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Home / Opinion / Views /  Mint Explainer: Can Biden bring hi-tech manufacturing back to the US?

Profits drive capitalism, and the US is the poster boy of a free-market economy. In a rush for profits, US companies outsourced hi-tech manufacturing to low-cost destinations.

The US manufacturing sector, too, cut corners. Indeed, US businesses have not capitalized on the country’s strength in manufacturing innovation and R&D in an effort to keep costs in check. It meant that Americans failed to become more efficient and productive than the Chinese or even the Germans.

President Joe Biden hopes to change all that and give a big push to US hi-tech manufacturing. He’s funding small US businesses–the SMEs–and hopes to take manufacturing innovation from the US labs to the domestic market and beyond. Outsmarting China won’t be easy, but a sleeping giant is finally waking up.

What has ailed US manufacturing?

Former US president Donald Trump waged a tariff war against China, worried about US manufacturing trade deficit. While he may have treated the symptoms and not the disease, it’s a problem all right for American presidents.

The US trade deficit in manufactured goods has more than doubled over the past decade. It has made US supply chains vulnerable to global shocks, such as the pandemic. And then, of course, thousands of jobs flew abroad.

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A McKinsey report in 2021, 'Building a more competitive US manufacturing sector', captures the problem areas for the US.

*“The US has lost six percentage points of its global share in scale-based activity over the past 25 years," says the report. Scale-based activity refers to large investments in physical capital, high plant utilization, and standardization of parts and processes.

*The US share of flexible activity, too, is down by four percentage points. Flexible activity refers to the adoption of digital production technologies to “reduce the scale necessary to be profitable".

*But in R&D and design-based activity, the US share of global manufacturing GDP rose four percentage points. This is US’s strength and something President Biden may want to capitalize on.

Simply, the US is ahead of the pack in innovation but struggles to scale up and take it to the market.

It’s a conundrum, all right, to some. Just why has the US failed to capitalize on its edge in research and innovation in manufacturing? It has a lot to do with the US companies’ hunt for immediate profits by cutting costs–after all, even the stock market rewards companies with an expanding bottom line. Many US companies have not invested enough in technology adoption, training employees and research.

So, despite being the global leader in R&D, US firms have not stayed ahead of Chinese and German rivals in productivity and quality.

The White House is waking up to the problem. The Biden administration is planning to “host a series of roundtables with the 16 Manufacturing USA institutes focused on scaling innovative technologies, promoting sector-based regional workforce initiatives, partnering with unions, and supporting small- and medium-sized suppliers, to develop specific proposals for how the institutes can strengthen our supply chains".

It also plans to involve industry leaders in identifying “transformative inventions" from US-based startups and commercializing and financing them.

There are other initiatives in the works to take cutting-edge innovation to SMEs. Now, they must be pushed to use them.

Biden rolls out the red carpet for small businesses

Over 99% of America’s more than 30 million firms are small businesses that employ about 60 million people, or about 47% of the US workforce. And yet the US SMEs have been losing heft in recent years, with their contribution to the GDP dropping from about 48% a few years ago to about 45% now. Biden hopes to revitalize SMEs with his goal of making the US a manufacturing hub again.

In recent years, the US has had an edge in high-skilled and high-paying services. The country has had a trade surplus in services, even though only about 5% of its services companies are exporters.

In contrast, manufacturing SMEs have languished with US companies outsourcing work to low-cost destinations such as China and Taiwan. In semiconductors, US-based fabs account for only 12% of the world’s manufacturing, tumbling from about 37% in 1990.

Biden administration claims it’s working with the private sector to raise nearly $80 billion in semiconductor investment for new fabs or expansion of fabs in the US through 2025.

Meanwhile, President Biden has unveiled the Creating Helpful Incentives for Production of Semiconductors (CHIPS) for America Act and will invest $50 billion in the production of semiconductors in the US.

