America's comparative advantage

As it turns out, America's manufacturing sector -far from withering in the face of foreign competition - is actually thriving. There are lessons to be drawn from the reasons for their success that relate to outsourcing.

It has become conventional wisdom that America's manufacturing base is withering in the face of foreign competition. Problems at GM and bankrupt auto parts manufacturer Delphi would seem to bear that theory out. Much of this belief rests on a simple accounting of income differentials.  How can America compete with labor in poor countries that charges a fraction of what is necessary to hire an American worker?

Of course, our biggest competitor in manufacturing is often the Japanese, a country that is hardly poor. But more to the point, this "wisdom" is based on a false premise, as described in the July 1st, 2006 issue of The Economist:

...someone forgot to tell American manufacturers the bad news. Most of them have enjoyed roaring success of late. Net profits have risen by nearly 9% a year since the recession in 2001 and productivity has been growing even more rapidly. The country's various widget-makers, moreover, show no sign of losing their innovative edge.

Companies like GM and Delphi are more exceptions than the rule:

Capital equipment and durable goods makers such as Caterpillar, General Electric, and industrial conglomerate, and Boeing, and aerospace giant, have always been the strongest bits of America's manufacturing base. Their position is the most secure, says James Womack of the Lean Enterprise Institute, a think-tank in Cambridge, Massachusetts, because there is so much knowledge embedded in what they make. Even when a company such as Boeing stumbles over its efficiency, as it did a few years ago, its intellectual property gives it room to recover. These days, however, American manufacturers of all sorts - not just the big durable-goods makers - are quickly improving their efficiency.

The engine of American manufacturing strength is productivity growth, which is often an indicator of an economy's ability to integrate new technology into production. Between 1995 and 2000, America already outpaced other rich nations with a productivity growth rate of 4.0%. After 2000, however, American manufacturers accelerated even that rapid pace, raising it to 5.1%.

Gordon Hunter, chief executive of Littlefuse, a maker of - you guessed it - fuses and other equipment related to the electrical systems in automobiles (a sector of the economy that is doing quite well supplying foreign carmakers such as Toyota and Honda), believes that American firms will maintain this high rate of productivity growth "due to a business environment that embraces innovation."

"Being flexible and willing to learn are skills that America still excels at..."

I've argued in the past that outsourcing poses little risk to American programmers because only certain kinds of development gets outsourced - namely, maintenance tasks or small additions to existing software that can afford the disconnect which must exist when dealing with programmers halfway around the world. This leaves more time - and resources - for domestic programmers to do what they do best, which is create new software.

This understanding is bolstered by an awareness of American ingrained flexibility and willingness to learn. Flexibility is essential to new software development and is less important in maintenance tasks where the general structure of a program is already well-understood.

Even though a CEO might type faster than his secretary, his time is better spent doing the things that CEOs do. The CEO's comparative advantage, in other words, dictates that the most value is derived from spending more time on tasks that he is uniquely qualified to do, even though he might do quite well at other tasks.

If new software is our comparative advantage, then it makes sense for us to concentrate on new software. That would be a good lesson to be derived from signs of a slowdown in outsourcing. We now understand where outsourcing best fits in our software development toolkit. Onwards towards the productivity gains to be derived from that rationalization.