Former Intel CEO Andy Grove is one of those guys who I always pay attention to when he speaks. Usually, he makes me look at things in a different light and, more often than not, shift my thinking on a certain subject. It's quite rare that I finish reading something he's written in near total disagreement, but it's happened this time. Grove has penned a long, and thought-provoking piece for Bloomberg, where he takes the surprising-for-Silicon-Valley position that offshoring jobs to China is bad, and the US government should get involved with protectionist policies on American jobs
Now, as always, his position is deeply nuanced, and not as simplistic as the typical calls for US job protectionism. He talks up the importance of job "scaling" in the US economy:
Startups are a wonderful thing, but they cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. This is the phase where companies scale up. They work out design details, figure out how to make things affordably, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter.
The scaling process is no longer happening in the U.S. And as long as that's the case, plowing capital into young companies that build their factories elsewhere will continue to yield a bad return in terms of American jobs.
Scaling used to work well in Silicon Valley. Entrepreneurs came up with an invention. Investors gave them money to build their business. If the founders and their investors were lucky, the company grew and had an initial public offering, which brought in money that financed further growth.
First of all, I'm not convinced he's right that the scaling doesn't happen in Silicon Valley. The same day that Grove's column was released, Tom Foremski had a short post about the hockey-stick-like job growth
at Silicon Valley's most popular companies, where even he worried that such scaling -- which does appear to be happening -- might "crowd out" other startups. So, we have Andy Grove saying Silicon Valley startups can't scale from an employment standpoint just at the same time the data shows that they still do...
But as we dig a bit deeper into the article, we find out what Grove's real concern is. It's not that jobs aren't scaling, but which kind of jobs are scaling
. And, to Grove, the problem is that we're no longer scaling manufacturing jobs
Today, manufacturing employment in the U.S. computer industry is about 166,000 -- lower than it was before the first personal computer, the MITS Altair 2800, was assembled in 1975. Meanwhile, a very effective computer-manufacturing industry has emerged in Asia, employing about 1.5 million workers -- factory employees, engineers and managers.
I'm kind of surprised that Grove would make this argument. From David Ricardo, writing 200 years ago, forward, the concept of comparative advantage is pretty well-established. Now, there definitely are some recent critiques of the concept of comparative advantage, and one major concern is whether or not it really applies in a globalized world, but the general theory still seems valid: if it's more efficient and economical (other things equal) for manufacturing to take place in China, then it should actually make the US better off. Now, obviously, reality is more complex than theory, and there are other considerations as well, including human rights, quality, and even safety (lead in toys and poisoned toothpaste, anyone?). But, on the whole, that's not what Grove is talking about. Instead, his main worry seems to be that if we lose our manufacturing prowess in certain tech fields, it actually puts us behind the curve in important new fields:
There's more at stake than exported jobs. With some technologies, both scaling and innovation take place overseas. Such is the case with advanced batteries. It has taken years and many false starts, but finally we are about to witness mass- produced electric cars and trucks. They all rely on lithium-ion batteries. What microprocessors are to computing, batteries are to electric vehicles. Unlike with microprocessors, the U.S. share of lithium-ion battery production is tiny.
That's a problem. A new industry needs an effective ecosystem in which technology knowhow accumulates, experience builds on experience, and close relationships develop between supplier and customer. The U.S. lost its lead in batteries 30 years ago when it stopped making consumer-electronics devices. Whoever made batteries then gained the exposure and relationships needed to learn to supply batteries for the more demanding laptop PC market, and after that, for the even more demanding automobile market. U.S. companies didn't participate in the first phase and consequently weren't in the running for all that followed. I doubt they will ever catch up.
Now, I will agree that this is a point that got me thinking. It certainly fits well with our recent post about how scientific knowledge advances
, where the research has shown that those who aren't actively involved in a particular field simply can't understand that field enough to stay innovative or competitive in that field. So, the real question is whether or not the jobs that are being offshored are really the ones in areas where the US needs to be that knowledgeable... and also whether or not the knowledge transfer really is that complete. If, as is sometimes the case, the design work still really takes place in the US, but the manufacturing takes place in China, which bit of knowledge is more important?
I can understand where Grove is coming from. While many people still think that Intel's advantage was in its chip design, that was never really the case. It was always its manufacturing capabilities that put the company ahead. Intel's manufacturing expertise meant that its yield rates (effectively, the percentage of silicon that was successfully turned into a working computer chip) were always significantly higher than competitors, allowing Intel to produce more at a lower cost, and keep its margins higher. So, it's no wonder that Grove would focus in on manufacturing expertise as being key. But there is more to innovation than just manufacturing.
