UNITED STATES OF AMERICA - Manufacturing News
UNITED STATES OF AMERICA
DEPARTMENT OF COMMERCE
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MADE IN AMERICA 2020:
THE FUTURE FACE OF MANUFACTURING
TUESDAY
JUNE 24, 2003
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The meeting was held at 9:00 a.m. in Room 4830 at the U.S. Department of Commerce, 14th and Constitution Avenue, N.W., Washington, D.C., Phillip J. Bond presiding.
PRESENT:
PHILLIP J. BOND
GRANT ALDONAS
ARDEN L. BEMENT
RON BLACKWELL
SAMUEL W. BODMAN
LINDA CONLIN
CARY CROUSE
NED ELLINGTON
TOM DUESTERBERG
STEVEN EMPEDOCLES
JUAN ENRIQUEZ-CABOT
TERRY LISENBY
BRUCE P. MEHLMAN
MARTHA MORRIS
LEO REDDY
ROSS E. ROBSON
GEORGE SCALISE
AMRAM SHAPIRO
WILLIAM A. STRAUSS
MICHAEL TIEMAN
W.R. TIMKEN, JR.
BRUCE TOMPKINS
SUSAN TRUMBULE
FRANK VARGO
JIM ZAWACKI
JOHN ZYSMAN
AGENDA ITEM PAGE
WELCOME/OPENING REMARKS:
Phillip Bond 3
FUTURE BUSINESS ENVIRONMENT:
John Zysman 10
QUESTIONS/COMMENTS: 17
FUTURE TECHNOLOGY TRENDS:
Juan Enriquez-Cabot 49
QUESTIONS/COMMENTS: 57
FUTURE BUSINESS PROCESSES/PRODUCTION ORGANIZATIONS:
Ross Robson 100
QUESTIONS/COMMENTS: 108
FUTURE WORK FORCE NEEDS:
Leo Reddy 138
QUESTIONS/COMMENTS: 152
CHALLENGES OF CHANGE/GOVERNMENT ROLE:
Frank Vargo 205
QUESTIONS/COMMENTS: 215
CLOSING REMARKS:
Samuel W. Bodman 243
CLOSING:
Bruce Mehlman 255
P-R-O-C-E-E-D-I-N-G-S
9:06 a.m.
CHAIR BOND: Well, let me begin by welcoming you all to the Department of Commerce, and on behalf of the Secretary of Commerce, and on behalf of the Secretary of Commerce, Don Evans, thank you for being here. We're grateful to each of you for joining us for what we hope will be a fruitful discussion. A number of you have traveled some distance to be here, and we're especially grateful and honored that you have come to join us in supporting this effort.
My name is Phil Bond. I'm the Under Secretary of Commerce for Technology, and oversee the Technology Administration or TA, as we call it. The TA is comprised primarily of two organizations, which are represented by their two leaders on my right and left. The Office of Technology policy is headed by Assistant Secretary Bruce Mehlman. It is, in layman's terms, an internal think tank for technology issues here in the Department, particularly focused on innovation.
I serve as the secretary's senior advisor on the Science and Technology and Innovation policies. The other dominant organization within TA is the National Institute of Standards in Technology led incredibly well by the gentleman on my left, Dr. Arden Bement. NIST, as you know, does the Bedrock Metrology and science work that underlies virtually ever facet of U.S. industry, and includes among its 3,000 plus employees two nobel prize winners in physics. So we're incredibly proud of what we think is the crown jewel of the federal lab system out at NIST.
We want to forewarn you of a drive by speaking we may have here in a minute. We are hopeful that under Secretary Grant Aldonas, who is Secretary Evans' designated leader for a manufacturing initiative that Secretary Evans announced earlier this year, that he may be able to drop by for a couple of minutes to give us an update and perspective on that effort.
However, before we perhaps have Grant come by, I want to start today with just a couple of thoughts to set the stage if I might. First of all, throughout 2002 and the very start of 2003, I was especially privileged to serve as not only the under secretary, but for that one year period also as the chief of staff to Secretary Evans.
And I guess I want to start today by underscoring his personal commitment to this question of what manufacturing in the United States can and must be in the future. Like his friend of 25 years, President Bush, Secretary Evans really believes there is no discernible difference between private sector leaders and public sector leaders. In both cases, their efforts are really tuned toward serving others. And the greatest kind of service, of course, is to help create jobs so that families and individuals can pursue the American dream.
With the same kind of perspective, you'll hear later today from our Deputy Secretary Sam Bodman, an incredibly accomplished gentleman, as you will learn. Dr. Bodman, a professor at MIT, helped start what we call the Venture Capital Industry in this country before running the Cabot Corporation for a number of years, and then agreeing to join his friend, Don Evans, here as the deputy secretary. You'll hear from him, as I said, later today. But I want to assure you that under their leadership we have established both a slogan and an operating function, which is American jobs and American values. And as you will hear from them today that's our focus and we believe it represents well what the American manufacturing sector is all about, too, American jobs, American values.
Secondly, by way of introduction, I want to give you just a couple of thoughts on TA's collective view of manufacturing. The conventional wisdom, of course, is that American manufacturing will continue its decline in number of jobs, and the question of what it might look like in the year 2020 is usually framed around the question of how small might it be, this conventional wisdom be necessarily accepted at all. In fact, manufacturing is going to be critical to the future, as it has been to the last 60 years, and we would submit that the real key to success is not to look at the components of individual sectors of manufacturing or service, but to look at innovation.
America's ability to generate innovation over the last 60 years, whether it is in military terms or economic terms has generated the standard of living that is the envy of the world, and it's why so many people refer to the 20th Century as the American century. We believe that in TA that we should focus on innovation, that while America cannot and should not compete to see who can pay their workers the least, we can compete on innovation. Indeed, this is America's great advantage. For reasons we don't fully understand, our culture and our system breeds innovation that is the envy of the world.
And we have every reason to believe that when we look into the future, we have the capability to run faster. Pardon me for a perhaps hokey analogy, but I enjoyed spending last weekend at the U.S. track and field championships. I noticed by watching those who won, those who ran faster, they didn't spend a lot of time trying to exclude the number of people who could get to the starting line or by tying the shoes of those they were racing against. They instead focused simply on being as fit as they could be and running faster than the competition.
I think the analogy holds for the manufacturing industry as well. We have not yet been privileged with Grant Aldonas dropping by. I do want to acknowledge Assistant Secretary Linda Conlin from Trade Development in Grant's Bureau here. Thank you, Linda, for joining us.
MS. CONLIN: Thank you.
CHAIR BOND: And do you have any insight into whether Grant is going to be dropping by? We're told that he was going to try to join us.
MS. CONLIN: I believe he is. It was concurred last night.
CHAIR BOND: Thank you, Linda. I also want to make a special recognition of George Scalise, president of the Semiconductor Industry Association, a member of the President's Council of the advisors on Science and Technology where George has been leading efforts in what is called the PCAST, also to focus on manufacturing. So, George, we're privileged to have you here with us as well.
We will be flexible as always and we will hope that Grant will join us, and if so, we'll pause for just a minute to hear some of this thoughts. As I said, he's kind of the chairman internal here of the effort on the secretary's manufacturing initiative.
I want to turn things over to John Zysman in just a minute to kick us off, but first just some logistical points for everyone. First and foremost, I appreciate that this is a meeting that is closed to the press. We are here only because we are interested in following the topic of manufacturing and not to score points in the press. However, we are going to be transcribing these discussions. We expect to make the transcripts public at a later date.
I want to assure you that the discussion will lead directly to the secretary's report on manufacturing, which is expected in September of this year, and we will have a number of folks here in the Department reviewing the transcript looking for good ideas to consider for inclusion in that initiative.
Our charge really, I think, today boils down to five things. One, we want to create a vision of the competitive global business environment for manufacturing looking ahead to 2020. John Zysman will be helping us with that. Secondly, exploring the major technological really disruptive changes likely to impact that competitive landscape. Thirdly, assess ways in which manufacturing enterprises specifically will need to change to meet those new coming dynamics. Examine the work force challenges. We're especially pleased to have the FLCIO joining us for the discussions today. Fifth, and finally, to discuss, of course, the Government's role in promoting the environment for innovation that can help our nation and its institutions to run faster in the future.
We do have a few individuals designated for each of these areas on the agenda to kick us off with just five minutes of opening comments. But let me underscore that what we want most, and what those five minutes of introductory comments are designed for, is to engage in an interactive dialogue among the experts around the table. We want to challenge each other. If we are going to agree, great. If we're going to disagree, let's disagree. But let's have a lively discussion that you can all participate in, so that we can get beyond the obvious statements of the need for education, the need for free and fair trade, and get deeper into what the real issues are going to be between now and the competitive 2020 for manufacturing.
With that, let me stop talking and start listening and invite John Zysman, the director of the Berkeley International Round-Table on the international economy to start us off with a discussion of the competitive global business environment in 2020. Mr. Zysman?
MR. ZYSMAN: Five minutes is a very brief time to do that task. And we begin really with a recognition that, as Under Secretary Bond has said, we're all convinced that manufacturing matters, and we're convinced that it must remain a strategic asset in the years going ahead, a strategic asset for the country, that is a desirable location for those activities, which maintains jobs and value added, and a strategic asset for American companies, so that as an instrument of their competitive positions.
Now, as we look forward to 2020, there's one certainty which is that whatever our efforts to understand and predict that future, the future will evolve in unexpected ways and post to us unanticipated challenges, which should hopefully play to the advantages of an innovative flexible society prepared to run faster than everybody else. I mean, who in the 1960s when we were really at the height of a manufacturing expansion in a post World War II success would have expected the Japanese challenge?
Who when we were focused on the Japanese challenge would have expected that a company like Nokia, that famous Japanese company, would emerge from the finished wastelands to, in fact, become a global producer of mobile telephony? And what, in fact, would we anticipate now? And I think that fact of the unexpected means that manufacturing, the ability to translate ideas into product, in fact, becomes all the more important. And retaining the capacity to make the unexpected becomes all the more critical. It's not just production of X or Y, it's the underlying ability to make things, the resources to undertake that.
Now, in these few brief minutes, I think there are three very clear features of the emerging economy, and two speculative ones. Let me at least point to them, rather than, as an academic might, discuss them. The three are, first, that established technologies and the management to exploit them will grow rapidly around the world with the result that the array of manufacturing and production capacities around the world will expand dramatically. To establish the conventional is just going to spread, and Solectrons taking full advantage of that in a sense has been created out of an early realization of that.
Commodity production services will be widely available. Now, that said, it's not clear how production will be organized. That is what will, in fact, dictate where things should be made. Unpredictability because of revolution, unpredictability because of security concerns. I mean, the biggest threat to American ports is not that we said something up the Hudson River, it is that something is put in an unexpected box somewhere in the world, and that reality may change the way in which supply chains are managed. In fact, which ports and which locations of shipping actually become critical. So that's today, but how these things are orchestrated over the next years and what things need to be produced at home becomes uncertain.
The second is that the sources of competition and innovation from abroad, both in underlying product and production, will expand. We may have, as I agree with the under secretary, competitive advantage in this, but we are not alone. Innovation is not an American monopoly. And whether this comes from the longstanding investments in science and technology made in Europe, which are real and significant, or something like the rapid telecommunications broadband and network build-out in Korea and in China and potentially even in Japan again with a resolution, a build-out that would, in fact, create leading edge markets that would induce production of new and innovative service and products.
We won't know where that is going to come from. We can be certain that those challenges will be there, and we, in a certain sense, have to understand how to anticipate them and how to respond.
The third is that we really have entered a digital era, but we mustn't be fooled by that digital reality into thinking that the ability to make things doesn't matter. Very briefly in three domains, in the traditional areas market may be more effectively segmented by database management, and we may want to respond by in a sense targeting products to that, and some product may be able to be targeted by using digital functionality, but the ability to change and use flexible production lines becomes all the more critical in those kinds of conditions. The ability to rapidly introduce new products becomes all the more critical.
Secondly, in the purely digital domain, you still have to make software. I mean, it's something that you make. It's not something that falls out of the sky. The way in which that production process is organized becomes crucial. And real innovation will emerge not as a transposition of the production processes of the electro-mechanical era into the digital era, but from things like open source software, which are in themselves distributed innovation systems that are radically different than what we have seen in the past, and rest on different notions of property. Not no notion of property, but really the right to distribute, rather than the right to exclude. I mean, IBM is hinging greatly on that particular definition of property.
And lastly, of course, in areas that, I'm sure my colleague, Professor Enriquez, will talk about in radical new areas in nanotechnology, biotechnology the ability to innovate and capture the value of science hinges on the ability to make things. It's not the small company without the ability to make something that is, in fact, going to translate nanotechnology ideas coming out of Berkeley into new products.
Now, those three things I think are evident and good places to start. The two areas that I think are less predictable are, first of all, what the consequences of a changing role of the dollar will be over the next generation. I think the one thing we can be certain of is that the dollar's role in the world currency system 20 years from now will not be the same. What the exact role will be, whether it is a multi currency system, whether there is an alternate reserve currency, is another issue. And what that implies about pricing of goods, because, of course, price reflects exchange rates rather than just what internally is quite unpredictable.
But if, in fact, the dollar drops in value, the U.S. will suddenly become a very attractive manufacturing location with considerable dangers. A danger that we will go after the cheap wage, parts and production, so that, in fact, it's not that the dollar will get us out of this, but that the nature of the challenges we face will shift as the dollar changes its role. And I promise you there is an avalanche there. The only question is who is going to fire the rifle shot that starts it down the mountain and when does that happen. If we could get the timing right, any manager will tell you it's all about timing. So we know that is going to happen in the next years, but we don't know when or what it will look like.
And lastly, of course, is the security issue that confronts this country and the rest of the world. And in the following sense, what do we need to make at home and, in fact, if we invest in security, what are the consequences of dual use technology. That is, heavy investment in military technology complicates commercial life. David Packard refused to let HP, after having been in the Defense Department, become deeply involved in military procurement issues. So the question becomes what will this set of security concerns do, and how do we not become the producers of specialty products that are unique to a particular set of needs, but retain the capacity to be competitive producers of the commercial product that in the end underlies the science and technology on which our security position will rest.
Now, let me just stop there and transfer this over. Thank you.
CHAIR BOND: Great. Thank you and let me first open it up and see if we've got anybody with an immediate question or comment. If not, I know that some -- Arden, go ahead.
DR. BEMENT: Yes. John, I wonder if you could expand on the difference between defense and federal procurement from a desirability of the private sector to enter into contracts, enter into commerce with the Government? Are there significant differences?
MR. ZYSMAN: Between?
DR. BEMENT: The defense procurement versus federal procurement from a regulatory, from bookkeeping, from other aspects?
MR. ZYSMAN: Well, I think there are. Let me make one comment and then turn it over to others who know more about it than I do. The defense issue, of course, is that their specialty functionality in which the balance of price and function, in fact, is different in that market than it is in other market places, and an overly great investment in achieving certain functionality can, in fact, distort a firm's position.
And, in fact, as many of the leading adjuces in computing, for example, move forward. The financial markets become the drivers of the most sophisticated computers, no longer just the Defense Department, and that creates a problem. The procurement issue often is that the structure of rules, if you take the way in which the post office procured optical reading technology for letters and so forth, means that in order to not -- it creates a very odd set of dynamics, because you can't vute your price when the sets of rules set up ways that run counter to the way in which a purely commercial pricing structure would be built.
You might know that a processor is going to cost one-tenth, what you're going to use will cost one-tenth of the price when you are actually delivering it, but you can't bid it that way unless it's a purely internal operation. I mean, IBM could. A company that's returning from the outside couldn't. So there are distortions there that, in fact, don't-- and you know that, and you're asking me to say what you know.
So let me say that and turn this over to others.
CHAIR BOND: Okay. Thank you. Any other comments? Yes, go ahead. And, please, help the folks out with a quick -- we've got your name and affiliation, but if you feel the need to add a phrase of explanation of what you're doing or whatever, feel free to do that.
MR. ZAWACKI: Gee, I don't know. Jim Zawacki. I have a company called GR Spring and Stamping, probably the smallest company in the room. I also am chairman of the board of PMA, which represents 1,300 companies in past and present Spring Manufacturers Institute, which is 300 companies, and the president council for sheet metal with seven countries that we just met in England.
My point to John is a fear I have is what we're talking about here in the academic mode doesn't take into account 50 percent of the population of the United States in 2020 who won't be available for any of the jobs he is talking about because of the technology transfer. You're talking software and biotech and nano. Our people aren't ready for this. And we talk about innovation and flexibility, you think the other Asian countries or the third-world countries aren't innovating?
If you design the greatest product in the world today and you patent it, more than likely, you're not going to build it in the United States. That's been the trend. And so what we got to do is think about that lower 50 percent of the United States and how are they going to have jobs in 2020. Otherwise, we have a problem.
DR. BEMENT: Can I ask a follow-up question? Jim, the National R and D focus relevant to manufacturing seems to be biotech, infotech and nanotech. How should that R and D agenda be broadened to look at manufacturing in a broader context?
MR. ZAWACKI: I don't claim to have the answers. We have what we, in our community, call smart zones so we think we have a big start up of biotech, and I'm not knocking that, just like I won't knock agriculture. And I could talk about that for a minute, but my point is how many jobs do they create? What we're facing right now is you're talking chiefs. We need jobs for the indians. And the reason I brought up agriculture is they represent 1.5 to 3 percent of the GDP, and they have a secretary of agriculture.
Their school system is based on agriculture, and yet manufacturing is so dominant in our U.S. society. By the way, my theme for PMA is manufacturing is vital to our economy. I just came from this conference with seven industrialized nations. They all have the same problem, and they all recognize that their government is not doing much to help them. My fear, when we talked 2020, gets back to that lower 20 percent. Personally, I don't have a fear. I have a fear for my employees, for my children, for my grandchildren. Hopefully, they are educated enough to get some of these jobs you're talking about.
The bio start ups we have in our community don't employ anybody. That's a real problem. Sales per employee in the bio, in the software industry is very high compared to what the manufacturing industry as we know it today.
CHAIR BOND: George, I'm going to come to you in just one minute, but if you want to just acknowledge that we are going -- we have set aside some time today to talk specifically about the work force needs for the future. And I guess I also want to grant your point about the current structure in terms of biotech and software and so forth. But I do think that we're looking at a future by 2020 in which we are going to see those no longer just the job as chiefs, but indeed the indians, and we'll talk about what we need to do in the work force phase to make sure that those folks are prepared for what we believe will be a growing sector of employment as well.
George, go ahead.
MR. SCALISE: Yes, let me throw in a little different –
MR. ZYSMAN: Can you speak into a mike?
CHAIR BOND: Yes, here, here.
MR. SCALISE: Let me take us to a little different point in this discussion. We're now also moving as John talked about how all this technology and manufacturing is going to gravitate around the world rather quickly, but with that we're going to deal with, I think, two important issues that we haven't had to deal with up until now for the most part.
First of all, the rate of change in technology is going to be very fast, and with that you either stay paced and continue to be a part of the future or if you lose a generation, the chance of you being a part of the future is greatly diminished if not impossible. The second thing is that we have an environment out there where the competition doesn't necessarily share the same, I won't use the word values, but certain, methodology that we have enjoyed with all of our trading partners for a very long time.
And I'll give you one example of that. If you look at China today, the way they are implementing their value attacks and the rebates associated with that, our view is that it clearly violates WTO rules, and with that, will distort investment patterns. Now, the problem with that is that the WTO is a good organization, it's one that we support, but it's also very slow to act and to come to a conclusion dealing with an issue of this kind.
So that everyone is a bit reluctant to go to the WTO to make an issue of it, and yet if you go back to my first point where this grade of change is taking place, once the investment is in place, the generation is lost, then it really won't matter whether or not you go to the WTO or anywhere else or how long it takes, because the issue will have been resolved for all time in certain areas. So I think that this also has to be understood that we're also in a different kind of race than we have been in the past. And it's one from which it will be very difficult to recover if you don't stay paced.
MR. STRAUSS: Good morning. I'm Bill Strauss from the Federal Reserve Bank of Chicago, I follow Manufacturing for our district. With 13 percent of the population in our region, we have about 40 percent of U.S. steel production, 40 percent of U.S. light vehicle production, so it's the one key sector that makes our district unique among all the other districts in the Federal Reserve System.
Since you brought up the issue about the dollar, being from the Fed, we're limited in our ability to talk about any future direction of the dollar, so I thought I would get my point in about that, at this point. When you do look at dollar trends, we went from having about 100 billion trade deficit to half a trillion dollar trade deficit over the last five or six years following the Asian crisis. And with all of those goods flowing into the country, and all of the dollars flowing out, it should have lead to a weakening of the dollar looking at my old J-curve theories of graduate school.
That being said, we saw the dollar continue to appreciate all the way through the early part of last year. And the reason is that there was a significant increase in the demand for the dollar and that was for reasons for investment in the U.S., whether it is our equity markets or directly into corporations. And I think directly tied into that were future returns on investments which were superior in the United States versus any other nation.
So in terms of future direction, I think what needs to be kept in mind is how our flexible markets allow businesses to do the things that they do in this country versus many other nations directly tie into that. And I don't think you can necessarily, look at just trade patterns, I think, it really comes back into future productivity gains going forward. Thank you.
CHAIR BOND: Yes?
MR. DUESTERBERG: I'm Tom Duesterberg, president of the Manufacturers Alliance. We're a slightly different organization, in that we're a membership organization that's devoted to executive education and economic research. I would like to introduce a slightly different perspective here at the start as we think about the future of manufacturing.
In a discussion with one of the governors from the Washington Federal CEO members at the last board meeting or the Alliance Board of Trustees offered the suggestion that we ought to do a thought experiment about what the economy of the United States would look like absent a vibrant manufacturing sector. If you look just at the vectors of change, we're losing jobs and a lot of production is going abroad. The thought is that we need to understand what the role of manufacturing is in the long term vitality and living standards of the American economy.
And I think if you look closely, a lot of the increase in the standard of living based on productivity gains, especially in the last 15 to 20 years, derive from advances made in manufacturing. So this whole question about what to do about manufacturing is inherently a political question. John Zysman brought up the issue of the national security implications, but there also is the implication of what will be our growth rate, what will be the increase in our standard of living that we can expect if we don't have the increment to growth that has been added by the manufacturing sector by and large for the last 20 years.
So I think it would be important in this exercise, at least, to pay some attention to the role of manufacturing in this larger overall question of how do we increase the standard of living in a highly competitive global environment?
CHAIR BOND: Tom, can I just follow-up there? I mean, obviously, John Zysman touched on this a little bit with the discussion of Homeland Security and needing some domestic capabilities to make sure you can secure the Homeland. And similar cases could be made for some other hotlines in a national security related manufacturing capability. But what are some of the other perhaps components of domestic manufacturing that you think strategically we need to keep an eye on to have domestic capability?
MR. DUESTERBERG: I'm sure there are others in the room who could better answer that question. But we see the evolution increasingly as John Zysman does towards a technology oriented, innovation oriented types of production. It's more and more difficult to compete in the commodity areas of production. We have a good research base, highly flexible firms, and the right socio-cultural environment, political environment, if you will, to allow rapid change.
So it's more these generic sorts of questions that I think are key, rather than looking at specific technologies. Those technologies will emerge. We don't know which ones they are, but if we provide the environment, the economic structure, the political structure, the social structure that encourages innovation and rapid change, then I think that's about the best we can do.
CHAIR BOND: Yes. Okay.
MR. VARGO: Thank you. I'm Frank Vargo, vice president for international -- at the National Association of Manufacturers. And let me be more stark than Tom was. It's not just that manufacturing matters. You know, the entire standard of living in this country depends upon manufacturers, one, because manufacturing is somewhere between 60 percent and two-thirds of everything this country exports.
Now, we happen to be fortunate in that we are the world's reserve currency and people so far have been very happy to hold dollars, kind of like having a credit card, saying sure, put another 500 billion on it, don't worry about it. But at some point, they will. Now, if in the meantime our manufacturing base continues to move overseas, and it is doing so in an accelerating degree, and all of our members say unfortunately we're just at the beginning. It's really going to pick up.
And we don't have this 60 percent to export or at least we don't have the things to export that people want to buy from us, what will happen? The dollar, as was noted, will go down. Not just to where it should be, and the dollar today is stronger than it was the day that Secretary Reuben left office, so the dollar is still too strong. But, you know, not getting back to a kind of sustaining level, it will collapse, and it will reach a level when we will be exporting, I don't know, shirts or something.
There will always be a manufacturing question. The question is at what level will it value how wealthy will we be? And as we look forward 20 years, you know, we can postulate some alternative pictures, and the one I just did is not one that anybody wants. And the question is how do we meet the constant price impression as manufacturing increasingly moves not just to China, but we have India after China and many places. And just looking at nanotechnology or new technologies is not, in itself, going to save us.
Certainly, the technology, the application of technology, the increase in value added and the ability to use it, the ability to have smaller companies as well as larger companies use this technology is incredibly important to our future. At some point, we'll be talking about education. And the point I will make several times today is, you know, I'm not so worried about labor costs in China right now as I am about the fact that they are cranking out an enormously larger number of engineers than the United States is, and this is what is going to kill us in the future.
CHAIR BOND: Frank, don't go away. I want you to answer your own question. What do you think we need to do in that future world? Where do you think we ought to be drawing that line that you alluded to?
MR. VARGO: Well, we need to utilize our advantages. And one of our best advantages is our flexibility. You know, the Japanese are not flexible, the Europeans are not flexible, and to a very large extent when you look at the European papers and the British papers for what they want to do to bring their manufacturings catch up with the Americans productivity. We have this tremendous edge as we have a longer term set of structural problems that calls for production in the U.S. are getting higher. And as our population ages, we have a larger number of retirees to production workers. You know, this is a problem that we have to deal with.
We have to come to grips. We have to identify our structural problems. We definitely have to avoid future situations in letting the dollar get over valued, as it recently was or as it was in 1980. But we also need to look at how we accelerate the development of innovation and investment and how we accelerate its dispersions, it's diffusion throughout the economy.
MR. ZAWACKI: Just a couple comments. One, one of the answers it's going to take a massive education program and it will take until 2020, but I think I heard George say with investment you lose a generation, so we've lost a generation with the investment, the largest capital investment in China last year, and every billion dollars is equivalent to 13,000 jobs or 15,000 jobs.
Why can't structurally we come up with some positive things that we can do? I mean, we can't wait 20 years to educate positive things for investment in the United States. Investment tax credits, if you hire people. The weak aren't going to survive. I'm not talking the ones that aren't working towards whatever you want to call it lean or world class. There are a lot of weak manufacturers in our society. But maybe they would learn something from this if we provide the positive atmosphere for the investment to stay here.
I could give you an example of a company. I won't mention the name, but it's public knowledge, it has been in manufacturing in our community for 125 years and just announced six months ago that they are moving everything to China and they have. And then there was an article in the Sunday's paper, the Grand Rapids Press, that said how they are beating Hoover and so forth, because Hoover didn't make this move. Now, how long will it take Walmart to realize that I can buy that electric carpet sweeper from the guy who is building it in China for $10 cheaper than the company in my hometown?
Now, the company in my hometown has a million square feet in that building, and they are going to keep their engineering in development. How long will it take them to realize I can buy an engineer in China or India for $3,000, so really I don't even need this. So all I'm saying is we need the positive things coming out of the Government for people to invest. I feel sorry for the capital good manufacturers in the United States. They are dying.
CHAIR BOND: Pardon me. Do you want to jump in or do you want to go later?
