"American companies discovered that they could have their manufacturing and even their engineering done more cheaply 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." -- Andy Grove, former Intel CEO, a year ago in Businessweek.
Other voices go much further, even claiming that decades of outsourcing have left the high-tech industry without the means to "invent" the next generation of products.
There are many factors that undermined the ability to manufacture high-tech products in the US -- and in many other countries of the "first world" -- but here are a few important ones.
The erosion of the commons. When it comes to knowledge, distance does matter. Engineers and scientists are more likely to exchange ideas and new concepts locally. When a high-tech firm's leader cuts funding for long-term research and start outsourcing those activities, it puts pressure on competitors to do the same. That affects the hiring of experienced people and new brains coming out of universities, who see no future in the area and move to other regions (and countries) to find work where their expertise is needed. Soon the critical mass of skills and knowledge erodes, and the other areas of design and manufacturing are forced to move, as well.
Some international corporations have realized that and have moved their research facilities to where the knowledge and brainstorming is happening. The Swiss pharmaceutical giant Novartis moved its research headquarters to Cambridge, Mass., to have its scientists close to other biotech firms in the area and to colleagues and universities leading in that area of research.
Most of the supply chain is in Asia. When the PC industry started in the 80s, most components were manufactured in the US. Since the PC business was very competitive from the beginning, OEMs started to look for cost-saving opportunities overseas. They started to outsource the PCB assembly to subcontractors in South Korea and Taiwan.
Soon, with margins declining rapidly, more pressure to cut manufacturing costs allowed the Asian manufacturers to do more work. They learned fast and started their own industry in key components such as LCDs, injection molding (a result of the massive investment in toy manufacturing in China), lithium-ion batteries, wireless cards, controller boards, flex circuitry, etc. US firms were only too happy to oblige, thinking they still had the high-end design and engineering of innovative products in their hands. But now Asian companies are leaders in those fields with their own products, and nobody can compete with them. With all those components being manufactured in Asia, who wants to import them to assemble the final product somewhere else?
Financial pressure from Wall Street. In his Businessweek article, Andy Grove mentions a friend who joined a large VC firm as a partner. "His responsibility was to make sure that all the startups they funded had a 'China strategy,' meaning a plan to move what jobs they could to China. He was going around with an oil can, applying drops to the guillotine in case it was stuck."
Basically, investors don’t believe anymore that a high-tech firm can manufacture products in the US profitably. Why should a startup try to convince them? Until Wall Street starts realizing the long-term damage that strategy is doing to the American economy, especially in innovation, the situation could only worsen.
Lack of government support. The US doesn’t have a job-centered economy anymore. It is consumer-centered. The way to fuel the economy is trying to restore consumer confidence and provide cheap credit to encourage spending. Instead of providing the means and support to restore research and manufacturing, the government is more interested in short-term strategies to fuel consumer confidence.
Also, there is no support for collaboration, because we fear foreign investment in key areas of the economy. A clear example is the Fiat-Chrysler deal. The Italian firm wanted to acquire a minority stake of the US car giant in exchange for transferring efficient diesel technology (already in use by GM in some of its European models). Some in Congress opposed the deal, because they didn’t want to use any taxpayer money to help a foreign corporation.
I think the manufacturing of the current generation of high-tech products in the US is basically gone. But restoring research and the "commons" could be a beneficial long-term strategy to rebuild the leadership in the design of new products. New technologies and materials could also be used to restore manufacturing here. If the industry and the government continue to focus on cheap products and competitive manufacturing abroad, then the battle is lost.
America Can't Manufacture Hi-Tech Products Anymore
Article first published as Why High-Tech Brands Can't Manufacture in the US on Enterprise Efficiency
