<h3><strong>How to Make an American Job Before It's Too Late: Andy Grove</strong>
By Andy Grove - Jul 1, 2010
Bloomberg Opinion</h3>
Andrew  "Andy" Grove, co-founder and senior adviser to Intel Corp., listens  during an interview in his office in Los Altos, California.  Photographer: Tony Avelar/Bloomberg News
Recently an acquaintance at  the next table in a Palo Alto, California, restaurant introduced me to  his companions: three young venture capitalists from China. They  explained, with visible excitement, that they were touring promising  companies in Silicon Valley. I’ve lived in the Valley a long time, and  usually when I see how the region has become such a draw for global  investments, I feel a little proud.
Not this time. I left the  restaurant unsettled. Something didn’t add up. Bay Area unemployment is  even higher than the 9.7 percent national average. Clearly, the great  Silicon Valley innovation machine hasn’t been creating many jobs of late  -- unless you are counting Asia, where American technology companies  have been adding jobs like mad for years.
The underlying problem  isn’t simply lower Asian costs. It’s our own misplaced faith in the  power of startups to create U.S. jobs. Americans love the idea of the  guys in the garage inventing something that changes the world. New York  Times columnist Thomas L. Friedman recently encapsulated this view in a  piece called “Start-Ups, Not Bailouts.” His argument: Let tired old  companies that do commodity manufacturing die if they have to. If  Washington really wants to create jobs, he wrote, it should back  startups.
Mythical Moment
Friedman is wrong. 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.
Intel Startup
I am  fortunate to have lived through one such example. 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.
10-to-1 Ratio
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?
Since  the early days of Silicon Valley, the money invested in companies has  increased dramatically, only to produce fewer jobs. Simply put, the U.S.  has become wildly inefficient at creating American tech jobs. We may be  less aware of this growing inefficiency, however, because our history  of creating jobs over the past few decades has been spectacular --  masking our greater and greater spending to create each position.
Tragic Mistake
Should  we wait and not act on the basis of early indicators? I think that  would be a tragic mistake because the only chance we have to reverse the  deterioration is if we act early and decisively.
Already the decline  has been marked. It may be measured by way of a simple calculation: an  estimate of the employment cost- effectiveness of a company. First, take  the initial investment plus the investment during a company’s IPO. Then  divide that by the number of employees working in that company 10 years  later. For Intel, this worked out to be about $650 per job -- $3,600  adjusted for inflation. National Semiconductor Corp., another chip  company, was even more efficient at $2,000 per job.
Making the same  calculations for a number of Silicon Valley companies shows that the  cost of creating U.S. jobs grew from a few thousand dollars per position  in the early years to $100,000 today. The obvious reason: Companies  simply hire fewer employees as more work is done by outside contractors,  usually in Asia.
Alternative Energy
The job-machine breakdown  isn’t just in computers. Consider alternative energy, an emerging  industry where there is plenty of innovation. Photovoltaics, for  example, are a U.S. invention. Their use in home-energy applications was  also pioneered by the U.S.
Last year, I decided to do my bit for  energy conservation and set out to equip my house with solar power. My  wife and I talked with four local solar firms. As part of our due  diligence, I checked where they get their photovoltaic panels -- the key  part of the system. All the panels they use come from China. A Silicon  Valley company sells equipment used to manufacture photo-active films.  They ship close to 10 times more machines to China than to manufacturers  in the U.S., and this gap is growing. Not surprisingly, U.S. employment  in the making of photovoltaic films and panels is perhaps 10,000 --  just a few percent of estimated worldwide employment.
Advanced Batteries
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.
Job Creation
Scaling  isn’t easy. The investments required are much higher than in the  invention phase. And funds need to be committed early, when not much is  known about the potential market. Another example from Intel: The  investment to build a silicon manufacturing plant in the 1970s was a few  million dollars. By the early 1990s, the cost of the factories that  would be able to produce the new Pentium chips in volume rose to several  billion dollars. The decision to build these plants needed to be made  years before we knew whether the Pentium chip would work or whether the  market would be interested in it.
Lessons we learned from previous  missteps helped us. Years earlier, when Intel’s business consisted of  making memory chips, we hesitated to add manufacturing capacity, not  being sure about the market demand in years to come. Our Japanese  competitors didn’t hesitate: They built the plants. When the demand for  memory chips exploded, the Japanese roared into the U.S. market and  Intel began its descent as a memory-chip supplier.