DR. BEMENT: Well, there was a question that came to mind as Jim, Tom and Frank spoke that really focused more on the lower tiered manufacturing. My observation is in the past that manufacturing and labor more or less migrated to the urban centers. And what I have seen happen in the last 40 years is that manufacturing has now migrated to the rural areas. So the rural economy is really a hybrid economy now. It's part agriculture and part manufacturing.
So the question looking ahead 20 years is what will that really look like? Because a lot of that manufacturing is somewhat divorced from the innovation infrastructure, which is often times located in the urban centers.
CHAIR BOND: Leo, you want to go?
MR. REDDY: Thank you. I'm Leo Reddy. I'm the CEO of a national coalition for Advanced Manufacturing. We're a nationwide community of companies, trade associations, federal laboratories, universities, centers, community colleges, manufacturing extension services working in a broadbased public/private partnership to improve the productivity and competitiveness in U.S. based manufacturing. That's our focus.
And when we have time left over to think about public policy, we do try to develop ideas from the front lines, basically, about what can be done in the public policy arena to aid and abet that process. Let me make a couple of comments. One, I'm delighted you're having this meeting, and I'm delighted with the secretary's initiative, particularly, for developing a manufacturing strategy.
I think we feel that we are kind of in a crisis today. It's a little bit like the crisis of the late '70s, early '80s where we were worried about losing our competitive edge across the board. Today, I think we are facing a crisis which is symbolized by the recession that's effected manufacturing, particularly, and by the rising competition from low cost, low wage countries.
A couple of months ago we had a meeting at GM where we brought in about 100 executives to ask specifically the question about looking forward 20 years, if you will, how can the U.S. compete with low wage countries, so low in manufacturing, which we all agree is very important to the nation. We came out of that meeting really feeling quite optimistic about our capabilities. I don't really share the global doom around the table, although we're in a crisis right at the moment.
We believe quite strongly we do have the national resources and the capability to mobilize our, especially, technology base combined with our industrial base, to essentially accelerate the development and deployment with advanced technologies to the point where our labor productivity will rise to a degree where the costs of labor are almost disappeared from the equation, perhaps under 10 percent of the overall cost of producing goods.
And if we get to that level, then that cost factor will almost disappear, which means the U.S., as long as it has the management ability and so forth, which I think we do, the creativity and the design to complete, we'll be able probably to compete in just about any sector that we choose to on the basis of competitive advantage given a reasonably open playing field. Our capacity to create will not be diminished, and thus the incentive to import for countries to go abroad to manufacture cheap exports back to the U.S. will for all practical purposes disappear.
Thus, the reasons for manufacturing abroad will shift less towards making cheap exports back to the U.S. and more to building markets in overseas countries, which we think would be a very desirable thing. We're not sure if competitiveness is quite the right vision, which kind of implies a zero-some gain. It would be a more comfortable, more sensible position for us to make sure that we are competitive in our goal to produce goods. But also if other countries are more productive and more prosperous, this is great for us, because what we need is we need markets for our products.
What good does it do to produce high value added technology in terms of products, if we don't have buyers? So we have a national interest also in improving the productivity and prospering in other countries, as long as we're making sure that we're taking care of ourselves. Now, we have recently published a white paper, which is on these topics, we've carried around Washington recently in my leadership group. It's been a very good reception for this, but three broad areas that we would suggest about, if I could just quote from this paper in terms of how to do this.
One, and particularly, "Develop and deploy next generation process technologies, which go beyond just nano and biotechnologies, important as they are, to develop essentially a new tool kit, if you will, of manufacturing process technologies, better enable American workers to keep pace with the technological change, and support the nation's smaller manufacturers, and particularly in their ability to be a world class supplier to our larger manufacturers."
Those in the broadest terms of three areas we're talking about, but to actually move forward in a significant way in those areas does require a national effort, which is again why this supports your initiative. We hope that it gets to the White House level. We briefed the White House on this. We were not particularly impressed with their comprehension of what we're talking about or their responsiveness, and we hope that through your good or others, that we can raise this whole issue much, much higher on the national agenda, and hopefully make it a message in the next election campaign.
MS. MORRIS: Good morning. I'm Martha Morris. I recently ran Severn Storage Manufacturing for IBM and then recently I've been retrained. I'm Global Services procurement on part of the retraining that we're doing at IBM and that's an important initiative that we have to make sure that we're taking our workers with us as we transform from a manufacturing culture, if you will, a silo based, functional base organization to a supply chain organization, and that's really what we have today and are focused on.
We don't think this, kind of term it, nomadic sourcing is going to stop, but we don't believe it is the end of the world or the end of manufacturing in the United States. We think it is good business, that it is driving efficiency and that that efficiency improving a company's competitiveness and cost structure can only fuel the research and development investment. And that it eventually does open up opportunities while they may be different, but opportunities in manufacturing.
And as I was a plant manager, I used to think of manufacturing, the order dropped to the plant and I had to ship it, and that's where my job kind of started and ended. And today, certainly, we're opening up more jobs in fulfillment customer facing jobs for manufacturing folks, partnering with the sales teams, so they can spend more time in front of customers closing deals as opposed to, you know, solving an order problem or solving a billing problem and having manufacturing folks, traditional manufacturing folks get into some of these non-traditional roles across the supply chain.
And we're retraining. We're spending millions of dollars on retraining, as well as grants to universities for advanced supply chain methodologies and technologies. So we believe that the supply chain is so key and we need to make sure our definition in manufacturing really reaches that ending process. And I think I would agree on we need to be flexible, and that's why we're really making sure that we are having strategic alliances as a piece of our focus and supply chain. We will do some of the key critical processes in-house, in the United States where we need to, but we will also align ourselves and partner ourselves with folks in other companies who have different expertise and use their grade matter as well as our own to make sure we're as competitive as possible.
There's a recent MIT study of the Fortune 100 CEOs that says, you know, that in the next 15 years it's not the company's kind of competitiveness, but it's really going to be supply chain competitiveness that's going to win in the market place. So we just ask you to think about that as we go through this discussion as well.
CHAIR BOND: Some folks have to comment on that?
MR. TIEMAN: Yes, Michael Tieman. I'm the chief technology officer of Red Hat, and I wanted to echo this concept of a tool kit and supply chain management. There is a great article that I saw in the Harvard Business Review last year, it was in April, published by Eric Von Hipple, a collaborator from Harvard University. And what he talked about was something called user innovation tool kits. And the concept was that if you look at a traditional manufacturing approach where the manufacturer takes responsibility for advanced development, design, building the prototype, you hand it then to the customer and the customer tests it and tells you all the things that are wrong with it, and you pump it back through that process, that winds up being incredibly inefficient in their study.
And the radical approach, which they have now observed in a number of industries, is that you treat the customer as the innovator, and the manufacturer is able to do the advanced development to provide parameters for a tool kit. The customer then takes responsibility for design, building of the prototype, testing and feedback, and the customer by operating the expensive part of the feedback within the customer context, once the thing is ready to go to production, the manufacturer can then produce it according to the parameters of the tool kit.
Probably the greatest example of this is what General Electric did with the plastics business where they took all of their proprietary knowledge, spent millions of dollars externalizing that knowledge on a website that would allow customers to basically design their own polymers using GE's own knowledge and know how, and once the customer had actually formulated the exact composition they were looking for, then GE could deliver, you know, any amount and it was perfect as opposed to well, that's not quite right. That consumer doesn't know how to operate the model.
The point of this, I think, though goes back to the very notion of, you know, what will it mean to be a manufacturer in 2020? And I think if we look historically, it's hard for -- I think it would be difficult for the common person in the street to associate flexibility with manufacturing. All right. Because one thinks something which is very inflexible, but this article by Eric Von Hipple, which has been updated, is a great example of changing the way manufacturers interface to customers and the result is much better profitability, faster kind of market, and it injects innovation, which the manufacturer themselves cannot possibly afford to provide. But in context with the customer, it can afford to deliver.
CHAIR BOND: Let's go over here if it's okay.
MR. MEHLMAN: If I could note one thing on what you said though, we're going to be circulating the Von Hipple article before the end of the day, as well as the Popkin paper from NAM and the NACFAM White paper.
CHAIR BOND: Okay.
MR. TOMPKINS: My name is Bruce Tompkins. I'm with Tompkins Associates. We are a supply chain consulting company, so I want to add on to what Martha was saying from her experience. My background is entirely in manufacturing, and so that's the world that I have come from. I mean, labor productivity is certainly and issue and we have to be cognizant of it, and we have to continue to improve our productivity. But it is now down to 10 or 15 percent of the total cost of a product.
So what's the other 85 or 90 percent of the product cost? There are still tons and tons and tons of waste in all the rest of the things that we do to bring a product from the design folks to a consumer. So there's still a lot of work to be done to improve that. Part of that is supply chain, part of that is just looking at the processes that we use. A lot of our processes used in manufacturing are broken.
If you would do a flow chart of those processes, you couldn't, because they would go off into no where and you wouldn't know what would happen. And I find that every day with the companies that I work with that they think they have processes that work, but they don't. And we've kind of squeezed the labor grape as much as you can squeeze it. I mean, there's not a whole lot of opportunity left.
People are doing lean and they are doing good things with lean, but there's not a tremendous amount of opportunity there. There's not the 50 percent kinds of opportunities. There are in the supply chain. There are that kind of opportunity available for improvement. And one other thing I want to talk about what Mike discussed is a trend that I'm seeing where we're getting a lot more into customers/ consumers designing products where they actually do the design of the product.
There are companies around that do that today. You get online and you say okay, I want one of these and one of these, and it's going to look like this. Well, I think we're going to see that escalate greatly where consumers are actually going to design the product and the manufacturers have to be flexible enough and capable enough to stay with them to be able to do what the customer wants.
So I agree with what Mike was saying about how we're going to see customers more involved in design, the impact on manufacturing and then also, obviously, in the distribution. They want it tomorrow, so that's the world that I see.
CHAIR BOND: All right. Great. Thank you. Well, a lot of talk about flexibility and traditional manufacturing and somebody who has been thriving in that world for a long time. Tim Timken, I would like to get your thoughts and comments on some of this.
MR. TIMKEN: Well, I appreciate that. I'm Tim Timken from the Timken Company, and I've spent 45 years in global manufacturing and 40 years in the political process of the United States. I served as the chairman of the National Association of Manufacturers for a period. And I realize that this is out of the Office of Technology and the tendency might be to deal strictly with technologies, but I would like to come back.
First of all, I think Tom can make the case for the need for manufacturing in our economy to such an extent that we all accept that. But I would like to go to Leo's point, because that's exactly the way the NAM is looking at that, and that is that, and it's a little bit 35,000 foot stuff, but I really want to have a chance to get it in.
It is that Government, at all levels, effects what happens in business in total and manufacturing, in particular, and at the global level, certainly, and we have the trade issues at the federal level, what the federal Government does, at the state level, what the state Governments do, even at the low they do. And basically, the issue, for Government, is to decide what are they doing that hurts U.S. manufacturing and what could it do to help U.S. manufacturing?
And because of the lack of understanding of the importance of manufacturing in the economy, I have over the years run into a wall of legislators or governors or others who simply don't understand the contribution of manufacturing to this economy and the jobs and the exports and the research and all of the things that go with it. And I'm a little afraid that if we stick with a report from my friend, Secretary Don Evans, and that is all the further we get, it will not be enough.
I echo Leo already here in the belief that the White House and the President and the total Administration should take a lead on extolling the need and desirability of manufacturing as part of our economy, and the encouragement of things that help manufacturing at whatever level of Government, and elimination of things that hurt manufacturing. Now, we can talk all day about individual techniques of supply chain management or other things that are evolving, which will surely be developed by the manufacturing industry in this country if left alone.
But you have issues of decor of what has made manufacturing important in this country. For instance, low cost available cheap energy. The Kyoto protocol would have been a disaster for manufacturing in the United States, and yet a significant number of our political officials were really willing to accept that that was the direction to go, simply because the Europeans, who are admired in despair, and the Japanese, who are admired in despair, had extolled it.
To me, that's a perfect example of the kind of things the Government is doing that are far greater than whether they can individually pick out a winning industry or a winning technology or anything like that. The fact that we are unwilling to drill in the Arctic, that we withheld production on a lot of federal lands is suicide in the long run for this country. And yet, that's active Government policy. And interestingly enough, some of the very people who are against that are the ones that claim to be for U.S. manufacturing and attacking things like NAPTA and trade issues.
And I think somewhere along the line somebody at the highest levels of the Government has to articulate and make sure that there is almost this checklist. What you are doing, does it help manufacturing? What you are doing, does it hurt manufacturing? And I love agriculture and I love the services industries. I think services derives a lot of their business from manufacturing, so if manufacturing dies, they might find themselves in a little worse position.
But I think it is important that manufacturing, as a specific sector, and it is huge and I mean in the broadest sense all the way to the software and everything else is part of manufacturing as we see it, needs a champion, and it can't be Don Evans. It has got to be the total Administration, because we're all ready to say that technology or labor department, all the rest taxation, all the rest of these folks are part of the issue and the problems as well.
Now, we talk about comparative advantage and my understanding of Adam Smith and Ricardo and so forth is a wonderful laboratory model, and it has benefitted actually the generalized direction of our economy, but if the Chinese are devaluing their currency by 30 percent, it isn't working the way it is supposed to work. If some nation develops a tax policy that's totally different than another nations, these are all distortions and that's part of what the federal Government, in our case, has to be aware of and take into account.
So I would say that I'm happy to be here and happy to discuss the emphasis on innovation, and the commercialization, facilitation of commercialization of innovation, transfer IP protection, all those kind of things are important. But I can't leave without saying to you and to Don Evans and again to the Administration we need a champion that understands how important manufacturing really is, which I think everybody at this table understands, and then the fact that Government leadership is required at the federal level to be able to get the global issues addressed, as well as the state and local issues.
CHAIR BOND: Okay. Thank you, Tim. Let me see if I can offer a couple of comments to kind of try to wrap up this first hour and provide a transition to our next point here. First of all, let me address you directly, Tim, and I think that Secretary Evans is committed to making this about more than the Department of Commerce and Don Evans. And that to do that it does require the broad definition of manufacturing. It does include a positive vision for the future in winning. It also requires a modern definition of what manufacturing is going to be.
There is still some work to be done on that in understanding that as the supply chain is made more competitive, which may include some globally outsourced piece of it, is that a good or bad for the economy? So I think we'll continue to wrestle that to the ground. And if it is ultimately, as John said at the very outset, about translating ideas into products, that that assumes that the federal Government is going to work on removing distortions around the globe, and that we are going to work on protecting intellectual property around the globe, so that if you move an idea quickly into products, someone isn't able to take that intellectual property, use a wage advantage and undercut you the next week.
And with that, this is going to be my attempt at transition with that little reference to intellectual property, I really want to talk about the disruptive intellectual properties of the future and what some of the implications may be there, and there we have a professor, author and deep thinker, Juan Enriquez, from the Harvard Business School to offer some opening thoughts. Juan?
MR. ENRIQUEZ-CABOT: Thanks. You know, it's really hard to see it until it hits you. And it's not immediately obvious what is happening, and you see that in business after business. And you know, if you would have asked who was the head of manufacturing and who was the head of knowledge and who was the head of astronomy and mathematics and life sciences and pharmacology in the year 1000, it was the University of Damascus, and it was the University of Islahiye, and it was the University of Shiraz, and it was the University of Baghdad.
And the reason why they were so powerful was because you had a closed system that kept trying to do what it was doing, and had a very deep set of beliefs, and anybody who disagreed with those beliefs was burned at the stake, and of course that was western Europe. So what ended up happening is that the Hebrew scholars migrated out of western Europe, went to the University of Baghdad and worked in the 400,000 book library there with Arab scholars who were translating Greek text, and that knowledge came into Europe through the Muslim University of Southern Spain.
So when you look at modern medicine and modern astronomy and mathematics and stuff, a lot of that stuff comes out of what is today a disaster. And it comes out of Hebrew scholars working side by side with Arab scholars on Greek text. Right. And you see that time and again. I mean, you see industries that think they are invulnerable. So you just have to read the reckoning and see what Helter Stem did with cars.
Country after country misses that boat. And what is really important to understand today is the consequences of missing that boat can be terminal, because if we had been sitting at the UN in 1950, there were 50 seats there, which means about 3/4 of the flags, borders and anthems of this world did not exist 50 years ago. And what you're watching is a system where country after country is falling apart, splitting, seceding, because it doesn't answer these questions right or on time.
And there is a series of implications to some of the things that are happening in knowledge basis. The thing that is driving the world today, I think, very fast is changes in notation systems on how you generate wealth. I would like you to try a little experiment on your notepads. Think to yourselves as to whether you can multiply 13,469 by 6,743, and the answer is yes, every person can, but not in Roman numerals. Right? And when you change notation systems from Roman numerals to Arabic numerals, you really change the way you do things.
And if you really want to make it easy, then do it on this thing, right? And this is not operating on Roman numerals or Arabic numerals. This is operating in 1s and 0s. And what has happened to your business, which is kind of interesting, is something that seemed really distant, a language that nobody spoke in 1960, which was a digital language, which everybody thought was just for computer geeks and computers and wouldn't really wonder through manufacturing. It has fundamentally changed every one of your businesses.
So every one of you, if you are not digitally literate, you're dead, you're not competitive, whether you are running payroll or whether you are running other things. There's an ad in the Wall Street Journal last week that talks about all the ways in which you answer phones in the world. It's an MCI ad. And you know, hello, pronto, etcetera, etcetera, except that all of that is translated into 1s and 0s. So you've collapsed a notation system with 26 letters, plus tones, plus images into two letters, and that's what has been driving the wealth in the world. I mean, that's the rise of Singapore, and that's the rise of Malaysia, and that's Silicone Valley, and that's computer aided manufacturing.
The thing that concerns me, at this point, is that we're changing notation systems again, and that the single most important map and notation system that, I think, we have ever come up with is a notation system for how life is coded. So we can now express life forms as a series of long chains of four letters. And in the measure that you understand that if you send one string of 1s and 0s and it says I love you, and you alter those just a little bit, and it says I hate you, right, or you speak Italian or you speak French, depending on which string of 1s and 0s you are sending.
The same thing is going to happen in life forms. And just as the computer revolution seems very distant from where you were in 1960 and maybe for some of you in 1970, the life sciences revolution seems very distant from your businesses today, but it's not going to be, because one of the largest single components of what you pay out is things like health care and insurance, and the way in which you make things is fundamentally going to change, because this thing here isn't a book, right? So you can't read the ABC's in this thing. It's light, no light, 1s, 0s.
This is a very different notation system, and that notation system really changes things. It upends civilizations when you change languages. You try typesetting an impossible headline like "Red Sox win World Series" in Chinese, very hard to do with 55,000 characters with warehouses full of typesettings. Very easy to do in 26 letters. Much easier to do in two letters, right? That's what's going to happen to life forms.
The first time we ever read a life form happened about 16 or 18 miles from here in Rockville, Maryland, and it was in 1995. The first time we read a human being was two years ago. The first time we read an insect was two years ago. The first time we read a plant was two years ago. Already we're beginning to change the gene code, which is the instruction set for life in various animals and plants in ways that they execute different functions, because life code and digital code can become interchangeable. Just make up how you want to do it.
If you've got four letters, the code for bacteria, and you say A, abnine, equals 00, T equals 01, C equals 10 and G equals 11, then you've made life code and digital code interchangeable. And as soon as you do that, because you know that you've got these little scissors that again a nobel prize winner who was sitting over here in Rockville, Maryland called Ham Smith, then you know that you can substitute digital code and gene code and you can do it inside living things, because a lot of the stuff inside you is not necessarily to execute life functions.
So you've got 3.2 billion letters of gene code inside each of your cells. You use about 3 percent of it in so far as we know, and the rest of it because we're ignorant, we call DNA. But it means you can take big chunks of data and substitute it with other chunks of data. And if you are a bacteria like an amoeba dubio, then you've got a gene code that's about 200 times the size of a human gene code. And in practical terms that means that you can sniff out information and insert a different string of letters into that amoeba. As a practical matter what that means is that you can store every New York Times every printed on a couple of amoebas, right, and they reproduce.
And if you're talking about blending nanotechnology and biotechnology, then the thing that you've got to start is that you can reprogram life forms. You can instruct metazoas to grow a second head. So you've got these little metazoas, little thingys, bacterias running around with two heads. Now, because each of your cells contains your entire gene code, your entire operating system is inside your skin. And if we understand how that works, then we can reprogram it.
And what they are doing at the Harvard Medical School in Clifford Tabin's Lab is they are reprogramming the gene code of chickens in such a way that they grow extra wings. I can show you pictures of chickens with extra wings. Why would you want to do that? Because when you were kids and you played with lizards, if the tail fell off, the tail regrew, right? Take a human being and cut off an arm or leg, it doesn't regrow. But because your entire operating system is inside your skin, and the measure that we begin to understand that operating system, we can begin to think about how do you regrow your own skin instead of transplanting somebody elses?
How do you regrow your eyelet cells if you've got diabetes? How do you rebuild your pancreas? How do you rebuild the back of your eye? Just beginning to understand this stuff. We can now reprogram oranges in such a way that they express forms of polyester that can be made into T-shirts. DuPont has done that with corn. This is a very different manufacturing environment. And just as some people kept multiplying in Roman numerals, and some in other notation systems, and just as some civilizations took off and others didn't, you're watching a breakpoint, and there are 12,000 to 14,000 people right now at the Washington Convention Center discussing this, and there's about 141 countries sitting there saying how do I do this? And that's where your competition is going to come from. That's where the change is going to come, and that's where you're going to define if this remains this century, too, an American century or whether it becomes something very different. Thank you.
CHAIR BOND: I can hear the sound of a few jaws dropping. So whole new ideas, completely new ideas that we would be trying to translate into products that we're at least currently familiar with, which I guess does get very quickly to the question of not only flexibility for the company, but protection for the property and the ideas behind it. When you look out there, Juan, let me come back to you real quickly for a follow-up, what are some of the first expressions of this transition that you expect to see? The first hurdles that folks like this are likely to confront?
MR. ENRIQUEZ-CABOT: Well, look, a lot of your investment portfolios are already in life science companies, not because you are investing in biotech, but because you are investing in little start-ups like DuPont and IBM. And one of the biggest projects at IBM is blue gene to try and decipher the most complicated set of instructions that we have ever faced. Because now we're going from gene code to protein code and that's orders of magnitude more complex.
The insurance issues that you are going to face are going to be very important, because everybody in this room is uninsurable. Everybody in this room can be run with a chip the size of a credit card, made by a company called Aphamatrix, and it will tell you whether you have one of 60,000 genetic conditions. And you are all going to have preexisting conditions, and that changes the nature of medicine in fundamental ways. It's going to change the nature of how you insure people, how you deliver health care.
You go to the doctor's office today it's a binary system. You're sick or you're not sick. You take a medicine or you don't take a medicine. Medicine is going to look very different, because they are going to come at you and they're going to say look, your average probability during life of getting colon cancer or breast cancer is this, and it will be a curve, probability curve. Except that because you've got a bracket 1 gene or a bracket 2 gene, you are 40 percent right shifted.
It doesn't mean that you are going to get cancer. It doesn't mean you have got cancer. It means that your chances over a life time are right shifted and you are likely to get it in a nastier form at an earlier age. And that's going to lead to a chronic set of medical care, and that may be delivered through things like beverages. It may be delivered through foods. It may be delivered through cosmetics and maybe your lipstick is going to have the stuff or maybe it's going to be in transmittal patches. But in the same way as the industrial revolution fundamentally upended how you produce things, and in the same way as Microsoft never thought its competitor would going to be Time Warner/AOL, a lot of your competition is going to come, and a lot of your opportunities are going to come from alliances that are very different structures.
So things like mining, which shouldn't really effect this stuff, well, the Department of Energy has been working on bacteria and engineering bacteria to eat uranium or gold. And if you can get bacteria to eat uranium or gold, then what you can do is you can stick it into the earth and not have to tear everything out. You put the bacteria in it, it's concentrated, it eats it, and then you concentrate the bacteria again, and that's how you do the mining.
Companies that are thinking about how you make the UDOS Unit, army uniforms of the future are thinking, you know, in material science one of the things that is really powerful is spider silk. Because when you have a fly that's a really big thing run into a very narrow string of silk, spider silk, that's a really strong material. How do you get more of it? You can't have privates milk spiders, right? It doesn't work. But you can have privates milk goats. So what Nexia has done, which is a company in Canada, and other companies have done this as well, is they have engineered the genes of goats in such a way that they produce spider silk in their milk, and that can lead you to make our U.S. Army uniforms that weigh as much as your shirt that are as strong as Kevlar and as flexible.
And that means that the next time that you go into the GOV hospital, they are going to be using ultra strong, ultra thin biodegradable sutures to sew you up. So as you go business by business through each of how you make things, how you manufacture things, how you make cotton, this is going to change things just as much as digital code did. Try an experiment. When you walk out of here today, just think to yourself how many times you are using digital code on your pager, on your phone, on your TV, to open up your hotel room door, to get a document to fax.
You've changed your language, okay. 20 years from now, your language and the type of things that happen to you on your daily life are going to be led by a combination of digital code and life code, and it's going to come together and it's going to be non-obvious, but it's already there in your food, and it's already there in your clothing, and it's already there in your insurance, and it's already there in your doctor's office, and it's already there in the way that you are making materials, and it's going to just come at people like a wave.
And by the way, China is going like gangbusters on this. China is betting on this, as is Singapore, as is Malaysia, as is Taiwan. You go into the Washington Convention Center today and you're going to see some really big booths with hundreds of people flying over from Australia to really catch this wave very fast.
CHAIR BOND: John? John wanted to get in here and then we'll go back to Mike.
MR. ZYSMAN: Thank you very much for your very interesting remarks. I mean, I want to just push one point on this, which is the innovations as you are suggesting aren't going to just be specific products or specific processes. They are going to undermine and radicalize and force radical change in the underlying business models.
MR. ENRIQUEZ-CABOT: Yes.
MR. ZYSMAN: And in some ways that's where we need to go with this, and to ask for this discussion where production fits into that and more broadly where Government policy fits into that. Let me build off of an example of yours here at the Aphamatrix example. With the Aphamatrix or the genetic coding which allows us to give some, not predictability, but as you're saying possibilities that makes us all insurable. In a certain sense, the question what becomes the structure of the insurance industry? In that sense, if, in fact, the function of these codes is to exclude people from insurance pools, it's one logic if, in fact, you know, insurance pools are pooled. And, in fact, it becomes ways of trying to anticipate high cost disease that can be treated early and reduce medical costs. The business model looks radically different.
MR. ENRIQUEZ-CABOT: Yes.
MR. ZYSMAN: So part of the question hinges there on how these things are combined. A company, since were mentioned out my way, called Omisha is trying to develop ways of using Aphamatrix kinds of coding to then try and help individuals at this point and see what that means. But that data right now needs to be private, because it has to be kept from the insurance companies, so their clients can't be excluded.
One business model precludes the introduction of an innovation. So that it seems to me that what we need to do from a policy standpoint are two things. One is understand how these new things -- what are the requirements in science technology to permit these kinds of production possibilities to emerge and to be applied in traditional sectors. And secondly, how do we structure competition so that there can really be experimentation among business models?
Now, I don't want to push that further, but the most obvious and outrageous example is Napster. I mean, Napster, which violates a set of property rules, nonetheless was an alternate business model. So the question becomes we want to preclude that which is the theft of intellectual property. At the same time, we want to create an environment in which we're not just competing, in which the winners are not predetermined by the rules of competition. And that's going to be really tough in this environment of rapid new technology.
