Dow Chemical's Andrew Liveris on the Future of Manufacturing -- and Making America Competitive AgainPublished: March 16, 2011 in Knowledge@Wharton
The head of one of the world's largest chemical manufacturers is calling for a new American revolution. Andrew Liveris, chairman and CEO of Dow Chemical, warns that the United States is heading for a dismal future if it does not wake up to global realities and rally to save manufacturing. In speeches, interviews, op-eds and a new book titled Make It in America: The Case for Re-Inventing the Economy, the Australian-born chemical engineer is urging Americans to re-think their country's approach to manufacturing, government intervention and economic growth.
"When Americans hear the word 'manufacturing', they don't think of the future. They think of the past -- and of a present defined by job losses, closed factories and a middle class in peril," Liveris wrote in his book, which he recently discussed during a visit to Wharton. "This stands in stark contrast to most other parts of the world, where manufacturing conjures thoughts of opportunity, of wealth, of growth, of promise."
In a speech called, "The State of the Union: A CEO's Path to a Sustainable Future," Liveris said he wrote the book and came to Wharton to "get the national conversation going" about manufacturing. Manufacturing, he noted, is no longer about producing textiles and tennis shoes, or smokestacks and steel. Today, when other countries think of manufacturing, they think of advanced manufacturing: "They think semiconductors, solar and photovoltaics. They feel the power of manufacturing. Countries are creating wealth, true value, by investing in highly specialized manufacturing sectors."
The United States, in contrast, is standing by idly as it loses manufacturing jobs to overseas competitors, according to Liveris. Unless Washington can develop a coherent long-term strategy, the United States will lose not just its factories but its ability to innovate as well, he argued. Government and business need to work together to renew America's manufacturing industry and secure its future.
Liveris speaks about global manufacturing from first-hand experience: He has worked at Dow for 34 years, and has led the Midland, Mich.-based company for seven. Dow recently committed to developing two new factories in Michigan to build solar shingles and battery packs for electric cars, but many of the company's other 5,000 products are made elsewhere. Dow employs more than 52,000 people at 214 sites in 37 different countries.
Once a leader in manufacturing, the United States has been hemorrhaging manufacturing jobs for the past decade, Liveris said. Between 2001 and 2010, U.S. companies closed more than 42,000 factories and lost 5.5 million jobs. About a third of the sector has disappeared.
The United States must reverse this trend if it wants to develop a sustainable economy, Liveris stated. Manufacturing is vital to a national economy because it has a high multiplier effect -- in other words, it creates supporting jobs outside of the sector. "Manufacturing matters whether I'm in Singapore or Moscow. Manufacturing creates jobs and creates jobs around those jobs."
Manufacturing supported 18.6 million jobs in the United States in 2009, according to a study from The Manufacturing Institute, a U.S.-based trade association. Analyzing data from the U.S. Bureau of Economic Analysis, the Institute estimates that manufacturing created 11.8 million jobs within the manufacturing sector and supported 6.8 million jobs in sectors outside it, in areas such as accounting, legal services, transportation, finance, insurance and real estate.
"For every dollar [worth of manufactured products created], there's $1.40 created around it in the supply chain," Liveris noted, citing the study's conclusions. "The service sector only supports half of that value.... There's no question in my mind where jobs need to come from.... Only manufacturing can create the jobs that a new America needs."
A Trickle-down Effect
If the United States does not find a way to make itself more attractive, manufacturers will continue to move elsewhere, Liveris argued. And once the manufacturing of a product moves abroad, the innovative energy around that product will soon follow. Countries will invest in research and human talent, and "suddenly, 'Designed in California, Made in China' becomes 'Designed in China, Made in China.'" he warned. "If we don't find new places to innovate, we will lose the critical mass to be the innovator."
Liveris already sees innovation emerging in China. To complement some of its manufacturing facilities there, Dow built a research center in China three years ago. "We currently employ 500 scientists [there]," he noted. "They are already at double the productivity rate of patent production than our best alternative lab in the world. They're smart. And we're employing more and more [who] are coming back from U.S. universities."
Other countries realize the value of advanced manufacturing, and are working aggressively to attract it, according to Liveris. When considering where to put a factory or build a facility for research and development, other countries have answers to tough questions about building costs, labor issues, market access, tax credits and regulatory requirements. In the United States, the reaction is too often "a blank stare," Liveris said. "If I get a blank face, I'm pretty much sure that this country doesn't have a strategy."
Countries such as Singapore, on the other hand, not only have appealing answers to Liveris' questions, but also offer stacks of case studies that show how the country has helped business in the past. "They understand what it takes to compete for my business," he noted. Unlike the United States, Singapore has addressed regulatory issues, taxes, energy, tort, health care issues and infrastructure needs. "They've got the rules of the road. And of course, they want to win. So they benchmark other countries, and they show where their country is on every one of these particular items."
