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Is there hope for U.S. manufacturing?

Mark Twain said there was no difference between someone who did not read and one who could not read. The same goes for manufacturing. A country that does not manufacture isn’t unlike a nation that cannot.

There is much talk in the U.S. these days to bring back manufacturing jobs for energizing the stagnant economy. But, how? The malaise that has gripped the manufacturing sector shows no sign of abating. Can this be remedied?

I was drawn to Korea when I advised one of the largest conglomerates of this country a few years ago. In particular, I was baffled by this question. Why is it that capital easily finds its way to manufacturing in Korea, but in the U.S., investors continue to be attracted to yet another series of exotic derivatives, the brethrens of which devastated our economy?

Most top Korean students earning advanced degrees in science and engineering from leading academic institutions in the U.S. return to Korea to join faculty of one of the universities, or start a long-term career at large industrial complexes.

In contrast, America’s brilliant minds trained in demanding technical curriculums end up in financial services as quantitative analysts. They cannot be blamed. Joining academia or industry may be inspiring, but the food is better on Wall Street.

The blame for the long but steady decay of manufacturing in the U.S., and the associated job losses, has been squarely put on labor. Advocates of that point of view provide only a pedestrian analysis. An average worker in the U.S. makes more money and receives more benefits than the counterpart in Asia. So, the migration of jobs to Asia in the form of outsourcing has become a trend.

This is unfair to labor, and Korea is the proof. Even though the labor cost is higher than many other parts of Asia, there is no flood of handing over manufacturing to sources outside of Korea.

I offer two reasons for the seemingly unstoppable journey of manufacturing to Asia: wrong analysis by U.S. companies and disservice by the financial services sector.

Sadly, a pattern has been established that manufacturing ought to be sent out of the U.S. Clever managers know that they jeopardize their careers if they ever present to the executive rank any analysis to the contrary. In turn, executives have a “mission: impossible” to convince a board of directors clamoring for short-term gains why production is better to be kept inside the borders when others send out jobs overseas.

Problems with producing anywhere but the U.S. get whitewashed with flawed analyses to show that benefits outweigh the costs associated with those problems. As a result, the value of “Made in America” as an important attribute of manufactured goods has diminished. Korean industrialists do not make that analytical error, and consequently jobs remain in Korea.

To illustrate the negative role of financial services in pushing manufacturing away from the U.S., a contrast would befit with the post World War II America. In that era, wealth was created by producing, not by transactional gains. Financial services operated prolifically to funnel capital to production. Industrialists got more attention at cocktail parties than financiers.

As the manufacturing sector matured, financial services found “creative financing,” and became embroiled in taking value from production, monetizing it, and handing it to deal architects. The rationale was simple but toxic. Why work so hard to produce goods, dealing with cumbersome issues ranging from labor to production processes, instead of executing deals that take capital out of producers and pass that through to deal makers?

Accordingly, manufacturers could not compete for the capital that was increasingly channeled to transactional gains instead of hard-core research and development, design and engineering, and production. So, manufacturing was sent overseas.

This trend can be reversed. To bring back manufacturing and to expand that sector as a vital component of reinvigorating the economy, the full consequences of outsourcing manufacturing must be considered.

There also needs to be willingness and understanding by the financial services that meaningful, long-term gains can only be achieved if production is capitalized more than transactional activities. Korea is a case in point why that must be in order to preserve employment in manufacturing and make the economy dynamic and prosperous.

In his novel “The Sun Also Rises,” Ernst Hemingway asks a fellow, “How did you go bankrupt?” The answer was, “First slowly, then suddenly.” The U.S. has been on a downward trajectory for losing production jobs. To avoid falling off the cliff, if Hemingway’s description of demise is to be believed, a shift in paradigm of how we look at manufacturing is needed, with the new paradigm having a Korean flavor.

By Jahan Alamzad

Jahan Alamzad is managing principal of CA Advisors, a management consulting firm in San Jose, the United States. ― Ed.