Juan Enriquez has touched one dimension of this and for those of us who sit in major research universities, it is one, because a wireless nanotech kind of university, you can tell the same kind of stories about the overturning of business models, not as powerfully, because I agree this is perhaps the most important thread of the next few years, but there will be several of these threads that are going to overturn our conventional ways of doing things.
CHAIR BOND: Let's go to Michael, and then I think to Amram wanted to get in.
MR. TIEMAN: So I basically agree with a lot of what you said, but I want to take a slightly different perspective. I think your analogy of Roman numerals is extremely apt. One simply has to walk the streets of Washington to see Roman numerals literally everywhere. And going to the comment that concluded the previous session, I would, in fact, say that for all the wonderful innovations that we can make in information technology, biotechnology, etcetera, the entity which keeps us in the domain of Roman numerals is Government, and I believe that we have to seriously look at how the architecture of Government and how the architecture of Government policies, you know, does or does not support.
And let me give you a particular example. We have a lot of clients on Wall Street who are basically manufacturing wealth. They turn computer cycles into capital value, and they do, you know, billions of dollars a quarter in gross profit at 80 plus percent gross margin. You know, that's probably even more profitable than the U.S. Mint, which is a pretty profitable operation in Government.
Now, there's a tale of two cities there. There are the modern investment banks, who in the past five years have basically reduced their costs by 80 percent and improved their performance to literally be the envy of the world, and even more outrageous outlyers like Etrade, who was able to realize a 45 to 1 cost benefit advantage by migrating to new technology. And then there are well-known financial services firms who are mired in the past, who have 147 incompatible billing systems, and they see their neighbors, who are literally, you know, down the street from them making tremendous progress getting on ever further advancing technology curves in the production of wealth. And these companies, because they cannot let go of legacy technologies which were themselves the envy of the world in the 1960s, they are finding themselves at an incredible competitive disadvantage.
I see the world sort of breaking into two camps, those who take advantage of a discontinuity and get on the new curve, and those who basically try to ride out their old position, and it goes right to the Roman numeral paradigm. What I sense is that there are a tremendous number of companies who are willing to be arbitrarily innovative, you know, in every way. And yet, the Government cannot be all things to all people, and I think it must ultimately take a position on whether or not it is willing to sufficiently change to allow the paradigm to move forward or if the Government will keep us in our Roman numeral notation, which had been, by the way, carved in stone here in Washington.
CHAIR BOND: Amram?
MR. SHAPIRO: I'm Amram Shapiro. I'm a director of Pittiglio, Rabin, Todd and McGrath and we're a consulting firm focused on business process, especially product development and supply chain. I guess I'm going to pick up on both some of the engaging remarks of Juan and also something that Mike said and suggest a theme. First, it just seemed so apt, I couldn't pass up the fact that having read Pepys' Diary not too long ago, and the fellow you spoke of the American century, Pepys was, you know, the head of the British navy in what was the British century.
Pepys was regularly given training and arithmetic, and his diary describes the slow and tedious and very difficult process of learning how to multiply and divide, so that he could use the notation that would permit the British century to exist. So the analogy of having the proposal that the modern Pepys in Washington, D.C. might have to learn what to do and what to pass up. And then picking up on Michael's comment, I'm going to suggest a theme that I hope will get picked up a little bit later in the Government section.
And that is that I find we talk over and over again of Government as an enabler or Government as a hinder or Government, I think, you know, in jobs case was talking about the risks of getting too involved in Government business, because it was going to somehow deform your commercial instincts or your commercial success. And I guess I would like to suggest that if we are broadening our thinking and looking forward to ways we could change the paradigm for the future, that I would like to propose that it is time for us to invite the Government to do just exactly what Juan is saying, which is not to be the last one to learn the new notation, but, in fact, to start to become an early adoptive.
I think that if we go through the list of practices that we're going to discuss today, supply chain, score model, for example, which has recently been adopted by the DoD, advanced ideas in new product development. I had breakfast this morning with someone who is doing a study to see if there are any of the kinds of processes that IBM has and that most commercial companies have in terms of new product development, based on pace or on stage gate or toll gate or something like that. And that study could only locate one in the entire Government.
And so my proposal is why not try and turn the paradigm around and say why can't Government become in a sense a more emphatic partner with the manufacturing world by truly adopting the notation, the business practices and to start operating much more like the commercial world? As a consultant, I've gone into company after company and said well, here's a good thing to do. And I mean, I have had, you know, for example, you know primes say well, that's a good process for product development, but it has no relevance to me, because I can't get reimbursed if I do that work in the sequence that makes logical sense.
Well, that's not that hard. In other words, if the Government can be seen neither as a source of last resort help or as a hinderance or as an entity to be feared because it's going to deform your healthy instincts, but if the Government can become like the commercial sector, adopt the best practices, become an exemplar in some places, it will understand better what works and it will no longer be deforming when you get involved in Government work, because you'll be using the same logic. And I think it could suggest an entirely different relationship between the sectors that could be extremely productive. And so I guess I'm inviting the Government to learn Pepys arithmetic and do it with the rest of us.
CHAIR BOND: Great. Thank you. Steve Empedocles, why don't you get here?
MR. EMPEDOCLES: My name is Steve Empedocles. I'm cofounder of a company called Nanosys in the bay area. We're a nanotechnology company and I just wanted to throw out Professor Enriquez' focused mostly on biotech, but there are other disruptive new technologies that are emerging that will be certainly as beneficial and as impactful in the area of manufacturing. So I just wanted to throw this out as another point of discussion.
Unfortunately, I don't have nearly as eloquent an analogy as Roman numerals for nanotechnology, so you'll have to bear with me. You know, there is a lot of hype about and a lot of expectations and excitement about nanotechnology, but if you cut through it all nanotechnology is really a new type, it's basically material science. It's the ability to control the fundamental characteristics of materials. And all of manufacturing is based on materials. And so I see this as a tremendous opportunity in terms of -- especially given the United States current lead in developing fundamental science and nanotechnology, it's a tremendous opportunity for the U.S. in terms of manufacturing in the future.
The analogy I like to use in terms of how I see nanotechnology impacting different industries and manufacturing, in particular, is that of plastics. The introduction of commercial plastics into manufacturing revolutionize virtually every industry. Before the availability of plastics in commerce, you were pretty much forced to manufacture items out of materials that you had access to in nature, glass, metal, wood, stone, things you could procure, you could find somewhere. And the introduction of plastics allowed you to engineer the physical properties of a material in a way that you couldn't before.
It allowed you to make this glass so that if I drop it, it doesn't break, and it's lightweight and it is recyclable, and it can be, you know, a bottle can be crushed up into a small size or can have a particular form factor that you couldn't have otherwise. Nanotechnology fundamentally is a way of controlling materials in a way that before only nature could. So rather than just the physical characteristics of a material, you can control the optical characteristics, the electronic characteristics, the magnetic characteristics, all of the fundamental, physical and performance characteristics of a material.
And I see the potential for nanotechnology to be able to revolutionize again in all industries because of that, because it will allow people to design materials for particular applications or for particular manufacturing techniques. Another important aspect of nanotechnology is that because you can control those characteristics, in many cases you can control them independently. So today, let me think, a good example is, organic LEDs, new display technology, certainly making progress in the United States but also overseas.
Organic LEDs are essentially just like traditional in-organic LEDs, but they are made of organic materials, polymers and the like. And if you want to make a blue organic LED or a red organic LED, you've got to synthesize a whole new molecule as different processing characteristics, different environmental sensitivities, different chemical compatibilities has to be manufactured using different processes. And the reason is that the functional characteristics of that material, the color in this case, are completely tied to its physical characteristics and its chemical characteristics.
With nanotechnology, we can control the functional characteristics, for instance color, completely independently of the chemical characteristics, and therefore make the equivalent of an organic LED, but where every color manufactures the same, every color has the same chemical compatibility and environmental sensitivity, and fundamentally change the way you would manufacture that product.
There are comparable examples in all different industries. And so without belaboring that point, I guess, I want to point out that this is a technology that has sort of a fundamental element based in manufacturing. And while a lot of these excitement and hype that's sort of buzzing around nanotechnology is based in things like nano-computers and in some circles things like nano-assemblers, which I think is more science fiction than science fact.
That the reality of nanotechnology and certainly the reality of nanotechnology in the next 10 to 20 years is the value of being able to control materials in a way that allows you to manufacture items that are higher value at lower cost using different infrastructure, an infrastructure that may be more compatible with the work force in the United States than overseas.
CHAIR BOND: And just to clarify, when you say fundamental change in manufacturing it's fundamentally lower cost manufacturing?
MR. EMPEDOCLES: Lower costs, but also different methods.
CHAIR BOND: Right.
MR. EMPEDOCLES: So right now, displays are manufactured overseas, because there is just no way to do it at appropriate cost scale in the United States, and that's because of the way it is done. If we can change, for instance, display manufacturing from being a large area lithographic process to a printed process, something that's done using inkjet printing or an equivalent, that changes the way you would process those materials, the way you would manufacture. I'm not saying that that necessarily is the right way to bring jobs back to the United States, but it's a new knob that you can tweak to try and design systems that are more compatible with manufacturing in the United States.
MR. MEHLMAN: Yes, I would like to jump in here. One question. Dr. Enriquez and Steve, and perhaps some others, by the way, great job doing what we had asked of you giving a vision of 2020, because I think at least half of the folks around the table are thinking that's fine and dandy, that's out there, but, you know, we are trying to get from here to there, and we're trying to understand what that means.
In thinking practically, it makes me wonder whether or not our vision is not production and manufacturing? Do we have the right vision in mind for 2020? What's your sense? Ought one expect if manufacturing is not -- if the definition of manufacturing is not changed, ought one to expect even a smaller percentage of the U.S. work force in manufacturing, for example, because rather than building a variety of things, we're going to be growing them in worms or amoeba or otherwise?
You know, with respect to nanotechnology it seems to suggest radical changes in how things are built and radical changes into how the processes operate, and that might suggest that at least what today's sense of what we might call manufacturing is very different. Now, I don't want to jump too far ahead to where you went, but that was a great question about the other 50 percent of the country. And I would just be curious, a great job at the 2020 now, as you view the transition, what's the manufacturing as a sector look like in 2020 vis-a-vis the brave new world you have described?
MR. ENRIQUEZ-CABOT: You know, if we had this conversation, as I'm sure it actually did occur at the USDA, and we've had that conversation in 1960, the phrases that would have been used would have been very similar. The foundation of this country is agriculture, and most of the people in this country that became great did it through agriculture. Agriculture is fundamental and if we kill agriculture, we will not be the same type of nation, and, by the way, they were right.
And what happened was in 1960 1/3 of the global economy was agriculture, 1/3 was manufacturing and 1/3 was services knowledge, and today agriculture is 4 percent. So what you have watched this country, is like Argentina, it just falls off a cliff, because they actually believe that and they stayed there, and that's what they did. And then they equaled one peso to one dollar and their economy blew to pieces, because it takes about 3,000 Americans to generate on U.S. patent and it takes 800,000 Argentines.
When you have productivity differential of 200 fold, I don't care what your inflation rate is. You know, I don't care if you've privatized or not. I don't care if you applied the IMS stuff. And I don't care if you've got a PhD from Harvard running your economy. It ain't going to work. So what's going to happen to manufacturing? As the value of ideas and bits and knowledge becomes ever more important, I think that agriculture is going to go from being 1/3 of the global economy to being a smaller percentage, because I agree, 10 percent of the value out of a lot of products is in labor.
And less and less of it is going to be in manufacturing as you module manufacturing, and the value manufacturing is not going to be in putting the labor into those machines, the value is going to be in conceiving those machines. It's going to be in protecting nanoelectric property behind those machines. It's going to be in spreading those machines. It's going to be in the franchising of those machines. I mean, I think you are moving towards a very different model of how you generate wealth in manufacturing, just as you move to a different model in seeds.
The value in seeds today is not in putting it into the ground, it's the seed is the diskette that can be reprogrammed. You can make that plant do something else. So what has happened to seed companies is they have been bought up over the past five or six years by the large chemical manufacturers and by pharmaceutical companies. That's why DuPont goes out and buys Pioneer, that's why Proctor and Gamble thinks about buying a pharmaceutical. You're going to see a really large scale of industrial structure.
Now, manufacturing is going to become relevant and important in the measure that manufacturing adds knowledge value, and you can get very specific about this, because this is already happening. The most productive people on earth today are not Americans. That was true in 1995. It was true in 1950, but it is not true today. The most productive people on earth today are the people of Luxembourg. And the people of Luxembourg don't manufacture, they move bits. They move financial bits. They move consulting bits. They move legal bits. They move trusts. They move a whole series of things, but that's shifted.
And I think as you're looking at your supply chains and where you are going to gather and how you are going to make manufacturing strong, how you're going to keep manufacturing relevant, it's going to be in the intellectual property component and how you move into nanotechnology and whether you do it in an organic way, and, by the way, we're very good at nanotechnology, that's what our bodies are. All right. We're very good factories of long chain molecules. And there's going to be a big argument in this country as to whether nanotechnology is going to go down a mechanistic engineering structured way or whether it is going to go a natural way. But I think the face of manufacturing is going to change in a fundamental way, as these things run on through it.
CHAIR BOND: Well, I've got some attention. We've got 10 or 15 minutes and seven people who have signaled to the Chair that they would like to comment, so I'm going to try to take them in order that I saw them.
MR. ZYSMAN: I mean, let me respond to this by saying when Steve and I flew here from California, we traveled across my home of origin, Nebraska, and when we looked down there, there was a lot of agriculture still there. So the question is what happened to it and what's happening to manufacturing? It didn't disappear. It was reorganized. And the problem was how we count. In a fundamental way, there are chains of activities, supply chains of activity, which we are now calling them supply chains in manufacturing.
The question is which ones are linked critically to final activity? If you lose agriculture, you may or may not lose the seed companies. I think you might well. In fact, you're certainly going to lose the sprayers, who are not going to fly down to Argentina to spray anything. So the question becomes how the upstream activities, not the downstream activities, of selling a Toyota as opposed to selling a BMW that's made in North Carolina or something like that, but where the upstream activities are and which ones, in fact, are critical?
And I think the part of the question that you're suggesting is a lot of those things are changed in the digital area. That's, Bruce, the piece that I was earlier trying to argue out in that piece, and it might be helpful if you wanted to circulate that, which I did for the National Academy of Sciences out of a conversation you folks, we all had originally sparked. But I think the issue really is to call this production, and that manufacturing is not just about factories.
It's about how you end up making things and the activities that go into making things. And I think using that word, there's one problem with changing the word from manufacturing to production, which there's an array of languages, including Danish it turns out, that don't have a word for production that's different from manufacturing. So actually making that transition if we want to impose it, isn't so simple.
CHAIR BOND: Steve and then our friend from the fed.
MR. EMPEDOCLES: So I want to step back and answer Bruce's question from the nano-perspective, which as I heard it was, you know, 2020 is a ways out. How do we get from here to there, and what does that transition look like? And you know, I'll go back to the idea of a nano-computer, you know, will there be nano-computers, you know, in 2020? Yes, I believe so. Will they be on your desktops? Yes, I believe so. Will they exist in 2010? Probably. But will they unseat the silicone industry? I don't think so.
That's a big job to do, and so what happens between now and that sort of transition point? And the answer is that again a lot of nanotechnology is not the sort of so discontinuous that you can't even imagine, you know, the day that Intel shuts down all of its silicone processing and produces a carbon nano-tube, you know, factory for making computers, but things that can be seemlessly inserted into today's manufacturing infrastructure, but also allow radical changes in manufacturing downstream.
So for instance, the ability to control materials to provide a new property that you can't do with today's materials, but they can still be processed using today's infrastructure, that's the type of transition that I see occurring over the next five years. One example is something that nanocists do and we're developing a material for thin film transistors. These are the electronics that control the back of your LCD display and your PDA displays. We're developing a material that processes just like a morpha-silicone, but it has the performance of crystal-silicone. It allows you to develop electronics that are closer to the processor in your computer than the very slow electronics that turn your LCD on and off.
The advantage of this, other than allowing you to develop new products and new concepts around that technology, is that it can be processed using the same infrastructure that is used for processing morpha-silicone, so it doesn't require an industry to shut down its doors or, you know, throw away billions of dollars of infrastructure in order to begin using it, but you can still realize the benefits. There are lots of examples of that throughout the nanotechnology industry.
The other thing I wanted to say is, I think, I apologize, it was Jim who brought up the lower 50 percent question, and I actually think that's a pretty important question no matter how we're getting to this next generation of manufacturing, because when I look at nanotechnology or biotechnology, I don't see a change in what these technologies will do to that issue of sales per employee. The benefits of bringing in a new type of material, a new type of, you know, bacterial faced mining technology or whatever is to reduce the costs of manufacturing by reducing the labor required to get to a certain end product.
How does that impact that lower 50 percent? It seems like we're, you know, continuing to head in that direction, and probably in one of the later sessions today what's going to be really critical is how do you bring that lower 50 percent up to the education level where they are no longer the lower 50 percent, where they are the appropriate manufacturing?
Mr. STRAUSS: Getting to the point about future trends, I think it is important to keep in mind where we've come from the past. So as Juan was indicating, back in post World War II manufacturing represented 35 percent of employment. It's most reading is down to 12.5 percent. Yet, when we look at the actual number of jobs in manufacturing, and if we think that job growth in manufacturing is indicative for growth for the entire economy, there hasn't been any manufacturing job growth. It's virtually flat.
The same number of people employed in manufacturing is the same within the last couple of years as it was just after World War II. Yet, when we look at output in manufacturing, its up by 600 percent. So I think we need to be very clear when we talk about how we're defining manufacturing, whether you're talking about it from the standpoint of jobs or whether you're talking about it in terms of production. How do you get a 600 percent gain in production without job increases? It's productivity. And the question is is that going to change going forward?
I'm learning a lot hearing some of the comments and some of the new and upcoming technologies representing some of the strengths of our economy and with that flexibility. And in particular, we see for the current period, meaning the post mid 1970s, there was a real up-surge in manufacturing productivity, particular, in durable goods manufacturing with the advent of computer numerical controls making adaptations for processes and to hear things from Mike about how we still have a long way to go to get some of the fat out of production processes, leaves me to sense that there is still tremendous opportunities for productivity gains. But again, from the standpoint of job gains, I'll leave that for the afternoon session. But I'm not very optimistic that we're going to be increasing our share with regard to the rest of the economy.
One of my last points since agriculture was brought up. In 1870 more than 50 percent of our employment was in farming. We needed more than one of every two of us to till the soil to feed us. A couple of years ago we had the largest output ever in our history with regard to agriculture production utilizing only 2.4 percent of our population or employment base. And again, with those productivity gains, the farm sector has certainly experienced those same kind of gains that I see happening in manufacturing.
CHAIR BOND: Ron, why don't you jump in here? I think it's an appropriate point and then we'll go to Arden and Mike and Leo.
MR. BLACKWELL: Thank you. I'm Ron Blackwell, corporate affairs director for the AFLCIO. We really commend the Department for holding this discussion on this extremely important issue and for inviting us to be a part of it. I think we should not be too comforted by this analogy to agriculture, because the success rate there is famous, of course, but, of course, we can't feed ourselves. Whereas, in the case of manufacturing, we have a 5 billion dollar trade deficit, most of which is manufactured goods.
We are consuming 1.3 billion dollars a day of goods that we're not producing. That is not the case in agriculture, as advanced as it is, and employment is really worse than staying flat. We've lost 2.5 million jobs since employment peaked in 1998. And this may be the first business cycle where the end of the recovery, we'll have fewer manufacturing jobs than we had at the beginning. So from the point of view of manufacturing workers, this is a depression. It's not just a recession. It's been going on for a while.
In terms of wages, those workers have been losing wages at about 1 percent a year, despite the fact of increasing productivity, which has been quite healthy. So for a large number of the people who work in manufacturing, their family incomes have been severely strained by these kind of developments. And I think the other important point that I want to make in this connection, these were fascinating remarks on nanotechnology and life science, and I think it is very important to envision the world in 2020 in this regard.
On the other hand, as Bruce said, we've got to get from here to there. And in that regard, I see technology in two lights. One is the kind of radical technologies that we have, to this point, been discussing. And the other is the more incremental technological improvements that will get us from here to there. And the incremental technologies are the ones that are made in production in manufacturing every day by people who go to work, people who run plants, people who work in plants, often a firm's specific knowledge that allows companies to compete in global competition. And I think we need to think about those incremental technologies along side of the radical technologies that are going to challenge us in the year 2020.
The incremental technologies, I want to say just because I'm out of the movement, you know, workers do know things about what they do that nobody else knows, because they don't do it. And much of this knowledge is wasted currently. And our industrial relation system doesn't reward people for sharing this knowledge with success in the enterprise. We need to figure out what kinds of, as we get moving in firm strategies, labor and industrial relations strategies would help us mind this knowledge more deeply.
And the second element of incremental innovation is one that NIST has been so involved in, which is finding or borrowing a success story from agriculture in the Extension Program that helped family farms reach standards of productivity. The plants that I know, in my history, in the labor movement, most of them were operating at best 70 percent of normal capacity, and if the routine business services of these people needed to meet their competition, we could really increase, especially, the small and medium sized businesses that can't afford consultants and can't generate internally the resources from modernizing their activities.
So I would suggest to the Department that as you think through technology and what role it plays in buttressing manufacturing, that we think both about the radical technologies and labs from which that comes, the kind of Government support that's necessary to make this happen, but also think about the incremental technology and what the Government can do to support the increasingly geographically diversified manufacturing face of the country and the small and medium sized manufacturers that employ so many of our people in manufacturing.
CHAIR BOND: And I think that's exactly where we're going to be going in our discussion. Arden and Mike, I think, are next and Leo. We still have a number of folks who wanted to get in, I think, on this kind of last point. We're up against the clock, so I'll urge everybody to be as brief as possible.
DR. BEMENT: Well, I'll start by thanking Ron for his reference to our Manufacturing Extension Program, which we think very highly of. Just taking a page out of one statement, since Steve's statements, we've been talking about the synthesis of new materials, either through biotechnology route or through a nanotechnology route. And it is a major revolution in the sense that manufacturing in the past has been pretty much conversion processes, whether chemical or mechanical conversion processes is what we're talking about now a synthesis not only in that shape and that function.
The importance of materials is that the introduction of new materials in manufacturing new products creates needs for new tools, measurement systems, and data and control systems. In this way they serve as a capital multiplier and spur capital markets. The same can be said for the insertion of other new technologies. In order to reduce the lead times required for such new technology insertions it is important to assure a closer integration between innovation and manufacturing systems in order to anticipate such needed changes and their associated capital investments earlier. I would be interested in any comments the panel may have on this point.
CHAIR BOND: Mike?
MR. TIEMAN: A number of people offered their suggestions about some things that we need to clean up, some late and sloppiness in the discussion about how we count things, what we count, what we call things, terminology, and the sloppiness I would like to address is the notion of intellectual property, which actually is a sloppy notion. There are copyrights, there are patents, there are trade secrets, there are trademarks. There is no cannon of actual intellectual property in the Constitution to these separate things.
The reason that it is important to understand these separate things, if you look at the dynamics of the Internet coming of age, there is this huge dynamic between the content people, who had proprietary copyrighted content on which they wanted to flow through commodity pipes. And then you have the network service providers who wanted, you know, proprietary pipes to hold commodity content. And it is very, very important to understand the dynamics that, you know, it's to have their stuff be proprietary and everybody else's be commodity. That's perfectly natural, and I'm not complaining about that. I'm simply pointing out the importance of understanding the classifications of these separate ways that people maintain their property rights.
Now, the reason that this is extremely important to the question of manufacturing is because there are a lot of things with, I love this comment about manufacturing, you know, potentially offering a capital multiplier, but it's a multiplier of one when somebody else holds the intellectual purse strings over something that that manufacturer device may or may not mitigate. So, for example, the discussion about Napster or Apple's struggle to bring the iPod to market, you know, there is this open legal question about whether or not it's legal for my wife to listen to my iPod while I'm here in Washington.
And the fundamental question of what can be manufactured if the copyright holders exert extreme interpretations of copyright law, that's important, but we can also look at genetics, you know. Who owns the genome and who owns which sequence, and at what point can you patent something? Can you patent something once you discover it exists or can you patent something once you discover what it actually does or can you patent something once you actually discover how to use that thing for something useful?
The cases are running through the courts right now. But the reason that this is so relevant to the manufacturing industry is because historically, I think, if you wind the clock back, if you look at the automobile revolution, for example, imagine how differently it would have evolved if, you know, the license and the rights to buy gasoline were intertangled with who you bought your car from and which roads you drove on, and what sites you decided to see, etcetera, etcetera.
That is the world that we're actually living in today in this interface between, you know, the actual computer that so many manufacturers and the network that it connects to. And the world of manufacturing 100 years ago lived where innovation was much more localized and things were much more interchangeable. Now, things are becoming increasingly nested, intertwined and talking about intellectual property as opposed to the specifics of copyrights, patents, trademarks and trade secrets confounds the issue, and I think will lead to a failure to be able to understand the context of manufacturing in a larger world of licensing.
CHAIR BOND: Thank you, Mike. Leo?
MR. REDDY: Yes, as briefly as I can, I fully accept the notion that whatever that Juan said so eloquently that there are countries and companies working actively right now to figure out ways to exploit scientific breakthroughs and scientific discovery, and again I accept the notion entirely that the countries and the companies who are able to do that successfully will be in a leadership position in 20 years.
What I'm concerned about is the public policy parts of this, because there's no question if you follow industry investment, while industry investment are, indeed, going up, industry investment in longer term process technologies is doing down. So industry is not going to provide the bridge between these exciting discoveries and actual productivity growth for economic growth. This would point to a stronger role by the federal Government in this area, which traditionally on both sides of the isle accept the federal Government play a role at least in scientific research.
But the indicators are all negative in this direction. Now, let me just give you four or five examples, and I give them some authority, because we have been following very closely for years the whole composition of federal RND funding and federal RND policies, an interesting roller coaster ride over the years. Just to give you a few examples, we have just, a couple of years ago, done a report based upon a study we did with RAND, Radius Database Study. We looked at all federal RND projects using a taxonomy of manufacturing terminology to determine which percentage of these projects were related to taxonomy.
We also looked at all appropriations and looked at programs to see what programs were related in this area. And in terms of basic and applied research, 6162 basically in the federal Government, the feds fund about 1.8, no, it's 2.2 percent of the federal RND budget goes into manufacturing science and technology in a basic applied area. I don't think it's a stretch to say that seems to be insufficient.
When Alan Greenspan wakes up every morning telling us that productivity, that technology based productivity is driving the new economy enabling us to grow with low rates of inflation, low rates of unemployment, surely, we should be investing productivity enhancement technologies at the federal level where it's vested very little. I was very grateful to whoever prepared this report about ATP's work, including technologies that have been identified over time. They are both disruptive and incremental, I guess. But ATP program, the ATP is in battle, as we all know, has been in battle almost since its inception.
There was a reference made to the only program we have to deploy technology to the backbone of our industrial base is maybe the small or medium sized manufacturers. Unfortunately, the MEP infrastructure, which is a great new infrastructure for the benefit of our economy, has to fight every year asking owners of companies to try and help to write letters to Congress to support the program. This isn't a very positive indicator.
In terms of the lab industry partnerships, there's a tremendous opportunity to get resources in the federal laboratory system. About 100,000 scientists and engineers with a multi trillion dollar public investment in those labs, that the labs will tell you they are very constrained to limit their work almost entirely to specific missions, not to discovery based research, but to single parts that have to go into specific weapon systems for some time.