In a separate interview with Knowledge@Wharton, Liveris pointed to Jurong Island as an example of Singapore's prowess. The government decided it would combine seven small islands off its southern coast to create an Asia-Pacific hub for the chemical industry. It brought government agencies together under the Singapore Economic Development Board to develop tax incentives, streamline regulations and develop the necessary ports and infrastructure. Since its official opening in October 2000, the island has drawn more than $30 billion of fixed-asset investments and now hosts 95 global companies that employ 8,000 people, according to Singapore government statistics.
"Jurong Island, when I first visited 30 years ago, was a swamp," Liveris said. "Today, it's one of the biggest petro-chemical/chemical campuses in the world ... that not only [attracted] the chemical sector, but all the industries that supply it."
Singapore and other countries "are winning jobs. They are partners to business. They are mitigating risks," Liveris added. "America as a nation is not doing that.... Our national posture has been passive."
Special economic zones are only part of the solution. Liveris pointed out a range of problems that hurt America's competitiveness: crumbling infrastructure, a breakdown in K-12 education and the lack of a coherent energy policy, to name a few. The last item is a particularly sore point for Dow, which consumes 850,000 barrels of oil a day. "I'm not saying the U.S. can solve [the problems of] oil markets, but how about a national strategy to replace imported oil?" Liveris asked. "Why haven't we developed this yet? ... Do you know how much of our imported oil goes into waste, between buildings, cars and consumption of all sorts? We could take off half the imports if we developed national standards in these things."
Unlike the manufacturing of the past, advanced manufacturing is not fleeing the United States because of labor costs, Liveris insisted, calling the idea "totally 100% wrong.... It has nothing to do with the wage costs. Often labor costs are a small percent of the total costs. Besides, if it was labor costs, how do you account for Germany? Germany has a vibrant high-tech manufacturing sector."
The real culprits, according to Liveris: high corporate taxes, low incentives, confusing paperwork and constant uncertainty about government policies. "There's a profound policy uncertainty in the United States," he said, adding that "the lack of certainty is killing manufacturing."
Only Japan has higher corporate taxes than the United States, Liveris noted in his book. "When state taxes are included, a corporation operating in the United States faces an average statutory rate of 39.1%," he wrote. Meanwhile, many other countries are streamlining tax filing procedures and reducing burdens.
Government rules and regulations can also be problematic in the United States because they are not coordinated between the states or with the federal government. In one state, for example, it may take nine months to get a factory permit; another state completes the process in nine days. State mandates may differ from federal mandates. Even within the federal government, rules from one agency may contradict those from another. Dow must comply with federal regulations regarding oil, for example, which it uses to manufacture many of its products. But under current regulations, three federal agencies -- the Coast Guard, the Department of Transportation and the Environmental Protection Agency -- have a trio of different definitions for oil.
"We ask for frameworks, we get burdens," Liveris said. Regulations are necessary, but they have to make sense. "When they make no sense, then no one is benefitting. What we have is a pile of regulations that really become barriers to companies like Dow to make investments."
Inconsistency and ambivalence add up. Manufacturing is more expensive in the United States than in other countries, according to a 2008 report by the Manufacturers Alliance/MAPI and the Manufacturing Institute, two U.S.-based trade associations. The report compared the cost of taxes, benefits, energy, tort litigation and regulatory compliance for manufacturers in nine countries, including the United States, Germany, Mexico, Canada, China and Japan, and found the United States to be disadvantaged by 17.6%.
"When you have to invest a billion dollars, which is what an average facility of mine might cost, 17.6% ain't chump change," Liveris said during his talk. It would be difficult to explain to shareholders why the company chose to operate in a more expensive environment, rather than build somewhere cheaper and pass profits back to investors.
Liveris' prescription for the United States is not for less government or more government, but for smarter government. There are not simply two types of economies, with unfettered free markets on one side and Soviet-style socialism on the other, according to Liveris. Governments in other parts of the world are actively partnering with business, and the United States must do the same if it is going to compete in the next century.
In the past six years, Liveris has visited the White House several times and is on President Obama's Export Council. Over time, he told Knowledge@Wharton, he has noticed the Administration's tone towards business has changed. "It's no longer what I call 'courtesy listening sessions,'" he said. "These are now roll-up-your-sleeves sessions. These are geared toward policies to make America competitive again." He points to a recent editorial that Obama wrote for The Wall Street Journal as "real tangible evidence that the Obama Administration is serious about reform."
As with the space program and the interstate highway projects of past decades, government policy has galvanized economic growth in the United States before. Today, Liveris noted, Washington must commit to some type of advanced manufacturing -- whether it be alternative energy, green technology, advanced medical devices or something else -- and then aggressively incentivize the world to come on board. "Only governments can create policy frameworks that provide certainty, create value and create jobs," he said. "I'm not afraid of government. I think government is a great partner."
Things must change, and they must change soon, Liveris added. "This country deserves a better decision than the one we're making by default."