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Why Manufacturing is Still Key to America's Future
By RO KHANNA
The McGraw-Hill Companies, Inc.Copyright © 2012Ro Khanna
All rights reserved.
Spurring Innovation and Economic Growth
Andy Grove, the former chairman of Intel, explained to me why manufacturing is essential for American innovation. Mr. Grove is an icon in the technology field, and I felt comfortable addressing him only by his surname. Born to a middle- class Jewish family, he survived the Holocaust and emigrated from Hungary to the United States in 1957 to escape the Soviet invasion. He was the third employee hired by Intel in 1968, and he rose to become its CEO from 1987 to 1998. Under his leadership, Intel's market capitalization grew from $4 billion to almost $197 billion, and the company became the largest computer chip maker in the world.
When Mr. Grove wrote a provocative cover article in BusinessWeek warning about the loss of manufacturing jobs, I sent him a note requesting a meeting, not expecting a reply. But Mr. Grove was intrigued that someone in the administration was paying attention, and took me up on my request to meet. So, I became his guinea pig for getting his message across to Washington.
Mr. Grove's office is surprisingly humble. At first, I walked by his two-story building because it had a vacant ground floor. After checking my BlackBerry to confirm the address, I decided to wander upstairs, where I found his office next door to a local travel agency. When I walked in, Terri Murphy, Mr. Grove's sole assistant, greeted me warmly and introduced us, before asking if she could run to the deli to get me a sandwich for lunch. All I could do was insist on paying because of ethics laws. The entire scene was a contrast with Washington, where a bevy of aides typically guard access to the principal and office suites for even undersecretaries and assistant secretaries can be the size of spacious living rooms.
Mr. Grove didn't waste time on pleasantries. He got right to his point: Were we all asleep in Washington? Did we even track how many jobs were being offshored every month? I told him sheepishly that we didn't have that statistic. He remarked with some disbelief: "If you don't measure that, how can you possibly expect to keep jobs here?" He then added, "If you don't measure something, you certainly won't achieve results. If you do measure it, you may achieve results."
After expressing his frustration, he asked me what I hoped to get out of the meeting. Sensing that there wasn't much I could say that would give him confidence, I thought the wiser course would be to ask him for his perspective on manufacturing. He's now a professor at Stanford, and he slowly opened up as if I were one of his students.
One of his legacies at Intel, I learned, was requiring that all research and development work be done with real-life manufacturing constraints. He didn't believe that researchers should dream up proposals in their own cubicles without experimenting, in real time, on whether those proposals worked or their cost implications. That's why he mandated that there be a single product team composed of both design and manufacturing. This simple organizational precept helped spur Intel's technological success. Mr. Grove was one of the first leaders in Silicon Valley to recognize that there must be constant dialogue between designers and manufacturers because innovation requires tinkering and trial and error. Steven Johnson, an incisive writer on technology, observes that today, Apple has a similar philosophy, requiring its design and manufacturing groups to "meet continuously throughout the product development cycle, brainstorming, trading ideas and solutions, strategizing over the most pressing issues."
When manufacturing goes overseas, Mr. Grove cautioned from his own experience, design follows. New products are likely to be invented in the places where current ones are being made. Mr. Grove's argument is corroborated in the recent pages of the Harvard Business Review. Professors Gary Pisano and Willy Shih, who have written for the Harvard Business Review, observe that the offshoring of semiconductor manufacturing to Asia put American companies at a disadvantage in developing solar panels. Once the process for turning "crystalline silicon into wafers" for semiconductors moved overseas, Asian countries had a head start in making solar panels using crystalline silicon and in attracting talented engineers for this new industry to their shores. Andrew N. Liveris, the CEO of Dow Chemical Company, makes a similar point in his recent book Make It in America, an account of why manufacturing matters now more than ever. He cites Mr. Grove approvingly, and observes that Dow Chemical has no choice but to build some research facilities close to factories that are outside the United States because the company cannot "afford to separate innovation from manufacturing."
What, then, about Jagdish Bhagwati's claim that the service sector is more innovative? Mr. Grove shrugged at the relevance. The service sector may have more innovation per dollar invested than manufacturing, since manufacturing has high capital costs. That means that our country should certainly provide further incentives for service innovation. But it doesn't follow that we should write off the manufacturing that currently is responsible for the vast majority of our innovative activity. Macroeconomic facts support this view. Manufacturing today accounts for 70 percent of the nearly $250 billion of business research and development spending annually. With that type of private investment, it's no wonder that almost 90 percent of U.S. patents involve a manufacturing component. According to a recent survey by the National Science Foundation, over a two-year period, 22 percent of manufacturing companies reported innovations (defined as new or improved products or processes), compared to only 8 percent of service companies. Manufacturing companies are those that turn raw products into finished goods, whereas service companies perform some activity for a customer.
Mr. Grove's central message is that the bulk of American innovation is rooted in a culture of close collaboration between designers and producers within businesses that encourage experimentation and that this culture is worth preserving for our own economic vitality. Offshoring, even if it is cheaper at times, may not facilitate the same level of breathtaking technological progress that has been America's gift to the world. While we may not want to single out individual manufacturers for special treatment, our nation must retain a threshold of manufacturing capacity if it is to continue to invent new products. This does not mean that our government should implement policies to shift "consumption dollars from services, which Americans want, to goods which they don't want quite so much," as columnist Steve Chapman properly cautions against. Rather, we should provide foundational support for American manufacturers so that they, as opposed to foreign firms, are capable of meeting the existing consumer demand for goods. As Mr. Grove observed, the "physical proximity, face-to-face contact, and organizational proximity" of design and production within the open American ecosystem has resulted in unparalleled breakthroughs that have improved the human condition.
When I mentioned the economist Robert Reich's arguments downplaying manufacturing, Mr. Grove smiled politely and said that the Commerce Department should be listening to people who have lived the innovation process. He didn't understand why the Commerce Department wasn't taking the lead in articulating and implementing an American competitiveness strategy. The last such effort was in the mid-1980s. From his perspective, the Commerce Department was a chronic underperformer, led in recent times by political hacks or bureaucrats, from one party or the other, who simply didn
Excerpted from ENTREPRENEURIAL NATION by RO KHANNA. Copyright © 2012 by Ro Khanna. Excerpted by permission of The McGraw-Hill Companies, Inc..
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