Remarks as prepared for delivery
Good afternoon, everyone.
Thank you for that warm introduction. Thanks to Dean Robertson and to all of you for welcoming me to your campus.
A special thanks to Governor Ed Rendell for being here today—as you know, he is a Penn grad himself, and a true champion of public/private partnership. Did you know that during his time in office, Pennsylvania exports nearly doubled? That is a great testament to the governor's vision and hard work, and his belief that manufacturing jobs are worth fighting for. Governor, it's great to have you here.
It is an honor to share this afternoon with so many future business leaders. Your talents… your knowledge… your entrepreneurial spirit… are more in need than ever.
If you have heard recent talk from the Administration in Washington, you know that business—and its unique potential to innovate, to create jobs, to fuel prosperity—is once again this nation's business. And that is just as true for those of you—those of us—who hail from other countries.
When the downturn began a couple years ago, there was a lot of focus on how business—finance, especially—had caused things to go wrong. Now the focus has shifted to how business—all of us and all of you—can make things go right. So a lot of us are counting on you.
Your impact on your countries and this country's futures cannot be minimized. Economic growth. Job creation. The environment. Quality of life. The effect that business leaders have on the world is tremendous. It is felt not only in boardrooms, but in living rooms and dining rooms… in parks and playgrounds… in villages and cities around the world. That is a lot of responsibility.
As populations grow and resources diminish, it is more important than ever for our companies to be deliberate and smart in how we combine sustainability with wealth generation. And as global competition heats up, nations need to be just as deliberate… and just as smart… in making sure their economies grow, and ensure that growth is sustainable.
Today I want to talk about what that means in practical terms—especially for the U.S. Because America has choices to make… and choices have consequences.
A GOLDEN ERA OF MANUFACTURING
I'd like to speak from a perspective I do not think you get very often.
I am a proud representative of the manufacturing sector, and of one of the biggest manufacturing companies in the U.S. In fact, I recently authored a book about the manufacturing sector, called "Make It in America"—which is exactly what I think we need to be doing.
I have come here today to tell you something you probably have not heard: We are entering a golden age of manufacturing. That's right—you heard me correctly. I said a golden age of manufacturing.
I know that statement surprises many of you. It surprises most Americans when I say it. The U.S. has become painfully accustomed to the loss of manufacturing jobs, the closing of plants, the shuttering of main streets in small towns and even some big cities.
Who of you has been on the Amtrak to New York or DC? Who of you associates the shuttered decrepit factories like "Global Dye Works" with manufacturing?
To many Americans, even the word "manufacturing" feels tied to the past. I see that feeling reflected in the curriculum here and at most other business schools. I was flipping through your course catalog, and noticed there is not a single class here with manufacturing in its title.
Look, you can level with me: you did not come here to Wharton, one of the world's greatest business schools, to study manufacturing. Did you?
I suspect most of you came here to study corporate finance… investment banking… management consulting… or similar fields. That, I know, is where the action is… or is perceived to be. Yes, those are truly exciting and important fields. But so is manufacturing. Especially advanced manufacturing
When I am speaking in China… or Germany… or Brazil… and I say: "Manufacturing is exciting," audiences nod their heads in agreement. Because they know it. They see it. They feel the power of manufacturing as it creates millions and millions of excellent jobs, jobs at the center of their economy, jobs that drive growth.
Countries like these are building wealth by investing in highly advanced… highly specialized… highly value-added manufacturing. They are building semiconductors and microprocessors; wind turbines and solar cells; lightweight cars, advanced batteries, cutting-edge medical devices.
Clearly, I am not talking about the old definition of industry—of smoke stacks and steel, low-skill, low-pay blue-collar jobs. I am not talking of Global Dye Works!
I am talking about new, advanced manufacturing in high-tech, state-of-the-art industries. Industries of the future. Industries that are changing the world—and the way we live in it.
More and more nations understand that power. They embrace it. It creates prosperity, which in turn creates greater demand, which creates the need for more research scientists and better universities, which create more innovations.
It is a virtuous cycle, and truly stunning to watch. It is even more exciting to participate.
Around the world it is clear: Manufacturing matters. Whether in Singapore or Moscow, Istanbul or Sao Paolo, Johannesburg or Seoul. It matters. It matters in terms of the jobs it creates and the challenges it—alone—can solve.
Manufacturing creates more jobs outside its own sector than any other economic activity. Even in 2009, when manufacturing experienced its sharpest decline to date, the sector still supported nearly 7 million non-manufacturing jobs in the U.S.—jobs outside the plant. Jobs along an extensive supply chain, effecting thousands of SME's. This, as you know, is called the multiplier effect.
