Trade deficit starts on factory floor. Study: managers rely on weak dollar, lose technology edge
Toasters from Hong Kong. Televisions from Korea. Kitchen blenders from Taiwan and cars from Japan. All of these and more add up to a trade deficit that's ``Made in America.'' It is a familiar message. But it is an important one that the Office of Technology Assessment (OTA), the research arm of Congress, reemphasized in a study released yesterday.
``The weak performance of American manufacturers is one of the most important underlying forces behind the large trade deficits of the 1980s,'' the report says. ``Since about 1970, US manufacturers have held on to their shares of world markets only when the dollar's value is falling. This is evidence that the United States has lost its once substantial edge in manufacturing technology.''
The OTA's rationale in singling out US manufacturing is that manufactured goods made up 85 percent of the $161 billion US trade deficit in 1987. To reverse the trade deficit, manufacturing must play a bigger export role, the report says. This is because service sector sales are ``simply not big enough'' to compensate for the flood of dollars paid abroad for imported manufactured goods.
A weaker dollar has helped increase exports of US manufactured goods in 1988, but counting on the lower dollar to sell US goods ``is a shaky strategy with risks of painful adjustments,'' the report says.
Several business experts agree. ``We are trading at the moment on a price tag basis, not on a fundamental improvement of manufacturing,'' says Martin Starr, a professor of production management at the Columbia Business School.
Although Mr. Starr and others agree with the thrust of the OTA's analysis, more is needed than simply putting fancy technology on the factory line, they say.
``The challenge to US manufacturing is to improve productivity and quality,'' says David Garvin, an associate professor at the Harvard Business School. ``I don't think adding technology by itself is the answer. The key is management.''
Mr. Garvin cites the General Motors-Toyota joint venture in Fremont, Calif., which has boosted auto-assembly plant productivity there without a lot of high-tech hardware. ``There aren't lots of robots,'' he says. ``But what it does have is the Toyota production system that emphasizes very small inventories, quick setup of machinery, pressure to keep defect rates down, and team problem-solving.''
Armand Feigenbaum, one of the world's leading experts on industrial quality, contends that better management understanding of the production processes is ``absolutely essential'' to making higher quality goods.
``What automation has produced without quality planning is just more bad articles quicker than before,'' Mr. Feigenbaum says.
Selling more American products abroad is mainly a function of meeting consumer expectations, which have been heavily influenced in recent years by the low-defect rate of foreign-made - in particular, Japanese - products.
``They simply break less often than US-made products,'' Garvin says, in explaining why the American consumer has ``continued his love affair'' with Japanese goods, despite higher costs due to the dollar's fall.
Boosting US exports will have to include making improvements in the design and function of products, experts like Garvin believe. But this has traditionally come through corporate research and development. And, the OTA report says, gains in US civilian R&D spending (which includes corporate spending but excludes military) have lagged other nations such as West Germany and Japan. (See chart.)
Research scientists and consultants to industry say that what is needed is not necessarily more spending but better utilization of what is already available.
``We're not strong at getting the results of research into the marketplace,'' says Ted Lyman, associate director for the Center for Economic Competitiveness at SRI International of Menlo Park, Calif., a contract-research center. Of US corporate research generally, he says: ``We're not focused in both targeting research and thinking through purposes of the research. We don't have our eye on the ball.''
Instead of keeping tabs on consumers and improving manufacturing and R&D functions, US managers' eyes are probably glued much more on bottom line profits for the next quarter, says Starr. This is usually blamed on the impatience of Wall Street portfolio-fund managers whose share votes can, if profits lag, put a company ``in play'' amongst a shark pool of corporate raiders.
But Starr says putting the blame on Wall Street and corporate raiders is probably a bit too convenient. Much of the problem, he says, may instead lie in overly conservative management that lacks true business leadership, imagination, and entrepreneurial spirit.
``These managers see over their horizon and say, `Why should I gamble?''' Starr says. ``That's not the entrepreneurial spirit. It is this spirit which is missing in the larger manufacturing companies. What US companies need are products that are new and startling and make people want to own them.''