On Wednesday, June 8, 2005, at 9:30 a.m. in room 253 of the Russell Building, the Senate Commerce Subcommittee on Technology, Innovation, and Competitiveness will hold a hearing on Manufacturing Competitiveness in a High-Tech Era. The hearing will address the current challenges that confront American manufacturers, examine how manufacturers have responded to these challenges, discuss how recent technological innovations have impacted the manufacturing industry, and explore what government should do to help American manufacturers remain competitive in today’s global economy.
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Witness Panel 1
Mr. Albert FrinkAssistant Secretary for Manufacturing and ServicesDepartment of Commerce
Witness Panel 2
Mr. Thomas R. HowellPartnerDewey Ballantine, LLP
COMMITTEE ON COMMERCE
SUBCOMMITTEE ON TECHNOLOGY, INNOVATION AND COMPETITIVENESS
UNITED STATES SENATE
HEARING ON MANUFACTURING COMPETITIVENESS
Thomas R. Howell
Dewey Ballantine LLP
June 8, 2005
Mr. Chairman and members of the Subcommittee, my name is Thomas R. Howell. I am a partner in the Washington D.C. law office of Dewey Ballantine LLP, where I specialize in international trade matters. Over the past 20 years I have represented a number of organizations representing U.S. semiconductor manufacturers, and in the course of that work I have prepared a series of studies of foreign industrial and R&D policies and their effects on international competition in microelectronics. The most recent of these, which I have provided to the Subcommittee, addresses China’s emerging semiconductor industry. I am also a contributing author to a study recently published by the National Academy of Sciences, Securing the Future: Regional and National Programs to Support the Semiconductor Industry. My testimony today is my own and not presented on behalf of any client or organization. I appreciate the opportunity to appear before you today. The semiconductor industry plays a vital role in the U.S. economy and national defense. In terms of value-added it may be the largest U.S. manufacturing industry, and semiconductors are a key enabling technology for a broad range of other industries, including computers, consumer electronics, motor vehicles, telecommunications, and aviation. The U.S. semiconductor industry is currently the world leader both in terms of level of technology and market share, with about 50 percent of world sales. However, it faces significant challenges to its leadership which arise out of foreign government policies that are designed to alter the terms of competition. These policies represent promotional strategies that fall into two broad categories, “leadership” and “close followership.” Leadership strategies. Japan and the European Union, the longstanding rivals of the U.S. in microelectronics, are pursuing promotional strategies designed to capture the leadership position from the United States with respect to market share and level of technology. · Japan and the EU are implementing large scale, long range, industry-government R&D projects aimed at developing leading edge commercial technologies and state-of-of-the art manufacturing facilities. Commonly these projects involve hundreds of millions of dollars in government funding, more than anything we currently see in the United States. · The strategy in both Japan and Europe is to build on a perceived leadership position in cell-phone technologies and develop leading edge semiconductors with cell phone applications, as opposed to PC-based chips in which the U.S. holds the lead. The Japanese and European strategy is based on the belief that in the 21st century, most people, particularly in the developing world, will access the Internet through cell phones and similar hand-held devices, not desktop PCs. It is unclear that these foreign efforts will result in a loss of U.S. market or technological leadership -- in the past many large-scale government-funded R&D projects in microelectronics have fallen short of their goals or failed completely. But others have significantly affected the competitive balance. The EU’s JESSI project, for example (1988-96), is widely credited with contributing substantially to Europe’s current strong position in cell phone technology. Japan’s joint R&D projects have played a major role in establishing the Japanese industry’s strong competitive position in microelectronics. And while Japan and the EU have substantially increased the level of government spending on microelectronics R&D, in pursuit of this strategy, the U.S. is moving in the opposite direction. U.S. government funding of microelectronics R&D has been declining for a number of years and is projected to decline further in the coming decade. But the most complex challenge confronting the U.S. in microelectronics is not coming from Japan or the EU, but