Intel Experience
Though  steeled by that experience, I remember how afraid I was as I asked the  Intel directors for authorization to spend billions of dollars for  factories to make a product that didn’t exist at the time for a market  we couldn’t size. Fortunately, they gave their OK even as they gulped.  The bet paid off.
My point isn’t that Intel was brilliant. The  company was founded at a time when it was easier to scale domestically.  For one thing, China wasn’t yet open for business. More importantly, the  U.S. hadn’t yet forgotten that scaling was crucial to its economic  future.
How could the U.S. have forgotten? I believe the answer has  to do with a general undervaluing of manufacturing -- the idea that as  long as “knowledge work” stays in the U.S., it doesn’t matter what  happens to factory jobs. It’s not just newspaper commentators who spread  this idea.
Offshore Production
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.
Our fundamental  economic beliefs, which we have elevated from a conviction based on  observation to an unquestioned truism, is that the free market is the  best economic system -- the freer, the better. Our generation has seen  the decisive victory of free-market principles over planned economies.  So we stick with this belief, largely oblivious to emerging evidence  that while free markets beat planned economies, there may be room for a  modification that is even better.
No. 1 Objective
Such evidence  stares at us from the performance of several Asian countries in the past  few decades. These countries seem to understand that job creation must  be the No. 1 objective of state economic policy. The government plays a  strategic role in setting the priorities and arraying the forces and  organization necessary to achieve this goal.
The rapid development of  the Asian economies provides numerous illustrations. In a thorough  study of the industrial development of East Asia, Robert Wade of the  London School of Economics found that these economies turned in  precedent- shattering economic performances over the 1970s and 1980s in  large part because of the effective involvement of the government in  targeting the growth of manufacturing industries.
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.
Job-Centric Economy
How do we turn such  Asian experience into intelligent action here and now? Long term, we  need a job-centric economic theory -- and job-centric political  leadership -- to guide our plans and actions. In the meantime, consider  some basic thoughts from a onetime factory guy.
Silicon Valley is a  community with a strong tradition of engineering, and engineers are a  peculiar breed. They are eager to solve whatever problems they  encounter. If profit margins are the problem, we go to work on margins,  with exquisite focus. Each company, ruggedly individualistic, does its  best to expand efficiently and improve its own profitability. However,  our pursuit of our individual businesses, which often involves  transferring manufacturing and a great deal of engineering out of the  country, has hindered our ability to bring innovations to scale at home.  Without scaling, we don’t just lose jobs -- we lose our hold on new  technologies. Losing the ability to scale will ultimately damage our  capacity to innovate.
Blade Didn’t Drop
The story comes to mind of  an engineer who was to be executed by guillotine. The guillotine was  stuck, and custom required that if the blade didn’t drop, the condemned  man was set free. Before this could happen, the engineer pointed with  excitement to a rusty pulley, and told the executioner to apply some oil  there. Off went his head.
We got to our current state as a  consequence of many of us taking actions focused on our own companies’  next milestones. An example: Five years ago, a friend 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. We should put away our  oil cans. VCs should have a partner in charge of every startup’s “U.S.  strategy.”
Financial Incentives
The first task is to rebuild our  industrial commons. 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.
I fled Hungary as a young man in 1956 to come to the U.S.  Growing up in the Soviet bloc, I witnessed first-hand the perils of both  government overreach and a stratified population. Most Americans  probably aren’t aware that there was a time in this country when tanks  and cavalry were massed on Pennsylvania Avenue to chase away the  unemployed. It was 1932; thousands of jobless veterans were  demonstrating outside the White House. Soldiers with fixed bayonets and  live ammunition moved in on them, and herded them away from the White  House. In America! Unemployment is corrosive. If what I’m suggesting  sounds protectionist, so be it.
Choice Is Simple
Every day, that  Palo Alto restaurant where I met the Chinese venture capitalists is full  of technology executives and entrepreneurs. Many of them are my  friends. I understand the technological challenges they face, along with  the financial pressure they are under from directors and shareholders.  Can we expect them to take on yet another assignment, to work on behalf  of a loosely defined community of companies, employees, and employees  yet to be hired? To do so is undoubtedly naive. Yet the imperative for  change is real and the choice is simple. If we want to remain a leading  economy, we change on our own, or change will continue to be forced upon  us.
(Andy Grove, senior adviser to Intel, was the company’s chief  executive officer or chairman from 1987 until 2005. The opinions  expressed, featured in the July 5 issue of Bloomberg Businessweek, are  his own.)
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