According to the U.S. Bureau of Economic Analysis, manufacturing has by far the highest multiplier effect of any sector. For every dollar in final sales, it supports $1.40 in output from other sectors. The service sector supports half that much.
So when you look at a country—America—that has 9% unemployment, that can barely keep job creation at pace with population growth, there is really no question where those jobs need to come from. Only manufacturing and its multiplier effect can create enough jobs. And only manufacturing can solve the major challenges the world will face over the next several decades: the rising demand for clean energy, for healthy and abundant food, for drinkable water, for sustainable solutions of all kinds.
That means that manufacturing, when done right, can marry sustainability with profitability, a sustainable and viable future.
That's why we at Dow are transforming our company—our R&D, our innovation pipeline, our geographic position—to grow and profit as we help meet those challenges. We are creating a 21st Century enterprise which does not see sustainability as a noun, but where we see sustainability as an adjective—one that applies to everything: Sustainable operations, sustainable solutions, sustainable opportunities, sustainable profits, a sustainable future. And high tech and advanced manufacturing, is at the center of it all.
OUR COMPETITORS UNDERSTAND THE STAKES
The countries that get it—the ones that see these opportunities—are creating holistic strategies to compete in the global market. Not just to compete, but to win. To create and dominate new industries.
The most competitive countries have a good sense of what goes through my mind, and the minds of other CEOs, when we are considering a new investment. They are responsive when we ask:
- What are the costs of inputs over the long-term?
- What is the cost of building the asset?
- What access will we have to markets?
- Do we have the human capabilities, the scientific and research capacity?
- Can we invest in R&D successfully?
- Can we scale up?
Some nations anticipate my questions—and provide smart answers. They set the rules of the road so that the private sector knows what to expect. They proactively offer risk management through low-interest loans, reasonable corporate taxes, and easy-to-navigate regulatory regimes. They offer incentives and the prospect of a better return on investment. Put another way, they minimize risk. By doing so, they attract business. They are partners to business.
Governor Rendell knows this well—he used similar strategies to attract manufacturing business to Pennsylvania. And you know what? It worked.
THE U.S. IS FALLING SHORT
But America, as a nation, doesn't really do this. Successive federal governments do not anticipate our questions, and rarely gives the private sector the answers we need. We ask for frameworks, but we get burdens. And the results can be measured by the loss of 5.5 million manufacturing jobs in under a decade. That's a third of the sector.
Sometimes it seems that we as a nation are so accustomed to the narrative of decline that we have stopped resisting it. Our national posture… is passive. We leave the big questions unanswered: on energy, on health care, on taxes and regulations on tort reform. There is profound policy uncertainty in the United States. And it is killing manufacturing.
The National Association of Manufacturers has found that structural costs (not labor) in the U.S. add up, on average, to a 17.6% disadvantage for U.S. manufacturers compared to their foreign counterparts.
When you are operating on a large scale, when you are talking about a facility that can cost, say, half a billion dollars just to build, that 17.6% represents nearly 100 million dollars of additional cost to build in the U.S. You could also look at that as a bonus of tens of millions of dollars to pack up and move offshore. $100 million to leave.
INNOVATION FOLLOWS PRODUCTION
Now I have heard the counter arguments—and perhaps you have, too. They go like this: It is natural for the U.S. to lose these jobs. They are disappearing because wages are cheaper in the developing world. Besides, as long as we keep innovating, it doesn't matter if countries like China do all the building and manufacturing. It doesn't matter that my iPad says "built in China," because it also says "designed in California."
These views are common. But these views are wrong.
Outsourcing based on wages has really become the storyline of manufacturing, but it is wrong. It is simplified in the media so that it can grab more headlines. But it is way more complicated than that.
Wage rates are not the only thing that impacts our bottom line. Labor costs in advanced manufacturing technologies are a small percentage of the total cost. Besides, if wages were the issue, you would not see, for example, the German high tech manufacturing industry making such huge strides on a global basis, being the vibrant export machine that it is.
The other flaw in this reasoning is that America can grow by just designing things. That will not work. Here's why the hypothesis of that case is wrong. Because where production goes, innovation inevitably follows.
Take the electronics industry. If you outsource it, other countries of course start making devices. Then they will learn how to make the next version better. And then they will build R&D centers and universities around that industry to generate the human and intellectual capital to sustain it. So you start by outsourcing production… and end up outsourcing creativity. Ask Applied Microdevices, or Intel, or any of the big electronics houses.
Over time, when companies decide where to build R&D facilities, it will make more and more sense to do things like product support, upgrades, and next-generation design in the same place where the product is made.
That is one reason why Dow has 500 Chinese scientists working in China, earning incredibly good money, and who are already generating more patents per scientist than our other locations. In fact, of the ten U.S. companies that spend the most on R&D, eight of them have R&D facilities in China and India. Not just factories, but high tech laboratories.