from China/Taiwan, who are pursuing a “close followership” strategy. “Close followership” strategies. Under “close followership” strategies governments do not seek to achieve market or technological leadership but rather to integrate the operations of their own industries with those of U.S. companies, and, by so doing, not only remain one step behind the leaders but also capture high value-added technology-intensive industrial and research functions for their own economies. Taiwan has been the most successful practitioner of this strategy but it is now being emulated in countries such as Malaysia, Singapore, Thailand, Israel, and most significantly, China. The “close followership” strategy actually enhances the competitiveness of individual U.S. companies by providing low cost, high quality production and design services to them. But it may pose a greater challenge to U.S. leadership over the long run because it is drawing offshore important parts of the U.S. microelectronics infrastructure, particularly in the area of semiconductor manufacturing. The danger is that over the longer term other key functions associated with semiconductor production, such as R&D and design, will follow the manufacturing functions to East Asia. At some point a substantial part of the education infrastructure that supports the industry could migrate there as well. At present, roughly 77 percent of U.S.-owned semiconductor manufacturing is still located here in the United States. But much of this capacity is or will become obsolete over the next several years, and the trend is toward establishment of a larger proportion of the next generation of fabs outside the U.S. Earlier this year an executive at Applied Materials, one of the most important producers of semiconductor manufacturing equipment, indicated that 30 new fabs will be built in China in the next 3 years. During the same time frame, the same executive stated that there will be 6 built in the United States. In part this trend reflects the fact that China is the fastest-growing market for semiconductors in the world, with an estimated compound annual growth rate of 20-27 percent in 2002-2008, versus about 7 percent for the U.S. But relative regional market growth does not explain investment trends. Nor do comparative costs explain current investment trends. The migration of some types of high tech manufacturing to Asia, such as assembly of electronics products incorporating semiconductors, reflects comparative cost advantages attainable by manufacturing in certain Asian countries. But the movement of semiconductor manufacturing to Asia is not being driven by comparative costs -- that is, if government measures taken to modify those costs are removed from the equation. The same equipment and processes are used everywhere to make semiconductors. Materials and other costs do not vary greatly from region to region. Direct and indirect labor costs are much lower in China and Taiwan than in the U.S., but because labor costs are such a small proportion of manufacturing cost, the total cost differentials are not that great. If the manufacturing costs for a 90nm, 300mm wafer fab in the U.S. is given a factor of 100, the comparable cost in Taiwan would be 93 and in China, 90. But the picture changes when the impact of government policy measures is factored in. To begin with, consider the size of the investment required to establish a single state-of-the-art wafer fab -- currently between $2 and $3 billion for a facility that may be obsolete in 3-4 years. Only a handful of companies are in a position to undertake such investments, and given the volatility of the industry, an increasing number of companies understandably have reached the conclusion that risks associated with such large investments outweigh any potential for gain. How do governments affect this equation? In some countries governments have put up a substantial part of the total investment cost to establish a state-of-the-art fab. The world’s first 300mm fab, for example, was built in Dresden, Germany with substantial funding from regional governments. But other forms of government support are probably more important than direct funding. One of the most important forms of government measure has been support for the establishment of semiconductor foundries, a phenomenon that occurred first in Taiwan but has spread to Singapore, Malaysia, Israel, and, most importantly, China. Under the foundry model foreign producers, usually with substantial government backing, in effect say “we’ll assume the costs and risks of building a fab. Give us your designs, and we’ll make them for you, in return for a service fee.” This is a very attractive proposition for a company trying to decide whether or not it can make a $3 billion investment to manufacture its designs. An increasing number of U.S. semiconductor