Finding the way to tariff-proof manufacturing

While it is too early to tell what the exact impact on U.S. industry and diplomacy will be from the latest tariff threat announced recently by President Donald Trump on more than $500 billion of Chinese imports, one certain result is that the price of goods will rise in the short term. 

To offset what are sure to be rising costs, it is necessary for policymakers, economists and corporations to consider a different mode of manufacturing operations: distributed manufacturing.

{mosads}In the traditionally centralized manufacturing model, goods are fabricated in a specialized factory and then shipped to consumers or the next manufacturing stop. Distributed manufacturing, also known as point-of-need-manufacturing, fabricates and assembles a variety of parts at the same place, very close to the end consumers.  

The centralized manufacturing model is built on the idea that a large volume of products manufactured at the same place reduces unit price. As Henry Ford said, “Any customer can have a car painted any color that he wants so long as it is black.” This implies that manufacturing flexibility equals high cost. 

One consequence of centralized manufacturing is that, as consumers, we accumulate lots of stuff, i.e., buying more than what we need. Instead of buying four screws to fix a hinge, we buy, say, 195 pieces because the entire 195-piece package costs less than $5 and can be shipped for free. 

We most likely leave the rest of screws — 191 of them — in the box for decades because the next time we want to use it, either we cannot find the package or the size does not fit.

While the centralized manufacturing model stimulates the pursuit for manufacturing efficiency, it also wastes resources as consumers are buying more than they need. Imagine all the energy used to extract raw metals from ores, shape them to the screw geometry, package them into that plastic box and ship them to your home. And now 191 pieces remain unused. 

The societal impact of centralized manufacturing contributes to the expansion and shrinking of cities. For example, Shenzhen of China, now the capital of electronics manufacturing, is arguably the fastest growing city in the world.

Before it was declared as a special economic zone, it had a population of barely 20,000 as a small fishing village in 1979. In 2017, it grew to a city of 12 million people. For context, during the same time period, San Francisco grew from 679,000 to over 884,000; Detroit shrank from 1.2 million people in 1980 to about 673,000 in 2017.

Interesting to note, the GDP per capita in San Francisco grew from $70,141 in 2001 to $86,830 in 2016 (a 23.8-percent increase); Detroit has changed from $48,717 to $52,084 (a 6.9-percent increase), while Shenzhen had a growth of 458 percent to about $27,000. 

The message here is that cities can stay at the forefront of the economy by innovating the way we handle manufacturing and the type of manufacturing we do. Distributed manufacturing is one of those innovations.

It is recognized as one of 10 emerging technologies by the World Economic Forum’s Meta-Council on Emerging Technologies. Companies have been doing some form of distributed manufacturing — cottage businesses for example — since the beginning of transactional society.

The historical difference between now and then is the vast amount of advanced technologies that are now seamlessly integrated into a manufacturing operation. An individual can create a usable part with assistance from an autonomous system that incorporates numerical modeling, cloud computing, the Internet of the Things and artificial intelligence; 3D printing is one example.

In the distributed manufacturing paradigm, we do not need to worry about tariff on the final goods. However, machine flexibility does not come free. It requires years of research and development (R&D) and often heavy R&D investment.

I have witnessed this first-hand as a faculty member specializing in manufacturing research for over 20 years and as a program director at the National Science Foundation that funds fundamental research.

This nature of capital-intensive business makes it extremely challenging to attract investment in developing innovative manufacturing systems. In the first quarter of 2018, only $415 million in venture capital (VC) investment was made in this area, compared to $7.26 billion for software.

When VC can have a long-term investment strategy — not just seeking quick return from apps — and when VC starts to bridge the gap that federal funding agencies left after funding the fundamental research, there will be a true link between two coasts and the middle of the U.S. in technical integration. The integration will advance a new manufacturing paradigm that will keep up our global competitiveness. 

Jian Cao, Ph.D., is Cardiss Collins professor of mechanical engineering, director of Northwestern University Initiative on Manufacturing Science and Innovation, associate vice president for research at Northwestern, and a Public Voices Fellow of the OpEd Project.