Is the American tech industry oiling its own guillotine?

Summary:Former Intel chief Andy Grove sees a troubled future for the U.S. technology industry. Learn why Grove thinks radical action is needed to spur a renaissance in high-tech manufacturing.

In the future, will Andy Grove be viewed as a prophetic visionary or a misguided agitator? The U.S. better hope that it's the latter -- or change its current economic policies -- because when Grove looks into the future he sees a U.S. tech industry that is likely to be severely diminished.

Grove, the former head of Intel, is best known for his quote, "Only the paranoid survive." His paranoia was once aimed at staying a step ahead of competitors in the PC wars of the 1980s and 90s, but in recent years Grove has expanded his purview to focus on the future of the larger tech industry and he is deeply concerned by what he sees in the U.S.

Grove has been telling anyone who will listen the last couple years that the American technology sector is in decline and he has proven himself eager to diagnose its ailments. Unlike other tech leaders, these days you won't hear Grove calling for a bunch of extra H1B Visas or other short-term tactics to buoy the tech sector. Instead, Grove has turned idealist, some would even say, "protectionist."

The patent mess

When Grove received a lifetime achievement award at the National Inventors Hall of Fame induction ceremony in May 2009, he told the audience, "As we celebrate the accomplishments of the last 50 years, I can't help but wonder if the next 50 years will be equally productive. I'm dubious."

In that speech he decried the U.S. patent system, explaining that in the early days of the transistor there was much more cross-licensing of patents and a greater spirit of companies building upon the same technologies -- even among fierce competitors. "Patents themselves have become products [today]," said Grove. "They're instruments of investment traded on a separate market, often by speculators motivated by the highest financial return on their investment."

Grove compared the patent system to the derivatives that led to the 2008 collapse of the U.S. financial markets and suggested that the patent system should use Thomas Jefferson's basic assertion that "The true value of an invention is its usefulness to the public," as the guiding principle for fixing the patent mess.

The decline of U.S. manufacturing

However, Grove has become even more passionate about another issue: The decline of the U.S. manufacturing sector, especially in tech. He has attacked the current American ideal that a continual stream of startups can provide all of the jobs and innovation that we need to build a healthy economy and maintain our leadership in the tech sector.

In a guest column for Bloomberg, Grove recently stated:

"Americans love the idea of the guys in the garage inventing something that changes the world... 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."

He pointed out that Apple has 25,000 employees but it outsources its manufacturing to a Foxxconn facility in southern China that employs 250,000 workers to build Apple products. And this 10-to-1 ratio is essentially the same for Dell and other high-tech companies that use Foxconn, a company that now employs 800,000 workers -- more than Apple, Dell, HP, Intel, Microsoft, and Sony combined.

The common refrain in the U.S. in recent decades has been to devalue and dismiss manufacturing jobs and hang our hats on the fact that most of the high-end knowledge workers remain in the U.S. for these tech companies, and that those jobs are much more valuable and much less commoditized.

Grove challenges that line of thinking, saying:

"Not only did we lose an untold number of jobs, we broke the chain of experience that is so important in technological evolution... abandoning today's 'commodity' manufacturing can lock you out of tomorrow's emerging industry... 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."

The example that Grove uses to illustrate this is batteries. The U.S. makes a fraction of the Lithion-Ion batteries used to power the world's computers and electronic devices. The U.S. lost the battery race a couple decades ago when it started shipping the manufacturing processes for consumer electronics to Asia. But now, Lithion-Ion batteries are going to be used to power electronic automobiles and that market could quickly dwarf the electronics industry and the U.S. is out of the game before it even begins.

Andy Grove speaking at the Computer History Museum in 2009. (Photo credit: CNET/James Martin)

Grove's solution

You can find a lot of people who agree with Grove's assessment of the state of the American technology industry. However, where the real controversy is over his prescribed remedy. Grove concludes:

"Long term, we need a job-centric economic theory -- and job-centric political leadership -- to guide our plans and actions... 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... If what I'm suggesting sounds protectionist, so be it."

Such a radical proposal has naturally drawn intense criticism, especially from free market proponents.

Peter Cohan of DailyFinance responded, "It would immediately raise taxes on any business that uses workers offshore, and those higher taxes would be passed on to U.S. consumers of those products in the form of higher prices. In theory, such a move would be popular with those who were hired through the proceeds of the tax. But those same people would also be paying higher prices for products made overseas."

James Altucher of The Wall Street Journal wrote, "I wish Grove could point out one country in the 100,000-year history of mankind that flourished because of protectionism."

Sanity check

What's interesting to me about Grove and his crusade to restore the U.S. as a high-tech manufacturing center is that it's a stunning departure from the Andy Grove that ran Intel in the 80s and 90s. Sure, you could argue that Intel was a chip manufacturer at its core and Grove is sentimentally attached to that idea and simply doesn't want to see that heritage lost.

However, this is the same guy that once lobbied vehemently for H1B Visas to allow more foreign workers (often working for much lower wages) into the U.S. to fill high-tech job openings. It's also the same Andy Grove who was almost anti-idealistic in the past. He once stated, "Technology happens. It's not good, it's not bad. Is steel good or bad?"

Now, he's suggesting that businesses have a "responsibility" to the society and communities that germinate them, and that part of that responsibility involves employing as many of its citizens as possible in the valuable work of the corporation. Make no mistake, he also believes it is imperative for the future success of the company itself to have closer control over its manufacturing processes. But, at its heart, Grove's message is one of altruism and civic responsibility as much as economic incentive. And maybe that's what's most appealing about it -- especially in an age of soulless robot CEOs who speak in nothing but platitudes and cliches.

Contrast the message of Grove with the reign of former HP CEO Mark Hurd, who decimated and demoralized his workforce at HP in order to maximize profits, and was almost universally praised for it by Wall Street bankers.

That said, I have my doubts about Grove's recommendations. Altucher is right. Protectionism has rarely ever worked for any economy, not in the long run. In fact, it has typically caused more harm than good when viewed in retrospect. And, that's when looking at economies hundreds of years ago that moved at a comparative snail's pace. In today's highly-connected global economy, protectionism is even less reasonable.

Still, something must be done. U.S. companies need to be incented -- both economically and culturally -- to build their products at home whenever possible and to train U.S. workers to take the lead in the kinds of next-generation high-tech manufacturing processes that Grove is talking about. The economic realities are brutal and will be difficult, if not impossible, to overcome in some cases.

But, the biggest issue may be the cultural and psychological one. The U.S. needs to champion and celebrate the companies that do show the kind of civic and community responsibility that Grove is advocating, and give them a regulatory and tax environment that help them flourish (that's the hard part).

High tech companies ship manufacturing and other jobs overseas because it's currently considered a best practice, and U.S. companies and public policy have greased the wheels to make it a turnkey process. In doing so, the rapid development of new tech products in the U.S. now funds a lot more job growth in China than in its own backyard, as Grove forcefully points out. To Grove, the situation begs a brutal analogy:

"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."

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This article was originally published on TechRepublic.

Topics: Intel, CXO, IT Employment

About

Jason Hiner is Editor in Chief of TechRepublic and Long Form Editor of ZDNet. He writes about the people, products, and ideas changing how we live and work in the 21st century. He's co-author of the upcoming book, Follow the Geeks (bit.ly/ftgeeks).

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