A Christmas shopping list: automobiles, cameras, stereo components, medical equipment, color televisions, hand tools, radical tires, electric motors, food processors, microwave ovens, athletic equipment, computer chips, industrial robots, electron miscroscopes, machine tools optical equipment.
What do these products have in common? They're technologically sophisticated -- requiring precision design and engineering. They're in hot demand worldwide. And their U.S. manufacturers are rapidly losing ground to foreign producers. Since 1970, the U.S.-manufactured share of each of these rapidly growing markets has plummeted by an average of 50 percent. Meanwhile, foreign producers have made substantial inroads into the United States -- on average, tripling their share of the U.S. market and treatening some U.S. manufacturers with extinction.
Why? American industry blames dumping of foreign goods in U.S. markets at cut-rate prices, cheap foreign labor, non-tariff barriers erected against U.S. exports, execessive U.S. government regulation. But these affect price competitiveness, and price is not the problem. The foreign-produced versions of these precision products often sell at prices equal to or higher than their U.S. counterparts.
The problem is competitive quality. Too many of our products are simply less reliable than the imports. The evidence is mounting: a U.S. electronics firm now uses Japanese semiconductors whose failure rate is fraction of those produced in the United States. A U.S. department store chain now puts its store label on imported Japanese stereos and West German hand tools because they generate fewer consumer complaints. A U.S. auto maker finds that its own foreign-made models require fewer repairs under warrantly than its U.S.-made models do.
Some U.S. companies, newly awakened to the quality issues, are exhorting their workers to use more care -- promoting quality control through "quality circle teams, more responsibility for individual works, lectures and demonstrations and quality-related bonuses.
But quality is less a function of attitude than of organization. As long as U.S. companies are organized primarily around short-term earnings, quality will continue to suffer. That's because each generation of new products is designed for a relatively quick payout: design engineers are not given the time or resources to make finetuned readjustments based on consumer experience, nor to work out all the glitches and bugs that typically accompany a new model. Instead, responsibility for de-bugging is assigned to inspectors who test random samples and to marketing and sales people who offer warranties, money-back guarantees and repair services for remedying the inevitable defective models. What U.S. manufacturers save in time and money in the short term, before their products get to market, they lose in the long term: in costly complaint-handling in repairs and servicing under warranty and -- most important -- in erosion of good will.
By contrast, engineers, in Japan and West Germany design for the long term. With greater time and resources, they can make small corrections on the basis of feedback from consumers, reduce the possibility of assembly-line error by designing color-coded parts with special shapes and fittings, run multiple tests on components to reduce the incidence of defects, and develop machinery to inspect automatically each finished product to ensure perfection.
U.S. business is myopic, in part, because product quality is difficult to quantify. U.S. managers -- trained to analyze cash flows, return on investment, price-earnings ratios -- can plot declining market shares but not declining comparative quality.
But a more basic reason is that U.S. managers have no choice but to focus on the short term. Financial analysts and institutional investors demand it -- buying and selling large holding on the basis of short-term changes in share price, with scant regard for the strengths of the underlying enterprise. Equity holders speak loudly to management, and their message is clear: earning now.
Japanese and West German businesses rely to a much greater extent on debt financing. Since debt holders are generally more concerned about long-term growth than short-term earnings, managers can set sights on increasing their world market share through quality improvements. The taxing and banking systems in these countries encourage debt financing by reducing the short-term risk of high leverage -- a strategy that makes sense in the long term.
Unless we improve product quality, our share in high-technology, precision-goods markets will continue to decline. Yet, our competitive position in the world economy will increasingly depend on these markets, as our agricultural and mineral wealth becomes depleted and labor-intensive industries like steel and textiles migrate to less developed countries. The answer lies not in exhorting workers, but in reorganizing our businesses to build in quality at the design stage, and in restructuring our financial market to encourage long-term growth.