The 75% Opportunity: How Innovation in the Physical Industries Will Transform the Economy

May 3, 2017

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Manufacturing
Could investments in information technology lead to more productivity from the manufacturing sector? (Photo from Wikimedia commons)

Takeaways

The increased use of IT in manufacturing and other physical industries can supercharge productivity and the economy.

As Silicon Valley firms reach all-time summits for market value and profits, the bulk of the economy across much of the nation crawls ahead only slowly. Apple, Alphabet (Google), Amazon, Microsoft, and Facebook top the list of the world’s most valuable firms. But wages and incomes in many industries and many regions of the country have, for the last decade or more, been flat, leading to voter frustration and counterproductive calls to cut back on trade and immigration.

What if, however, we could apply many of the tech titans’ tools to the rest of the economy, turning old-line physical industries into cutting-edge information industries? What if we could deliver better jobs, incomes, and consumer benefits to far more Americans without protectionist measures that do more harm than good? The fact is a number of America’s struggling industries are poised for explosive growth – if we change policies and allow them to invest and innovate the way Silicon Valley does.

One of the biggest differences between the digital and physical industries is their use of information technologies. Industries like finance and publishing, for example, have fully embraced digital tools, while sectors like manufacturing, healthcare, and transportation have only just begun to leverage the miraculous power of Moore’s law. This giant gulf between the digital and physical industries’ use of technology is a big reason the digital industries are so much more productive than the physical industries, with higher incomes and faster job growth.

The data are astonishing. Although the digital industries are just 25% of private sector employment and 30% of private output, they make 70% of all investments in information technology. The physical industries – manufacturing, retail, healthcare, education, and transportation, etc. – employ 75% of workers and generate 70% of output and yet make just 30% of all IT investments.

This “information gap” shows up as far higher productivity (and thus incomes) in the digital industries, such as tech, software, mobile, finance, and professional services, which happen to be concentrated on the coasts. Perhaps surprising is that job growth in the digital industries – those firms with more “automation” – is also faster than the physical industries, which are less automated.

There is, however, an upside to this recent disappointing performance of the physical industries. If three-quarters of the economy is underperforming, that means we have a huge opportunity to boost growth for thousands of existing and new businesses and for millions of workers. Technology is especially important for manufacturing: there’s no way to compete with low-wage foreign labor making low-value added products. And we don’t want to. But a new synthesis of human creativity and machine skill can support U.S. manufacturing jobs. The idea is not to  copy those who are trying to copy the U.S. but to create new manufactured products using entirely new design processes and advanced technologies.

I can already see it happening where I live in Indiana, the heart of agricultural and industrial America. Firms large and small are beginning to deploy technology in creative ways to deliver breakthrough products and services in healthcare, agriculture, energy, water purification, smart manufacturing, logistics, urban services, and bioscience. Two of the biggest innovations in recent years – the shale petroleum boom and the ride-sharing revolution – are examples of applying infotech to physical industries with spectacular results. But these are just the tip of the iceberg.

This really is the 75% percent opportunity. And it points toward more innovation for more people in more places all across the country.