The Biden administration is also opening new funding lines for the SMEs to help them scale up. The official export credit agency of the United States, the Export-Import Bank (EXIM), is working on a strategy to “provide financing priority to environmentally beneficial, small business, and transformational export area transactions, including semiconductors, biotech and biomedical products, renewable energy, and energy storage," says the White House.

That’s not all. The Department of the Treasury and the Small Business Administration will funnel more than $70 billion in additional lending and investment for small businesses, including small manufacturers.

Lessons from China

China became the world’s factory over three decades, powered by its cheap labour and a symbiotic ecosystem of suppliers, component manufacturers and distributors. The transformation did not happen overnight, but over three decades. Its speed and progress only gained strength after the dragon’s entry into the WTO in 2001.

In many ways, the Chinese government converted manufacturing into a mass movement through a tidal wave of small businesses sweeping the country. There are over 140 million SMEs and self-employed in China. SMEs contribute over 60% of total GDP, 50% of tax income, 79% of job creation and 68% of exports. In 2020, a staggering 22,000 new businesses were being registered daily.

Biden perhaps hopes to do something similar, harnessing the unique strengths of the US. So, the US is opening funding lines to small businesses, exposing them to cutting-edge innovation and technology, hoping productivity gains will follow, neutralizing the cost advantage (cheap labour) that China and other Asian countries, such as Vietnam and India, have.

There are a couple of emerging trends that could possibly herald a US manufacturing renaissance–rising labour costs in China and growing automation on factory floors.

How technology can be Biden’s weapon

Slowly but surely, China is losing its labour-cost advantage, as a McKinsey study discovers. Technology is helping companies cut costs and augment their workforce.

Many companies in the US were early adopters of Fourth Industrial Revolution (4IR) technologies to remain competitive and sustain operations during the pandemic. 4IR is a cocktail of artificial intelligence (AI), robotics, the Internet of Things (IoT), et al.

And then, there is the growing footprint of robotic automation in manufacturing processes. According to the International Trade Administration, industrial robot installations in the US rose by over 10% between 2008 to 2018. Over 80% of this was in manufacturing.

In fact, Reuters reports a surge in robots joining the US workforce in 2021, a record high. North American companies added 40,000 robots to their rolls in 2021, soaring 28% over 2020.

Clearly, there have been supply-chain challenges in recent times, and companies have been forced to make optimum use of tech resources. More so, the pandemic created a scarcity of human resources, making robots a real option.

Can the US become the world’s factory?

The US houses some of the world’s best universities and research institutes. In a technology-driven world, the US is still seen to be ahead in innovation and R&D initiatives. With its economic muscle, it can certainly gain heft as a manufacturing destination for the world in the years ahead.

Can it best China in manufacturing, particularly in hi-tech products? It won’t happen overnight.

China has built a manufacturing ecosystem that is difficult to replicate swiftly. And the Chinese are very good at lifting the best business practices from rivals and partners, as the Germans have found out. They will do whatever it takes to retain their cost advantage, even harnessing technology at scale if required–robots, 4IR and beyond.

Also, remember, Vietnam, India, Taiwan, et al. are also cost-competitive, not only because of cheap labour but also because of their relatively weak currencies against the dollar. So, if high-tech manufacturing moves out of China, other nations too will benefit from a trickle-down, including India, as Mint has reported earlier.

So, at 79, Biden will perhaps not be able to make the US a manufacturing powerhouse in his presidency. But he’ll want to leave a lasting legacy that future US Presidents can possibly ride on. It took China three decades to get here.

Can Biden unleash animal spirits that’ll compress time and vault the US to the top of the manufacturing high table much faster, maybe in a decade? It’ll test Biden and the presidents to come. But, if Biden transforms US manufacturing, it’ll do a world of good to his sagging approval ratings.

Elsewhere in Mint

In Opinion, Harsh V Pant says India should make the most of its geopolitical sweet spot. Jaspreet Bindra examines whether Sanskrit is the best language for AI. Sudipto Mundle argues why fiscal and monetary policies need to synchronise. Long Story tells how to fix a drowning Bengaluru.

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