firms are “fabless” and outsource all of their designs to foundries, while others are “fab-lite,” outsourcing a significant part of their total production. In other words, the chip is designed here in the U.S., manufactured in China or Taiwan, and in many cases incorporated into an end product somewhere in Asia. The U.S. “fabless” company does not take any of the risks normally associated with building a $2-3 billion facility. But the facilities themselves, and the skills to run them, increasingly reside elsewhere. The first pure play foundry in the world, TSMC, was established on the basis of an equity investment by a special fund administered by the government of Taiwan. The investment would not have been attempted by the private sector because it was seen as too risky. Today I am not aware of a foundry anywhere in Asia that does not enjoy significant government support. In a number of cases governments have taken equity shares in foundries. Because the number of purely private, unsubsidized companies in the U.S. or anywhere else that are willing to invest $2-3 billion in a fab is declining, government-supported foundries are accounting for an increasing share of global semiconductor production. Most of the new fabs being built in China will operate as foundries. Tax policy is another particularly important form of government support. The world’s most successful foundries are TSMC and UMC, both located in Taiwan. They control nearly two-thirds of world semiconductor foundry manufacturing. The government of Taiwan has implemented policies which ensure that these and other similar Taiwan-based semiconductor enterprises pay no taxes, year after year. In fact, in a number of recent years, TSMC’s after-tax income has been higher than its pre-tax income, reflecting the application of accumulated tax credits. China has now replicated Taiwan’s tax holidays. Paying taxes, in jurisdictions like the United States, and paying no taxes in China and Taiwan, can have an enormous bottom-line impact and may constitute be a very significant decisional factor in determining where to open a new fab. Then there is infrastructure. The Silicon Valley phenomenon has been intensively studied abroad, and foreign governments have created their own versions of the Valley in many countries. These seek to integrate research universities, high tech manufacturing, and venture capitalists into a dynamic relationship that promotes innovation and entrepreneurialism. Perhaps the most successful version has been Taiwan’s Hsinchu Science-Based Industrial Park, which has become a magnet for foreign and domestic semiconductor investment. In addition to tax-free status. soft loans, grants and other forms of financial support, enterprises located in the Park enjoy extensive infrastructural support, nearby research universities, and superb institutes of applied industrial research. China is now creating its own versions of Hsinchu, and in some of the Chinese parks, semiconductor producers are reportedly receiving free land and free structures from regional and municipal governments. They also receive preferential rates on electricity, water, and specialty gases, all of which lower their operating costs. Then there are government incentives to individuals. One of the key advantages enjoyed by TSMC and UMC has been their ability to attract and hold many of the highest quality managers and engineers in the industry -- it said that “they get the best people.” A key factor in the competition for such talent is Taiwan’s tax treatment of company stock and stock options given as compensation to individuals. Shares are taxed on their par value rather than on their actual market value at the time received, which may be many times par value. In addition, when the shares are sold, there is no tax on the income received (apart from a nominal transaction tax) because Taiwan has no capital gains tax. As a result, Taiwanese companies have been able to offer highly talented Taiwanese and foreign engineers the prospect of rapid accrual of substantial personal wealth. Taiwan has become a “talent magnet.” Chinese tax policy, while not identical, seeks to replicate such incentives to individuals. Finally the location of new investments can be driven by government investment incentives such as China’s preferential value-added tax (VAT), which was revoked in April of this year after strong objections from the U.S. government, Japan, the EU and Mexico. In 2000, the Chinese government established a preferential rate of value-added taxation (VAT) for domestically based semiconductor design and manufacture. While all imported devices are subject to a 17 percent VAT, under the new policy domestic designers and manufacturers of semiconductors received a rebate, resulting in an effective VAT rate of 3 percent. The preferential VAT policy effectively