Our Manufacturing Ills

This is a very insightful article about one aspect of our manufacturing ills. The lede:

One of the themes that came up while I was profiling White House manufacturing czar Ron Bloom earlier this fall was managerial talent. A lot of people talk about reviving the domestic manufacturing sector, which has shed almost one-third of its manpower over the last eight years. But some of the people I spoke to asked a slightly different question: Even if you could reclaim a chunk of those blue-collar jobs, would you have the managers you need to supervise them?

This strikes me as a very important question to ask. It’s one thing to bemoan the evisceration of our manufacturing capacity the last several years. One of the frequent excuses has been, ”œhow can we compete with China’s low wages?” Not to mention the other one, ”œthe same thing has happened to Europe.” But as the article makes pretty clear, although Europe has lost some manufacturing jobs, they’ve retained the well paying value-added jobs, quite well.

More after the jump.

It’s not obvious that you would. Since 1965, the percentage of graduates of highly-ranked business schools who go into consulting and financial services has doubled, from about one-third to about two-thirds.

No engineers. No practical applied scientists. No people in industry tinkering with making a better widget. But they have trained their focus, laser-like, on re-engineering the financial landscape. To everyone’s detriment. I’m reminded of my brother in law, an electrical engineer. One would think he’d be in demand. Of course, he’s not. Only having found a job with a defense research corporation. We seem more interested as a polity to improve how we kill others, as opposed to improving the quality of our lives.
Oh, wait, wasn’t that GE’s catchphrase many years ago? Aren’t they one of the largest defense contractors out there?

And while some of these consultants and financiers end up in the manufacturing sector, in some respects that’s the problem. Harvard business professor Rakesh Khurana, with whom I discussed these questions at length, observes that most of GM’s top executives in recent decades hailed from a finance rather than an operations background. (Outgoing GM CEO Fritz Henderson and his failed predecessor, Rick Wagoner, both worked their way up from the company’s vaunted Treasurer’s office.) But these executives were frequently numb to the sorts of innovations that enable high-quality production at low cost. As Khurana quips, ”œThat’s how you end up with GM rather than Toyota.”

Many of you will not that I have been highly, highly critical of GM, especially from a product development point of view. Now we know why they were caught so flat footed when oil went through the roof: their executives were better prepared to massage the financial numbers and re-engineer the company from that perspective than in creating new cars that people wanted.

How did we get to this point? In some sense, it’s the result of broad historical and economic forces. Up until World War I, the archetypal manufacturing CEO was production oriented””usually an engineer or inventor of some kind. Even as late as the 1930s, business school curriculums focused mostly on production. Khurana notes that many schools during this era had mini-factories on campus to train future managers.

And we’re going to have to have something like this again if we are going to get this country moving forward again, instead of living of a nationwide binge of equity extraction.

After World War II, large corporations went on acquisition binges and turned themselves into massive conglomerates. In their landmark Harvard Business Review article from 1980, ”œManaging Our Way to Economic Decline,” Robert Hayes and William Abernathy pointed out that the conglomerate structure forced managers to think of their firms as a collection of financial assets, where the goal was to allocate capital efficiently, rather than as makers of specific products, where the goal was to maximize quality and long-term market share.

By the 1980s, the conglomerate boom was reversing itself. Investors began seizing control of overgrown public companies and breaking them up. But this task was, if anything, even more dependent on fluency in financial abstractions. The leveraged-buyout boom produced a whole generation of finance tycoons””the Michael Milkens of the world””whose ability to value corporate assets was far more important than their ability to run them.

Anyone remember that scene in the Julia Roberts and Richard Gere movie? He was a corporate raider who decided to actually run a company that made things? I know, it was a sappy, Hollywood happy ending cliche, but still, we don’t see much like this any more, do we?

The new managerial class tended to neglect process innovation because it was hard to justify in a quarterly earnings report, where metrics like ”œreturn on investment” reigned supreme. ”œIn an era of management by the numbers, many American managers … are reluctant to invest heavily in the development of new manufacturing processes,” Hayes and Abernathy wrote. ”œMany of them have effectively forsworn long-term technological superiority as a competitive weapon.” By contrast, European and Japanese manufacturers, who lived and died on the strength of their exports, innovated relentlessly. One of Toyota’s most revolutionary production techniques is to locate suppliers inside its own factories. The New York Times’ Jon Gertner recently visited a Toyota plant and reported that the company doesn’t actually order a seat for a new truck until the chassis hits the assembly line, at which point the seat is promptly built on-site and installed. ”œIf the front seat had not been ordered 85 minutes earlier, it would not exist,” Gertner observed. Alas, these aren’t the kinds of money-saving breakthroughs the GM brain trust has ever excelled at.

Yeah, where’s that vaunted Yankee ingenuity?

The country’s business schools tended to reflect and reinforce these trends. By the late 1970s, top business schools began admitting much higher-caliber students than they had in previous decades. This might seem like a good thing. The problem is that these students tended to be overachiever types motivated primarily by salary rather than some lifelong ambition to run a steel mill.

Better to be a titan of finance””move markets and shake the world””than do something as prosaic as run a profitable steel mill, or make a better widget, of course. America is an aspiration society””and this myth is killing us. It’s always got to be new and improved””and yet that’s just marketing. Name me one product, outside of Apple, that is really new and improved? And besides, Apple products are for wealthy, latte sipping elites.

And there was a lot more money to be made in finance than manufacturing. A recent paper by economists Thomas Philippon and Ariell Reshef shows that compensation in the finance sector began a sharp, upward trajectory around 1980.

