Is the American tech industry oiling its own guillotine?

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.

TOPICS: Intel, CXO, IT Employment

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

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  • But India and China are protectionist

    China controls the value of its currency, keeping it low relative to other currencies. If China's currency were allowed to rise, by free market forces, trade between the U.S. can China would equalize, forcing companies to reinvest in the U.S. This happened between the U.S. Japan 15 years ago, many U.S. citizens are employed by Japanese companies.

    India has several policies, one for example requires that every project can be at most staffed by 1% foreign workforce. This same discriminatory behavior is carried over in the hiring practices of Indian companies in the United States. Indian companies in the U.S. are typically staffed with between 50%-90% Indian citizens here on an H-1b or L-1 visa. Indian companies don't even try to hire U.S. citizens, before turning to the H-1b visa (the outsourcing visa as it is known in India).

    What you are talking about in the article is just "Product Protectionism", but countries like India (officially) want people to be included in the trade agreements, since this is how they view it, you must also include anything that governments-groups-tribes use to gain the upper-hand in business.

    The product-centric view is a 19th century paradigm, when people (except slaves), information, currency couldn't be moved quickly enough. Today, apparently, you can include people, information, currency (at least according to India and China). Our protectionism would merely counter their protectionism, which we cannot see because of the 19th century paradigm.

    Both countries use their near monopoly on labor, to
    • Well said


      That is exactly right. The US blindly believes that all others play fair, and they play fair in return.
      Roger Ramjet
      • RE: Is the American tech industry oiling its own guillotine?

        @Roger Ramjet - I think that is a possibility, even as cynical as I am...
      • "Here's a bone Rover, go fetch."

        @Roger Ramjet
        [i]The US blindly believes that all others play fair, and they play fair in return. [/i]

        As much of it is by design as it is by naiveness, concepts of "fair play," or short term, insular greed.

        Now mind you, your role is to play along and not make waves. The status quo - and often your employer - demands it. As a bonus, if you'll roll over on your belly, they may rub it for you. Always makes the queer tasting medicine easier to swallow. ;)
      • Not exactly.

        @Roger Ramjet
        "That is exactly right. The US blindly believes that all others play fair, and they play fair in return"

        You don't actually believe that do you? I mean the "US blindly believes that all others play fair" part? Because if you do your not thinking straight. First off, we just read jake_leone2 points on how the other major economies run their affairs, you don't think only jake_leone2 knows these things and the US does not?

        Clearly the US knows perfectly well whats going on in other countries, and to a far more detailed and specific tune then the one jake_leone2 just laid out for us. Make no mistake; the US government and pretty much all the major companies are absolute experts in how other economies manage their financial and economic affairs.

        The question is if the government and all the major companies know whats going on why are they just sitting around letting it happen instead of doing something about it? The reason is, because its far far more complex then just one big country in the US being so dominant in all areas of commerce that they freely run all other players off the field so to speak. Think about it, if your so powerful and above the rest in anything, there soon isn't a game to be played anymore, at least not with others.

        At best you can subdivide and bifurcate your own players any number of ways into teams that can compete against themselves and each other, but that only takes you so far, particularly in the world of business and large scale economies. Simply put, you have to keep the rest of the world in the game somehow. And in this case if it means letting various parts of the world play the game under different rules so they can get good at the game and learn how to compete in their own way you do that, simply because it keeps the world afloat economically, not only is everyone better off financially in the final analysis, it will keep the world happier generally, and I would suggest thats a very good thing. Its just not a good idea having a situation where your the country with all the riches and the rest of the world is just generally pissed off about it. I am sure you can see that to some degree there is already more then enough of this world perception going on as it is. There is hardly a good enough reason imaginable why we should be seeking to increase that perception in any significant way.

        Like it or not, international economics is plenty more complex then simply a country doing its best to move as many jobs as it possibly can to within its boarders and then simply generating as much revenue as possible and keeping as much of it as possible within its boarders.

        First off, in general terms, healthy world economy will always give rise to more jobs in a country like the US then trying to become protectionist and closing out the world. Secondly, the US is many decades now past being able to work as any kind of an island in the world. The US, more then any other country has forced itself into the very fabric of world finance, economy, politics, culture, communications, military, entertainment, you name it. There is absolutely no question that the main job for the US is now to do everything it can to keep that international fabric as healthy as it generally can, and unfortunately if that means the US loses a lot of manufacturing jobs to other countries then thats the way it has to be. The US can no more have any major sector of the world collapse as the ripple effects would be far worse then losing manufacturing jobs.

        Its a far more tangled and complex problem then the US, or its multinational companies not realizing that other countries are not really playing fair. Its way more complex then that.
      • 1

        @Roger Ramjet

        It is true - in US trade negotiations, the goal is always to get to fair trade. But the outcome is never equal trade. Thus our trade imbalance. Thus the offshoring of our tech work.

        We're still in a leadership position. Most offshored projects take longer and suffer from low quality (either poor features or high defect rates). If we wait much longer, we will have taught our competitors how to win at our game, and we'll no longer have a competitive advantage.

        The argument that no economy ever grew during protectionism is patently wrong. The United States was a highly protectionist nation up to WWII. And we led the world in almost everything. Since WWII, we have opened our borders and not coincidentally watched our economic leader role decline steadily.