enabled China to “capture” a portion of Taiwan’s semiconductor capability. Foreign investors, predominantly Taiwanese, rushed to the mainland and established new wafer fabs in order to benefit from the VAT preference. A talent rush to the mainland of experienced Taiwanese managers and engineers occurred. By 2003 roughly 20 new Taiwanese-owned fabs had begun operations on the mainland, were under construction, or were planned to become operational by 2008, all of them foundries. Executives at these new foundries cited the VAT preference, which gave them an “unbeatable” edge over imported devices, as the principal factor underlying their new operations. While China’s preferential VAT has been revoked, it has arguably already achieved its objective of a massive drawing in of capital, technology and talent, enabling China to establish a modern semiconductor industry. It has been suggested by some that the migration of semiconductor manufacturing to Asia represents a natural division of labor with more advanced countries, and that the high-end functions -- R&D and design -- will remain in the United States, Europe and Japan. But over the long term the design functions are likely to migrate to where the action is, which is where the manufacturing is located. This is happening already in Taiwan, in particular, which is now using its strength in manufacturing to build a strong design industry, with extensive government support. China, too, is following this path, although it is at an earlier stage of development. The long run danger is that so large a proportion of leading edge semiconductor manufacturing and design functions come to reside outside the United States that the top graduates from engineering schools see their future not in the U.S., but in China and Taiwan and other parts of the world. They will seek to build their careers there, not here. At that point, it would be very difficult to reestablish U.S. leadership. It is not in our national interest to see the entire infrastructure for the design and manufacture of semiconductors to migrate outside of the United States. A recent report by a Defense Science Board task force concluded that the migration of U.S. capabilities in semiconductors outside the U.S. posed “long term national economic concerns.” Given that semiconductors are at the core of virtually all critical defense systems, the national security concerns are obvious. The problem we confront is that the commercial realities of the semiconductor business are leading to a relocation of design and manufacturing functions outside of the United States. Identifying a comprehensive set of recommendations for addressing this problem effectively would take a sustained industry-government dialogue of the kind we saw in the 1980s in connection with the challenge from Japan. I would like to offer several preliminary suggestions: First, it should be recognized that the present offshore movement of semiconductor production is being driven by deliberate government measures as well as by commercial imperatives. Therefore, the U.S. government should continue to place a priority on the elimination of trade and investment distorting measures like China’s preferential value added tax that violate international rules. China’s use of a WTO-inconsistent measure to attract inward investment that would not have otherwise occurred was a serious market distortion in a strategic industry. The U.S. acted properly in placing a priority on the elimination of this measure. At the same time it should be recognized that many of the incentives used by governments to attract high technology investment do not clearly violate any WTO or other international rules, so there is a limit to what can be achieved by invoking existing rules. Over the longer term it will be necessary to negotiate the establishment of international norms on the use of government incentives for high tech investment. Second, the U.S. government needs to examine domestic tax polices that affect U.S.-based manufacturing in light of foreign tax policies that are functioning like a magnet for manufacturing investment. While I do not recommend any particular tax measure, the fact is that U.S. measures are needed to offset the effects of foreign tax holidays in some way. Finally, we must recognize that competition in this industry is increasingly a competition for a limited pool of talented people, whether U.S. or foreign born. The U.S. has the lead in this area, and we shouldn’t allow ourselves to lose it. This means above all maintaining our excellent system of research universities and ensuring that the world’s leading edge R&D continues to take place here in the United States. Specifically we should increase, not curtail federal spending on university-based, leading-edge R&D and other forms of support for U.S. research universities.