Grove reiterates the same point later in the article, but makes a big assumption:
Consider this passage by Princeton University economist Alan S. Blinder: "The TV manufacturing industry really started here, and at one point employed many workers. But as TV sets became 'just a commodity,' their production moved offshore to locations with much lower wages. And nowadays the number of television sets manufactured in the U.S. is zero. A failure? No, a success."
I disagree. Not only did we lose an untold number of jobs, we broke the chain of experience that is so important in technological evolution. As happened with batteries, abandoning today's "commodity" manufacturing can lock you out of tomorrow's emerging industry.
But you could make the same argument with plenty of industries that went overseas, or were more automated, that didn't
end up harming the US. The textile industry was once a huge domestic industry, but much of it has gone overseas, and because of that, we tend to have cheaper clothing for everyone. Again, there are issues there to be aware of, such as human rights and sweatshops -- something I'm not defending -- but it's not clear that jobs going overseas automatically means harm to the economy, as Grove implies.
Grove then challenges the "free market" orthodoxy by pointing to the growth of certain east Asian economies in the 70s and 80s that were largely due to heavy government involvement and planning:
Consider the "Golden Projects," a series of digital initiatives driven by the Chinese government in the late 1980s and 1990s. Beijing was convinced of the importance of electronic networks -- used for transactions, communications and coordination -- in enabling job creation, particularly in the less developed parts of the country. Consequently, the Golden Projects enjoyed priority funding. In time, they contributed to the rapid development of China's information infrastructure and the country's economic growth.
Indeed, that's undoubtedly true. But Grove is playing a bit of a game with confirmation bias on this one. Yes, certain government mandates worked well for certain countries, but some of them also had governments force them to bet on the wrong technology. Japan bet on certain technologies (like HDTV) too soon, and discovered that they got leapfrogged in the market. Sometimes, it's absolutely true, a government can help an industry develop, but often it can push an industry down the wrong road. To ignore that is dangerous. In fact, we were just discussing how some of Japan's choices pushing certain industries have had long term negative consequences
in terms of Japanese domestic efficiency and innovation.
Protectionism leads to perverse incentives that can absolutely work against long term growth and innovation.
Yet, Grove goes so far as to suggest that we should put a tax on offshoring and try to force companies to keep certain types of jobs in the US:
We should develop a system of financial incentives: Levy an extra tax on the product of offshored labor. (If the result is a trade war, treat it like other wars -- fight to win.) Keep that money separate. Deposit it in the coffers of what we might call the Scaling Bank of the U.S. and make these sums available to companies that will scale their American operations. Such a system would be a daily reminder that while pursuing our company goals, all of us in business have a responsibility to maintain the industrial base on which we depend and the society whose adaptability -- and stability -- we may have taken for granted.
Yikes! Grove should certainly know that the history of trade wars -- even when you "fight to win" is not pretty for any
of the countries involved in those wars. They lead to less growth, less innovation and higher prices. They're incredibly dangerous, and the unintended consequences do significantly more harm than good.
Besides, how do you pick the "good jobs" from the jobs we're actually better off offshoring. Nearly every day we hear stories about attempts by the US government to protect jobs in a particular industry. Just look at US telco policy or US copyright policy -- both of which are very much designed to prop up less efficient companies in the industry, at the expense of more innovative, more efficient upstarts. Protecting jobs comes at a cost to efficiency. If we always had a policy of "protecting jobs," then we never would have automated the telephone switching system, which put tons of "operators" out of work. But that also opened up massive new innovations, including the internet. I don't think anyone would argue that the jobs created due to more efficient telephone switching have so far surpassed the jobs lost from no longer needing operators to connect one party to another.
Yes, Grove has an important point in the middle of all of this, about the potential loss of key knowledge and expertise that is needed for the next generation of innovation, but he's cherry picked the other examples, without realizing the very real and very serious downsides to protectionism and to having government policy pick which industries (and which players in those industries) are "winners" and which are "losers."
In the end, the article is thought-provoking, and is at least making me reconsider some aspects on how we handle knowledge transfer for future innovation. But mostly the suggestions seem to go too far in heavy handed government involvement in propping up less efficient businesses, just to keep jobs local, even if it comes at the expense of future innovations that actually will (despite Grove's claims) create the jobs of the future.