Now it is not too late to do something to balance this loss of R&D from the U.S. Our experience at Dow—where we manufacture in 37 countries and sell in 150—is that there is still great value in building a market by exporting from the United States.
The U.S. is still the largest economy in the world. The U.S. is still the largest manufacturing economy in the world. It has critical mass, and scalability. The U.S. still has a first-class university system, turning out high-skilled workers. AND it still has a flexible, mobile, productive workforce, with a still decent immigration system. That is one of the reasons why Dow's Advanced Materials division is still based here in Philadelphia.
Before Dow's acquisition of Rohm and Haas two years ago, the company had called Philadelphia home, with its headquarters just a few blocks from where we are today. That location was originally scheduled to be closed – but we knew how important these jobs are to the community, and we knew how valuable the talent of this community could be for our operations. So by working closely with the government here in Pennsylvania and the city of Philadelphia, we found a way to keep it open. And since then, we have made it integral to our operations, and aligned our other businesses to the work happening here.
For reasons like these, multinational corporations like Dow still see the U.S. as our hub. Growing overseas is not a threat. The way we structure our global operations reflects that as our overseas operations grow, so does our home base, our hub. Even when we manufacture in other countries, those operations are but satellite spokes from our central hub in the U.S.
But over time, the hub might move. Why? Because we cannot sustain innovation as our production base moves. And China potentially, could become the larger hub. Even larger than the U.S. I'm sure you know that China just became the world's second largest economy.
I believe we are arriving at a tipping point, and if we do not do something, U.S. companies will lose the capacity to scale in this great economy. We might still be able to create start-ups through research-based universities. But once those start-ups are ready to commercialize their products and scale up their operations, they won't be able to do it here. This is not theoretical. It is already happening.
According to the National Science Foundation, only nine percent of ALL U.S. companies participated in product innovation, in the U.S. between 2006 and 2008. Just nine percent.
I believe this is a genuine crisis, and it requires an aggressive and immediate response.
I believe that that response must come in the form of a national economic strategy. One that recognizes, once and for all, that the global economy is indeed not a level playing field. And that the playing field will not level itself.
Governments around the world see this. The government here must see this, too.
Many business leaders reject the idea of government involvement in our economy. Now many believe that the best way to create growth is just to let markets rule.
I am a firm believer in free markets. But we have learned in recent years that for all the wisdom of markets, there are important areas where markets, frankly, aren't so wise. They cannot always ensure that our global and national economic foundation is sound.
Markets can never be a substitute for the kind of long-range, strategic thinking that is the responsibility of government. Only governments can create the kind of policy frameworks that allows businesses to do what only businesses can do. Create value. Create jobs.
I am certainly not calling for bigger government. Nothing of the sort. What I am saying is that we need a smarter government—one that gives companies a degree of predictability and certainty when they invest in the United States. And I mean all the States in the United States.
For that to happen, we will need something else to happen first. We need a shift in mindset—to that of a genuinely collaborative spirit. We need a true partnership between business and government. For the greater good. For the national interest.
The public and private sectors both need to have input into what that framework looks like. In fact, that's why we at Dow wrote the book I mentioned, Make It in America. We wrote it to share our concern about the problem and our ideas about solutions. I encourage you to read the book—see if you agree with us.
Even if you do not agree, the important thing is to have a dialogue. A process. A genuine partnership. In Washington and State Capitals. We need elected leaders to assume good faith on the part of business leaders, and vice versa. History shows what a difference this makes.
I am reminded of President Kennedy's clarion call: "We choose to go to the moon in this decade and do the other things," he said, "not because they are easy, but because they are hard." The response to that call was extraordinary. By engaging business in this national enterprise, President Kennedy spurred the creation of entirely new industries.
R&D originally aimed at the space program produced a broad array of innovations. Solar panels… ultrasound scanners… surgical technologies…medical imaging… the computing age and these and much more grew out of that effort. President Kennedy called on America's can-do, creative spirit. And America delivered—just as it always has.
CHOICES AND CONSEQUENCES
Will it again? The United States has some choices to make. Not just the choice between one policy and another, but the more fundamental choice between action and inaction.
That is our choice. And choices have consequences.
America may not recognize it right now, but by refusing to get in the game, we are choosing to go subscale. We are choosing, at this tipping point, to tip in the wrong direction.
Without manufacturing, we will never be able to create enough jobs. Without manufacturing, the hub will move eastward, firmly to China and India. Without manufacturing, we will lose innovation.
This will not happen overnight. But believe me, ten, twenty years from now, when China becomes the largest economy in the world… when they have competitive corporations at a global scale… when they have the best IP generation and the best universities in the world… the United States may have to settle for being the service sector for China. Will we choose another fate?