        It's time to incent US businesses to keep work onshore. There's such a large, strong, well-educated, unemployed workforce that could be retrained and put to use. Before we employ people overseas, let's get our fellow citizens back to work.
      • RE: Is the American tech industry oiling its own guillotine?

        @Roger Ramjet
        Not quite right.
        The "people in charge" are paid, to say that they believe in "free markets"/outsourcing.
    • RE: Is the American tech industry oiling its own guillotine?

      Too true. We are on unequal ground when the competition is protectionist and financial basis are so different. There is already a noticable rise in costs in both India and China as more move into their respective middle classes. But relative to the US, they are very much protected by government restrictions on international trade and control of the value of trade currency, so despite their rising costs, there is still a fundamental inbalance. They win, we lose - for now.

      My worry is that too many IT professionals here in the US will give up before we can turn it around. I've already seen many leave the field as their jobs get out-sourced to companies like CSC who in turn, outsource to India and China. I'm 36 years in the field, and coul easily work 10 - 15 more. But I don't see much of a future beyond 5 years right now - even if that long. So what good is the college degree and MBA? All the certifications? I'm still looking an unemlpoyment in less than two weeks, and no prospects.
    • Well said

      @jake_leone2 The only people that make good on the US model are the bankers and the "pump-and'dump" types that are not interested in building industry, just lining their own pockets.
    • RE: Is the American tech industry oiling its own guillotine?

      @jake_leone2 <br><br>You nailed it. Free trade works if the system isn't rigged. Typically, large trade deficits lead to a correction in currency exchange rates, which levels things back out. But not if they are playing games with the exchange rates.

      We've been waving a red flag that this was coming for 20 years...Ross Was Right!
      Reform Party USA
      • FAIR trade, NOT free trade.

        @Reform Party USA

        What should be done is that importers be forced to abide by U.S. regulations -- and a tax levied on their products to fund a foreign inspection regime to ensure that U.S. regulations are followed abroad.
  • Manufacturing? WTF?

    What I have to wonder is: why is Andy all in a wad about offshoring manufacturing? What about offshoring, and inshoring, R&D? Andy does not seem to give a hoot about all science and engineering jobs being lost.
  • RE: Is the American tech industry oiling its own guillotine?

    I have been a software developer for over 10 years, so far i have been displaced twice. Once by Indians on L1 Visa while working for a large bank, and a second time by an inexperienced, non creative but cheap and very obedient Indian developer on an H1B visa.
    Each time i had to defer paying my student loans for over 6 months while i was on unemployment (guess who pays for the interest? YES, the US taxpayer).
    I also payed very little taxes while on unemployment, and was collecting unemployment checks while not being productive, and using my time to only look for a job.
    In short whatever those companies saved by hiring cheaper labor ended up being payed most probably twice by the US tax payer to cover all the disaster expenses that come with unemployment, also the saved money ended up in some executives pockets as bonuses, and was not recycled into the local US economy, since either went to banks overseas or was spent on some overseas leisure trip...
    Displaced Software Engineer
    • RE: Is the American tech industry oiling its own guillotine?

      @Displaced Software Engineer

      `In short whatever those companies saved by hiring cheaper labor ended up being payed most probably twice by the US tax payer to cover all the disaster expenses that come with unemployment,`

      Now you have begun to understand the concept behind "corporate welfare".
    • RE: Is the American tech industry oiling its own guillotine?

      @Displaced Software Engineer - Not just cheaper labor from overseas but "foolish" cheaper labor. I just recently got let go after 13+ years as an SDET so that they could hire someone younger, for less money, who's going to be willing to work all day, most of the night and all weekend where as I, with some experience and life under my belt, realize that you cannot live to work, you have to work so you can live.

      In the end, Wall Street rules all, and the accountants run the companies so it's no longer about quality and experience, it's about cost cutting.
      • All Too True


        Wall Street's war on Main Street is largely complete.
  • So true...

    Mr. Grove is one of an increasing number of voices pointing out flaws in the way we've evolved our modern Western economies.

    It is of particular interest that he likens patents to derivatives - a very accurate observation.

    It is an unfortunate fact that creative/manufacturing, a.k.a. the "real forces of economy" have over the course of the 90s given way to financial speculators and money brokers.

    Politicians would do well to pay attention.
    • RE: Is the American tech industry oiling its own guillotine?

      @cookeecut - they're not.

      The question is 'why'.

      And as long as the spiral downward continues, the ROI people expect when learning these trades will cause people to not study or care.

      Never mind the amount of taxpayer-funded subsidy these 'multinational' corporations feel they are entitled to, while not hiring the people who help pay taxes in return.

      And is it philanthropic to lower wages?

      If the US is prepping itself for the guillotine, it's because lobbyists are paying the government to do so.
      • lobbyists are paying the government to do so...

        ...and the only reason they can is because liberal Americans, thinking government was their sugar daddy, gave government that much power.
    • RE: Is the American tech industry oiling its own guillotine?

      @cookeecut <blockquote><i>
      It is an unfortunate fact that creative/manufacturing, a.k.a. the "real forces of economy" have over the course of the 90s given way to financial speculators and money brokers.

      Politicians would do well to pay attention. </i></blockquote>

      They have. That's why the financial sector can pretty much write policy to suit itself while -- at best -- dying manufacturers get short-term help in closing the doors and turning off the lights.
      Yagotta B. Kidding