2010 July 04 Sunday
Andy Grove On Declining US Manufacturing Base

Former Intel CEO Andy Grove has written a piece arguing that the US is losing a long term competitive advantage by outsourcing so much manufacturing abroad.

Today, manufacturing employment in the U.S. computer industry is about 166,000, lower than it was before the first PC, the MITS Altair 2800, was assembled in 1975 (figure-B). 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, also known as Foxconn. The company has grown at an astounding rate, first in Taiwan and later in China. Its revenues last year were $62 billion, larger than Apple (AAPL), Microsoft (MSFT), Dell (DELL), or Intel. Foxconn employs over 800,000 people, more than the combined worldwide head count of Apple, Dell, Microsoft, Hewlett-Packard (HPQ), Intel, and Sony (SNE) (figure-C).

Foxconn will inevitably end up doing more steps of the value generation process. Some of the companies now using Foxconn will get wiped out by Foxconn.

In an earlier era a successful American company like Apple would have generated a large number of American jobs. Nowadays a successful American company generates a large number of Chinese jobs for a different company.

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 (STX), 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?

Plus, we make it worse by importing millions of low skilled peasants from Mexico and Central America. How stupid are we? Very stupid. Our political leadership and opinion makers are incredibly foolish.

Grove says the ratio of money spent to jobs created has soared. Silicon Valley has ceased to be a jobs creation machine for Americans. The cost of that job creation has gone from a few thousand dollars initially invested per eventual job created to $100k per job.

Grove says that we are losing the technological ecosystems needed to stay on the technological edge. The innovations for improving manufacturing efficiency end up being made abroad. Engineers in America effectively cease to be in the loop. We can't stay on the cutting edge in design and product development or in the development of manufacturing equipment if we have no manufacturing industry. He criticizes economists who think that the work moving abroad has a low value added. Grove sees the models of economists as overly simplified and not how the real world works.

I strongly urge you to read the whole article.

Share |      By Randall Parker at 2010 July 04 09:59 PM  Economics Trade

James Bowery said at July 4, 2010 11:09 PM:

"And now the two forces, Industry and Finance, are in a struggle to see whether Finance is again to become the master, or creative Industry."

-- Henry Ford

I didn't know Andy Grove was an antisemite. And here I thought he was Jewish!

A.Prole said at July 5, 2010 12:34 AM:

Well at least SoCal utilizes some of the peasants and underclass by making some jolly good porno.
My Brazzers (TM) feed has become indispensible - watching America's finest, exotic pulchritude jiggling away whilst being poked, prodded and porked has become THE default activity of the bulk of male-kind rich enough to have net-and-laptop.

Dave Gore said at July 5, 2010 11:08 AM:

The U.S. makes up 4.4% of the world's population (0.3 billion vs. 6.85 billion). So as the rest of the world approaches our per capita manufacturing capability, we can expect 95% of world class products to be produced outside the U.S. We in the U.S. will increasingly focus on local services (health, education, entertainment) plus a smaller number of world class manufactured products we make especially well (e.g., airliners and movies). 95% of the exciting, leading edge breakthroughs will occur outside the U.S., but that's as it should be.

The jobs that will disappear are those that pay well for mediocre effort. The premium for talent will rise. Government can't do much about this; attempts to do so will pull down the standard of living for everyone in the country, and encourage retirement or migration of the most productive.

icr said at July 5, 2010 11:13 AM:

Most libertarians-and mainstream economists- still claim that manufacturing remains strong and healthy in the US. Isn't a lot of this manufacturing made up of low value added products like poultry, pork, beef and wood products?

Michael L said at July 5, 2010 11:51 AM:

people have been saying the same thing for decades, it's just that now, in the process of time, the validity of the viewpoint becomes much more obvious. Everybody knew all along that Socrates is mortal, but the fact becomes much more obvious when he is finishing up the bowl of hemlock.

The real question, IMHO, is "what will this Mr. Andy Grove (and others like him) do about it?" If he is the former CEO of Intel, he probably has greater capability to do something meaningful than your average reader of FreeRepublic. Well?... People have been talking about this for years and look how much that helped the situation. Talk, like they say, is cheap.

Wolf-Dog said at July 5, 2010 6:48 PM:

A new New Deal is needed. A better definition of productivity must be established. When jobs are being lost by moving manufacturing abroad, the remaining unemployed masses simply run out of money to purchase the cheaper goods made abroad; and paradoxically, when they were employed, they could afford the more expensive goods made here but now that they are unemployed, they cannot even afford the cheaper goods.

Reactionary_83 said at July 6, 2010 8:04 AM:

Intelligent article. 3 points: 1) Mr Grove should not compare the intelligence and foresight of the Chinese adminstration to that of the current American one. The idiocy of the latter never ceases to astound me. 2) America is not as racially homogeneous as it used to be. In the 50/60's, there was a greater sense of kinship at the national level and this would have encouraged the enactment of the trade policies described. Future entrpeneurs wil be less inclined to be subjected to Grove's proposed measures as the USA fills up with more immigrants with whom they don't identify (regardless of they lip-service they pay to immigration, multi-culturalism, etc.). 3)Automation will displace huge swathes of the manufacturing sector everywhere and this will happen sooner than most people think in both Cina and the USA as described by Martin Ford in 'Lights in the Tunnel'. However, I still think Mr Grove's ideas are a good idea and should be implemented.

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