 30 competitive regional clusters in the US. As well as the obvious clusters, such as car production in Detroit and aero-industry in Seattle, he identifies clusters specialising in electrical measuring equipment in Oregon, cardiovascular equipment in Minneapolis and polymers in Massachusetts.

Hard skills are crucial

The UK appears to have fewer clusters. However, since some of the areas identified by Porter – Oregon, for example – are larger than the UK, two telephone manufacturers, one based in Plymouth and the other in Glasgow, would still be part of the same cluster in the US.

The most important lesson to learn from clusters is to work together rather than locate together, according to IfM economic adviser Michael Kitson. He says: `Collaboration is an important element in improving the growth performance of manufacturing firms and for innovation. Given the apparent benefits, what is of concern in the UK is the low level of collaborative activity.’

As well as collaborating more, US companies tend to use different mixes of management and production techniques. Paul Swamidass, professor of operations management at Auburn University, Alabama, says: `By about 1980, US manufacturers recognised they were lagging behind the Japanese. People said we were going to disappear as an industrial nation and so on. They looked to Japan for answers, and started adopting lean manufacturing techniques like just-in-time, total quality management and statistical process control, as well as initiating a greater focus on customer satisfaction.’

Customer demand forced companies to become more flexible, which meant they needed to be integrated in terms of information processing and production systems.

So better supply-side management and integration of suppliers, vendors and distributors with manufacturers began to take place.

US Management showed that they had the courage to make very tough decisions by closing down inefficient plants and improving efficiency elsewhere. In the process they created more jobs than their competitors in Western Europe. `There is no parallel in manufacturing history for such a turnaround in such a short period of time.’

Ideas such as total quality management were subsequently taken up in the UK, and in some cases have been superseded. But the big difference now between the US and UK is in the types of technologies that they use, according to a recent joint report by Swamidass and Graham Winch, professor of business analysis at Plymouth Business School.

The report found that the US was far ahead in adopting `hard’ skills – such as CAD, CNC, flexible manufacturing systems and robots – while UK tended to match the US on `soft’ skills like material requirement planning and total quality management.

The difference is greatest in emerging hard technologies such as factory robotics. Winch says: `I think all of this adds to a time dislocation, and that basically we are lagging behind the US by something like four to five years.’

Both hard and soft techniques produce benefits in terms of reducing costs and expanding production. But costs appear to be more important to UK manufacturers.

`The harder technologies tend to cost the money,’ continues Winch. `There is a lot of benefit you can get out of just-in-time and total quality management without major hardware investment. Maybe UK manufacturing looks at the hard technologies and says: “We won’t get the payback on this within three years”.’

One result of the higher level of investment in hard technologies is that capital stock is twice as high for US workers as for their UK equivalents. This makes the average US worker about 50% more productive than his or her UK counterpart.

Dougie Peedle of the EEF believes UK manufacturers should not be blamed for under-investing. `There are plenty of things companies can do for themselves, but you have to have the right environment as well. We have the problem in the UK of manufacturing investment falling off a cliff, which is not unrelated to the strength of sterling. Firms will only invest if they think they will need extra capacity in the future.’

Looking to the long term

As well as creating stability, Peedle believes the government could do more to encourage R&D spending in the UK, which is proportionately 30% lower than in the US.

The US uses an incremental tax credit system which rewards increases in R&D spending for all companies, rather than just the smaller enterprises which benefit in the UK. `More R&D encourages process and product innovation. And of course large chunks of R&D are actually carried out by larger companies,’ he says.

The US-based National Association of Manufacturers estimates that R&D spending adds about 0.6% to US productivity every year. This proportion is increasing all the time as more R&D is performed using faster computers.

Of course, companies cannot invest in R&D and production without access to funds. Large and medium-sized manufacturers in the US find it easier to get venture capital funding or sell shares on the stock market than in the UK. This leaves banks with more money to invest in the smaller manufacturers, he said.

The big boost to productivity will be a move into computer-based transactions between companies, says Winch and, again, the US is leading.

`For example, contacts between design offices and customers are much more likely to be computer-based in the US than the UK, so collaborative design work is enhanced more significantly in the US than in the UK,’ he says.

`If you are asking me to point to a factor which I thought would be influential in the future, as opposed to what we have reported so far, I would probably point to the rate at which UK manufacturers are integrating their design and manufacturing processes with suppliers and customers.’

Action on this front will determine whether the UK can start to catch up – or get left to trail even further behind.

* Technology adoption and impact in US and UK manufacturing: some early comparative results, Graham Winch and Paul Swamidass, University of Plymouth Business School, 2000. www.plymouth.ac.uk

* Innovations in Competitive Manufacturing, Paul Swamidass (editor), Kluwer Academic Publishing, forthcoming in 2000