What a waste. There are significant barriers to industry working productively with labs and with universities for that matter. So if we're going to get serious about this, we really have to change the culture and change our priorities. And again, I don't know any way to do this, except to raise this whole issue to the Presidential level. Somebody has to articulate the promise of these new technologies, and make the public understand the meaning of this in terms of our future and prosperity on national security to begin to make a real difference and change these indicators that I have just mentioned.
CHAIR BOND: Jim?
MR. ZAWACKI: Yes, I'll try to be real quick, just some quick points. I'm still worried about productivity. I think a lot of productivity coming from manufacturing is because we're buying cheaper goods and then forwarding them in the United States. That goes into the productivity factor.
I would like to say that if we can change the human codes, one, that maybe we could change it so that they would start buying more American.
(Applause)
MR. ZAWACKI: But my concern is it's very exciting to hear about all these new developments. But you got to realize technology can be pushed around the world with a push of a button. So if I can come up with a better nano or bio product, and I can do it cheaper in China or Malaysia, it's going to end up there. Who is kidding who when I develop these products? I'm very concerned that what we're talking here is white paper coming out of the Right Place Program, 100 page white paper said the latest statistics available for manufacturing direct and indirect good and services, that's consultants, the supply chain people, represent 45 percent of the GDP and 41 percent of the jobs.
You got to ask yourself if in 2020 our base is going to be eroded, how many academics, consultants, supply chain management people, if all they are doing is bringing goods in from overseas, are we going to have? I'm very concerned that there's different types of manufacturing base in our society, and thank you for mentioning the small and medium manufacturer that makes up the major part of corporations and almost 60 plus percent of the jobs in the United States.
Are we going to be lost or aren't needed? I'm worried about the suppliers' plastic parts, metal parts and so forth. I know you need these technologies. I just don't think it is going to replace everything by 2020. And we got to know that. And again, I get back to, and I know it is coming at a later part, the other 50 percent. But somebody in this group says the Government has got to change. You are stopping us. We're giving our jobs away. So that's a big part that has got to happen also.
CHAIR BOND: Peter, we're going to close it out there, as we're running behind on the clock.
MR. DUESTERBERG: I can keep this to 60 seconds. Sometimes stating the obvious is useful; I think Professor Enriquez started talking about the possibilities engendered by the revolution in biotechnology and understanding the gene code. But one of the things that is possible from that revolution is customizing health products, pharmaceuticals designed for specific individuals. But what we see more broadly in manufacturing is the evolution of the ability to do customized products on a much broader scale than that.
This suit, I bought off the rack, but I could go down to Brooks Brothers and get a custom made suit by stepping in their MRI like device and having the measurements sent off to wherever they make their stuff these days, and also buy shoes the same way. There is a vision of the five day car or the three day car, which is customized.
I think all of these technological developments, including communications technology and the digital revolution, allow this to happen. It has huge implications for the shape of manufacturing, the shape of the firm, and what the firm has to do in the future.
CHAIR BOND: Okay. Tom, thank you. I'm sorry to have called you by the wrong name earlier. Thank you, Tom.
Now, we'll try to transition now a little bit behind schedule to a discussion of understanding future business processes and production. We're looking at an increasingly competitive world with innovation increasingly being adopted and addressed around the world, with disruptive technologies on the horizon and incremental technologies in the work place. Ross, how are we going to tackle this going forward?
MR. ROBSON: Well, my name is Ross Robson. I'm the executive director of the Shingo Prize for Excellence in Manufacturing from Utah State University, and as one of three universities around the table, we're not as well-known as Harvard and Berkeley. However, I can tell you that we have set up more student experiments with NASA's shuttle system than both of those universities put together. And we do administer what we think is the premier manufacturing award and recognition program in North America, in spite of the fact that I'm in the den of the Bald Ridge National Quality.
CHAIR BOND: Be careful.
MR. ROBSON: I do feel to some extent like a lamb in the lion's den of technology this morning. And as I've pondered the discussion and I think of the Timkens, the NuCorps and the Delphis, at least three companies that I feel like I know a little bit about casting the question made in America 2020 is a self fulfilling prophecy to simply address technology and innovation. And yet the earlier discussion was very heavy focused on kind of the doom and gloom and someone finally said let's get beyond doom and gloom, and the here and now and today and, of course, NAM focuses on that quite well. But they also focus on the future.
I guess my biggest concern given the nature of my work is that we tend in engineering schools and business schools to teach complexity, that therefore tends to have a focus on technology. And what I find is that we don't have MBAs or even undergraduate students that we can attract to the field of manufacturing. We have an MBA with an emphasis on manufacturing. And I have a devil of a time, even though you give me a good student, a lean foundation, which I can give them, and I can get them hired by the Lockheeds, the Delphis, the Forbes, the JCIs, the lean focus companies in the United States without much difficulty.
Now, very little has been said this morning about Toyota. I don't know whether I have heard the word Toyota once or not. Auto has been mentioned. But frankly, folks, from my vantage point of the U.S. automotive industry, the U.S. aerospace industry, today the Air Force, the Army, particularly, the depos and the logistics folks and a whole host of other industries, Toyota is the class of world class manufacturing.
And they are not known as a technology company. They are not known as being terribly innovative. But they have all of those foundations clearly in place. They are known as a basics company, a basics corporation that has evolved over the last 50 years, and their focus is simplicity. Trying to make the job easier and simpler for the worker. And that translates by definition Toyota Production System lean thinking is essentially synonymous.
And in thinking about the technology and the innovation, that does not translate into the multiplier effect that NAM historically has called our attention to and continues to call our attention to, and it seems to me that in the current economic climate that we're in, that the role of the Commerce Department, the U.S. Federal Government is to focus on the basics of manufacturing, the blocking and the tackling.
I thought of the analogy last night of the NFL versus the NBA, as opposed to track and field. The NFL there is only two ways to put the offense together. It's passing or running. And clearly implies a team kind of focus effort. Yes, it is a little more complex today in the offense than it has been in the past, but it's basically blocking and tackling. And as contrasted with the NBA, and I'm a great fan of the NBA and the Utah Jazz and the team focus of the Stockton to Malone, but the NBA is truly built around leaders, around superstars and letting them do their own thing.
With all respect, I'm going to offend a couple of folks around the table and maybe a lot of folks. The difference between American leadership and Toyota leadership is that Toyota leadership is truly blocking and tackling. It's passing down from generation to generation, whereas we see in too many American corporations looking for the next CEO leader, who is going to lead us on to Nirvana. Now, Timken is certainly not one of those corporations, because the family tradition has truly been there and continued that on for years.
So it's kind of that back to basics. Let me use a week ago Ford Motor, we all know, celebrated 100 years. Let me use the words of Henry Ford. "Ordinarily, money put into raw materials or into finished stock is thought of as live money. As the bean counters would have us believe, it is money in the business that is true. But having a stock of raw materials or finished goods in excess of requirements is waste. And Toyota Production System lean manufacturing is grounded on the identification and elimination of waste.
15 years ago I didn't know what the heck this all meant. Having a public sector background surprisingly and not an engineering or business background, you know, we've always said that if Government would eliminate waste. Well, I'm here to tell you that there is equal to or greater waste in our private enterprise system in the United States than there is in our Governmental systems. And I know that's an offensive statement that's not going to resonate well with a lot of people.
My premises is there are well run Governments, there are poorly run Governments. There are well run businesses and there are poorly run businesses that are making a profit today. Which like every other waste turns up in high prices. Who here wants to pay high prices and low wages, and who wants to work for low wages? Henry Ford, 1926."
There are competing paradigms, which is kind of the message that I think I was given, mass production it is fraught with waste, constraint theory, Angel Enterprise, reengineering, we've been through those paradigms, those models, those methods. To me, we are confronted today with the quality sig-sigma movement versus the lean movement. To cast it fairly loud and clear, the quality sig-sigma movement represented by the Bald Ridge National Quality award and lean represented by a little program at Utah State University called the Shingo Prize for Excellence in Manufacturing.
To the best of my knowledge, the only award recognition program in the world focused on lean, the identification and elimination of waste. Let me just give you a technology process kind of example and then kind of end it there. Approximately, 25 years ago, FICO became to produce for Mercedes the first airbag. That gave rise to an airbag industry in the automotive industry. And FICO became Morten, they bought machines that cost 10 plus billion dollars, took up 8,700 square feet, the design to production time was 12 months, and the units produced per hour was 180, and that was a machine utilization uptime of about 50 percent, because of the picket place robots, the high technology and the high automation in the particular line today.
Today, with lean manufacturing and today the company is now Auto Leave, a Swedish company, two plants recognized by us this year, floor space of 1/8th, 1,100 square feet, the design to production time two to three months. In other words, the new customer comes in, two to three months production time. The people required, instead of 14 back in the old days, sales of 2 to 3, capital costs 3/4 of a million as opposed to 10, and the production units maybe about 250 per hour with a machine utilization uptime of about 93 to 95 percent.
In other words, that is the productivity that has grown. That is the manufacturing that has driven productivity. I would with all due respect question Greenspan relative to his argument that the productivity of manufacturing has been technology, especially as we've seen the technology bust of the last three or so years. And furthermore, the technology boom of ERP systems by any lean manufacturer is detested as not meeting their needs, the SAPs, etcetera, etcetera of manufacturing in the United States.
And so to summarize, if I look at three companies, I've recognized the Timken bearing system, Gaffney, South Carolina a few years ago. The year before we recognized them, 14 bearings were returned. A mistake rate of 2.2 parts per million. The next year they had 16. It went down to 2.1 parts per million. They delivered their first 750,000 bearings to Toyota without a return. Take Nucor Steel, we've recognized their Nucor Yamato Steel Plant. Where?
CHAIR BOND: In Arkansas.
MR. ROBSON: In Arkansas. Rural, rural Arkansas. They don't use the TPS technology or the methodology, but certainly a lean company who has prospered mightily, and their CEO, Dan D'Amico, once lived right across the street from me. You take Delphi, with all due respect, Delphi as it was spun off from General Motors was a mass manufacturer. I'm willing to even boldly suggest they were probably, by comparison with Toyota and a lot of others, I'm going to say, not a very good manufacturer. And yet, they saw the writing on the wall. And J.T. Battenberg put together a team that adopted lean and they have transitioned from mass manufacturing to lean manufacturing faster than any other major corporation in the history of the world.
Demonstrating that you can do it. And so, for example, an injection molding plant, a brand new plant, new technology, new everything from a year ago when we recognized them, today they have reduced their cycle time by 10 percent, 2.4 million dollar annual savings. Their change over time reductions from 28 minutes to 23 minutes, visualize on these, change over time 5 minutes every time you do a reduction, and their quality, the part production return rate has gone from 10 to 1 year to date.
We have recognized probably 10 plus companies whose quality today, based upon lean thinking, is in the vicinity of single digit PPM rates. And I guess my message and my area of emphasis would be that it is that kind of emphasis, yes, that's going to lead to fewer jobs, but it's going to lead to competitive jobs with the Mexicos, the Chinas and whatever the case may be. That's longer than five minutes. I apologize.
CHAIR BOND: That's all right. I'm sure it's going to prove provocative on lean versus, to some extent, quality, teamwork versus superstars. Now, Bruce wants to jump in here and then we'll invite folks to comment. I'm going to apologize in advance. I have to slip out for a meeting over your lunch break and Bruce will run it from there.
MR. MEHLMAN: Thanks, Phil. Just, Ross, one follow-up question, maybe a point and a follow-up question. First, you noted the tech bust and, of course, that's true, although an interesting thing about the tech bust certainly if you, as I did, held chairs in a variety of technology companies, it was quite a bust.
MR. ROBSON: It hurt.
MR. MEHLMAN: At the same time, looking at how technologies are used, the depth of their integration, it seems to me that things have continued aggressively to move on, E-Commerce is one example, business to business. The wild eyed prediction by the folks who told me that when I worked at Cicso, I was going to be a trillionaire by now. the wild eyed predictions were 1.3 trillion dollars in B to B and it's apparently 2.4 according to Foster for this year in business to business e-commerce and that may set up the question nicely.
What are the measures of health for the manufacturing sector? It sounds like it's not total employment, according to your sense. It's not percentage of U.S. employment that goes against leanness. Is it productivity uptime speed to change, you know, flexibility measures? Do you have a sense, because we're trying not only to maximize the Governmental contribution to our manufacturing health, but to know what indicators we should look for to determine when we are most competitive and when we are least competitive.
From what you're saying and from what we've heard from the Federal Reserve and certainly what Dr. Enriquez said about agriculture, it raises the question ought folks say is employment greater or smaller and that's the measure, but rather other factors?
MR. ROBSON: For Toyota, they measure safety, quality cost, delivery and moral. So output results from manufacturing, we measure quality costs and delivery. Cost is largely productivity. The issue of cost you've got cut, you have savings with quality and delivery kinds of issues. So from my vantage point, the three dominant measures by which you measure manufacturing is quality and there isn't any of us who want to buy a computer and an automobile and not have work tomorrow. And I thought GM's response to Microsoft a few years ago that well, yes, computers are cheap, but if ours broke down as often as the computer shuts down, we wouldn't have a vehicle to drive. Response was a good one.
So quality, cost and delivery, and what we see is that companies who have driven, who have truly become lean, and I offer companies like Johnson Controls. You look at their stock price during this recessionary period and it is not gone down or varied by less than 6 or 7 percent in an industry that has been hit mightily hard or Danaher or Donnelly, unfortunately, now owned by Magna Corp out of Canada. Lean companies have weathered the recession really quite well.
Now, you take Delphi, yes, they are struggling, and struggling for a variety of reasons. But they have plants in the United States that are competitive with plants in Mexico, competitive with plants in China. I believe that Delphi ought to be in China, but manufacturing in China for China. And the supply chain that was discussed earlier, the notion of that supply chain, we got an irrational supply chain. I can give you an example of just windshield wipers, 77 days added, that crosses the border between U.S. and Mexico twice, the rubber coming from Malaysia, and Ford has a strategy of building nine different vehicles on one platform with their suppliers colocated and instead of having them strewn, and Delphi is well-aware of this problem, even though they have got 50 plus plants in Mexico, largely shipping back to the U.S. across the border.
The challenge is bringing that, rationalizing that supply chain not just through some software or business to business approach, but rationalizing and by bringing it closer to where the final assembly actually occurs.
One last point. JCI, three different assembly plants we have recognized, different strategies in each plant. They receive an order from the car company when the car passes paint. Within nowadays two to three hours, they build the seat, keep the seat in total synchronous order, ship it to the company 100 percent on time delivery for years, near perfect quality for immediate installation in the automobile without any staging, any storage, any inventory whatsoever. And they are turning their inventory at those facilities about 300 times a year. Everybody can't meet 300 times. I mean, more than daily. That's where the competitive manufacturing capability not only today, but 2020 for the United States where we will get the bang for the buck in being able to compete within the global market place.
CHAIR BOND: George, I know you wanted to?
MR. SCALISE: Yes, I wanted to make a couple of comments. I want to tie the last section into this one, as I think they all do tie together. But the one question about, in the last one, the industries most vulnerable to disruption and likely to be displaced, certainly, and again, Heisman and nanotechnology issue, I think semiconductors might be the first industry to fully manufacture in the nano region. As we go to 90 nanometers, and the fact that we've gone into at least the definition of what nanotechnology is, and we're there now.
What we also know is that the technology we are using is going to be disrupted here before too long. And we're working to figure out just what that does mean to us. The methodology that we're employing is a road map, and we put this road map out every two years new and updated in the intervening year. And we draw together the best minds of the industry, Government, actual labs, universities, worldwide. I think we have about close to 450 people now involved in this process, and we break it down into all the elements.
My point is that it's telling us a great deal about what is likely to occur in nanotechnology, what we need from the metrology world that this is so much involved in and why they need more funding, so that we can be sure that when we get to that next level, we can actually measure what it is we're doing. We can't even measure any of this today. And certainly in the bio area, those problems are going to be much worse than where it is. At least in our place, we have a foundation built now. In the bio area, we don't have any of that foundation in place in large part.
So I think that kind of thinking of how you put road maps together, what are the likely trends out there, and be dynamic enough to keep shifting and changing and eliminating and adding to as we learn more with each iteration of this. I think that process is going to be extremely important as we deal with these very rapidly changing technologies, and a lot of which we have very little knowledge to begin with.
As you go into this next section, and we're talking about organization structure and flexibility, I think those things are going to evolve based on what the technology drives us to. If you think in terms of the outsourcing business models that exist today in our institute, called fabulous boundary model, there are different definitions, I'm sure, for other industries, it only happens because that is the likely thing to occur and it provides an innovator approach to solving a very obvious problem at some point.
Earlier on, you could not have the fabulous boundary model, it would not have worked, because the technology was far too complex to, I won't call it commoditize, but certainly it has some of those attributes. It reaches that point at some stage and then we'll pursue that next emergence out of that. So for us to try and think about what is the business model we're going to be utilizing, it may be kind of a fool's error. And I don't know if we need to do that. I think we need to focus on what is it we need to do in the basic research, what are the road maps leading us to in terms of various paths that we might take, and then we continue to iterate on this and do the right things, develop the right technologies, the business models will begin to evolve.
But finally, again, I think if this labor management relation structure and so on, there is a compensation issue as well. It isn't mentioned, at least to my knowledge, and I would just point out that one of the things we're going to have to do to deal with this, I think, is to better understand what it is that our competition does in way of compensation today, and what are their tax laws versus our tax laws today, and how does that impact? And this is going to be a huge issue, especially because of what we're going through here with various scandals and the fallout from that.
If, for example, the stock options become a casualty or a casualty because of the tax treatment of stock options, it could take away one of the most important incentives that we have in our compensation system that helps us hold technology and business model capability unfold. You don't pay a tax on a stock option exercise in Taiwan or in China, for example. And we pay rather a substantial sum, therefore, you can hire people at much lower rates and again they're still making a lot more money for all. It's because of the way they are treated in taxes, not because of the compensation.
So I think my point is here that we have to worry more about the fundamentals and let the practices evolve, and I think that will occur. And I think that has been demonstrated time and again. The entrepreneur will step in at the right time and say I can take this opportunity now and go about it in this way. I can be more successful than the folks who are already in this business.
I would strongly suggest that we think about that aspect of where we are headed, and what we need to do as far as the Government is concerned. So it is supporting that fundamental research that this has to do for trilogy. It is allowing our tax structure being placed to compete with the world that's out there that it's competing with. Again, going to the methods, I think what is the foreign direct investment? Why would it be better to make that foreign direct investment here than in China? What are the methods they are going to be using, and how are we going to end up with our GDP growing faster as a consequence?
CHAIR BOND: Ned, you had your hand up, and then Frank.
MR. ELLINGTON: My name is Ned Ellington with Georgia Tech, for the university, Ross is at the round table. I just wanted to tie a couple of comments in from the previous two sessions to try to answer your question about what we measure, because I think what we measure, being a productivity person, is extremely important.
From this morning's session, one of the things that I sort of came away with is a couple of comments that we danced around, but never really put on the table was that as we enter into 2020, there's this thing called the multi national. And the multi national is a new player that, although has been around for a lot of years, is seizing hold of the global environment. You know, why is Motorola in China and putting a lot of investment there? It's simply because of that emerging market.
It seems that someone made the comment with respect, I'm going to tie this into the multi national, that it's the supply chains that compete, not companies that compete. And I would definitely agree with that. Being from the south, it tends to be one of the competencies we have in the south is to attract multi nationals, particularly, automotives. We now pretty much cover the southern automotive tier. Every state has something and something pretty large.
It seems to me that countries then might in the future compete for supply chains. So if you say how do we measure our manufacturing health in this country, I don't quite have the answer, but it's somewhere around how well are we doing at the global level? The U.S. is obviously a huge market. We're looking for Nissan plants and Honda plants and Toyota plants, etcetera, in the south, because we want them to make cars, buy their cars and we like to buy them there. I would rather see a BMW made out of South Carolina than Germany.
It's a huge market. And our green companies and having a manufacturing infrastructure that is able to compete at the international level is extremely important measure on how well we're doing as a manufacturing base. So that's half of it. I would suggest that the second half of that is how well are we doing in sending things out? I've been overwhelmed this morning about the positiveness of the new technologies coming at us, and, you know, I'm excited about that.
But how do we turn those new technologies into something that we can export and tackle with the trade deficit, because I'm extremely concerned about the trade deficit. I think that at some point, I'm not an economist, although I'm out of business school, it implodes because we don't have money or have jobs to buy all these nice things that we want to buy and the trade deficit continues to loom and get bigger and bigger. And I'm not quite sure how the bank -- somebody is going to have to pay the banker here sooner or later.
So it seems to be, Bruce, that another thing that we ought to be measuring in the health of our economy in the manufacturing is how effective are we at sending things out? We pride ourselves on the high tech, and for some reason even, I get a sense of sitting around the table here, we do believe that we are the most innovative country in the world. I've not traveled extensively abroad. You know, the innovation of Japan still continues to amaze me on Iraq and how they do these things, so I don't -- I'm not convinced that we're the most innovative people in the world.
But we do have a hold on the high tech. We had until recently when the high tech trade deficit starting going down. I think it was two quarters ago we have a trade deficit now in the high tech area. So it seems to me that just sitting around the table I've learned a lot of things that we are doing in the U.S. We haven't figured out yet how to pull it together and make it productive. And I think we continue to believe maybe with the old paradigms of the past that it's just going to naturally occur, and yet somebody continues to point out that the multi nationals are going to take these great ideas and run wherever the low cost, whether it's energy, environmental, labor, whatever it is is going to go run it.
And as a stockholder in some of those companies, I sure want them to do that. So there's the paradox. How do we insure that return on that investment and get these cheap good, yet not hollow us out. So it seems to me that what we measure is extremely important. One that I'll offer up, but don't know how to do yet, is that we have a lot of research. We spend a lot of dollars, both at the federal level, I know in our state we spend a lot of dollars to stay level, but I don't know how effective those dollars are actually being used.
To get to Jim's company and folks like that, I don't know how quickly we can move that technology and get it adopted, but it would seem to me that some measure of our return on our federal investment into products, services that we actually export would be moving us in the direction. I know in the university we have tremendous pressures to not worry about 15 years out in our research, to not worry about seven, but now worry about three years out. And even in the business school, how do we find out about processes that we can put into place and transfer those processes to get quick returns not 30 years out or 15 years out?
So I would only offer up your question again as something that we ought to maybe dwell on, because what we measure is going to matter. As a country, we invest a lot of money into things that we somehow don't gain a competitive advantage over.
MR. MEHLMAN: Okay, a lot of hands. We're going to go Frank, Ron, Arden and then Steve, which may bring us closer to lunchtime. Frank, I would be curious to hear what you think, especially when you look at NAM's membership, multi national corporations are among the biggest, best and brightest. You know, an interesting dynamic we always here, I think, from the Government perspective is almost to stop us before we move globally again, nature of comments from the big trade associations with the big multi national members, who are clearly becoming more competitive by globally sourcing.
MR. VARGO: Well, it's very important that we go after the right problems. I agree with so much of what Ross said, but on gloom and doom, it is not something great, because looking at what we have are absolutely necessary. We see a brilliant future, all the technologies that are coming, and it's basically technologies and new technologies that spur future demand. But between here and there, we have to be very, very careful not to fall into the trap saying that we don't have to do anything. If we continue in our present directions, we're not going to have the future that we want. We're going to have to seek changes, changes from the Government, changes from business.
So much of what we're talking about is trade. We keep coming back to trade and the trade deficit. It's very important to understand there are a couple of different things going on now, and that China is really not one of them yet, but it's going to be. There is no question in our minds, as we look at our external accounts or look at the trade deficit, the overwhelming amount of that is because the U.S. Government allowed the dollar to get over valued.
You know, in 1997 we were doing pretty well. We had a sustainable trade deficit. Even textiles in 1997 was one of the best years textiles ever had. But in the few years since '97, we've gone from a trade deficit of 1 percent of our GDP to 5 percent. Currencies have got to change and the Government has got to focus more on the Asian currencies that are not allowed to change. But that's not enough in itself. That will just take us back to a relative competitive situation where we were in 1997, and the world continues to change.
If you look at the European reports on the future of manufacturing, the British, the Japanese, they are all talking about what we're talking about around this table, moving up the technology ladder and making productivity more efficient. So on the one hand we're going to be pressed by China and the Asian countries and lower value added manufacturing, on the other we're going to be pressed by the Europeans. We have to continue to accelerate. We have to do better. We have to have our companies become more efficient.
One of the best forces for that is competition. Nobody changes, nobody improves unless they really feel the heat of competition. But there are different forms of competition. Our officially depressed currency is a very different thing than having a company that operates lean manufacturing. Where this takes me is this meeting today, I hope, will not result in just a report that gets tucked away, but is part of the process, because we do have to change.
NAM has to focus and it is focusing more on just where manufacturing goes in the future, and what industry itself has to do, and how we promote those practices. But the Government has to change also, and we'll be talking about that more this afternoon. But it's not clear to me that the Government's current structure, and I spent over 30 years in the Commerce Department and love this place, but it's not clear to me that the Commerce Department and its role in the Government and the way the Government perceives manufacturing and the U.S. role in the world economy is adequately incorporated into the structure of the Government that we can make the kind of changes necessary.
MR. MEHLMAN: Ron, Arden, then Steve.
MR. BLACKWELL: Thank you. The FLCRO and NAM don't always see things eye to eye, but in the case of the value of the dollar, we're absolutely aligned. I think the challenge to manufacturing, especially in getting from here to there, can't be mounted without some adjustment in the scholar. And I would only add to that that there's a very special problem now that didn't exist in the past, which is China and many other Asian economies that are linked to the dollar. So the simple fall of the dollar under current circumstances is going to do as much to divert production to Asia as it is to bring production back to the United States.
I raised my hand to put on the table a different firm level challenge, because I think the central challenge at the level of the firm is we have many manufacturing firms that don't make things here. And so manufacturing firms have different views on this as well within the membership of NAM. And one of the forces that is, I think, at the firm level that we haven't discussed before is militating the change in their business and competitive strategies is the pressure they feel from financial markets.
The Commerce Board did a very important report recently on responding to the crisis in corporate Governments arguing that we need shareowners of American companies and not simply share traders of American companies, which adds a short term focus, which makes it virtually impossible to put together a manufacturing business over a long period of time, and especially involved investment in product development and research and development and education and training in the capital markets, along with the increased competitive challenge in product markets, because of globalization are two of the most pressing problems at the level of firms, which are moving firms out of manufacturing, like General Electric is now a financial services company or emptying the manufacturing content of manufacturing firms that are staying in the business of manufacturing.
And I think there may be something the Commerce Department could consider doing. For example, one of the things that the Conference Board recommends is that you could tax the capital gains on shares that were held for longer periods of time at reduced rates. It gives a premium to shareholders who hold the shares. And for large institutional investors like Labor Pension Funds, for example, some 7 trillion dollars in our capital market, they would take an active role in the governess of these companies, and the kinds of business strategies and competitive strategies that firms adopted.
This is an enormous source of patient capital that could support instead of militate against manufacturing companies staying in manufacturing, but also competing in manufacturing in the United States.
MR. MEHLMAN: Dr. Bement?
DR. BEMENT: I'm going to try and transition from the discussion we had this morning, which put a lot of emphasis on innovation, not only for improved productivity, but also for industrial transformation, and to anticipate some of the discussion this afternoon and to suggest that we spend some time talking about our National Innovation System. And in talking about the National Innovation System, I'm reminded of the content in the NACFAM White paper that urges that we pay more attention not just to research and development, but research to implementation, which would suggest that the innovation system for the nation should pay attention, not only to new concept creations, but also technology development, technology diffusion and technology utilization, which suggests more components, the training and education infrastructure component, the research infrastructure component, the information transfer infrastructure component and also the business infrastructure component, which would be largely involved in supply chain integration.