At Dow, we want America to succeed. It is why we wrote Make It in America.
More important, it is why we are still investing here, why we are opening plants in Michigan, creating jobs. Working closely with Washington and East Lansing in alternative energy technologies.
We have a huge, vested interest in the United States. Our company has been here since 1897. This country is in our DNA.
As I said, we believe that America retains enormous assets… beyond its workforce or universities like this. There is something here that's wired in the DNA—a love of freedom, a spirit of entrepreneurship, the idea that you can really make it in America, in both senses of the phrase.
We haven't lost those things yet. If we can keep those competitive advantages, and build on them, we can still return to an era of prosperity.
THE NEW GENERATION OF BUSINESS LEADERS
It can happen—it has to happen. We have to make the hard choices.
I have been encouraged recently by what the administration and some in Congress have been saying about preparing to compete in the global economy. About out-innovating, out-educating, and out-building our competitors. About working with business as a partner.
I am hopeful that this is the first step in making those hard choices. But in all honesty, we will not solve these challenges without people like you.
Part of the challenge we face is a policy one. But another part is cultural. And this may be the more critical challenge.
There is a tendency among higher educated people to gravitate towards finance and capital markets. Three decades ago it was industry; two decades ago it was high-tech innovation; but since then it has been finance. Today, most of our top talent seeks to be in the business of allocating money efficiently and taking a cut off the top.
By all means, this is necessary; we need providers of capital and credit and that is a role the U.S. can and should play. But if that's the only role we play… if all we're doing is providing capital to other nations… sooner or later they are going to cut out the middle man. In some ways, this is already happening, and there is no reason to believe it won't keep on happening.
I talked about how innovation has followed manufacturing to China. At some point, financial services will, too. I do not just say this as a manufacturer. I am on the board at Citigroup, as well as IBM. I see it happening.
The world of finance is changing, and at some point, certainly during your professional lives, China is going to develop capital institutions that will rival ours. Hong Kong and Shanghai are just the start. We see the same thing in Germany, with Frankfurt.
Germany accesses efficient use of capital. It accesses capital markets. And at the same time, has maintained exports of 50 percent of its manufacturing goods.
My point is that if we do not solve the manufacturing problem—a problem that might seem far removed from your current career plans—you will see the effects, whether you like it or not.
The way you think of Wall Street's role in the world is going to change. So, yes, we need smart people to focus on financial services. But we need them to focus on value-added innovation even more.
We need brazen entrepreneurs and courageous corporate leaders. We need astute policymakers to establish frameworks to harness that brazenness and courage. What we need, more than anything, is you. -So I challenge you to seriously consider building something that lasts.
You may not have taken a class in manufacturing, but by the time you have finished your coursework here at Wharton, there is no question in my mind that you will have the knowledge—and the know-how—to find extraordinary success in every aspect of manufacturing and industry.
And you need to look no further for role models than my good friend, and Wharton grad, Jon Huntsman. In the early '80s, Jon, who had spent some time working at Dow, was looking for a new venture, looking to strike out on his own, at the same time that Shell Oil was getting rid of its non-core assets. Jon saw enormous potential: a plant that could nearly double its output without any additional investment. He was relentless, creative, and determined to make it work. When he finally gathered $42 million to purchase a chemical plant in 1983, the Huntsman Chemical Corporation was born.
In the years since, Huntsman grew his business to become one of the most successful chemical companies in the country. Today he employs more than 11,000 people. And keep in mind, every chemical manufacturing job inside a plant creates about five jobs outside the plant. That means that Jon's company is supporting tens of thousands of workers around the country, in addition to the 11,000 whose paychecks he writes. In addition to the jobs he is creating, the products he is making are improving lives here and around the world, and helping us meet the century's great challenges.
Now that is someone to emulate!
I hope my words will cause some of you to step back for a moment and at least reconsider the path before you, and the impact you can have in your career.
Should you choose to help usher in a Golden Age in Manufacturing, it will define your relationship to the world as a businesswoman or businessman. It will be a statement of identity… a statement that you want to become a driving force behind job creation, community revitalization, world-problem solving and business growth.
I truly believe there is no other area where you can enjoy such an extraordinary life. Where else can you have a rewarding career—financially and intellectually—and change the world at the same time? Other countries are encouraging their most talented people to focus their talents on building their economies through manufacturing. America needs to do the same.
If your generation of business leaders is committed to corporate responsibility… committed to using business as a tool for sustainable solutions… then your generation can improve the lives of many millions of people, and create prosperity at levels never seen in human history.
That, I believe, is what this next century needs. It is what this nation needs. It is a responsibility—and an opportunity—that rests with you.