Why Andy Grove’s Advice May Not Be So Good

In a guest column for Bloomberg, Andy Grove, former CEO of Intel, wrote about how the US can create new jobs through revitalizing its manufacturing industry. In his own words:

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.

Grove is arguing for a more nationalistic approach to capitalism. According to Grove, outsourcing manufacturing work hurts America not just because it takes away jobs, but it weakens the US job force’s ability to innovate. He thinks the intense pressure to reduce costs and increase the speed at which things get done is ultimately a harmful mentality – and that there should be incentives to keep manufacturing jobs in America.

Andy Grove, former CEO/Chairman of Intel Corp. (Photo via Green Tech Media)

I have tons of respect for Andy Grove. Intel was one of the few companies that recognized when they needed to make a huge shift in corporate strategy. Like many large firms, their business (memory chips) got “eaten from the bottom” by a swath of much-cheaper competitors (Japanese firms).

Intel and Grove swallowed hard, left the hundred million dollar business of memory chips, laid off 13,000 employees, and bet the company on processors. And the rest ($83B market cap & 83,000 employees in 2008) is history. And I’ll say it because I know you’re thinking it: Damn, that took balls.

So what about his recommendation that the government incentivize companies to build factories in the US?

I don’t have a strong background in economics so you’ll have to take any thoughts I have to offer with a grain of salt. [1] But my understanding is that economic growth is fostered when goods, services and capital can move between private owners without government intervention – that’s supposedly why free markets work.

In the free market model – its fine for Chinese companies to do all the manufacturing as they have a competitive advantage with cheap labor, lots of space and raw materials. US firms should focus on areas where they deliver the most value – developing advanced, highly valued technologies (or combining existing technologies together that people find very valuable) because there are lots of very smart, innovative people who understand how to create markets and develop breakthroughs.

Foxconn Workers (Manufacturing plant for Apple, Dell & Sony, employing 920k people).(Photo by Southern Weekend, via Engadget)

However, this seems to be producing results where lots of Chinese people become gainfully (and painfully?) employed, while many Americans are jobless, while a select few run tech startups and make millions [2]. It seems we’re not happy with this and thus we should do something about it. Luckily, Andy Grove has a plan. But wait, this model is very simple as it only focuses on the corporate players. What if we introduce some complexity (and realism) by considering government policies and national culture and how these strategies will play out in the long term. China has a number of government policies like

  • preventing people from moving so they can’t leave the industrial town/cities they live in
  • government subsidies/loans for manufacturing
  • weaker health and environmental policies that allow these factories to be made more cheaply while causing more damage to their employees and the water/air/wildlife around the factory
  • A culture that rewards hard work, sacrifice and obedience to authority

These factors play a major role China’s current success in manufacturing – and it’s job force will gain expertise in particular technologies, allowing them to potentially  build “the next big thing”. But as some of the harsh conditions in these factories become publicized (particularly Foxconn, employer of over 920k people, former employee of 10 workers who committed suicide) things may change. The lack of investors might also hamper major innovations. And finally, as China becomes more politically and economically open, fewer citizens will want to work in industrial jobs, especially if they are causing them physical and psychological harm. In the US we have things going for us in terms of fostering innovation, (and things holding us back too) [3]:

  • Forgiving bankruptcy laws
  • A number of strong Universities (plus generous financial aid packages for students at those schools)
  • A culture that supports collaboration, innovation and “out of the box” thinking.
  • Difficulties in getting students excited about, and competent in math, science and technology
  • More capital than ideas to be funded
  • Laws that prevent foreign students from working/starting companies in the US [4]

Ultimately I don’t know if Grove’s advice is good. Perhaps fighting outsourcing will keep Americans employed and creating manufacturing subsidies will help us learn more about technology and keep our edge. But perhaps it also leads to inflation of the dollar and weaken our financial strength in the future. Already, Silicon Valley is trying to reverse some of the “protectionist policies” that the US has instituted (see the Startup Visa) so it’s questionable whether Grove’s ideas will gain any traction among the tech elite (you know, the people responsible for the innovation and job growth). I’m not the only one scratching his head re: Grove’s remarks - Jason Hiner of Tech Sanity Check writes:

I have my doubts about Grove’s recommendations. [James Altucher of the Wall Street Journal] 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.

I’ll leave you with this thought: perhaps we should be thinking beyond nation-states and thinking about the global community. After all, the global economy is play a more influential and integrated part in everyone’s lives – perhaps we need to figure out our “Global Strategy” and see how we can ensure jobs and economic growth for ALL people, not just Americans.

Footnotes

[1] Though to be honest, it seems like economics is one of those areas of study with little agreement and a lot of “theory-driven” advice that is hard to prove one way or the other. [2] Clearly a total exaggeration but it gets the point and the sentiment across. [3] Early-stage startup investor Paul Graham has more to say about this in his insightful article How to Create Sillicon Valley [4] This is a serious problem. The US is educating top students and preventing them from adding to the economy. “Between 1995 and 2005, immigrant-started companies created more than 500,000 jobs and 52% of all Silicon Valley startups.”
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