The business schools had their own incentives to channel students into high-paying fields like finance, thanks to the rising importance of school rankings, which heavily weighted starting salaries. The career offices at places like Harvard, Stanford, and Chicago institutionalized the process””for example, by making it easier for Wall Street outfits and consulting firms to recruit on campus. A recent Harvard Business School case study about General Electric shows that the company had so much trouble competing for MBAs that it decided to woo top graduates from non-elite schools rather than settle for elite-school graduates in the bottom half or bottom quarter of their classes.

No surprise then that, over time, the faculty and curriculum at the Harvards and Stanfords of the world began to evolve. ”œIf you look at the distribution of faculty at leading business schools,” says Khurana, ”œthey’re mostly in finance. … Business schools are responsive to changes in the external environment.” Which meant that, even if a student aspired to become a top operations man (or woman) at a big industrial company, the infrastructure to teach him didn’t really exist.

It all comes back to education and what a perverse choice set money has created in this country. We simply cannot educate people to compete with the Volkswagens, UniLevers, Toyota’s and Sony’s fo the world. Hell, even most of Apple’s manufacturing line is outsourced.

In fairness, all that financial expertise we’ve been churning out hasn’t been a complete waste (much as it may seem that way today). Many of the financial restructurings of the ”˜80s and ”˜90s made the economy more efficient and competitive. Likewise, it would be ludicrous to suggest that simply changing the culture of business schools would single-handedly revive U.S. manufacturing. As I explained in the Ron Bloom piece, that sector faces a variety of challenges, not least the mercantilist industrial policies of our foreign competitors.

I seriously dispute this. The ”˜80s and ”˜90s were but the first wave of equity extraction in America””not financial restructuring.

And then there is that little mercantilist issue. It’s time America really rethought the idea of free trade. Talk about a civic religion!

On the other hand, it’s hard to believe that American manufacturing has a chance of recovering unless business schools start producing people who can run industrial companies, not just buy and sell their assets. And we’re pretty far away from that point today.

Yes, our education system needs to reorient its priorities, no doubt. And so does society at large. Instead of going to school in the hopes of someday being a celebrity of finance, maybe society will start hailing the great American inventor or tinkerer? Haven’t seen news about one of those in a long, long time.

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Sean Paul Kelley

Traveler of the (real) Silk Road, scholar and historian, photographer and writer - founder of The Agonist.

7 CommentsLeave a comment

  • I constantly deal with infrastructure issues and present the findings to decision makers. A majority of the decision makers come from the MBA genera of education, as you amplify on. The pathway to management in government or private industry is an MBA or Law degree coupled with some public policy thrown in. This type of person in upper management of infrastructure providers presents a very difficult environment to communicate the pending failures looming due to long term planning failures and maintenance issues. Since this model of education has become empowered within the last 20 years, we have coasted off the previous management by folks who knew the systems, because they themselves either designed them or were the technical overseers. This new breed of MBA manager is slowly killing our infrastructure do to the inability to truly understand how the system works.

    The only way I have been able to communicate to this type of manager is the consequences of not dealing with the issue in how it directly affects them. I communicate to these people by inserting pictures taken from newspapers showing sinkholes swallowing fire trucks caused by leaking of aging water systems, coupled with a newspaper headline saying something to effect “Grand Jury finds upper management failed to take action in water system failures”. The days of presenting a proper report that will be thoroughly read and understood by upper management is long gone. This inability is why so many consultants need to be hired to distill technical information to cartoon Power Point presentations. I find if a complex subject is not communicated within about 5 to 20 seconds, the ability to communicate has passed.

    This is just one result of the current state of management.

    “There are two types of folk music:
    quiet folk music and loud folk music.
    I play both.”

    Dave Alvin

  • … in agreement. I appreciate the commentary, SPK. There are quite a lot of layers to the economic hole the US (and by extension of course Canada) has dug itself into, one really doesn’t see how it would be possible to dig out.

  • Yes to this engineers and practical applied scientists but do I as the worker need managers of the old school. I need managers that their only job is to provide me with everything I need to do a good job not stand in the way. I’ll go with Dr. Demming thoughts on management about this.

    I totally agree the only thing that was made in this country for the last 15yr or more was worthless paper sold to people who sold more worthless paper. GM problem was always the thought that what was good for GM was good for the nation, what joke. The company should have buried and the workers given the money that was spent to save for a few weeks.

  • … operational management was my favorite because this field can get pretty sophisticated and the benefits are readily apparent. But than again my background is science. Most of my fellow students fell for the lure of Wall Street though and flocked into the Finance classes. Bunch of effective market crap as far as I am concerned.

    Although I was in the minority some students felt the same way. Another German with an engineering background at one point confided in me that he stayed up all night to calculate the optimal gear ratios for a car because he just felt the urge to spend his time on something real.

  • i bemoaned the fact that you could smack the collective leadership in the Big 3 across the back of their heads with a casebound copy of The Toyota Way and they still wouldn’t be able to see straight.

    From the perspective of a Detroiter, it looked like most of the automotive sector had reached a point where they made cars only to bring customers into the financial division. Actually, it sill looks that way except for Ford.

    This “free trade uber alles” crap has got to go, and we need to start concentrating on making things and adding value. It’s not going to “come back”. It will have to be rebuilt…unless we go the route of the Southern states and attempt to make ourselves the destination of choice for European and Japanese outsourcing.

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