Business Report

Location Matters in Manufacturing

Research shows that regional and national differences in manufacturing practices help determine whether emerging technologies are economically viable.

The migration of manufacturing from the United States to Asia could be having a significant impact on which advanced technologies are commercialized. Specifically, there is evidence that the shift in manufacturing is curtailing the development of emerging technologies in areas such as optoelectronics and advanced materials for the automotive industry.

National differences: In her analysis of optoelectronic and automotive component manufacturing, Carnegie Mellon University professor Erica Fuchs shows that the fate of emerging technologies can be linked to the choice of manufacturing location.

In studies with colleagues at MIT, Erica Fuchs, an assistant professor of engineering and public policy at Carnegie Mellon University in Pittsburgh, shows that the relocation of component manufacturing from the United States to East Asia in optoelectronics and to China in composite body parts for automobiles changed the economics of producing the technologies. The result in both cases is that emerging technologies developed in the United States were not economically viable to produce in the Asian countries because of differences in manufacturing practices. And Fuchs suspects similar effects are happening more generally as production shifts to the developing world. Location matters for “which products will be economically viable, which products countries will be most competitive in producing, and which products countries and companies globally are most likely to develop,” she says.

The findings add to a growing awareness that manufacturing plays a critical role in driving innovation. Harvard Business School professors David Pisano and Willy Shih argue, for example, that innovation capacity often disappears if a country loses its manufacturing sector, because the knowledge and abilities needed to develop new technologies are often closely linked to the skills and expertise associated with manufacturing (see “Innovation Depends on a Robust Manufacturing Sector”). Fuchs builds on this idea by showing that regional manufacturing differences can cause the most advanced technologies to fall by the wayside. “Manufacturing locations can affect the evolution of technology globally,” she says.

At the core of Fuchs’ argument is the recognition that there are significant differences in manufacturing practices in different countries and regions, and that those differences drive which technologies are economically viable to produce. While labor cost is the most obvious difference between countries, Fuchs says, it is not necessarily the most important one. Manufacturing downtime, yields, and material costs and quality are among the factors influenced by location. Engineers are routinely taught in introductory design classes to “take all these different variables into account when considering the most competitive technology,” she says. Yet businesses and policy makers often neglect the potential impact of manufacturing location on technology competitiveness when picking manufacturing locations.

In the case of optoelectronics, Fuchs and her colleagues examined how manufacturing economics affected the commercialization of new integrated circuits in which various photonic components, such as lasers and modulators, are squeezed together on a single chip.  Fuchs found that in the United States, the newer technology would be cheaper to produce than older optoelectronic designs, in which the laser and other photonic devices are built as discrete components. But in East Asia, the reverse is true; her analysis showed that because of local manufacturing practices, the older design was cheaper to make. As a result, says Fuchs, work on developing the new technology “was largely abandoned” by the companies that shifted their manufacturing away from the United States.

Fuchs drew similar lessons from a case study on the automotive industry, where cars made with polymer composite bodies are far lighter and thus consume less gasoline than cars with conventional steel bodies. Producing the new composite bodies could be competitive with the prevailing technology when the manufacturing was done in the United States. But in China, the newer technology is more expensive to make than the prevailing one. Her analysis shows, for example, that assembly accounts for more of the cost in steel bodies than composite bodies, and assembly is cheaper in China than in the United States. In composite automotive parts, material costs dominate, and there China lost its advantages.

Of course, consumers in different countries tend to prefer different types of cars, and those preferences can also help determine which technology is most economically attractive for local manufacturers. But surprisingly, says Fuchs, she found that manufacturing variables were far more significant than consumer preferences in determining the economic viability of the automotive technologies.

What happens to emerging technologies when manufacturers abandon them? Where do the engineers who worked on the newer technologies go? Can new companies sprout up in developed countries to exploit the newer technologies? Fuchs is beginning to look at those questions. Much of the responsibility for commercializing the emerging technologies will fall to small firms, supported by venture capital and government funding. But it’s unclear whether those companies can compete in the short term with larger, multinational firms pursuing older technologies that are currently more cost-effective. “Does our innovation ecosystem have a way to push the new technology forward anyway—to have inventors move to new places and pick up the technologies, or to have other firms pick up the new technologies?” she asks.

But Fuchs also says her research suggests there are plenty of opportunities for businesses that learn how to take advantage of regional and national differences to match technologies with manufacturing locations. In this globalized world, “we have to understand national differences and what they mean for the economic viabilities of emerging technologies,” she says. “And we have to learn to integrate [these national differences] into new technology development, not just from the market side but also from the production side.”

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Advanced Manufacturing

In July, Business Impact will examine why advances in manufacturing are still critical to economic prosperity and the health of your business. During the month, we will explore the intimate—and often complex—connections between innovation and advanced manufacturing. Innovation is critical in both creating new manufacturing opportunities and in developing new tools, such as robotics and cloud computing, that can make manufacturing more efficient and productive.

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