Mr. Sebastian MurrayPresident & CEOFPI Thermoplastic Technologies
To: U.S. Senate Committee on Commerce, Science and Transportation
From: Sebastian Murray President and CEO, FPI Thermoplastic Technologies
Samuel Murray and I are 50/50 owners of a plastic manufacturing business located in Morristown, N.J. We employ 120 people and we have sales revenue of approximately $15,000,000. 5 years ago our business was on the verge of bankruptcy. A major U.S. retailer that accounted for a third of our sales changed its source of supply from FPI to a Chinese supplier. Since our sales had plummeted literally overnight and without warning we were in dire financial circumstances. We began to lose money and our cash flow was hemorrhaging. Shortly thereafter our bank placed us in the work out group and we were heading down a path to liquidation. We are a successful enterprise today primarily due to NJMEP, the New Jersey unit of the Manufacturing Extension Partnership (MEP) of NIST. In our hour of need we were introduced to NJMEP by the Morris County Chamber of Commerce. Together with Robert Loderstedt, President of NJMEP, we implemented a multi pronged turnaround strategy to revitalize FPI including; 1. Acquisitions – NJMEP worked with us to roll up and acquire 2 smaller plastic injection molding companies to replace lost sales and to diversify our customer base. 2. Inventory Management and Control- NJMEP suggested we close an outside warehouse, which we did that saved us the $40,000 dollar monthly operating costs which resulted in a $480,000 annual savings which we used to implement the other phases of the turnaround strategy. Additionally, we sold excess inventory totaling approximately $1,000,000 improving cash flow. Plus we implemented an MRP/MPS system and cycle counts to improve inventory management and control. 3. Lean Manufacturing-We engaged NJMEP to implement lean manufacturing techniques which lower our costs of production and increased our manufacturing efficiencies through the use process changes and automation, using robotics. Consequently we have raised our sales per employee from $80,000 in 2000 to $125,000 in 2005. Our goal for 2006 is $150,000 per employee. 4. Banking Relationship – NJMEP worked with us to refinance our debt by changing banks and lowering our interest expense with reduced rates and an extended term. Today FPI is profitable and growing. Our sales volume is over 30% ahead of last year. In 2006 we expect our sales to exceed $25,000,000 an increase of 60% over 2005. We are no longer intimidated by Asian competition. We have used this threat to spur FPI to become a global low cost producer. None of this would have been attainable without MEP. MEP is an essential asset and lifeline for American manufacturing. It is vitally important that the U.S. Senate continues its support of programs such as MEP that aid and strengthen American manufacturing companies. Thank you for your time. Very truly yours, Sebastian Murray President and CEO
Dr. G. Wayne CloughPresidentGeorgia Institute of Technology
Testimony for the Subcommittee on Technology,
Innovation, and Competitiveness
Senate Committee on Commerce, Science and Transportation
Dr. G. Wayne Clough, President
Georgia Institute of Technology
June 8, 2005
Manufacturing is an essential part of our economy. Not only are manufactured goods the currency of world trade, but manufacturing is what creates wealth. It adds value to resources by making them do something more, which is something that services cannot do. For most of the 20th century, manufacturing was based on the Henry Ford assembly line model. Each worker carried out the same small task over and over, and a standardized product rolled off the end of the line, each one identical to the one before. Few of the workers in those manufacturing plants had more than a high school diploma–if they even had that. Then, about three decades ago, global competition for manufacturing jobs began to heat up. Many companies realized that large pools of unskilled labor willing to work for much lower wages than those in the U.S. could be accessed by moving plants overseas. This led to a large scale shift of jobs out of our country. In part due to this out-migration of jobs, manufacturing accounted for only 14 percent of the U.S. Gross Domestic Product in 2001, down from 27 percent in the middle of the twentieth century. Manufacturing jobs declined from 30 percent of our workforce to less than 15 percent. However, these numbers mask a second major shift that occurred in the manufacturing industry in the 1980s and 90s. The manufacturing processes themselves began to be fundamentally changed with advances in technology, and this was accelerated with the invention of the microchip. Manufacturers rapidly adopted new technology that reduced the need for manpower while at the same time they integrated new management techniques that called for more sophisticated and adaptable workers. This led to a vast family of production tools that offer unmatched precision, quality, and efficiency– rom CAD-CAM to “just in time” and “demand-pull” manufacturing. The new technology that has infused manufacturing is capital intensive rather than labor intensive. Robotic arms now assemble products. Automated guided vehicles (AVGs) move supplies and products around the plant. Real-time communication feeds information back into the process in time to reduce the margin of defects to virtually zero. Salespeople with cell phones and laptop computers cover more territory in less time, and sophisticated logistics systems