Most of the discussions today talked about supply chain. I didn't hear very much about support chain. When you think of supply chain, I tend to think vertically, but if we think support chain, where you talk about the service industries and now support manufacturing or the service components that used to be part of manufacturing that are now outside of manufacturing, then the part of the whole logistics trade, which deals not only with the product or the production side, but also the product development, the sales and the service, all that is part of the business infrastructure that we're making reference to.
I think the questions that come to the surface are where are the weak links or the missing links? And furthermore, is there a role for a private/public partnership in any one of these elements and where should that partnership be? Do we have the infrastructure that anticipates manufacturing in the year 2020? That's the issue.
MR. MEHLMAN: Steve?
MR. EMPEDOCLES: Thank you. So I actually think that's an excellent comment, and unfortunately it was part of my comment. I had wanted to follow-up on Ned's earlier comment about the fact that there are these new industries that the Government is putting a lot of money into, like nanotechnology, that that money is not necessarily going to the places where it is most needed or at least most needed to get us where we need to be by 2020.
The thing that makes me think that, and I'm not under valuing at all the, you know, importance of funding basic research in new sciences like nanotechnology, because I think that's absolutely critical, but the thing that always surprises me is that on a week by week basis, I probably get 10 times more calls from Asian companies interested in establishing business partnerships with NASA than I do U.S. companies. When I talk with U.S. companies, they are looking at next quarter's revenues. When I talk with Asian companies, they are talking about the next 10 years.
They are looking at nanotechnology as the thing that will save them in the long run. Whereas, U.S. companies are looking for well, how is it going to make more money? Well, unfortunately, new technologies rarely make people money tomorrow. There's always some lead time. And it's not as if, you know, the Asian economies are better than, you know, what we're going through, so why is that different? I actually don't have the answer to that. But it seems like there is a role that the Government could play with the tremendous amount of money that is, for instance, going into the National Nanotechnology Initiative that could help support that transition make the larger companies which are going to be the users of these new technologies the implementers into new manufacturing paradigms to incentivize them to take that longer view or perspective.
I also think that has a potential role in terms of Jim's comment about, you know, no matter what we do, biotech or nanotech, whatever, eventually it is going to end up overseas, because, frankly, it's more cost effective to build stuff there. There are two reasons for that. One is it's less expensive for the inventors if we are the inventors to manufacture there. And two is it's less expensive for other people to manufacture there, either when patents run out or when they decide they don't care about your patents and are going to manufacture it anyway.
One way to help balance that is for the U.S. Government to help incentivize manufacturing in the U.S. by either subsidizing manufacturing here. I'm not sure if you think the other people in this room that know much better how to implement that type of incentive, but something where it becomes for the inventors more cost reasonable to manufacture here. And second is either enhancement of patent laws to help prevent other companies from manufacturing overseas.
And maybe, although I'm not sure how to implement this, the use of trade secrets. I mean, the Coca-Cola recipe has been a secret for an awfully long time and it's not protected by patents, and if it is manufactured overseas, it is because Coke wants to, not because somebody else has decided to do it. There are ways to prevent that, but it has to be economically reasonable for the holders of the technology.
MR. MEHLMAN: Michael?
MR. TIEMAN: So for those of you who see the problems of the dollar today, the big problem that I see in 2020 is actually an over use of technology protection strategies. And I think that we're seeing the beginning of this today. I don't know how many people have used a word processor and wondered whether or not it did not already have too many features. Going to the point about lean manufacturing, we are seeing a trend on Wall Street where people are disposing of overly complex proprietary software of which they are only using 10 percent of the actual functionality.
When you think about the number of bugs in software, it's just we haven't gotten really good at manufacturing software yet. You know, if you are only using 10 percent of the functionality, but you have 100 percent of the bugs, it's written really bad. And the point of this is toward the lean manufacturing point, there is a tendency today, there's a strategic behavior today to continue to integrate more and more and more technology into a single monolithic black box, which is the opposite of lean software manufacturing.
Lean software manufacturing is about being able to produce components which can be optimally used, configured, managed, etcetera, etcetera. And I fear that for all the hopes that we're putting on the technology industry, we have created a huge economic incentive for just the wrong kind of behavior for this technology industry to actually deliver us. The path that we're on right now will deliver us, but not to any point anyone here wants to endure.
MR. MEHLMAN: Why don't we do this? Why don't we break now for lunch? We have lunch for all the participants right down the hall here on the left. 4813 is the room number. I apologize to some of our friends throughout the Commerce Department, we, for financial reasons, weren't able to have an everyone can eat buffet. For folks who have come from elsewhere, if you have somebody who has come with you and sat through it and for the NIST operating directors, please, do join us. I think that about hits our capacity. Ross?
MR. ROBSON: Bruce, could I just note many of you are not aware of the Shingo Prize and I understand and appreciate that. I do have a copy of our guidelines and would be happy to bequeath a Shingo Prize pen to you today, and there's more than one for everybody in the room, and we would be happy to offer that to each of you.
MR. MEHLMAN: Thanks, Ross.
MR. ROBSON: Bruce, can we leave our stuff in this room?
MR. MEHLMAN: Well, sure you can leave stuff. Certainly papers and stuff. My own recommendation would be take anything of particular value, wallet, watch, etcetera, shoes.
MR. ROBSON: Thank you.
(Whereupon, the meeting was recessed at 12:01 p.m. to reconvene at 1:09 p.m. this same day.)
A-F-T-E-R-N-O-O-N S-E-S-S-I-O-N
1:09 p.m.
MR. MEHLMAN: We're trying to think deep thoughts and see if we can -- manufacturing matters. I think the fact, if we didn't believe that, we wouldn't be having this round-table in the first place, and I'm glad we have taken the next step beyond all agreeing that manufacturing is important and that we need to think more. We need to do more perhaps even in the taxation regulation litigation and other policies that have to date been proposed, and think more about National Innovation Systems and how we support manufacturing through our National Innovation System at all levels.
From my own perspective, as the architect of a not entirely focused agenda, although thanks to your contributions, it's moved well. On the one hand, I want to definitely get to where we're hoping to go this afternoon. On the other hand, I think there are still several great questions that are out there and many participants that we haven't yet heard from and we would like to.
Some of the questions are having U.S. companies, does it hurt or enhance U.S. competitiveness to have U.S. companies globally sourced. When the IBMs or the Solectrons or most of the biggest NAM members, you know, when they, Motorola and others, choose to manufacture in China, they purport to the market and to the street to be doing it for purposes of being more competitive and for accessing talent and for accessing improved cost structures and for being able to focus.
And what you hear in round tables like this in front of the Government sometimes is that they are being forced to do it, they don't have a choice, or sometimes the bold ones will say it's because of good global opportunities. I don't know that I would ascribe to what's good for GM is good for America as a pure doctrine, but it just instinctively seems to me what's good for IBM is not bad for America. It's got to be good for America.
So we may be able to tease a little bit more of that. I think we have heard some, and no surprise from our friend from RTP Red Hat, around the question of Intellectual Property Rights, and a question that we have out there, but not yet addressed, is whether global adherence to the intellectual property regime as currently defined is a good thing or whether we ought to put our energy into causing greater global adherence to IPR or whether we ought to be rethinking the entire Intellectual Property Right regime.
We heard a little bit about the idea and Leo Reddy, I thought, did a great job talking about the optimistic view, the long term that what should be good for other nations is also good for America, and that we will have global markets available for our good and products and services. We haven't heard whether folks predict that by 2020, we are trending in such a direction that there will be global markets and global opportunities for American goods and services to support our efforts both at home and the efforts that are the fruits of our foreign direct investment.
So from one perspective, there is a lot I would like to get to in the morning. I think the more responsible thing to start with, and we may hit many of those topics again just like we hit some of these afternoon topics in the morning, but it's the turn to anticipating future work force needs.
We know that in the United States, what we talked about, how often labor is only 10 percent, and we heard from some of our supply chain experts that labor may just be 10 percent. So it seems that even significant cost differentials may not explain entirely why so many of the best and brightest American companies are globally sourcing both their production and their research and development.
And I think what we already heard around the table and where I'm sure this is going to go and, Leo, where I'm hoping we can turn to you first on is the question of anticipating future work force needs and ensuring that we have an innovation force, a work force that is capable. I thought Jim did a great job at maybe the first comment out of the box, talking about the bottom 50 percent in the nation, and it does seem to me in all of these discussions that so much of our long term success will directly result from whether or not we're able to both raise the floor, so that the baseline average American's capabilities are commensurate with the type of technologies they are going to be working with, as well as to continue raising the ceiling, so that we, if possible, grow and attract, entertain a disproportionate percentages of geniuses and of others who are really going to lead the nation in developing intellectual property and cutting edge processes. With that, if we can turn to you first.
MR. REDDY: All right. Thank you, Bruce, for this opportunity. It's interesting how this question of the work force keeps intruding into other discussions. I was amused this morning that several times, the work force issues began to emerge, and I think are still, so let's try to save this for this afternoon, so I guess this afternoon we'll kind of get to that topic. Even you were getting to the work force.
MR. MEHLMAN: Yes.
MR. REDDY: Bruce, it just is kind of there. I had the same experience when we started NACFAM back in '88, '89 and we were trying to work with industry to find out what policy infrastructure would best support productivity growth through advanced technologies, and we did a survey of a large number of companies on this topic, and out of the blue a lot of companies were saying well, technology is great, but technology is available. What is not available are sufficient numbers of workers with the right skills to make effective use of technology.
And so with that, we began to focus on work force and we really make that kind of a third leg of the triangle, if you will, of technology supply chain and work force that we tend to focus on in some depth, and we have done -- everything we have learned since that time has reinforced our view that this is, indeed, a major structural issue.
And, as I said in my earlier remarks, I think our community, at least, is convinced that if we are going to compete with low cost countries, low wage countries, we simply have to focus much more strongly on the industrial work force.
Just to give you a little perspective on this, when we started looking into this back in '89, '90 and so on, we started looking at all the federal programs and found that, generally, federal programs really are not work force skills development programs. They are primarily second chance programs whether you're looking at Job Corp, looking at JTPA, whatever, the kind of special populations programs, not really so much related to the mainstream work force.
After all, the education system is basically out in states where, I think, governors spend a lot more money and have a lot more influence on this issue, but the feds have programs, but they tended to be more focused on special populations. So while there is a great deal of political rhetoric surrounding this issue, the real meat and potatoes in the federal Government has always been rather lean in this area as a general proposition.
But we looked at tech prep and schools that work, Perkins and all the different federal programs. We are concerned that the traditional funding for what we should call trade schools that really go back to World War I and the Smith-Hughes Act has been declining steadily over the years. The Perkins' Bill, which is about one billion dollars a year, is about the only remnant of what you might call career and technical or vocational and technical education.
Still, we weren't sure if those programs were that effective. We much more attracted by an idea that came out in the last Bush Administration, namely having industry articulate its needs through identifying national skill standards for the work force. That seemed to make sense. I mean, standards are something that industry understands. Specs are something that people understand, so you kind of get industry to be more articulate.
Also, the school systems were very frustrated over the fact that companies are demonstrably unhappy with the school system. I'm not sure if Tim was involved in this, but I remember Phyllis Eisen back in '93 did a report out of NAM in which they interviewed a lot of CEOs around the country, and the conclusion was the school systems were a failure. But the schools, for their part in the complaining, well, yes, but these companies don't send people to work with the schools. They don't really show up at their advisory council meetings. There was kind of a finger pointing thing going on.
So we thought that skill standards might be a way to kind of communicate better between industry and the education and training system, what they actually needed. So our organization received a number of grants from the federal Government to develop industry skill standards along with other groups, and in '97 we won a competition for cooperation with the NCIO, actually, to develop a nationwide system of skill standards, assessment and certification for manufacturing workers, essentially entry level for first line supervision.
So my comments are going to tend to be oriented a little bit more towards the front line work force, a little less to the management and to the engineering group. And after all, those workers represent about 85 percent of the manufacturing work force, so they are a factor. But we started working on the skill standards, which were funded and organized through the Department of Labor for the National Skill Standards Board. That's just a little bit of background.
What we're trying to create through this group called the Manufacturing and Skill Standards Council, which we manage with our labor friends is now chaired by Jim McCaslin, who is the president of Harley-Davidson, Harley is very interested in this, is essentially trying to create for manufacturing the equivalent of the ASE system.
Now, how many of you know what ASE stands for? Actually, all of you know what ASE stands for. Let me remind you. When you drive into a garage to get your car fixed, you want to look over the door to see this little oval sign that says ASE in blue lettering. What that means is the automotive technicians, formally called grease monkeys a long time ago, are well qualified to fix your car. They are well qualified, because they have been trained and assessed against a national system based on industry standards and they get certified. That system has been around now for 20, 25 years and is, frankly, our model. It works extremely well.
If you are a good automotive mechanic, the way to get a good job in a repair shop is to be ASE certified. If you are a shop owner, you want to have people come in with that certification, because you know what they can do. If you're a worker, that certificate is portable. It means the same thing in Maine as it does in San Diego. This is a highly successful system. It's working very well, and the beneficiaries of the system, of course, are the consumers such as ourselves. Most all of the automotive technicians who want to get good jobs have to be ASE certified. There are about 800,000 of them.
In manufacturing production alone, I'm not talking about the skill trades necessarily, but in production there are 12 million workers almost none of whom have any form of certification whatsoever. So we're taking excellent care of our cars, but when you talk about running a factory where people are running multi million dollars worth of equipment and so forth, we don't have as well developed a system of certification or safeguards.
So the effort there is to try to certify a large percentage of production workers. I thought I would just give that to you as an example of what, within the manufacturing community, we're trying to do. We also think that by professionalizing that work, we'll make it somewhat more attractive in terms of attracting people to manufacturing work, which is a major issue, as we know.
NAM just released another study recently about the fact that manufacturing careers have a very poor image in the country. Just to address this issue a little more broadly, and I will try to do this in two or three minutes, again, the skills issue keeps coming to the surface so frequently, and there have been so many studies about this that we decided, in my organization I actually was heavily involved in this myself, to really research the last two or three years of major reports, data, anything we could get a hold of on this topic to see if we can get a better idea of what's really going on in this particular arena. And we have published this report. It will be published in just a week or so, and I will be happy to provide it to anybody here who is interested, but it's really a resource paper, which documents the problem.
But there is no question when you look at it that the skills gap, which is a familiar phrase, it has been around for a long time, is really deepening, deepening to an alarming degree. Just to give you one or two points, I think most people are familiar with the NAM report called Skills Gap reporting that 80 percent of manufacturing executives are experiencing a shortage of qualified workers. That's 80 percent.
Some other data is showing if current trends prevail, the shortage will become even deeper in the future. Nearly 60 percent of the new jobs in the first two decades of the century, your 2020 thing, will require skills that are held by just 20 percent of the present work force.
Now, when you think about this, this isn't very surprising. The technology is moving at an ever accelerating pace as we have learned this morning, again, reminded by our experts on nanotechnology and bioscience. However, is the school system moving at a similar pace? Not really. There is a strong focus on academics and certainly, through the President's Bill, Leave No Child Behind, and we all support academics, but we kind of lost track of the fact that at a certain point, people have to begin to learn in a contextual framework. They have to begin to think of careers. They have to start to think about what they want to do with their lives.
And there is no question that the data show very clearly that Americans are spending more and more time after they graduate from school sort of churning in the marketplace, churning and churning, sometimes for an average of 10 years or so, 10 or 12 years, before they find their career track. Now, that is a lot of productivity downtime and it's certainly not helping us find workers with the right skills.
Again, I hate to keep beating up on the feds. It's a tendency when you're not working. I used to work in the Government, so it's a funny position to be in, but it seems to be an irresistible urge that people have when they come to Washington. But still, when you look at the federal response, certainly, I think everybody stands up and salutes the No Child Left Behind Act, which was the President's really major initiative when he was elected.
And if you read the different books on the early years of the Bush Administration, this was, in fact, the topic, the thing that was the closest to the President's heart. So the new education bill, Leave No Child Behind, is certainly a major piece of legislation, a helpful piece of legislation. But again, the focus is very strongly on academics, particularly performance at grades four through eight. It doesn't really get you into the area of career or technical education.
While all the data show that people learn much better in a contextual framework than the purely academic textual learning is not really being sustained. The only program that I mentioned before, which has been the traditional way that the Government has funded vocational and technical education, has been the Perkins Bill. The Department of Education right now is trying to kill the Perkins Act and is substituting for it a new organization, really a whole new paradigm shift in federal funding in this area, where about half of those funds would go into academic learning, no longer into vocational or technical education, and the remainder would go to technical colleges.
The problems is that you might argue that's okay, but technical colleges end up getting even less money as a result. So there is no question in terms of funding, which is really the substance of policy, that funding, at least at the federal level, towards technical education enabling people to keep up with the pace of technology is diminishing and not increasing, which is another troubling trend.
The governors seem to be more tuned into this problem, because perhaps they are closer to economic development. If you read NGA reports, they talk a lot about improving careers in technical education, about the importance of improving their work force, realizing that unless the American work force develops its skills, that it won't really be able to compete in the global economy. But the problem with state Governments, of course, is they are broke. So we do need to really look at somewhat more bold policies, I think, in this area, as well, because the shortage of workers really is a fundamental problem.
Let me just mention a couple of other examples. The National Skill Standards Board was empowered by the National Skills Standards Act to build this national system of certifications for all sectors of the economy. Well, they have just been closed down, too. So we're closing down the Perkins Program. We have closed down the National Skill Standards Board. We have been working behind the scenes to try to create some interest in the idea of a technical training tax credit, so that companies and individuals would have an incentive to return for technological updating, let's say, every five years. And we have been over at the Department of Treasury talking about this. We have been talking to people on the Hill, but we're not really gaining any traction there either.
So it's a significant challenge, and we know it's a major challenge certainly for the IT industry, software intensive industries. The whole saga of the H1-B visa issue has become a legend in its own time. I'm sure all of you are familiar with this, that the Valley, in particular, was hard up for software people, for programmers, planners and so forth, so they wanted to import more from abroad through the increasing doubling or tripling. I think we're on the non-immigrant quota, H1-B, to bring people in going from over 100,000, I think, to about 250,000 a year. This was a very contentious issue.
But on the other hand, in fairness to the industry, I mean, they were claiming they could not find a sufficient number of people within our own population for these jobs. I mean, think about it. That's really a shame, because the jobs they are talking about are some of the best jobs we have to offer, some of the strongest career pathways, the greatest level of knowledge intensity. And yet, our own society is not producing enough of those kinds of jobs.
So I'm not really talking about wet backs, strawberry picker jobs. We're talking about real jobs. So, I think, if you look across the different factors that drive productivity growth, my own assessment is that the weakest sector is the work force.
Now, just to recall what I'm talking about and, again, I can go with Alan Greenspan on this since he talks about factors driving productivity, but his view is basically that there are three major factors, capital, technology and human resources. He doesn't mention management, but we all have our opinions about management. Every company has its opinions about that, but generally speaking, we have raised management to an art. Thanks to Peter Drucker, Harvard Business School, and a lot of other people, I think we have pretty well developed management skills.
But Greenspan's point is that technology is doing pretty well. It's really driving our productivity growth and he castigates capital investment, so we really need to get capital investment rolling. And I must say that the recent tax package, I think, did an excellent job. I'm not quite sure why companies and associations haven't quite got the drift of this, but if you really read it literally, the 50 percent bonus depreciation and the one year expensing for small businesses from 25,000 to 100,000 in one year, you can write off. If you're a small company, you can write off 200,000, I think, 67,000 of a $200,000 investment in the first year.
So we're moving towards first year expensing. That includes not only machinery, but also software and systems integration and everything else. It's really very, very bold and your letter picked up on this thing. When you look at this, this is a remarkable breakthrough. So I think the capital issue has been alleviated to some degree.
But in terms of the work force issue, it's hard to find anything comparable to really deal with this very, very large question and whatever we do, whether through the Tax Code or really pay more attention to career and technical education or whatever, we just need a lot more attention to that part of our structure for supporting manufacturing, because I think it's the weakest link that we have when you look at that infrastructure.
MR. MEHLMAN: Thanks, Leo.
MR. ZAWACKI: I hate to be the one talking, but I was going to make a comment earlier and it ties in with what Leo said, it's I have had the opportunity to visit 30 countries probably in the last seven years, visiting companies and educational systems, but the one that impressed me was Singapore.
I was with the minister of trade, and the first thing he did, and it was a group of 10, he put up on a slide, it was a vision for Singapore. And I thought oh, geez, we got a problem. They got a vision. We don't have a vision in our country, but somewhere in there it said they wanted to have the highest educated work force in the industrialized world. In the next sentence, they wanted 30 percent of their people in direct manufacturing. And somehow, we have got to have that vision.
The problem is our vision lasts as long as the Administration, and we got to stop throwing stones at one another and agree on a vision that we can live with for the future and build on it, because it's going to hurt us. Here is a little country like Singapore and they have got a high educational system.
Oh, one last point. Bruce, you mentioned this 10 percent. Most manufacturers would say their labor is 10 percent or below, but they are talking direct labor. You start adding indirect labor and overhead, you're up at 25 percent. It's significant when you can go to China at 5 percent of the cost of U.S. or more, so it's not 10 percent. We have driven our direct labor down through technology and automation and so forth and so forth. It's all the indirect and overhead that has to support it.
DR. BEMENT: Yes, I had two questions for Leo. One is for ASE certification, where do people go to get training for ASE certification? That was one question. The second question had to do with capital costs for trying to provide vocational training at the 12 level or secondary schools. What is the role of post secondary educational institutions, community colleges and so forth, for which the state does make a fair amount of equipment investment in trying to provide tech centers and training centers for manufacturing? At what level should the training begin and where should it be focused?
MR. REDDY: Your first question again?
DR. BEMENT: Well, you were talking about the ASE certification.
MR. REDDY: Oh, where do they go for ASE?
DR. BEMENT: Yes, where do they get their training?
MR. REDDY: Well, it's interesting. A lot of the ASE training is given precisely in those schools that are supported by the Perkins Bill, vocational technical high schools, which now are almost de-funded entirely and technical colleges, that's where they have tended to go in the past. I am sure there are also some private schools they can go to get that training. There are private training organizations. But in terms of the support from the Governmental side, it tends to be in those areas.
On capital costs, you know, this is another interesting question. I think one of the reasons why high schools in particular, but even technical colleges in the next instance, are not investing too heavily in capital is it's an expensive thing to do when you import. Even when you have vendors who are willing to either give you or donate or sell you their hardware or software at lower cost, that also becomes out of date, and it's a difficult thing to nourish that, but mainly it's expensive.
Now, also this is true in universities where an honest, you know, university president will tell you that, you know, there is a good return on investment if you have people going through really kind of basic courses where you have the same teacher using essentially the same textbook with some new additions that was given about the same time as a McGuffey's Reader and has about the same currency. To really open up laboratories where you have computers and you have hardware and all these sorts of things, is a much more expensive proposition, and this is true at the college level, as well, as at the secondary level. So that is a major barrier, the cost of capital.
But there are some new technologies that can help with that, as well as online learning. We have been doing a lot of work with Raytheon Professional Services, who have developed really a brilliant process of simulating factory floor situations. So you can get online and you can test somebody online, because it's very hard to develop, especially, national tests, which we're involved in if you have a human observable test.
I mean, think about it, somebody standing behind somebody in a factory for the level of subjectivity here and thus, the liability to suit goes way up. So if you can simulate that environment in a consistent program, that's a very helpful thing. There are a lot of tools, a lot of technological tools that can be used in this particular space, and I think it's a major area for technological research myself.
MR. MEHLMAN: I have got Juan, Ron and Amram. Although, I would note, John Zysman, I notice you in the back. I don't know if we still have boxes of the vision as 2020. If we do, maybe to bring in something that we have been looking at and are still looking at, under Secretary Bond through the NSTC is looking at, how radical advances in technology can impact the education and training landscape, and looking at more than the next generation broadband, but how we might, as part of a national innovation infrastructure here, have truly advanced delivery and applications in technology to train and to educate and how that might create a competitive advantage and a work force advantage. The compilation of visions we're going to bring is a really good read and it's helpful. Thank you.
MR. REDDY: I quote the secretary in this report about that kind of initiative.
MR. MEHLMAN: Good.
MR. REDDY: So it's really the right way to go.
MR. MEHLMAN: Juan, Ron, Amram, Frank.
MR. ENRIQUEZ-CABOT: I stepped out for a minute and I apologize if I am repeating something which you said, but there are two things that I think are also important as you look at training and education. The first is by treating people as a short term variable cost, we have broken the apprenticeship in business, because a lot of these folks, businesses have paid to invest in people, but in the measure that your labor turnover increases, and the amount of months somebody spends at your company lessens every year, then a lot of that education that was practical training provided by the business has ever less incentive. And now, we want to shift that to someplace else.
You know, there is a question as to how you want to treat people as you require more and more skills and more and more training. This may not be a viable lull. The second thing I would like to say is one of the places that really is doing training well is really surprising. All of you know that there is a significant gap in test scores between different groups. There is a black/white test gap score in a series of things that have gone wrong in schools.
There is one place where that doesn't happen, and that is inside military schools. So if you go to the various bases in the United States, there is no racial gap in mathematics. There is no racial gap in engineering. There is no racial gap in a series of other things. I mean, military schools on bases are leading families to live on bases in really lousy housing when they could live in much better houses just outside the wall. And even though they are making virtually nothing, they choose to stay inside the bases on not as good a housing because of those schools.
And once those kids get out of those schools and go into the military, one of the few institutions in this country that is really taking education seriously is the military. And you can see this at West Point where some of the kids I have ever taught sit, and you can see this in the way that they promote people. They know where they are going to send people. They send them off to the best schools in the U.S. They get their college degrees. They get their masters. They get their PhDs, and there is a continuing education mostly driven by technology, because a lot of these are hard core nuclear engineering, engineering, technical training bases.
And there you have got an example of an institution that, I think, has become the most respected institution in the U.S. to the point where when the rest of Government doesn't work, then have these guys run the mayors' offices and have these guys run not just the war, but, you know, a whole series of things that are not part of their charter, because that is one part of the Government that is educating people in very interesting ways, and it can be done and it has been done.
And it's not an issue of throwing a lot of money at it. It's an issue of putting in the right incentives and the right structures, and making people accountable and having a code of honor. I think it's important to look at what the military has been able to achieve from school education, high school education and education of other grades.
MR. MEHLMAN: Ron?
MR. BLACKWELL: Yes, in his initial remark, Jim mentioned this morning that we got to worry about the bottom 50 percent. I was reminding him at lunch time that, as I counted, it was 75 percent. 75 percent of the population of our country does not have a college degree. And these people have to find some way to make a living, and the American middle class was built by these people having manufacturing jobs and being able to work with their hands and support a family and put the people into schools. That's why I'm sitting at this table, for example.
But even if you leave management aside, there is a range of skills that exists in the manufacturing work force. The largest white collar strike in American history was one a little over two years ago when the engineers at Boeing, 6,000 engineers at Boeing in Seattle, went on strike. They had issues around terms and conditions of employment as workers always do.
