What is the locational link between production/manufacturing and research/engineering/product design? That is a key question underlying the I-Cubed Economy (and much of the debate on offshoring). Is product design and engineering tightly linked with the manufacturing process – as was argued a few years ago under the rubric of manufacturing matters? In other words, if production moves offshore, will product design and engineering naturally follow? Or is distance dead – and given information and communications technologies, engineering and design can be anywhere and production someplace else?
Economic history is ripe with examples of both. Clearly, the globalization of manufacturing over the past few decades (actually during the entire 20th Century) has shown that for mass produced goods, production and engineering can exist literally world apart. But a finer grain analysis of the globalization phenomena has also shown a strong local design/customization component to the process.
Far from being an academic question, this issue forms the implicit foundation of many views of our economic future and the economic growth process. Can the US economy survive as a “service” economy, where we handle the high-end engineering, research and product design portion of the production process? Or having lost the manufacturing portion, are we destined to lose the design part as well? Or, alternatively, has competition shifted from the mass manufacturing paradigm to solely a design/innovation paradigm — where the US maybe losing its competitive edge in innovation completely independent from what has happened in manufacturing?
A new study of the notebook PC industry in China sheds some light on this question:
China has become the world’s largest producer of computer hardware, driven by large scale investment by multinational and Taiwanese companies. At the same time, computer hardware production and employment in the U.S. have fallen by about one-third since 2000. A new concern is that knowledge activities such as new product development are being pulled along with manufacturing to China. Based on a study of the notebook PC industry, it is concluded that production is pulling some product development activity to China, although the shift is also driven by the availability of low cost engineering talent. While the U.S. has retained its role in marketing, concept design, and product planning, it has lost many of the engineering jobs associated with notebook design. The number of jobs affected is relatively small, but the movement of knowledge work may portend similar changes in industries with larger numbers of jobs at stake.
In other words, those parts of the process that require tacit knowledge of the market – product concept and product planning – are remaining in the US (as a major market for notebook PCs). But more and more of the activities that are related to the physical production process, including design and prototyping, are moving to China.
It is not clear whether this middle-portion of the process (design and prototyping) necessarily needs to shift to be near the production facilities. However, as the study authors explain, there are economic reasons for the shift:
Production and sustaining engineering clearly benefit from proximity to manufacturing, as production problems can be addressed immediately on the factory floor and engineering changes in existing products can be tested in production models from the assembly line. It also makes sense to move pilot production to China rather than maintain an assembly line in Taiwan just for this purpose. Then the question arises whether to move the expensive test equipment from Taiwan to China. If so, then there is more reason to relocate the design review and prototype processes as well.
The location-specific activity in this process is the front-end concept work. This is remaining in the US not because we are necessarily theoretically the best at it, but because we are a major market and it requires on-the-ground market intelligence. Other major markets, such as Japan, are also locations for this front end work. This may the future of China as well:
as China’s PC market continues to grow, and its users become more demanding, it may become the leading market at least for the Asia-Pacific region, and definition and planning of products suitable for the region may be done there.
The study ends with the following conclusion:
Product development, design, R&D and other innovative activities account for many jobs in industries such as software, IT services, electronics, aerospace, automobile, clothing, and pharmaceuticals. In some cases, these activities may be pulled along with manufacturing, or they may move to places where engineering and other creative skills are abundant and cheap. If so, our research suggests that China will attract a good share of the knowledge work associated with manufacturing industries, given its large pool of engineers and its role as a manufacturing center.
A sobering thought. But, issue might not just be how many US jobs will be shifted because of design following manufacturing. Rather it might be how many of the high-end knowledge jobs of the future will be created in other countries, rather than the US, to service those increasingly sophisticated markets.
If high-end design and product concept jobs require localized knowledge, then there is no reason to believe those jobs that service the US will leave the US. By the same logic, however, there is no reason to believe that US-based workers in these jobs will be able to service other markets. Americans will be designing for the US market, Chinese/Japanese for the Asia market, and Europeans for the European market.
This scenario completely contradicts the view that many, I suspect, have of the future of our economy. Under that view, the US will maintain its economic competitiveness by exporting design services, innovation and other intangibles. My tracking of our intangibles trade shows that this view is not sustainable. The increasing dispersion of design and innovation capacity – either following or independent of manufacturing capability – means that we need to seriously re-think our vision of the US economic future.
And the sooner we undertake that re-thinking, the better.