speed the products on their way. The entire process, from designing the product to shipping it, has been computerized. The skill levels expected of workers are now far beyond that of the earlier era. The remarkable changes brought about by new technology have enabled manufacturing to outpace other sectors of the U.S. economy in productivity. Between 1977 and 2001, overall U.S. manufacturing output, measured in constant 1996 dollars, almost doubled. While productivity for the U.S. economy as a whole increased by 53 percent, manufacturing productivity rose 109 percent. Over the course of the past 25 years, overall prices rose by 140 percent, but productivity increases held the increase in the cost of manufactured goods to 60 percent. The combination of increased automation and greater productivity meant manufacturers could meet market demand with fewer employees, so that instead of moving overseas as they had during the 1970s and 1980s, many manufacturing jobs actually began to disappear entirely. What has been happening in manufacturing is analogous to what happened previously in agriculture, which saw an ever-shrinking number of farmers feed an ever-growing world population. Backing this theory up, manufacturing has been shrinking not just in the United States but everywhere. Estimates are that 22 million manufacturing jobs disappeared worldwide between 1995 and 2002. A new buzzword appeared in the manufacturing community–“lights-out” plants–referring to facilities that are so automated that there is no one around who needs to see what they are doing. Even though advanced technology caused them to shed jobs, recent research indicates that had American manufacturers not moved rapidly to incorporate new technology and improve their competitive posture, the U.S. manufacturing sector would have lost even more jobs as more manufacturers closed their doors entirely. At Georgia Tech, we see these factors reflected in the detailed survey of the state’s manufacturers that we conduct every few years. We are presently in the middle of the 2005 survey, so 2002 is the latest for which we have final data. However, when you compare the 2002 data with the 1999 data, about half of Georgia’s manufacturers underwent major changes in strategy or structure during that three-year timeframe. Most of these changes involved innovation and/or technology, and were aimed at quick delivery, adapting to customers, and providing value-added services. The 2002 survey showed that companies with new-to-the-industry products, value-added service offerings, and substantial employee use of computers had significantly higher growth, profitability, and productivity than those who did not engage in these practices. About 60 percent of Georgia’s manufacturers do some type of new product development, and more than one in five are developing products that are new to their industry. These companies who are innovating have significantly higher growth, profitability and productivity rates. Manufacturers filing patent applications–another measure of innovation–also had significantly higher return on sales. Those who introduced new processes experienced significantly higher return on sales and growth in value-added per employee, and firms with Web-based customer/supplier linkages or ordering capabilities had significantly higher returns on sales. We have traditionally thought of factories as dusty, greasy, and full of rows of people operating clanking machinery. However, while manufacturing of that sort may still be needed to make some products, it will fall at the lower end of the economic spectrum, which we will cede to others. American manufacturing of the future will need to be focused on the high end of the economic spectrum if we want to maintain our standard of living. We will need to pioneer new manufacturing techniques and focus on the highest-possible leading-edge precision technological work that it is not possible to do in other parts of the world. The strategies even of the latter part of the last century–cost control, “total quality,” and continuous productivity improvement–will not be enough. To win in the 21st century will require flexibility, collaboration, customization, precision, global market savvy and speed. To quote a recent statement on “Ensuring Manufacturing Strength through Bold Vision” by the leaders of the National Science Foundation, “The big winners in the increasingly fierce global scramble for supremacy will not be those who simply make commodities faster and cheaper than the competition. They will be those who develop talent, techniques, and tools so advanced that there is no competition.” During 2004, I was privileged to serve as co-chair, together with IBM CEO Sam Palmisano, of the National Innovation Initiative, sponsored by the U.S. Council on Competitiveness. We involved 400 of the nation’s best minds from academia, industry, and government in developing an action agenda designed to help the United States create an economy based on innovation. The National Innovation Initiative generated 30 recommendations that we grouped under three broad topics: talent, which is the human dimension of innovation; investment, which is the financial dimension of innovation; and infrastructure, which provides the enabling framework for innovation. All three of these have a bearing on the competitiveness of American manufacturing, so I will touch briefly on each one. High-tech manufacturing operations require employees with a much higher level of skills. For example, technology and processes at the Timken