What they went on strike for was that their knowledge, the knowledge they had, and they weren't deprived people, these were third generation PhD engineers in this group, they were concerned that the most successful company in Boeing in America's most high performing export sector was losing its grip, because the company had been taken over by bean counters, and the brains behind the planes, which is how they viewed themselves, and you got to put the finest airplane in the air as they saw it, their counsel was not being listened to.
(Audio feed disrupted for approximately 30 seconds.)
MR. BLACKWELL: -- about the skills that we don't have that we need to produce. Neil has described very well the programs that we worked with them on in doing that. But you also need to figure out how we can use the skills that we already have that are not being used, and especially those that are being wasted. I don't know how many skilled mechanics are not only losing their jobs, you know, thousands every day now, and they are just drifting away from using those skills. We are losing skills on the back end, because we're not using them.
So I think it's partly using the skills we have got, partly skilling the people that don't have those skills. Here, on the skilling part, I think you need to think about the skill compliment to the revolutionary innovation that was discussed earlier today, and that's our national labs.
If I might, on a personal note, my brother was our first member of our family who went to college. The University of California school system was the only way he could have afforded it, and he went on to become the vice president of the Sandia Corporation of Research, which is one of our major national labs and an enormous intellectual treasure, especially important to be able to use in times like this. It wouldn't happen if our children can't find a way to get educated to the limits of their abilities at the very high end, as well as the kind of recognition and skilling of people at the vocational level who are not going to go to be college graduates, but are going to need skills in order to fit into the system.
Now, I'm not sure how you do it, because this decision is made mostly at the business level, but we have got to find a way to use the skills that we have got, because our businesses in high standard companies, I mean, I'm sorry, high standard country in a globalized world, unless our corporations are not learning organizations, building firm specific competitive skills, there is no way we will be able to hold our industrial base in this country.
And right now, our workers in America are being told you are going to have four jobs in your life. Don't get too used to being here and don't waste your time on learning firm specific skills. You better learn it for the market. Workers aren't stupid. That's exactly what they are doing, but when all they know is general skills that can be bought on a market, yes, you can buy those skills, but so can anybody else.
We have got to change our business model, so that we're harnessing the knowledge that workers have, mining that deeply, and we have got to find a way to integrate them into participation of the production process and the innovation process to produce the kind of incremental progress that is going to be necessary to rebuild the heart of this industrial base.
I often fear in these conversations that we hope that there is some technological deus ex machina that is going to just kind of solve this problem, it's going to drop out of a lab somewhere, and I don't want to undermine in any way what drops out of labs, but I don't think, Professor Zysman is not here, I don't think there are enough high tech niches to absorb the proportion of the American work force that we need to employ in manufacturing if this country is going to have an industrial base.
And therefore, we won't have the jobs that those people need to secure the middle class for our country, and I fear that there are only three choices for us here. We can either continue to borrow 1.3 billion dollars a year in order to consume more than we produce, which isn't going to happen because of compound interest, if no other reason, or we are going to have to consume less, which is not a very happy prospect in the world's leading standard of living country, or we're going to have to find a way to produce more, and it seems to me that's the course we have got to chart.
And our institutions, as Leo has mentioned, that support the development of skills and the institutions we have for integrating the skills that our business now have are weakening. They are not strengthening, and I don't have the menu of things to change that, but I think that's what the Department needs to identify. How can it strengthen the utilization of existing skills and build the kinds of skills that we need?
MR. MEHLMAN: Thank you. Amram?
MR. SHAPIRO: I would like to kind of continue on the theme of people and our manufacturing work force as a valuable asset. I told a story during lunch and I realized it was apposite. I promised Ross I would bring it in, because it's almost a kind of companion piece to his story of the Toyota manufacturing system.
A few years ago, I was interviewing the head of manufacturing for one of the big three auto companies, and he said well, you know, like Singapore, we have a vision and I will tell you our vision. I won't name the year, also I won't locate anybody. But he said the vision is really simple. He said pretty soon, every one of our plants is going to have one man and one dog. I looked at him and I said what does that mean? He said well, he said the man will be there to feed the dog, and the dog will be there to make sure he doesn't touch the F'ing machines.
This was not a culture which was trying to build its future on a respect for the worker. I mean, hell, he was the second most important employee apparently. And when you compare that to the Toyota system, which started with safety and ended with morale, you recognize that that's a very different model. And I don't want to present any idea that there are not great companies that have a high degree of respect for their people and are not built around morale in this country. There are a great many of them, and some of them are, in fact, the most spectacular performers.
But I think that at its heart what is at issue here is, you know, within the world I operate in, which is really within the walls of companies, is that every company has a responsibility to take the knowledge and the know-how that it contains and somehow capture it in its own business processes, so that it can make the average person work as well as its absolute stars, and make one of its weaker people work as well as its average, and that that is one of its responsibilities well beyond anything that Government or education can do.
The companies themselves contain both the raw material and the know-how, which actually leaves every day as people retire and no one has really solved the problem of knowledge management in capturing their know-how in terms of business process. And if you do it well, then that problem of legacy is solved and the problem of respect and morale and employee and worker loyalty is solved. So, I guess, I'm leading to the Toyota model over the unnamed big three.
MR. MEHLMAN: I have as our lineup here Susan, Michael and Ned. Although, one thing I would ask Amram and certainly others as they participate, Ron, I didn't get a chance to ask you, are there specific examples? I mean, these are all fair and good points, and it would be great if there were ways for corporations to do an even better job of tapping the resources within their employees. Hopefully, many do. I don't know if it's teaming. I don't know if it's alternative models of management labor.
Amram, for your point, is there an example of a company or a group of companies you would point to doing what you say needs to be done?
MR. SHAPIRO: Well, it's so interesting, I mean, because, I mean, I get the privilege of going into company after company, and so, you know, what I have found and what I have really gotten used to is that the cultures are as different as human beings and as countries, and that you can come to the same functional end in vastly different ways.
I mean, at the one extreme, a company I happen to admire greatly is WL Gore and Associates where, you know, they do it in very -- I mean, they do it in almost a Maoist way. I mean, they have no titles and they build plants until the parking lot is full and then they build another plant, because they have all kinds of very powerful ideas about how to empower people.
I mean, I worked with them. At one point, they didn't have a head of manufacturing, because no one had been anointed by the organization yet. So they said until a natural leader emerges, we'll do without one. So, I mean, you can imagine very few companies have the stomach to manage without that, but they achieved a high degree of morale.
You can go to, you know, DuPont at the other extreme where you will find a much more organized, much more functionally striated organization, but one where people's, you know, sense of commitment and loyalty is still very strong where they put in a lot of business process that captures their knowledge before people left, and you will find, you know, people who are there for their third generation.
It's not as it was in the '50s where you could count on your grandchildren going, I mean, and there have been many changes that have broken the bonds of that kind of loyalty. But I think that if there is a serious respect for the knowledge that is contained within companies and then how it's transmitted, whether it's through informal mentoring or through the formal capturing of process and documentation, you have a whole gamut of ways of capturing that, and the net impact is that it is to everyone's advantage to be partaking in, essentially, the knowledge of all the people they work with. And now, you have people standing on the shoulders of others and that's exciting and they are happier to be there, so maybe that gives you a range of answers.
MR. MEHLMAN: Thank you.
MR. ROBSON: Bruce, Jim mentioned to me at lunch that, I think, the figure was 27 suggestions implemented per employee last year in his corporation. There is an example right there, and I am suspecting that he is hiring, basically, off the street and then he is putting the system in place to accomplish that objective without worry of whether we have all the systems in the world to have a well trained and educated work force.
MR. ZAWACKI: The other one I gave them was we haven't had a lost time accident in 14 years nor have we ever had a Workman's Comp case since I bought the company 18 years ago.
MR. MEHLMAN: Wow.
MS. TRUMBULE: Wow.
MR. ZAWACKI: Culture is big and we work in cross functional teams. Our measurements are QCDSM. The eighth deadly waste on the Toyota system is not taking advantage of the skills of your people. One other part, as long as I got the microphone and I apologize, we talk about reskilling our work force, but what is coming out of our school system is not good neither, and they need some help. We got a 20 percent illiteracy rate.
Ferris State University did a survey of 8,000 seniors, high school seniors. Not one of them mentioned manufacturing as a career going forward. Of course, in many cases we don't want them, because they are not prepared. So we got to look at it from that standpoint, too.
MR. MEHLMAN: Thank you. Susan, you had-- I got Susan, Frank, Martha, Michael, Ned.
MS. TRUMBULE: Yes, I would like to echo some of the comments on work force development. I had an optical manufacturing company I started four years ago and subsequently, sold it to Solectron. It was a classic bootstrap start up, trying to go out and get business and hire people. Stock options were absolutely key for me to be able to attract people to optical manufacturing, at the time, both at the direct labor level, as well as at the engineering side.
I spent quite a bit of time trying to recruit people to join my company, and I had a tough time convincing them that manufacturing could be glamorous, that there were benefits to working for a manufacturing company. So many people have preconceived ideas even amongst the engineers, as well, that, you know, manufacturing is a good thing rather than sort of the back end of the glamour businesses.
So we started four years ago in optical manufacturing. Nobody was doing that, at the time, so we had to train all of our people ourselves. Today, people are starting to out source optical manufacturing. My guess is five, six, maybe 10 years from now, that will have likely moved to other countries, and I am going to have to look for those new technologies to retrain my work force perhaps in the nanotechnology area. The incentives to retrain, I think, are going to be key for me.
The other thing that, I'm sure, is apparent to everyone here is the proliferation of PCs on the manufacturing floor. You need workers with IT skills. Many times, we have taken people in and had to train them on basics, and those are skills that they carry with them throughout their career.
The IT collaboration as we collaborate with our customers is another important point. I liked hearing the comment of, you know, transferring technology at the push of a button, but yet, it takes me eight weeks to get a T-1 installed, so that I can communicate with my customers. I think our infrastructure is still not where we think it is in terms of being able to communicate back and forth.
And then finally, I don't think any discussion of work force can skip health care costs. That was a big issue for me as I started a company, and I looked at my training costs, other benefit costs. I think that's something that needs to be given some attention to, as well.
MR. MEHLMAN: Thank you. Frank?
MR. VARGO: Well, I think the problem is even grimmer than we have been discussing. Ron hit it when he said, you know, we have to do a lot more with what we have, because it's not just a matter of seeing that we restore our productivity, so that we can compete with the rest of the world. We are going to have to pay back through an export surplus, at some point, trillions of dollars of goods that will be produced by American workers, but not consumed here, and the standard of living will go down unless our productivity can be astonishingly higher than we have had before. And the technology certainly will be part of it, but we have to do ever so much more with the American labor force than we ever have.
One of the scariest things to me is one of our member companies, who has a plant in China, said, you know, Frank, that is the most efficient plant we have in the world. It's got nothing to do with wage rate. All the factory foremen have engineering degrees. He says in the United States, we cannot afford to do that.
Now, the other scary thing is, you know, Leo is exactly right with this remark and I have heard it before, about 10 years ago, 20, you know, we go through a cycle. We know that we have to change our educational system. We know we have to put in the money and it's going to be astonishingly expensive, but we don't do anything about it. I think the reason we don't do anything about it is we don't have the vision. We don't really feel the need, because since World War II and maybe before, we have been on top of the world.
It's very difficult for those of us even in this room to conceive the United States could be replaced by somebody, but we can. We have to recognize that as a distinct possibility, because we're disinvesting until we recognize, until we look over our shoulders, it's not going to change.
MR. MEHLMAN: Martha?
MS. MORRIS: Well, again, I am sort of echoing a few things that were said in, Frank, your comments, but we certainly measure cost quality in delivery, as well as the next company, but also looking at our people and we do a global pulse sort of thing, we call it, to try to figure out how our folks are feeling, how their morale is, because it is a stressful environment these days.
You know, I mean, we measure relative contribution to your peer, although we encourage team work. So it's an interesting environment, but we also put a lot into our mentoring and coaching and we find the more you invest in that, the better work force you end up with, because, you know, you're talking about what next in their career, whether they are the non exempt on the manufacturing floor or your, you know, professional engineer.
And so it's important at all levels, I think, that we invest in that as a management team and encourage our first line managers, and make sure that they are educated in the skill of coaching and mentoring, and that we don't forget that.
We have also looked at the costs of retraining versus hiring new, and we found it about 40 percent less to go ahead and retrain as a general statement, and so we are really trying to put an emphasis there. In looking at new jobs, there are some sectors in the manufacturing or supply chain area that we feel are growing.
I mean, look at security. We need more experts in how we cross borders, how we do logistics, how we get to some of the emerging market. And then the other thing we were doing, as I mentioned earlier, the grants to Michigan State, Arizona State and Penn State for advanced supply chain methodologies, and they have come forward as leading schools, and we see the graduates in integrated supply chain with those degrees in the business area, you know, growing. I don't have a percent of their growth, but we are certainly tracking that and watching that as those, you know, degrees were unheard of really 10 years ago even.
The other item that we're doing is really partnering with development and making sure that manufacturing or integrated supply chain in development are interlocked on the delivery of products, but we have gotten a new area of business, which is engineering in manufacturing services in selling that.
There is a void, a vacuum for some of those skills in marketplace, and so we really have a revenue opportunity in that area, as well as in e-procurement, touched those kinds of procurement ideas. And so those are just areas where we had no revenue and we just took some of the key folks we had and put them to work with talking to some of our customers and it has really paid off.
MR. MEHLMAN: Michael and Ned, and then Tim.
MR. TIEMAN: So there are two topics in this session, which as of yet have not really been connected, and I myself would not have connected them if I had not been walking in a very unsafe neighborhood in Cambridge a month ago. It was the property of an independent book store, which is voted the best book store in the country in 2002, and I came across a book called Chomsky on Miseducation. And the insight that I got from that book, which relates to this conversation, is that the failure of the school system is a symptom of exactly what Ron is talking about, which is the failure to value the skills that we have.
There is no reason for people to emerge from the school system with velocity and momentum if all they are going to hit is a brick wall that limits what they can do in their careers, what ownership they can have for their job, etcetera. And so as I have been listening to this conversation and people talking about the illiteracy rate and so forth and so on, and also the lack of the schools, the contribution I would like to make to this conversation, and I cannot take credit for the originality of the connection, is that these two things are connected.
And when the Government starts looking at the policy about how to solve Ron's problems with the workers that he represents, the Government must understand that there will necessarily be a dramatic and direct and, quite possibly, almost immediate impact on the quality of our educational system if we can unblock the wall that we have put in front of our workers' abilities to use their skills.
MR. MEHLMAN: Good. Ned, Tim and then Terry.
MR. ELLINGTON: I'm not sure if I am going to agree with you or not. It seems to me there is two issues that we are confounding in this whole thing. Discussions about the needs of the work force for manufacturing, I come from a mind set that I'm convinced that manufacturers are today called business enterprises. They make products. They design products. They sell them. They service them. They are in the business of making money.
They understand that they need the best and the brightest and we're in a global environment, and they don't really care where they get the best and the brightest. IBM, I'm sure, you don't care and others don't either. You just want the best and the brightest. So it seems to me that manufacturers in the enterprise sense pretty much know what they want and they are going to go find them.
MR. TIEMAN: Can I rebut that very quickly, which is I think that what we have learned in certain other areas is that if we are not good stewards of our resources, we use a little bit too quickly, and while I might agree that from scratch, we might look for the best and the brightest, I think long term we are establishing an unsustainable environment, and perhaps the reason that we're so desirous of the potential H1-B visa applicants is because those people coming from those countries, you know, have not yet seen the disillusionment that long time residents of this country experience.
MR. ELLINGTON: I wouldn't disagree with that, so let's add that to the equation of how do we sustain, so how do we attract and sustain the best and the brightest? I'm going to get to a point, too, but let's expand on that for just a minute.
I hear a lot of discussion on production workers and, granted, I think we, as a country, have zeroed in on that problem. I come from an environment where at the university, we have made a fair amount of business at educating managers on some fairly simple business concepts. Statistical process control is one, you know, that the country has gone wild on over the years, a very basic skill.
So I would suggest that it's not just the production workers that need to be attracted and retained in skills. It's the engineering staff. It's the middle management. The hottest business books today, and I'm a big fan of Steven Covey's and others that are very simple principles, but we seem to make a lot of money reminding ourselves of the basics in corporations.
The other issue though, the confounding issue, let's put manufacturing aside and, again, you know, global economy, a lot of opportunity out there. We're going to figure out how to make it work. There is this other thing called society that we talk about in this discussion and, I don't mean to be crass, it's how do we get people employed that aren't educated?
And manufacturing seems to be the place that in the last many years is the best deal in town. You know, when we lost farm workers from the farm to manufacturers, not many people complained, because the wages went up and they had a better deal, and then they could buy a home and put a car in the garage, etcetera.
Nobody is screaming for manufacturing laborers to go somewhere else with a higher pay. So all of a sudden, manufacturing has sort of a twofold mission. Find employees and retain them and keep them current, so they can, you know, make money and also be the place to educate people, for uneducated people to get a job. And we would all agree that that's a good thing to do.
Now, having said that, it seems to me that, Bruce, there is two parties of responsibility here when we talk about educating the work force. One is manufacturers retaining them and keeping them. The other is society, and for some reason it just seems, in my lifetime, it's heresy to criticize the education system. It's heresy to say we ought to run it like a business.
If we look at the stock price of the Department of Education and our own state systems, etcetera, you know, it would be declining. We're not producing the highest quality employees. It seems to me that the basics of the education system we have already sort of talked about. They need to be able to read, write, do a lot of the basic things, and so you wouldn't have to retrain. And in university, we don't have to train them for a whole first year, so they can get into the freshman level classes.
So there does seem to be a significant failure in the education system that I don't know if the Department of Commerce is going to take that on in this report. Obviously, I wouldn't want to author it. But the answer of more money and what scares me is that it gets wrapped up in the discussion on manufacturing. Yes, manufacturing is a great place to employ people and I wish we could employ more, but you can't expect the manufacturing sector to educate the basics.
MR. MEHLMAN: Did you say if the Education Department were a stock, it would be declining or delisted?
MR. ELLINGTON: It would probably be some board of director shot.
AUDIENCE MEMBER: It probably wouldn't even be on.
MR. MEHLMAN: Tim, Terry, Arden.
MR. TIMKEN: Well, I have spent a lot of time on this, obviously, as has been mentioned. The NAM has 14,000 member companies, but 10,000 of them have fewer than 300 employees, so it's not just a big company organization. And has been mentioned by others, the quality of available work force remains the predominant concern amongst all the membership.
But in addition, I run a company and we employ about 10,000 people in the United States, and we have people in China, India, Poland, Romania, Czechoslovakia and lots of different places, so we get to see what's going on in manufacturing worldwide.
And I have to admit that my father built what I think was the third public vocational high school in the country in 1938. Dr. Bement's wife went there, and today I wouldn't build that school, and I realize that there is lots of levels of businesses that require different skills, but I have come to the conclusion myself, because I know of the 16,000 or so we have in the United States, many of them steel workers, we will not hire another person that doesn't have at least a solid high school graduate attainment and probably, and I have made this speech to the school people and to others, probably at least some additional post secondary education.
And it's not because of what necessarily that they are going to learn, have learned, but it is that they have capability of continuous learning, and that's what it's all about. And they cannot justify the wage levels we pay in our company in competition with the rest of the world with lower skills, and it has been exemplified in the State of Ohio and we were part of it.
Our percentage of high school graduates that go on to college is one of the lowest in the midwest amongst all the rest of our competitors there, and the reason is that there were good jobs and good wages at Timken and other places, those jobs no longer exist anymore. The similar compensation requires a skill that is not an eighth grade graduate like their parents or even a high school graduate, as I say, but higher.
And if that's true for our company, which is a manufacturing company for sure, then I have to begin to extrapolate that out against the country and I think the school system, and even here we're talking about it some more of running a two track system. One, kids that will go on to higher education and all the rest that are not going to do it probably is disservicing a significant percentage of those kids who could, presumably, go on to college or higher education, but we have put them off on the wrong track.
And I started to believe, and I have told some of the school people that I work with, that I actually think that all kids should be prepared for higher education. And sure, there is 10 or 15, 20 percent of them that aren't going to be able to prosper well in that system, but why should we take another 20 or 30 percent and divert them when if they have that intellectual ability as a result of the education to continuing education, then they can defend their higher paying jobs as they go forward.
And so, you know, Leo, I like the certification. I mean, that's where we were in 1938, but I'm not sure that that's what most of the aspirants of the school system should be trying to actually do. So when we talk about work force capability, that's my revelation. I think they have to be post secondary school equivalency.
MR. MEHLMAN: I've got Terry, Arden and then Ron.
MS. LISENBY: I think this is further to what Tim is saying, and it may be illustrative of the dark side of productivity gains. We have been early and avid adopters of new technology in the steel business. So while steel is about as basic as you can get, the jobs aren't basic anymore, so we're hiring more and more graduates, particularly engineering metallurgists, and if you think it's difficult to attract people to manufacturing jobs, tell them you're manufacturing steel and their eyes glaze over.
And for the most part, these are high paying jobs. Our average steel worker, you know, most of whom have certainly post secondary education, they are making close to $60,000 a year, but it has become a critical problem for us, so much so that we continually have a number of technical jobs. At any one time, there is probably a couple hundred technical jobs around the company that aren't filled.
When we opened our last mill, Greenfield start up, we went through 6,000 applications to hire 300 people, and it's just getting to be a real critical issue for us, attracting folks into manufacturing. One step past that into steel, which doesn't have the greatest track record, although, Nucorp has been successful. So we see it as a real issue.
We have for a number of years had a scholarship program, and we're very committed to education and we pay, I think now, we're up to, $2,500 per year for every child of every full-time employee, and that helps us a great deal in employee loyalty, but I can't tell you that it brings a lot of those kids as graduates back into the company. We used to see that. We used to see father, son, next generation. We're in mostly rural areas. Now, for the most part, the kids get educated. They want to work in technology. They don't want to work in steel.
MR. ROBSON: But, Terry, you don't have a challenge at the entry level, do you, in Nucorp?
MS. LISENBY: We do in some of the applications, and I know what you're thinking about.
MR. ROBSON: And is that in production levels?
MS. LISENBY: Not necessarily, but we do in a lot of the new processes like Thin Slab where you really want to hire. You don't want to hire for the entry level, and part of this may be self inflicted. We try to hire someone who can move up to the next level, and the same thing Tim said, we're looking for people who can continue to be educated.
I mean, we focus on it so much that we do 360 evaluations and it goes from Dan and I all the way down through supervisor level. That is a big capital commitment to do those 360 evaluations for that many people, but that is how crucial it is to keep developing talents.
MR. MEHLMAN: Arden and then Ron.
DR. BEMENT: I think this has been a very constructive session, but the challenge that is still ahead of us is how do we sell manufacturing as a value to the nation and who articulates that value? I believe it starts with national leaders, such as corporate leaders, in acticulating expectations the career opportunities.
And, Tim, I believe you put your finger on it. Some plants that I have visited which were really the top performers had operators with post secondary education. They were also given release time to do course work. Their aspiration was to get a B.S. Degree, and by the way, when they got their B.S., they weren't planning to leave manufacturing. They were going to continue to work up the career path within the company.
And many of the operators in the most productive plants, when you consider the revenues they were producing per individual, were getting a small fraction of the value they are producing in the form of salary. So the company could afford to have B.S. operators on the shop floor.
I have found in my experience with manufacturing that the tradition for some plants was to promote from the work force those who eventually became plant engineers and managers, because they were best able preserve the corporate memory of “how manufacturing is done here”.
I argued the need to have graduate degree people on the shop floor to figure out how manufacturing should be done in the future, not how to preserve the way that manufacturing has always been done? I was quite pleased to find more recently that some manufacturing companies employ plant managers with advanced degrees. Today you could probably find in many manufacturing plants advanced degreed personnel who are not only leading the manufacturing, but in some cases actually doing the manufacturing.
MR. MEHLMAN: Ron?
MR. BLACKWELL: Amram made a very important observation awhile ago that each company has its own culture and some organizations their own tradition, and I think that's right and it's an invaluable feature of the creative enterprise that a company ought to be. And I think there is a limit to what the Government can do with regard to training work force.
But I think one of the things the Government could do is to convene somehow places where companies meet each other and understand how they use the human capital and the human resources in the enterprise. There may be programs like that. I don't know. I'm just a corporate affairs guys.
But I can tell you this. There are two kinds of models here. One is a model where the company's management is charged with identifying the problems of the company, and the management or its consultants applying the solution to that problem. And then the only remaining problem is how to train the workers to do stuff they don't know how to do?
There is another model where the workers are trained to find, identify and find problems, and are seen as a part of the solution of the problems they find, and in the process skill themselves in devising the solutions. One is obviously a more participated system than the other. I would suggest to you that at least the companies that I have worked with that have been most successful in training are the ones where the training is integrated in the participation of the production process inside the specific culture of the business.
And I think, you know, the Government can't do that from the outside, but Government could provide a place where companies could meet and learn from one another on what can be done here, because I think Ross read from the founder of Ford awhile ago, and I was having ambivalent feelings, but the Ford system sort of treated workers like they didn't know very much. One is just as good as the other. They weren't very intelligent. You couldn't trust them, so you had to watch them every minute.
But actually, in my experience, you know, workers are just human beings who want to do a good job and they enjoy doing a good job when they are allowed to do it, and when they actually are allowed to get involved in helping making the company successful and feel a part of it, you have got a different border of commitment in a different kind of environment in which training takes place and skills are developed.
MR. MEHLMAN: Okay. So the next two I have got are Ross and Michael. Although, I wonder if you or perhaps Ross, have you seen studies? The logic of what you're saying makes sense, and one would assume that some business school has compared the marketplace success of companies that empower their employees to be creative and to be part of the process, as opposed to those for whom employees are pure inputs, and one would hope and expect you would find a performance differential among those who empower workers. Have you seen such things?
MR. CROUSE: There is.
MR. MEHLMAN: All right.
MR. CROUSE: There is a real life example of what you're talking about here right in the United States. It's called Toyota. The Toyota Production System, I mean, the work force is the asset. I mean, they are about continuous improvement and they are about long term commitment to their people. So the expectation of the factory floor worker is you are to figure out how to continuously improve the way you do your job. That is an expectation that is placed on them, a part of the Toyota culture.
The Toyota culture is what drives that expectation into the people. And I agree with Ron and your comments. We need to somehow foster that continuous learning process into the people that we hire on the factory floor.
MR. ZAWACKI: I thought you were going to mention NUMMI. NUMMI would have been a better example.
MR. CROUSE: Well, NUMMI is a real nice example, too. Do you know the story of NUMMI?
MR. MEHLMAN: I don't.
MR. ZAWACKI: Worst plant GM had, radical union problems. They closed it down.
MR. CROUSE: Freemont, California
MR. ZAWACKI: Freemont, California. Toyota wanted to come to America, so they went to GM and said let us manage that plant, hired back all the same people, except the managers.
MR. CROUSE: Except the managers.
MR. ZAWACKI: And had run the most successful company in the United States, one of the most successful. It's really a turnaround story if you're looking for stories.
MR. CROUSE: It's a 50/50 joint venture with General Motors, but it's 98 percent controlled by Toyota. Okay. And the main issue there is the culture that they implemented to support the production on the floor.
MS. LISENBY: Harley-Davidson is a good example, too, a good example, and a I learned what I know about it from my experience representing Xerox workers. They invented the process. They lost half their market share. They regained it through a process of worker involvement.
MR. CROUSE: Yes.
MS. LISENBY: Tapping into worker knowledge. I have never seen anything like it. They had other problems, as we do not know, but I really became a believer that this really has the potential for tapping into the creative potential of the work force.
MR. MEHLMAN: Go to -- I'm sorry.
