In 1968, two well-known technologists and their investor friends anted up $3 million to start Intel Corp., making memory chips for the computer industry. From the beginning, we had to figure out how to make our chips in volume. We had to build factories; hire, train and retain employees; establish relationships with suppliers; and sort out a million other things before Intel could become a billion-dollar company. Three years later, it went public and grew to be one of the biggest technology companies in the world. By 1980, which was 10 years after our IPO, about 13,000 people worked for Intel in the U.S.
Not far from Intel's headquarters in Santa Clara, California, other companies developed. Tandem Computers Inc. went through a similar process, then Sun Microsystems Inc., Cisco Systems Inc., Netscape Communications Corp., and on and on. Some companies died along the way or were absorbed by others, but each survivor added to the complex technological ecosystem that came to be called Silicon Valley.
As time passed, wages and health-care costs rose in the U.S., and China opened up. American companies discovered they could have their manufacturing and even their engineering done cheaper overseas. When they did so, margins improved. Management was happy, and so were stockholders. Growth continued, even more profitably. But the job machine began sputtering.
U.S. Versus China
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.
The largest of these companies is Hon Hai Precision Industry Co., also known as Foxconn. The company has grown at an astounding rate, first in Taiwan and later in China. Its revenue last year was $62 billion, larger than Apple Inc., Microsoft Corp., Dell Inc. or Intel. Foxconn employs more than 800,000 people, more than the combined worldwide head count of Apple, Dell, Microsoft, Hewlett-Packard Co., Intel and Sony Corp.
Until a recent spate of suicides at Foxconn's giant factory complex in Shenzhen, China, few Americans had heard of the company. But most know the products it makes: computers for Dell and HP, Nokia Oyj cell phones, Microsoft Xbox 360 consoles, Intel motherboards, and countless other familiar gadgets. Some 250,000 Foxconn employees in southern China produce Apple's products. Apple, meanwhile, has about 25,000 employees in the U.S. -- that means for every Apple worker in the U.S. there are 10 people in China working on iMacs, iPods and iPhones. The same roughly 10-to-1 relationship holds for Dell, disk-drive maker Seagate Technology, and other U.S. tech companies.
You could say, as many do, that shipping jobs overseas is no big deal because the high-value work -- and much of the profits -- remain in the U.S. That may well be so. But what kind of a society are we going to have if it consists of highly paid people doing high-value-added work -- and masses of unemployed?
David Fuller's view Some fashionable analysis less than a decade ago sang the virtues of "platform companies" in the West, which produced brilliant design and technological breakthroughs, but exported all the dirty manufacturing work to Asia or South America. This was heralded as the latest evolutionary step for mankind. After all, the industrial revolution of the 19th century proved that you did not simply have to grow things to prosper; the 20th century was the triumph of financial engineering (sic); so platform companies would ensure our higher standard of living, free of sweaty assembly line jobs. The loss of manufacturing did not matter, we heard, because the profits would revert to the parent company. We were also told that platform companies would be more stable for the economy because volatility caused by the hiring or firing of workers in line with economic cycles would occur in the developing countries.
A few wiser heads, including Mark Faber, said this was rubbish because aside from the elite designers, an economy based on shuffling financial products and a shopping mall on every other corner would prove to be unstable and unsustainable. Moreover, once the manufacturing was gone, we would lose the capacity to manufacture competitively. And what happens when the developing countries assimilate technology and start to design their own superior products?
Andy Grove is right to focus on job creation but I think his proposals carry enormous risks.
In a market-oriented global economy, capital flows to where it will find the best return. An extra tax on the product of offshore labour, which Andy Grove proposes, would weaken the balance sheets of US companies which face very daunting international challenges. Also, it could easily trigger a trade war which the indebted US is not in a strong position to win. Also, offshore manufacturing is not just a matter of competitive wages. Education and infrastructure are also crucial, and sadly, the US is falling behind in these areas as well.
I feel that what the US can and should do to make manufacturing more competitive at home is to provide regional tax incentives for both US and foreign companies. My stronger hunch, though, is that little will change until standards of living in Asia on the way up exceed those in the US on the way down. There is precedent for this. Japanese automobile companies such as Toyota eventually found that it made more sense to manufacture in the US, where costs were lower and the government was happy to offer incentives.