Company, which is the world’s leading manufacturer of roller bearings, have become so sophisticated that the company now looks for workers with bachelor’s degrees for many of its entry-level positions. Georgia Tech’s survey of Georgia manufacturers has identified human resource problems as their foremost worry. Yet the United States is falling behind in the education of technology workers. China, India, and the European Union each graduate more engineers than the United States and the gap will continue to grow based on present trends. Also, our past ability to rely on ample supplies of international science and engineering graduates will be tested as more of these students are enticed to take jobs in the growing technology businesses at home, and as increasing numbers simply choose not to study here because of concerns about post 9/11 visa and export control policies. One of the primary investments in innovation is R&D. In January of 2004, the Department of Commerce released the results of a series of roundtable discussions held with manufacturers around the nation. Among the areas that manufacturers believe require immediate attention is a commitment to sustained and balanced R&D to ensure that the federal government reinforces rather than hinders innovation and bringing new ideas to market. About the same time the Department of Commerce published its report, another report was released by the Subcommittee on Information Technology Manufacturing and Competitiveness of the President’s Council of Advisors on Science and Technology (PCAST), chaired by George Scalise, president of the Semiconductor Industry Association. The PCAST report pointed out that as the speed of technology development accelerates, the linkage between research and manufacturing becomes much closer. Locating a manufacturing plant close to an R&D operation that is generating new process and product ideas facilitates the human interchange that speeds ideas from the lab to the marketplace. As a result, places with both strong R&D centers and manufacturing capabilities have a competitive edge. The good news is that some semiconductor manufacturers have remained in the United States rather than moving overseas despite the cost benefits of off-shoring, because they want to be close to the university R&D that is driving new developments. The not-so-good news is that the level of R&D being conducted in countries like China and India is improving and many U.S. and global companies are building R&D facilities in these countries. This means competition may increase for more sophisticated manufacturing jobs as well and if this is so, the United States may end up with a security problem as well as an economic problem. The present technological superiority of the United States has flowed from the strong investments we made in scientific research since World War II, and that lesson has not been lost on those who aspire to compete with us. We need to not only consider improving investment levels in R&D, but also how they are distributed. A recent PCAST report showed that funding for research in key areas of engineering and physical sciences have declined while levels in other areas increased. In a world where future manufacturing developments will come from interdisciplinary research, care must be taken to support an appropriate funding portfolio. As a part of the third topic, infrastructure, the National Innovation Initiative looked specifically at strengthening America’s manufacturing capacity. We were concerned because while the United States remains the world’s leading nation in the production of manufactured goods, our rate of growth in manufacturing production has remained virtually flat over the past four years. During the same timeframe, 2000–04, Asia (excluding Japan), Central Europe and the Balkans, and Latin America experienced strong growth in manufacturing production. Our high-end competitors–Western Europe and Japan–also outperformed us. The National Innovation Initiative calls for the United States to design and implement a new foundation for high-performance manufacturing production. That means new human, organizational, financial, and policy models must be developed. New designs, processes, and materials need to be introduced and new manufacturing technologies should more rapidly be brought to the production cycle. We are moving in that direction, with flexible automation, complex numerically controlled tooling, precision engineering, distributed manufacturing, e-commerce to connect and manage supply chains, materials databases, and shared-use facilities for R&D and pilot production, which lowers the risks and barriers to entry. Technologies like these will not only increase productivity even further, but will also help to offset lower wages in other countries. As a technological university, Georgia Tech has a wide range of experts devoted to evaluating what is happening in manufacturing, divining future opportunities for this core industrial sector, and developing the manufacturing technologies and methodology of the future. Several important themes are emerging from their work. First, manufacturing technologies of the future will include molecular and nano-manufacturing, bio-materials and bio-processing, micro-electro-mechanical systems (MEMS), free-form fabrication, and new software control technologies. Ideas that will come more strongly to the fore include innovation, knowledge management, customer relationships, and waste reduction – not only in the manufacturing process, but also over the life of the product. These