MR. CROUSE: Could I make one other comment?
MR. MEHLMAN: Sure, Cary.
MR. CROUSE: Somebody brought up, and I think it was Leo, about process technology development and inventory and getting that into our engineering schools. One of the things that I think is extremely important is that we foster through the engineering schools the product design side and the manufacturability side or the process side.
As they go through their schooling, too much we have these silos of design and then process. We need to figure out how to bring those two together, such that we can be successful on the manufacturing floor with processes and designs or designs and products that can be manufactured efficiently, because in the U.S., and several of you mentioned already, health care costs are a big issue for us. We cannot continue to deal with double digit percentage increases on health care year after year. It's just not going to happen. We're going to go out of business if that continues to happen.
Now, the other thing that nobody has mentioned yet is U.S. pension funding requirements. We need to figure that issue out, too, because at General Motors right now, that is $14,000 a vehicle that they are in disadvantage to the Toyotas and the Hondas as they enter the United States. So we need to figure that out, too.
MR. MEHLMAN: Thank you two. I want to roll to the next topic. Ross and Michael. Ross?
MR. ROBSON: Well, again, a multitude of thoughts. Having my wife just retire from public education as a kindergarten teacher, I really have problems with believing that the educational system is as broke as we would like to make people think. Having lived in five states and so forth in a country, there are problems, but I'm not sure it's with the educational system.
And, Leo, with all due respect, I am an old former HR kind of background, I am always a little suspect of asking corporate executives about entry level job skill capability. And I do think that we have a shortage, a real problem, in engineering schools and attracting people to manufacturing, and to engage in manufacturing, but I do tend to agree with Ron that we don't do a very good job of engaging our work force as Toyota does, as I see Delphi doing, as Nucorp does in a different way based on their incentive system. And so I'm a little suspect of some of the studies about how dire our system truly is.
In my case where I go out and spend a lot of time with some of the best manufacturing facilities in North America, Canada, U.S. and Mexico, I don't hear from the Delphi plants that we have a bunch that have applied for our prize this year, and we have recognized more Delphi than anyone else. When I get down to the manufacturing level, I don't hear the dire kinds of concerns by the HR people or the operations people about the quality of the people that they have available to hire and put on the job, on the shop floor. And that applies in Mexico, no matter where in Mexico, and certainly Mexico are bringing onto the shop floor a lower level of educational skill, knowledge and background than we do in the U.S.
So the question is that issue of engagement, and let me just conclude by, here is possibly the most insightful question that I ever heard asked of three automotive executives, and I knew two of the three very well, at a conference, open session, and none of them touched the question with a 10 foot pole. And this was the written question. "I work for a Japanese managed company. We use TPS, Toyota Production System. We focus on quality, delivery and cost. Top management, our president and senior management, are on the floor each day monitoring and understanding any quality and productivity issues. They don't need month end reports, just countermeasures for correcting problems."
Now, the question was do you believe that American senior management can change their executive culture, and he put quotation marks around the question, to be more involved? And two, when was the last time that anyone was on the shop floor to see a problem? And I just point to a Harvard Business Review article about three years ago by Spear and Bowen of which Mr. Cho of Toyota, Mr. Ohba of the Toyota Supplier Support Center said Spear and Bowen, get it right in their article "Decoding the DNA of the Toyota Production System," and the engagement, the activity, the involvement of people on the shop floor.
And, by the way, in Georgetown, Kentucky on the assembly floor about 33, 34 percent of the work force hold college degrees with one dentist and one lawyer on the assembly line. That's where lawyers belong.
MR. MEHLMAN: Well, as a lawyer, it's better to be on the assembly than under the assembly line. So, Michael, you want to offer a last thought here?
MR. TIEMAN: A last thought, which goes back to the education system, and I want to maybe challenge a little bit the notion that the concept of vocational school is bankrupt now. I went to what many people told me was one of the best high schools in the country. In fact, George H.W. Bush told me that at my graduation. But my wife taught for three years at a technical, it was called a technical arts high school, it's Lick High School in San Francisco founded by James Lick around the turn of the century, and the education that these students got, which fully prepared them for successful careers at places like UC Berkeley and places like Harvard and places like Brown and Rice and Stanford and everywhere else, I think it was invaluable.
And as we decry the illiteracy rate of high school students, whatever measure we choose to take, I wonder whether an illiteracy in manufacturing is partly responsible for where the manufacturing industry is going. Many people have said it's really hard to get people excited about manufacturing. Let me tell you that the students at Lick High School had an appreciation for how metal worked, for how glass worked, for how wood worked, for how a lot of these other processes worked.
They developed notions of quality and skill and values, which not only comported them well through college, but probably made them the exact kind of productive people we want. And if we completely sanitize the experience of manufacturing from high school and focus only on, you know, see Dick run and see Jane run and okay, great, you have a high school diploma, we are, I think, sowing the seeds to the end of manufacturing.
MR. TIMKEN: I don't agree.
MR. TIEMAN: I knew you would.
MR. TIMKEN: I disagree.
MR. TIEMAN: I knew you would.
MR. MEHLMAN: That's too good not to pursue.
MR. TIMKEN: If you're looking for programmers, all you have to do is come out and look in Ohio and get outside of Silicone Valley.
MR. TIEMAN: We're in Raleigh, North Carolina and NCSU is the number one source of engineers for IBM and a number of other companies globally.
MR. MEHLMAN: Tim, do you want to mix it up?
MR. TIMKEN: Well, I just did. I mean, you know, I went to school in California, so I have some feeling of what the view of the world is out there, and I don't disagree with his prescient. I didn't say abandon at all. I said we're to do it uniformally. In the south was a perfect example. When we started facilities down there, they had the worst two track system I have ever seen.
Vocational school was the graveyard. If you went to vocational school, you were buried and nobody wanted to go there, but they got sent there. And I think that is permeated still through the rest of the system. Even in Ohio where we are, I'm telling you that in my belief the schools are discouraging kids from educational attainment that they could have. And, you know, we used to teach them in the vocational school, manual arts and drawing and a lot of those things. We don't even have that anymore. We teach them computers.
MR. TIEMAN: Football and baseball.
MR. TIMKEN: We have pretty good football there, too.
MR. MEHLMAN: Ned, son of the south, wanted to pipe in.
MR. ELLINGTON: Yes, this is the last comment on the south.
MR. MEHLMAN: No Jeff Foxworthy, please.
MR. ELLINGTON: And the distinction there is vocational at the post high school versus the high school. And in the south, I got to give Commissioner Breeden a huge thumbs up on this. He took the Georgia two year system and turned it into a tremendous post secondary education system. They produce engineering technology students throughout the state in a lot of places.
The one thing that I would encourage you to do, most of those faculty presidents, vice presidents, are trying desperately to get their vocational schools a four year credited bachelor's degree. That is the trend in the vo-tech schools at the post secondary level. So it's the trend because of employers like you, and it's because of the students. The students put a lot of work into this, and at the end of four years, they want a bachelor's degree or at the end of two years, they want an associate's degree that has got a lot of teeth in it.
And so I commend that part of our education system, and I think it's one of the valuable components. I just want to get high school students qualified to get into the vocational schools.
MR. MEHLMAN: Leo, you have begged a small dose.
MR. REDDY: I just want to take a second in self defense to clarify a couple of points. I think I stirred the waters a little bit by placing a lot of emphasis on certification. Tim's point, I think what students and the parents are looking for are increasingly certificates or certificates and degrees. It's really both. And the model we have in mind is not certificates or degrees. It's really both, and our models would tend to be where people go to technical institutions to get Microsoft systems engineers, certificates, as well as the board of Cisco certificate, as well as their aid, and that sort of thing seems to be more what we're talking about.
On Ross' part, I just want to reassure him that we agree totally, and I think Ron would pick up on this. As far as defining skills and knowledge are concerned, we precisely do not ask corporate executives to do that. The corporate executives try to popularize this notion, but all of our standards are driven by front line workers, who are actually using the skills and knowledge and who, indeed, as Ron said, really have a higher level of understanding of the skills and knowledge actually needed to perform work than anyone else. I just wanted to clarify those two points.
MR. MEHLMAN: Thank you. We're going to move into our last section. We'll get an introduction from Frank Vargo in one moment. Deputy Secretary Bodman will be joining us and, David Bohegan, if I can ask you about 2:50 I was supposed to go up and grab him. Without Phil here, I'm going to stay for now.
This is a classic Washington story. We originally had Deputy Secretary Bodman all day. He was excited about being here, and then we had him for a half a day, because the secretary needed him and the secretary needed him for then this morning something else, and we're going to get him from 3:00 to 4:00.
The good news is he helped make sure we were on track and has been very much as a former CEO of Cabot Corporation and PhD professor at MIT and CEO of Fidelity Investments, he guides all of our efforts and all of our thinking, and has been very interested, and I know will want to read very closely the transcript from this. But we'll hopefully get him for what may well be the most interesting piece or at least the piece that most folks are most eager to do in Washington, and that is tell the Government what to do.
What I have heard so far and, Frank, I'm going to turn to you, but what I have heard so far is we need more federal spending on education, lower taxes to compete with foreign nations. We need more federal spending on training, less taxes for training by companies, more federal spending on basic RND, tax breaks for learning by workers, more federal spending on RND manufacturing processes. We have got to get out of the way where we are over regulating, but maintain worker protections where regulations are critical.
We need lower health care costs, but we have got to embrace personalized medicine. The market leads in process, but the Government needs to do the basics. The Government brings incremental process or the conflict between Government leading in process -- I'm sorry. The market leading in process and Government doing the basics versus Government bringing the incremental process improvements through extensions.
We have a greater global adherence to the U.S. IPR regime, as opposed to transforming the overall IPR regime entirely, accelerating global sourcing to increase U.S. firm competitiveness versus decelerating global sourcing to maintain jobs, treating workers as long term partners versus reducing pension pressures on profits and prices, and we have had discussion of manufacturing as either a major arm and focus of the Commerce Department, perhaps a Secretary of Manufacturing the way there is of agriculture or even vice president of the manufacturing states of America.
Frank, I'm sure you are going to bring this all together for us, and we're eager to hear what you say.
MR. VARGO: Actually, I am.
MR. MEHLMAN: Thank you.
MR. VARGO: You know, that's a very good list. If you could get that done, you know, that would substantially address the problem, but you're not going to get it done. And, you know, again, I worked in this building for many years, but the deputy secretary is not here. Why is he not here? It's not because he is disinterested. He has got other priorities. Grant Aldonas was supposed to be here. I know Grant, a fabulous guy, hardworking. He has got other priorities, too, and that is kind of how the Government is on this.
So the biggest challenge is not actually identifying a list of things that we need to get done. It's deciding that we really have to do them, and we are not there. And in my view, if we keep going in the direction we're going, you know, we're toast. And it's not just manufacturing. It's the whole U.S. standard of living, and right behind that is going to come the U.S. leadership position in security and in the whole global political arena, the whole world system.
Now, I'm not gloom and doom. I am very optimistic. We know what we want and we have the tools. It's just a matter of being able to put it together. And we do have one advantage that, I think, hardly anybody else in the world has, maybe the Australians, and I want to go to an anecdote that quite some years ago, I was in a meeting. Something like this, except we were focusing on Europe, because, you know, we didn't worry about ourselves, at that point. Poor Europe, what can we do to help them? Why don't they innovate? And we had this session, again, very much like this, and the general conclusion was well, it's because Europe doesn't have venture capital firms.
And it was a meeting with businesses, as well as Government officials. And this gentleman in the back of the room who had been quiet the whole meeting raised his hand and said excuse me, you are all very nice people in Washington, but you are all wrong. He said I will tell you what separates Europe from the United States and why the United States can innovate, he says because the United States is a nation of failures. He says nobody got on the boat from the old country who was a success. Only the failures came here and we tolerate failure.
He says, you know, three engineers leave IBM, no offense, and borrow a million dollars and they start up and they go broke. They come up with another idea. They borrow another million dollars. Eventually, they will get there. But he said three engineers leave Siemens, borrow a million deutsche marks and they lose it, they will never borrow another pfennig for the rest of their lives. That's the difference.
You know, the private sector here is just incredibly flexible compared to anywhere else in the world that I know. We have this very strong advantage, but we do need the Government to do a few things and maybe to get out of the way, and there are only three things really.
I brought a letter that Jerry Jasinowski sent to the secretary, and there are copies outside, which lay out these three things. And, you know, basically, we need the Government to help facilitate the more rapid development in utilization in innovation and investment. The second thing is to reduce the cost of producing in the United States, and so many of these products are brought about by the Government, because, you know, we never envision we might be number two and we always saw ourselves as wealthy enough to be able to afford these things. And the third is to level the international playing field, not just in terms of the Chinese currency, but some very fundamentals in trade policy, for example.
We're in a position now that the average U.S. tariff on industrial goods imports is 1.8 percent and, as Fred Nichols of NAM points out, that is not a trade barrier. That's barely a speed bump. But in many parts of the world, all over South America, all over southeast Asia, Asia and 50 percent of our trade deficit is with these countries, we face WTO legal tariffs that average 30, 35 percent. Well, how did we get into this position? Because our trade negotiators were dumb? No, you know, it was the Cold War.
Again, we felt we were wealthy. We said you come to our market, you know, build your factories, fight the communist guerrillas out there in the woods by having good paying jobs, raising your standard of living, and it worked. It worked, but now we are in a situation where our market is still open and theirs is not open to us. We have got to have a level playing field.
Basically, the Government, of course, needs good economic policies that will foster the development of manufacturing and tax trade, but in addition to that, we have been talking about infrastructure and we're not talking so much about roads and airports, but some ports, and we have to be sure that the Department of Homeland Security does not move our infrastructure backwards to make it much more difficult for us in international trade, but the human capital infrastructure, the education system, which business cannot do for itself.
Energy, you know, surely people saw the natural gas prices coming. It didn't spring overnight. And, you know, it's very difficult to do anything about it before it really costs. We look, as you noted, to the Government for research and additional pure research, but I think the point was made we need applied research increased, as well, and I agree with that.
The dispersal of the technology, particularly the smaller firms, you know, so many, Tim mentioned, we have 10,000 small firms. I have never heard them so desperate before. Most of them will tell you this is the worst time they have ever been through. They are all to busy to look around and say well, what technologies could come here, what changes in my production? Something like the Manufacturing Extension Partnership is needed in a much larger sense than we already have it.
And then, finally, the Government has to promote the acceptance of change, because change is coming and I can tell you again, our members, that there is growing resistance to change, whether it be trade or anything else. It's been reflected more in the Congress than in the Administration. But the main challenge is that we as a nation and the Government don't really believe we have that serious a problem yet, so we turn and say well, you have got to do something about health care. You have got to do something about litigation. Yes, but that's tough. Well, yes, it is tough, but the consequences of not doing it are severe, but they don't believe that.
Not too many months ago, I listened to a very senior official in the Department of Labor who was explaining that well, the unemployment figures for this month weren't all that bad and the question came up well, what about the loss in manufacturing? And the answer was well, we're not a manufacturing economy. That's significant.
The Administration has done a wonderful thing, truly wonderful things. It has been noted a number of times with the tax package, and we need this to spur the growth of consumption. It does a lot to help alleviate some of the difficulties in investment. But I get the feeling too much the Administration, because we have done it now, you know, there is nothing more that needs to be done, and that is just not so.
And it's not just a matter of this Administration. We don't need the Manufacturing Revitalization Act of 2004 and then the job is done. This needs to be a national change. We need to see this as a priority that continues from Administration to Administration, and we just are not doing it, because, in my view, we just don't recognize that we have got a problem.
MR. MEHLMAN: Thank you. Tom?
MR. DUESTERBERG: I endorse Frank's remarks. I will just elaborate on a couple of things Frank said. First, in terms of attention to the issue, there are some optics here that I think are important. A lot of people have commented on the difficulty of recruiting into the manufacturing sector.
We can do a thought experiment and think back to the 1960s or the 1950s when the real challenges that faced us were from a national security perspective. We did things like set a goal of landing a man on the moon and we spent perhaps 1 to 2 percent of GDP on the Apollo Program for a period of a decade. There were immense consequences to that investment not only in terms of the spinoffs, but also in terms of the excitement that resulted from a truly historic achievement.
Many interesting things have been discussed already today, biotechnology, nanotechnology. The advances in computing and information technology are just extraordinary in the last few years. Why isn't someone out there visiting manufacturing plants? They are talking about that. It's no longer cool to be in manufacturing, because everybody thinks they can go up to Wall Street and become an investment banker and be rich and retire at the age of 30.
So I think there are things that don't cost any money that leaders can do to call attention not only to the historic role, but perhaps the future role of manufacturing.
Now, from the 50,000 foot level to the ground floor level; I have endorsed Frank's remarks about the need to pay attention to tort reform. We have 70 companies and counting that have gone bankrupt already due to asbestos liability, some of which had absolutely nothing to do with producing asbestos. It continues to sap the ability of companies not only to expand and do research, but just to survive.
I would also endorse Frank's remarks that we need to pay attention to the micro level, microeconomic policies. We are all in favor of this stimulus package that has been passed in the law. It's going to do great things starting in about a week, but there are other things that can be done. A couple people mentioned energy policy. We have historically had one of the most competitive chemical industries in the world, and part of that was due to the availability of natural resources such as gas and oil at reasonable prices. It's also due to the fact that we have an incredible research base in organic chemicals and inorganic chemicals. That industry is rapidly becoming noncompetitive because of the price of natural gas. And again, there are things that can be done.
We used to produce competitively a lot of aluminum in this country, in large part due to the fact that we had fairly inexpensively priced electricity, especially in the Pacific northwest. We have shut down that industry for reasons that were important, at the time, but I believe that the crisis will pass in terms of the availability of water. Are we going to reopen that industry or aren't we? That's something that ought to be at least considered.
The telecommunications sector is one of the highest technology sectors in the country. It was one of the poster children of the boom of the 1990s, although it probably engendered a bit of over investment. Nonetheless, high technology industry had a lot of ramifications for other sectors such as the computer industry. We must get to a ubiquitous broadband environment, and it's very difficult to do that when you build a broadband delivery system that you have to share with your competitors.
So the reason that Intel and a lot of others involved in the computer industry have been getting involved in telecom regulatory issues is because there is much that can be done, and the next step in the advance of computing is to have the capability of fast communication.
The final thing I'll mention is that a lot of folks have talked about the explosion of strategic alliances in technology consortia. It's one of the characteristics of modern, fast moving, highly innovative industries. A lot of attention is being paid to antitrust policies as a result of that. Certain types of consortia are being discouraged with an overly aggressive antitrust policy. The characteristic of modern technology is that it changes very rapidly. Any competitive edge is something very ephemeral, so the attempt by antitrust authorities to limit the exploitation of often temporary competitive advantage is counterproductive. I would commend everyone's attention to a wonderful book by Will Baumol on The Free Market Innovation Machine: Analyzing the Growth Miracle of Capitalism, which outlines the need to take a look at antitrust policies.
MR. MEHLMAN: Thank you. I will continue. I would like to continue this dialogue. Although, I guess, I would make one observation, and I recognize that my role here is to listen and to convene, and not to even be into debate or necessarily answer the concerns. I would observe just on a couple of points with respect, for example, to broadband, an area near and dear to my heart, that what that high tech broadband coalition asked for they got in toto recently from the FCC.
And, Frank, you make very good points about the importance of this issue, but I would disagree with any suggestion that this is not very important now to the Secretary of Commerce. He came and spoke to your board meeting in Chicago, and let it be known that he has asked all of his under secretaries across the department to engage very actively in probably more than 25 round-tables around the country at a listing stage in a report, and I anticipate more than just a report, but action and action on a permanent basis, as you described, a continuing partnering relationship.
And then last, and I won't go on an item by item basis through the letter, which sure looks like it's the issues that we have heard and that we're going to keep hearing, but I would note from things as diverse as fee diversion to an energy policy to increases in RND investment, health care costs via liability, we are listening. We do hear you. I think there are a lot of responsive policies that have either been enacted per the tax package and No Child Left Behind or that are in process and that we're pushing shoulder to shoulder with you trying to get done.
So I would encourage continued, robust recommendations, as well as very specific recommendations here, because I would observe that we are being heard and it's more than Dr. Bement and myself, but rather across both the Commerce Department, the PCAST and across the Administration, there are folks who are very interested in making sure manufacturing stays vital, and making sure the Government does everything it can to support on a permanent basis manufacturing.
MR. VARGO: Could I just note?
MR. MEHLMAN: Please.
MR. VARGO: That, you know, in no sense did I want my comments to be interpreted as critical of the Department where I worked for 34 years, and this Department has a leading role. We're here today. The secretary has done a great job. I just use the illustration that even within the Department, you know, there are competing priorities. You don't really have somebody within the Department whose number one focus is on manufacturing.
MR. MEHLMAN: Thank you. Jim?
MR. ZAWACKI: I don't want to challenge you, but I was a panelist at a round-table and I sat next to Grant Aldonas, and when asked about an under secretary of manufacturing, and it's on tape, on record, he said for five minutes that there is nobody in this building that understands manufacturing, and maybe that's a good idea. I'm paraphrasing.
MR. MEHLMAN: Well, I'm never going to speak for Grant. I would suggest, for whatever it's worth, I believe Dr. Bement very well understands manufacturing, but I think the point that you are making, and it's a fair point and it's one that we have heard before and we're definitely taking back to consider, is on what permanent basis is there somebody whose entire existence is manufacturing?
NIST does great work with manufacturers, but they also have other things they consider. In part, I believe that makes their manufacturing effort stronger, because they also can reach across to some of the biotech and some of the nanotech and some of the information technologies. But I fully understand the point that you are making, and I know that is being right now discussed at high levels. Ross?
MR. ROBSON: I was so naive that I went to my bookcase before I left and I brought John Zysman's book Manufacturing Matters, and the subheading, "The Myth of the Post Industrial Economy," and I think Frank's comments and Jim's comments support that basic premise. I will tell you that as I look back over history, I don't see one great deal of difference between which party is in the White House as to the emphasis on manufacturing over the last 20, 25 years, and we continue to hear this notion of a post industrial society, a service economy.
What I tended to hear today is that well, and with all respect to those who are around the table, the supply chain is important to manufacturing, vitally important, but it doesn't represent manufacturing at the plant level, shop floor level, gemba, where the action really is, and there is nothing. I feel like a nano voice that speaks louder than the entire federal Government on behalf of manufacturing, and my contact is so limited that if there is only 25 percent accuracy in that statement, then I feel like that's sorry commentary.
So I think the federal Government has got to get its act together relative to a manufacturing policy. I don't know. I understand issues of tort reform and the asbestos issue to some extent, one of my old acquaintances from JCI heads up one of those companies in bankruptcy, and the health care issues and so forth.
It seems to me that manufacturing, number one, the role of commerce, the federal Government is to level the playing field relative to the economy, and that is a difficult, difficult challenge to achieve, and then to support best practices, and best practices that add the biggest bang for the buck, that add value. We have talked about value. Anything that we do that adds cost that doesn't add value is waste and shouldn't be done.
And I can just tell you that applied materials, applied lean thinking to finance found that 75 percent of what they were doing was waste. They found that they were able to close the month end book in six to seven hours rather than five to six days. A company out of Mexico applying the same to human resources found that 75 percent of what they were doing in their human resource department was waste, and they value streamed it, and it's those best practices that we need to emphasize those that truly add value.
Some of them are aware to you, but there are just a ton of -- some of the best ones. If I were to say Freudenberg-NOK, I don't know how many around the table, there would only be two or three, I'm going to guess, that would know anything about Freudenberg-NOK. Yet, one of the strongest, most viable companies in the United States today relative to best practices in manufacturing.
MR. MEHLMAN: Thank you. Ned, are you bidding an option or are you holding your glass?
MR. ELLINGTON: Bidding. I'm going for the mike. A couple of comments, and really I'm sort of referring back to your agenda here on some of the challenges of Government. Just a couple of things that are observations. I don't really know how to fix them, but we do seem to collect a lot of the wrong data, and that drives a lot of decision making. And I love productivity, but, you know, we all keep reminding ourselves that labor productivity is how we seem to interpret in the United States, not necessarily a good thing to do.
Our labor productivity can go up, because we export parts to China and so we're just shifting labor around, as folks have said. So, you know, one of the things that maybe the study ought to look at is what are some of the data that we ought to really be collecting? I mean, I would love to get a value added type analysis and understand why we don't have that in United States, but it seems to me if we're going to go into 2020 continuing to push statistics that are based on labor productivity, we are going to be short.
The second sort of comment is that, again, I am going to sort of push the issue that we do have a lot of investment in technologies and it seems that we have, as tax payers, go ahead and pay that bill and we want to continue to pay that bill. I would love to see us continue to wrap up that use of technology. We, I think, convinced ourselves this morning that we're still going to compete as a country on innovation. I'm not quite sure where that's taught in the school systems.
I'm not sure of the Government's role, but it does seem that we invest a lot in that, and how do we create, and perhaps the suggestion here is clusters of innovation or communities or infrastructure based on innovation, but it seems innovation is a science. It's a process. It's not serendipity. It happens. We can design it. We can teach it. We can feed it with the federal labs. We can do a lot of things. But if we just think by saying we're going to compete, because we have always competed in innovation, I guarantee you we will probably sit around the table in 10 years and say boy, hopefully, we'll get to be an innovative society a little better than we used to be.
And the third comment is your agenda talks about the roles of Government, federal and state, and I recognize that most of our discussions have been around federal Government. But the states, obviously, invest a tremendous amount of money in technology and in universities, I'm in a state university, a tremendous amount of money. And for years, we have been contending and competing with each other to steal each other's plants from one state to the next, and we have a pretty good track record and we're proud of that.
However, going forward, I'm not sure that that's the best strategy for the country, and I'm again a big stakes rider, but it seems to me that there ought to be some continued investigation, if you will, in the federal world and how to pull some of the states together, so that we don't over invest and duplicate each other time and time again.
And, again, being in a university, just to drop the hint, we tend to go where the federal dollars are. Even in universities, we tend to come together and work in consortia, so we can get the federal dollars. So I think that strategy of looking and understanding not only what's going on at the federal level, but at the states level might be able to help us shape some investment in this tech transfer area particularly.
MR. MEHLMAN: Okay.
MR. SCALISE: Well, I was just going to make two very brief comments. Again, looking at it from the technology world, unless until we do the fundamental and the basic research at our universities, the leadership we enjoy today will not be sustained. I mean, that is the seed corn. That is what has made us successful in these areas. That is what will make us successful in the future 5, 10, 50 years down the road. So I think that's issue number one.
But the second issue today is that the competitive environment in the world has changed a great deal, and there are many countries out there now with the capability, albeit from the learning that came from our universities in most instances, that are able to compete rather vigorously. And the issue now is not whether or not they can compete vigorously, but whether or not we make certain that they all play by the same rules. And I know that's an easy thing to say, and it's not a cop-out. It's one of those things that was a lot less important 10, 20, 30 years ago.
Increasingly going forward, it will be extremely important, because that can be the determinant. When you're talking about a 5 or 10 percent delta based on policy as opposed to cost structure or anything else, that will be the determinant. So I think from a technology standpoint, I would just make those two points. That's what we are focused on.
The semiconductor industry, we invest just through the trade association about 60 million dollars a year in university research, basic research, because we know that's the key to the kingdom as we go forward. Without it, we won't win. And I think if we could get more industry investing in the universities, in that research program that we have at the various universities across the country, it can make a major difference as far as how well we compete in the technologies that are unfolding ahead of us where the real opportunities are for growth.
