Waves of fear have been sweeping the country for the past decade. In boardrooms, on business pages, and at dinner tables, laments about losing American jobs to cheap overseas labor have created a steady drumroll of anxiety in the American psyche. China, Mexico, and India, in this chorus of dread, are the low-wage winners threatening America’s economic prowess.
But the dread is misplaced, says Suzanne Berger, author of How We Compete: What Companies Around the World are Doing to Make it in Today’s Global Economy (Doubleday, 2005). Contrary to popular conception, “focusing just on cheap labor is never a winning strategy,” says Berger, the Raphael Dorman-Helen Starbuck Professor of Political Science. Studying the real and sometimes contradictory impacts of globalization, Berger portrays the path to economic success as complex and anything but a single, narrow track.
Researching international firms for five years (1999-2004), Berger and a team of engineering and social science faculty and students at the MIT Industrial Performance Center took an in-the-trenches approach, the first-ever such analysis of globalization’s effects. Examining fast-paced, high-tech industries — electronics and software — as well as slower, more traditional sectors like the automobile, textile and clothing industries, Berger and her colleagues analyzed the design, R&D, manufacturing, outsourcing, management, and marketing strategies of 500 firms in the U.S., Europe, and Asia. What they discovered was surprising.
A key finding is that a production revolution occurred between the late 1980s and today. In the eighties, high-performing companies conducted most essential functions within their own four walls. Today, “modularity” is the linchpin of production success. In the current Lego-type production system, digital technology enables different companies in different parts of the world to carry out different functions. Consider iPod — the must-have accessory for the under-40 crowd, which boasts nearly a 90% market share. With product design made by Apple in California, components manufactured in Japan, and assembly in Mainland China, the iPod is an icon of the new fragmented global economy. This modular approach to production, which allowed the slim device to move from concept to market in under a year, is at the heart of its stunning triumph.
NOT A FORMULA
Yet Berger’s portrait of global winners and losers is far from formulaic. Gap and Liz Claiborne ride their brand-name success by completely offshoring production to foreign-owned contract manufacturers. Zara, the Spanish clothing company, is a study in contrast. It can implement its successful core strategy — lightening-fast reaction to shifting consumer demands — because it controls design, fabric, and assembly on home turf. A third variant of success is Emilia Maglia, an Italian apparel manufacturer that owns a plant in Romania, where they’ve trained the locals in Italian knitting techniques. As Berger shows, even for the same product in the same industry, there are different ways of succeeding. Her take-home message is that globalization leaves a large arena for choice, and choices matter. If even the economic actors most exposed to harsh competitive pressures have room for choice, she argues, then industry and society have more possibilities than acknowledged by pessimistic readings of globalization.
Emilia Maglia’s experience shows that cheap wage rates are not the winning factor, as often supposed. The firm’s expensive angora sleeves made on Italian soil are 50 percent cheaper than those made in its Romanian plant, despite that the Italian workers’ wages are 10 times their Romanian counterparts’. Italian factory workers have years of experience detecting and fixing mechanical breakdowns, maintaining equipment, and retooling machines for new products. The result: Their productivity towers over that of the Romanians. Productivity and unit labor costs, not wages alone, are the critical factors in global success.
Berger’s modularity model offers other implications as well. Companies can sprout by being excellent at just one or two functions; barriers to entry have lowered. Cisco and Broadcom — startups that grew rapidly because they didn’t have to develop their own manufacturing — are cases in point. In addition, fragmenting production “has led to an explosion of innovation, as well as to great rapidity in moving innovations into the market,” says Berger. What does this mean for America’s long-held lead in innovation? “It’s an open question. (Modularity) has given developing countries like India, Taiwan, and China a real chance to move up the ladder rapidly, which means new competition at each point in the chain of functions.”
While offering no silver bullets or easy formulas, Berger points to immersion in other cultures as critical to innovation, essential to understanding consumer needs and wants. “When an American company operates in China only through outsourcing, it’s losing a learning opportunity. It’s not learning China.”
This paradigm applies to an MIT education, as well, says Berger, who directs MISTI, the MIT International Science and Technology Initiatives, which has placed 2,000 students in international internships since 1994. “Learning how to participate in knowledge creation outside your own society is critical for our students. We need to educate them to have certain qualities of mind, and provide them with real, hands-on experience in a country. It’s not a frill,” she says. “It’s an absolute essential.”