technologies and ideas are expected to be expressed in the context of several inter-related trends, including movement away from mass production toward semi-customization; shifts away from centralized production locations to distributed sites; and the transformation of centralized business control toward collaborative relationships between distributed sites. We can already see the trend toward customized manufacturing in the ability to order customized clothing from manufacturers like Land’s End or L.L. Bean, and the opportunity for customers buying a car to send their specifications to the factory online rather than compromising on what a dealer happens to have on the lot. The next stage is expected to be “additive manufacturing,” which enables end-users to participate in the design of more sophisticated products like hearing aids, dental restorations, eye glasses, and joint replacements. Additive manufacturing holds potential to embody an entire manufacturing system within a single, small machine. That has led some to predict that additive manufacturing machines for certain purposes will be introduced for use in the home within the next decade or two. Even as manufacturing machines become smaller, so will the scale on which manufacturing takes place. Already the United States has seen a significant drop in machine tool production, which paralleled a significant decline in R&D spending in this area, as attention has shifted to microscale tools and machining. Nano-manufacturing is the place where nanotechnology will transform from an exotic research field to something that reaches out to touch all human civilization. Nano-manufacturing addresses not only work on the nano-scale, which is one-billionth of a meter, but also the engineering of new materials at the atomic and molecular level that have novel, unique, and improved physical, chemical, and biological properties. Nanoscale engineering can greatly expand the range of performance of materials and chemicals, as well as creating microscopic machines and systems. Nano-manufacturing has the potential to impact virtually every human-made object, from automobiles to electronics, from advanced medicine to energy production. Three specific areas where we are working at Georgia Tech are nano-computers that utilize nanotubes as interconnections instead of transistors; disease diagnosis and controlled drug delivery; and optoelectronic materials. But successful implementation of nano-manufacturing will require standard measurements at the atomic level, special manufacturing environments, and micro-scale technologies and quality control mechanisms. It will also require the involvement of experts in a much wider range of disciplines than traditional manufacturing–including electrical engineers, physicists, chemists, biologists, and biomedical engineers. Even as the leading edge of American manufacturing moves to unprecedented levels of sophistication, there are segments of the industry that cannot and should not be left behind. America’s traditional manufacturing industries still have a relatively strong presence in our nation’s economy, and attention must be given to their competitiveness. The U.S. pulp and paper industry, for example, generates $100 billion of shipments a year–30 percent of the world’s production. Technological innovation is important to keep such traditional industries competitive. The growing need for the rapid development and deployment of very sophisticated manufacturing technology and techniques is particularly challenging for the nation’s 350,000 small and mid-sized manufacturers, who employ more than seven million people and comprise nearly half of the U.S. manufacturing base. These companies often lack the information, expertise, time, and money required to engage in the constant innovation and upgrading required to do well in today’s competitive marketplace. However, with some timely assistance, they can also succeed. For the past 40 years, Georgia Tech has operated a state-supported network of industrial extension offices that serve Georgia’s small and mid-sized manufacturers, and as part of our surveys of Georgia manufacturers we have tried to assess the benefits of that service. What the 2002 survey showed was that companies assisted by Georgia Tech had comparatively higher productivity–an average value-added increase of $3,000 per employee. Finally, changes in manufacturing processes have significant logistics implications. The U.S. trucking industry transports more than three-quarters of the freight in the country, and changes in the manufacturing process have major consequences for the logistics of moving those loads. The trucking industry has already had to make significant adjustments to facilitate the implementation of just-in-time manufacturing, which requires greater load and time precision and more recently just-in-case policies designed to prevent and address unexpected disruptions in the increasingly tightly engineered supply chain. Future changes will require even more logistical sophistication. The competition for manufacturing jobs and new applications and technology is going to grow in the future. We have to adjust to a changed landscape, and re-commit ourselves if we are to compete with nations that will have larger technological workforces and wage advantages for some time to come. Fortunately, the U.S. still has an edge and our society supports entrepreneurism and risk taking. However, the window of opportunity will be open only so long and we need to take action now if we are to succeed.