DEPUTY SECRETARY BODMAN: Since I came in late, you'll forgive me, but what do you mean by playing by the same rule?
MR. SCALISE: Leading up to the WTO commitments that everyone has, and the reason I say that, Secretary, is the WTO is a good organization that has good rules. It's also slow. And the last thing that we want to do is to have to rely on the process of WTO to solve a problem, as opposed to the rules themselves. I think that's the issue.
DEPUTY SECRETARY BODMAN: Thank you.
MR. MEHLMAN: Other recommendations, thoughts for the Government? Ron?
MR. BLACKWELL: I just want to -- I certainly don't have the experience with the Department of Commerce that Frank has, but I can say with confidence that the American Labor Movement shares his concern that there is not a sense of urgency in the federal Government about the crises that manufacturing is now in nor anyone, if the federal Government doesn't do it, that plants a flag that says we're going to rebuild the industrial base in the United States.
And we will be with NAM right behind the federal Government that does that. Now, we may disagree on the policies or argue about different elements of the policies, but that's the fundamental missing element here, as well as sharing, leading with a vision about what a strong industrial base would be in our country. Both of those things, I think, are the central things and the policies will follow behind that.
Now, when we get to the policies, we also share a concern about the dollar. I think it's the single most important thing that can be done that would improve this competitive situation of American manufacturers, particularly small and medium sized manufacturers. You know, the world is a wash in manufacturing capacity and the movement of currency really drives the direction that demand takes. And in the mid '90's or in the early '90s, we were doing pretty well, because the value of the dollar was low, but as it accelerated through the 1990's, that's when the crunch really came.
And I think without relaxing some of that pressure, and maybe finance won't like it, but manufacturing can't make it if it doesn't get some help there. They said before that has to be joined with some kind of policy or strategy with regard to the companies who are tying their currency for GO political strategic reasons to the dollar, and most especially trade issues that we have, they are a little different than NAM, but the trade front has to be dealt with right behind that.
And then right behind those issues, there are the issues of health care and pensions. You know, we don't have a national health care system. We're the only country in the developed world that doesn't. We have bargained very hard for health care benefits for our employees to great costs to the manufacturers, who provide those benefits, as has been explained here, but they are in competition with countries that have national systems, you know, and it's a devastating burden to international markets with this kind of competitive disadvantage.
And the similar thing has to do with our pension systems, which are seriously under funded, and the current rules for refunding those are a major issue for short term relief on this front. Looking longer term, it's a question of the Government, once we're leading here, we have to find a way to produce creative companies. And the labor movement traditionally has been satisfied to work with simply making sure that we shared in the benefits of successful companies, but that's not possible in a globalized world. Workers and their representatives have to be a part of creating the value in the manufacturing sector, and we're anxious to engage with our employers in that way to build, rebuild, the American industrial base and make successful manufacturing companies here.
DEPUTY SECRETARY BODMAN: Was your point on health care costs that American companies competing with Canadian or British companies have higher health costs per capita? Was that your point?
MR. BLACKWELL: Yes, that's right.
DEPUTY SECRETARY BODMAN: That's your point?
MR. BLACKWELL: Yes, we spend more per capita, in absolute terms and per capita than any other country in the world, and in many of these countries, these are paid by tax payers, and we pay them directly out of our corporate revenue.
MR. MEHLMAN: Jim, please.
MR. ZAWACKI: You know, a lot of times, you know, six hours, it's hard to sit still for that long, but a lot of times what we said today, people thought we were talking doom and gloom. I don't think so. I was brought up in the era of thinking of America is the greatest country in the world. And yet, we don't go around saying what's going on in the rest of the world like we don't have the highest standard of living. We don't have the best education system. Our death rate, infant mortality isn't the best. Our life expectancy isn't the highest.
My point in saying all these things, I could go on, high school rate of graduation isn't the highest, the literacy rate. My point is, I'm not a substance abuser, but until you recognize your problem and admit you have one, nothing is going to be done about it. And so all I wanted to do was echo what Ron said in the beginning and what Frank said, we don't see any champions coming out of Washington. We're scared, scared for our future. We think it's a vital part of America.
And, as I said, the report that came out of the Right Place Program, whether the statistics are right or not, they go back to 2000, 45 percent of our GDP comes from indirect and direct manufacturing and 41 percent of the jobs and we're losing it. In the paper this morning, USA Today, said that 50 percent of the imports coming into America from China come from multi international countries that have gone over there just for lower labor costs. We need the positive incentives to invest in the United States. So I guess I'm speaking for the small and medium manufacturers, which represents 60 plus percent of the jobs. We're going to lose it if we don't do something.
MR. MEHLMAN: I'll turn to Frank. Although, for the Deputy Secretary's benefit, we have heard a lot of good information, a lot of good advice. One of the things we have certainly learned is anybody who prefaces their comments with I don't mean to speak doom and gloom is about to put a serious depression on us. Frank?
MR. VARGO: I would like to use the news item here just as an example. In the first place, so far, and it looks like it's changing, and that's a serious problem for us, but so far very little of that is American investment. Most of it is Taiwanese and Japanese investment and there is a lesson there.
If you look at troubles that Japan has now, Mr. Secretary, you know, a lot of it is with the banking system, but if you look at a graph of their industrial production, it has been flat since 1990, about the time they started to move their production to Indonesia and Thailand and China. And one has to ask can Japan come back having given away a substantial amount of its manufacturing? And it's a question of we have to.
And as we ask the question, of course, we're also talking about ourselves. We're not there yet. We can still save ourselves and we need a champion. The Department of Commerce has got to be that champion, but the Department has got to look and see is it set up the way it needs to be? Is it able to put in the constant priority and pressure on other agencies?
The Congress, when we talk with Congressmen and Congresswomen, who are very interested in manufacturing, they come back and say yes, but what you ask is too much. You know, we're fixing health care, fixing tax. We're not there yet. So I think there's time. We can still fix this, but we're getting close.
MR. REDDY: Just to recap a little of the earlier discussions, Mr. Secretary, I think I was one of the individuals trying to lead the charge against the doom and gloom group by commenting that on a recent policy planning meeting that we held with about 100 manufacturing executives, I think we came to the conclusion that the United States does have the capability to be competitive in any industry sector.
There are certain things the federal Government can do to help. We talked about working on technology to develop a new tool kit of process technologies, productivity enhancing technologies, a greater focus on improving the skills and knowledge of the work force, working to improve the performance of smaller manufacturers and so forth, but we always come back to the notion that to really make that happen and to create a high level of interest and commitment around the country, we need high level leadership.
So what I want to do is spend just a couple of minutes giving you a bit of background of why it was that we ended up with the formulation we did in our white papers we distributed to a lot of people here, including Grant Aldonas. We called on Grant, given his role in developing the strategy for the Administration.
But our very first recommendation was move global competitiveness higher on the national agenda. And in our debate on this type of topic at the GM Tech Center last March, we came up with the notion that we should call upon the redefinition of the secretary's title. Actually, it would be the Secretary of Commerce and Industry with the argument that the secretary is the national leader of this stronger focus on manufacturing and some of the things that need to be done, and also creating an under secretary for manufacturing were sort of the recommendations we started with.
And after our discussions here and mulling this over, we amended that. And, of course, we still would be delighted if the secretary added that title and if we had an under secretary or whatever. We certainly don't retreat from those recommendations, but I think our sense was that this issue is of such importance to the long term well being of the country, that really we need a Presidential level of attention, not just, you know, retitling the secretary and adding another position.
In fact, the response or the interest, the commitment in manufacturing really had to be an interagency process, as well. After all, the many other agencies of Government who have a vested interest in the performance of the manufacturing base, certainly Defense, but also DOE and several others, NASA and what have you.
DEPUTY SECRETARY BODMAN: All other.
MR. REDDY: So our view was let's have a leadership role on the part of the Secretary of Commerce, but certainly let's also have a White House role, perhaps even having a new position in the White House, somewhere somebody really focused on manufacturing and more interagency leadership, perhaps you chairing an under secretaries committee of manufacturing or manufacturing technology. We are very fond of GATE-M, which is struggling to get off the ground, but NIST, we think, is the natural chair of this effort to have interagency special manufacturing technologies.
Then on the issue of manufacturing as a whole, I just want to you to know why we came out the way we did. It wasn't that we don't want to increase the role of the Secretary of Commerce, but it really goes beyond that to the Presidential level and into the other agencies, as well.
MR. MEHLMAN: Thank you. Other thoughts here in the last section on what the Government can and must be doing?
MR. ZAWACKI: Just a quick thought. I was with Secretary Evans a month ago, five of us, and one thought is when a senior official ever goes out to visit outside of Washington, D.C., visit a manufacturing plant. Why? You bring the press with you. It will bring some attention to it. We need the attention.
MR. TIMKEN: April 24th, the President did come to my manufacturing plant with his whole plane-load of press, so I was impressed. And as you may recall, that is where he launched his speech on the economy and drive for the tax reduction. So he does understand what a manufacturing plant looks like, and he did come to one, and I have to give him credit.
MR. MEHLMAN: That's great.
MR. VARGO: Could I add to that? Having been around the Government awhile, I think it's very important to note that this President, this Administration, have gone out to manufacturing more than anybody else has. This is the right time to do that and, you know, we look for good things to come.
MR. MEHLMAN: Any thoughts, Dr. Bement? Secretary, anything you would like to add?
DR. BEMENT: I did have one comment. Leading up to this meeting, there was a fair amount of discussion about the diversity of the manufacturing sector in itself. In other words, what would you classify under an SIC code as manufacturing these days, and does the SIC code correctly define a manufacturing enterprise, because some manufacturers, like General Electric, which used to be recognized as a manufacturing company is now largely a financial service company with a little bit of manufacturing.
So, I think, Ned, you made the point that it's important to measure the right things. And oftentimes, it's important to measure the right sector, because if you're developing a policy framework, it's important to know if the policies you are developing really benefit the whole sector at large, and whether the sector is going to come back and say that doesn't really apply to us. And so it's a coherency of the policy structure that, I think, also has to be given some attention.
MR. MEHLMAN: Ross?
MR. ROBSON: The question about the SIC code stimulated one thought, and that is simply we have talked about innovation, we have talked about manufacturing, but the whole issue of remanufacturing, obviously, Nucorp still does that in part by melting down scrap, but the development of a remanufacturing infrastructure in the United States is certainly one that I think needs to have more focus on for 2020 than I think we currently have, at this point in time.
Certainly, that's the case in the automotive industry and a host of other industries, more in the durable goods, I acknowledge, but the notion of natural capitalism, a book that the Shingo Prize recognized a couple of years ago, and the use of our scarce resources. I am aware that the Environmental Protection Agency are seriously looking at the notion of lean thinking relative to using fewer and fewer resources, which the lean thinking community is totally and completely supportive of relative to energy, safety, etcetera, etcetera, etcetera.
So there needs to be some significant thought put into remanufacturing. There are a few industries. The aluminum industry is doing, I don't know, at least a modest job of recycling and reclaiming and reutilizing, but that's certainly an area that our landfills in the United States could benefit mightily from with some focus on that, and I think it's going to simply become more and more important as we approach 2020.
MR. MEHLMAN: Tom?
MR. DUESTERBERG: I'll just throw out one more idea for the heck of it. A technique that has being used frequently in the past 75 years to draw national attention to issues of considerable importance, especially issues that span Government departments, is the idea of a Presidential Commission. Perhaps it would be the right time now, instead of racing into legislation or an executive order to change the function of the Commerce Department, to have a Presidential Commission that is, thoroughly backed and endorsed by the full weight of the Administration, with a number of leading experts to take a look at some of the issues we have discussed here today, including these issues of measurement. I think those are appropriate.
The Commission could begin with some idea about what things are going to look like in 20 years, and then go from there. They could make a set of recommendations that would have the weight of the Presidential Commission itself and, presumably, support by industries and by academia. I think that would be one way to draw attention to the importance of the sector while setting the ground work for the types of changes that may be needed.
MR. MEHLMAN: Amram?
MR. SHAPIRO: Thank you, Bruce. It's good to see you, Sam. I'm going to return to a point I made earlier, which I alluded to earlier, but it's more apposite right now, and that is if we're going to take, you know, a long term view, there may be any number of things that need to be done in the short term, but if I try and imagine what might be profoundly different in a gathering of this kind in 2020, if the meeting felt less like oil and water coming into contact, that is the private sector and the public sector having to kind of understand each other and translate for each other, and use mechanisms like this as a translation factor. I have only consulted once or twice to the Government, and I found it unusual. I remember doing a project.
MR. MEHLMAN: You ought to work here.
MR. SHAPIRO: I did a project for the U.S. Postal Service around the time when I used to work at Arthur D. Little, and Arthur D. Little was doing a lot of the RND for the Postal Service, and I remember going in and talking very excitedly about some good techniques for doing technology planning and having a very polite fellow look at me and ask me if I knew how many Postmaster Generals had been in that position in the last four years. I think, you know, it was five, I think, or three. And he said, you know, I'm going to listen to you and if I like what you have to say, I might try it, but if I don't, I can wait.
And so I had my first lesson in the differences between the perspective on time and the perspective of urgency and the perspective of how to change. So if I'm going to go back to my hobbyhorse, it would be that if between now and 2020, we could actually take any number of the really magnificently successful ideas that have been raised today, supply chain, you know, copying the Toyota Production System, the kind of technology management and new product development management processes that folks like DuPont and IBM use, and address things like technology transfer with relevance to, Arden, the question you asked repeatedly about transfer out of the national labs using, you know, sourcing techniques such as you will be dealing with, the whole array of things that corporate America is using to wring more benefit out of what it's doing and see where those things could apply.
Lately, we have been using out of the quality world, voice of the customer techniques as a way of hearing what people want. You know, a meeting like this done voice of the customer style might be a fascinating exercise. The point is if the Commerce Department could champion, just cracking the door open and bringing some of these practices in, I think that they will do as much to a kind of mutual understanding as any specific policy, all of which I think are serious, and I am not meaning to denigrate. But I think it's simply, let's say, an orthogonal suggestion and maybe a non intuitive one that I think might actually have a lot of long term benefit and recurring benefit.
MR. CROUSE: Just to add to that comment, I think it might be a good idea that the Government embark on an idea to understand what lean enterprise initiatives are with manufacturing being at the crux, because the objective from a private sector perspective is to eliminate waste throughout the enterprise, not just on the manufacturing floor, to get out of silo mentality, to horizontal common process, utilizing the entire lean enterprise to drive the improvement. And I see that very applicable in the Government, and if you can understand where we're coming from in your own shop, it would definitely help us bridge this language gap.
MR. ROBSON: The whole subject of administrative kaizen or continuous improvement out of the lean movement is growing tremendously, and companies like GM have a champion at the top to drive the kaizen through the administrative apparatus. And I gave a couple of very salient examples of, and the bottom line is I would honestly sit here today and say that there is still 25 percent waste in Timken, Nucorp, Delphi today, and there are some of the better companies, which therefore says we got some fairly poor companies out there. And I only use those three, because I know a little, just a teeny bit, about them.
MR. CROUSE: A start might be to read the book called Lean Thinking by Jim Womack.
DEPUTY SECRETARY BODMAN: Well, let me make a couple of comments if I may. First, I apologize for my late arrival. This is more typical than I would like to admit. My boss is the President's best friend and, therefore, that makes his schedule very hard to predict and when his changes, mine does. So you will have to forgive me.
I have not met all of you. Some of you I have met. I'm Sam Bodman. I'm the deputy here. I came to this job from the private sector. I spent 30 plus years running two companies. Before that, I was a teacher, and so I came here. I feel much more comfortable talking to you about what you're doing and thinking about than I do about what I do most days, and so I was pleased to get a chance to sit in on at least part of this gathering, and I am very pleased to be here this afternoon.
Since I wasn't here, it would not be fair for me to try to sum up what you have all been talking about. I have gotten some sense of that from talking to my colleagues, but I have heard the different views expressed, and let me just add, if you will, a few comments from my perspective as to how we are trying to approach these matters in the Commerce Department as seen through the eyes of a refugee from the private sector who is now an aspiring bureaucrat.
MR. MEHLMAN: You're doing an outstanding job.
DEPUTY SECRETARY BODMAN: Yes, that's what you say now. Some comments on education, and clearly that's a big issue when we have had these gatherings before and talked to people, representatives of the private sector. We know that's a major issue, certainly, education, the primary through secondary schools in particular. The President has made an effort, and I do think we will start to see some success in terms of the testing and measuring of how we're doing that is being, if you will, forced into the system and we're going to see the so-called No Child Gets Left Behind.
The President has been criticized for the terminology, and so I can tell you that he firmly believes in that and we'll see. So we have got to have people that when they graduate from high school can join the companies you all represent, and go to work or can join the union represented here and get a job and start to make a contribution. And in many cases, that's not the case today. We don't have enough education, enough functional education among our graduates, particularly in the technical areas, which is a serious issue.
We are blessed with what is still today the best higher education system in the world, in my judgment. As I have heard mentioned here, it is the source of the standard of living that we have today, in my opinion. Without that, we would not have the standard of living we have today. A lot of that got started after the Second World War with a unique and, as far as I can tell, totally unplanned, and I know unbudgeted, relationship that evolved between the military and the universities, and that came out of being force fit during the Second World War, and what was the Office of Naval Research and then DARPA has now evolved into a variety of things, really funded a lot of the cutting edge research among what became the so-called research universities. And out of that came many of the great commercial/technical advances that we have benefitted from.
It's under attack, higher education. I guess I would say in a constructive way other countries are not ignorant of the statement I just made. Some might debate it, but I think most people would probably agree with most of what I said. And you are now seeing places like China keeping their smart kids at home. When I taught at MIT, I used to have a lot of them. Were I teaching there today, I would still have some of them, but a lot of them they are keeping them at home and they are building up their own universities, and they are starting to work on much of the same things that you all have already been talking about.
And so we're going to see the same thing in my judgment over the next couple of decades. We're going to see the same thing in our universities that all of you who are running manufacturing companies are seeing today. I, by the way, have great empathy for it. I came here. I spent the last 15 years of my life running a manufacturing company that operated in 25 countries, so I have some sense of what you're dealing with.
And I think our universities are going to have to get better. They are going to have to be more specialized. One of the big problems, our universities are all trying to copy each other. There are very few, if you think about it, universities that really try to specialize in any one area. They are all trying to be "great research universities." And the so-called Porter theory on clusters and trying to identify areas where a region, for example, can build up a particular strength, I think, is something that our universities need to focus more attention on than they have.
There was a comment, vision for manufacturing within the Government. I will tell you it is very hard for this Government to have a vision on anything. We are totally stovepiped and we live within these compartments. This is not by way of a complaint. This is not by way of an excuse. It is by way of a fact. Congress likes it this way, and making organizational changes in the federal Government is, as many of you know, a massive undertaking, a several year job. It is not a several month job. It is a several year job, and so you don't do it very often, because it's certainly not worth it.
And the Secretary, my boss, has heard the message. He has heard it from NAM. He has heard it from a number of you. He has heard it from companies that he was out visiting when he was in Ohio and he was in the various places around the world. He, by the way, does almost all the traveling. I run the engine room, and I burden our visitors like you with my comments from time to time, but basically he is the guy that's out dealing with the real world. And he has heard you and he is taking steps, and has asked Grant Aldonas, as you know, to head up an effort to relook at how we're organized and what kind of focus we can bring to this, and I think you will see something come out of that.
The Commerce Department can and will be active. I will tell you the authority of this Department, the inherent authority of this Department within the Government is modest. That's not a complaint. That's not an excuse. It is a fact, and if you deal with the State Department, you deal with the Treasury, you deal with the Justice Department, you deal with the Department of Defense, things get measured in this town. The measure of one's manhood or womanhood is one's budget size, and we have a lot of people here, but we have a five billion dollar budget. That sounds like a lot. It's peanuts in this town.
And, therefore, one deals with issues of a philosophical nature, which this is, by force of personality, by force of being willing to differ from the crowd and being quite argumentative, none of which falls within the rubric of how Washington runs. Everybody in this town tries to, and works very hard at being nice to everybody else at all times, almost at all costs, and the reason for it is nobody knows who they will end up working for the next month. That's just a fact. It's not a complaint. It's not an excuse. It's a fact.
And this is not a partisan comment. This is not whether it's republicans, democrats, it doesn't matter, everybody wants to be nice, because personnel decisions that are made are made in very bizarre ways, in my opinion, and you don't know. All of a sudden, somebody will be knighted and will be titled and suddenly, you know, they are the boss and so, you know, it's nice to be liked by whoever it is. And so since it's a random process seemingly, that it means that the currency, what one needs to do to accomplish, a lot of what I hear you all asking, we need a leader, we need somebody to take positions and do things, that runs counter to the way the town works and you need to know that.
It's not that we won't do it. It's not that we can't do it. The Secretary will stand, I have seen him do it, and take positions and argue and so forth and we will, but you need to understand that it is not consistent with the way Government works, as I have come to know it, now that I am an expert having been here two years.
Manufacturing is scared for its future. I heard that said, and I can understand that when one looks at the numbers. I can understand that feeling. I guess I would, at the risk of sounding too much like a Pollyanna, you know, we work very hard here on both tax reduction plans. We are hopeful. We are optimistic that we will see a turnaround in this economy, and one way or another, before we get anything profound done at our end, we will see what happens. We are going to see what happens, and to the extent that the economy recovers, employment recovers, it will be quite interesting to see what happens in the manufacturing sector and get some measure of that. We will get some sense of that.
So, again, I missed most of this and I just heard the end, and you probably are all tired having sat. If I had to deal with this guy all day, I would be tired myself. And so it may be that I just sort of got the negative slant of this at the end, but I am a little more optimistic that at least there is a shot. As we start going forward, we will see some improvement.
It does not mean we don't need to worry about this. This is a primary responsibility of this Department and of the Secretary, and it's not that he is going to ignore it, but I will watch with great interest, assuming we are correct and that this economy starts to recover the way we believe it will over the next few quarters. It will be very interesting to watch the way your sector operates.
The strength of the dollar. The policy of this Administration is that there will be a strong dollar. That's the policy of the Administration. I attended a Cabinet meeting about a month ago, I guess it was. At the conclusion of the meeting, a question came up. I guess one of the reporters came in at the end and asked the question then. The President said the policy of this Administration is we believe in a strong dollar. The policy of this Administration is we believe in a strong dollar. He didn't repeat it for a third time. He said are there any questions? And so that is the policy. Therefore, that is the policy.
Now, having said that, with all due respect, and I have enormous respect and affection for the President, he is an extraordinary man, one might pose the question were we not to have a policy of a strong dollar, what might we do about it? And I would submit that if you just look at the economics of it and be wherewithal that the United States Treasury has to affect the value of the dollar, it is very modest.
If we wish to drive the price of the dollar up, the value of the dollar, we could start buying dollars for awhile, but there are a lot of dollars out there. And it would get tiresome after awhile, and then we would stop and then it would roll over. So the President has stated the policy, and that is the policy, but if you start to look behind it, what is it that we could, in fact, do? This is a free market and there are a lot of dollars, and it's really the opinion of the traders as to what and where, and that is, you know, the politics of it.
The Secretary of the Treasury says well, he raises an eyebrow when all of a sudden, some trader thinks that, you know, he did mean it or he didn't mean it, and so since we're in the hands of traders who are emotional people like the rest of us, that, too, can affect it. But ultimately, the way the economy performs versus the other economies of the world and how we pay interest on our commercial paper, on our Government bills, is going to be the determinate of what the value of the dollar is.
The performance of the economy, growth rate, and we continue to have the most powerful economy in the world as halting and as unpleasant as it has been to deal with it recently. It continues to be the best economy in the world. I sure wouldn't swap it for any one of the Europeans and the Japanese speak for themselves.
So, you know, obviously, our manufacturers are getting some benefit now that they didn't have before. It will be interesting to see. It takes six to 12 months for that to take effect. People tend to sell a currency ahead or they tend to hedge and so forth, and so you're going to see the hedges run out, I think, and we'll see how much impact it has.
Costs. Pat, how much time do I have? Are you going to run me out of here?
AUDIENCE MEMBER: Probably about one minute.
DEPUTY SECRETARY BODMAN: All right. I'm going to have to go. I would say a couple of things on costs, on health care. Health care is the only thing that corporations in America buy that they do not know the value of. You can go to a chief financial officer of any company in the country and you ask what the cost is and what the value is of raw materials, labor, whatever, they can tell you.
Health care, nobody knows. Somebody over here commented on our span of living and other things. Yes, there are some criticisms there. I would submit the cost per capita in Canada is 40 percent of what it is here, I think. I would not want to have a medical problem treated in Canada. I'm quite comfortable having it treated here. The same thing goes for England. So you got to start poking at my judgment. You got to start poking around and start getting a sense of what it is our corporations are getting for what they are paying for your union members, and I don't think they know.
I have asked a number of the CEOs and chief financial officers who have been in here, and I get a blank stare. We have to have some way in dealing with health care costs. Everybody talks about costs. We do not describe or discuss what we're getting for it and we have to, and it's the only cost, and it's a big thing on everybody's plate, 12 percent a year, etcetera, nobody deals.
Pensions, we are taking that seriously. I spent an hour and a half on it this morning. The Secretary was there with me. We're going back over there to deal with a related issue. You will see some help there on the pension area, I believe.
I'm going to get hooked out of here. Anyway, those are some thoughts. I will give my other thoughts to Bruce and he can send them out to you. I would close from my standpoint, and I now on behalf of the Secretary, thank you all for being here. This has, I take it from the comments of my colleagues, been a spirited interchange, a lot of good questions, a lot of good comments, and when we call and ask people to come, I'm frankly always amazed when they do, because everybody is busy.
And I just wanted to thank you all, because we take it seriously. I will have the time to sit with Bruce and go over his written report on this, right? I will see before long.
MR. MEHLMAN: Yes, yes.
DEPUTY SECRETARY BODMAN: And we will get input on this, and it will go into the hopper as we are trying to cope with these very tough problems that you have articulated. And I apologize for coming late and leaving early, but that's how I live my life and I will now move. Thank you all. Sorry.
MR. MEHLMAN: Why don't we make it so that Dr. Bodman does not leave early, and I will just add my thanks, too. We appreciate all the time and the travel. Thank you.
(Whereupon, at 3:50 p.m. the meeting was concluded.)
POSTCRIPTS & ADDENDA
AMRAM SHAPIRO: One thing has struck me that I wanted to mention. I suspect it may have struck you too, since you certainly alluded to the subject in your outline. This was the absence of any substantive discussion of globalization. With a 20 year horizon and a time of unprecedented global contact and interdependence this is surely one of the most important long term factors and yet it was skirted in the day. Fernand Braudel, the great French annaliste historian talks of the World Economy and in our lifetime it has extended beyond any former boundaries. This is the new fact of our lives and what it means for manufacturing is profound. The worker today in America competes with the worker almost anywhere. The company seeking to build capacity may do so almost anywhere. The conditions for American manufacturing in 2020 will be as determined by the conditions of manufacturing in the World Economy as by the developments in our country. Clearly there are many factors that favor one country, state, locale over others, but these factors are not so dominant as in the past and may be less so over time. An American engineer competes with an Indian one. An American worker competes with a Korean one. An American scientist competes with a Japanese one. And the company is growing. What it means for policy is that any factor important for healthy American manufacturing must also be championed worldwide. Intellectual property rights, good fiscal policies, low trade barriers, elimination of slavery and brutal exploitation of workers, decent wages and benefits, and easy flow of capital. Make your own list, but the American Century cannot be a colonial one but rather one which reprises the spread of the rights and efficiencies that have so enriched us in the last.
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