The long-awaited and hard-earned return to profitability at the country’s largest auto suppliers, reported by the Wall Street Journal last week, reflects deep structural shifts underway in the nature and organization of advanced production in the United States.
As hardware and software converge in the nation’s R&D- and STEM worker-intensive advanced industries, suppliers are being relied on to produce more and more of the innovations that iconic firms such as Boeing, Ford, General Electric, and Siemens integrate into highly sophisticated advanced products and platforms.
Recent Brookings work on the space industry in Colorado and the automotive industry in Tennessee—each an example of what we call an “advanced industry”—sheds light on the extent, complexity, and locations of these supply chains undergirding U.S. competitiveness.
Let’s zoom in on the auto industry. According to the Bureau of Economic Analysis, supplying the motor vehicle and parts manufacturing industry alone was a $393 billion enterprise in 2011. Compare that to the $78 billion in value added output generated by the industry itself and it becomes apparent that the coveted motor vehicle manufacturing complex stands atop an often-overlooked supply chain four times its size. And as the WSJ article makes clear, suppliers are roaring up the value chain.
Today, suppliers undertake 25 to 40 percent of R&D within the auto industry.
Despite the growing innovation imperative in this hyper-competitive industry, Brookings’ deep analysis in Tennessee—the state with the fifth-largest automotive industry in the United States in terms of jobs and largest in the Southeast—found that many small and medium-sized suppliers lag significantly in innovative capacity. This poses a serious problem: Despite being home to major GM, Nissan, and Volkswagen assembly plants, a remarkable 78 percent of Tennessee’s 94,000 automotive industry jobs lie in the supply chain.
One low-cost way to boost the innovative capacity of small and medium suppliers, where the bulk of jobs lie but competitive pressures are most acute, is to intensify cluster dynamics. Cluster dynamics—productivity increases and innovation enhancements unleashed by the co-location of complementary activities and the flow of people, ideas, and technologies among firms in similar industries—may sound secondary but are in fact critical drivers of competitiveness in modern economies.
Leading companies in the industry increasingly recognize the competitive benefits of proximity to a robust supply chain. Another recent WSJ article quoted GM acknowledging the compelling quality and cost rationales for co-locating parts manufacturing and assembly. British automaker Jaguar Land Rover, for its part, has emerged as a leader in transforming its supply chain into a collaborative network for product and process development. And while a number of megatrends are behind the present “re-shoring” wave, a new understanding in corporate board rooms and finance departments of the true cost in terms of logistics, uncertainty, and knowledge transfer of managing extended supply chains is one of them. Scholars including Harvard Business School’s Gary Pisano and Willy Shih and economists such as Greg Tassey, meanwhile, are leading a renaissance of recognition across sectors that the co-location of related upstream and downstream activities unleashes all kinds of productive spillovers so powerful as to measurably increase the competitiveness of individual companies, regions, and nations.
As the competitive dynamics within U.S. advanced industries evolve, coordinated public-private efforts to intensify best practice sharing, process upgrading, and broad-based technology diffusion can help places and their advanced industry clusters not simply manage the disruptions, but lead them.