Writings and observations

Rebuilding scale-up capacity

Not strictly a Northwest item, but connected in some ways, and important generally . . .

Andy Grove, one of the founders of Intel – which is Oregon’s largest private employer – has some tough words about what serious economic rebuilding in America will take. Writing in Bloomberg, he writes about why the traditional American approach of simply growing new, small, innovative businesses is hitting a wall as a serious economic re-igniter.

Startups are still starting up, he said, and that’s fine. The glitch is in what happens after that: “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.”

What happened? “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. 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.”

Leading to: “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?”

What to do now? Groves offer one idea: “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.” There may be other approaches too.

As an Oregonian blog post on this notes, Groves’ comments have generated a lot of commentary pro and con. But from here, they seem sound, something our political people ought to be addressing. Sooner rather than later.

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One Comment

  1. fortboise said:

    It was other countries’ tax incentives (and of course the cheap labor pool) that got the offshore ball rolling some decades back, so adjusting our own tax structure to compensate for the externalities of the process makes sense.

    It’s not easy creating those financial incentives to swim against the tide of what makes management and stockholders happy. It’s not the sort of thing business leaders can or will do on their own. It takes political will, and action, driven by leaders like Grove.

    A thoughtful, well-reasoned opinion piece in a respected business journal is a good start. But a million miles from “done.”

    The longer unemployment hangs around 10% (plus whatever the unreported percentage is), the more motivation there’ll be for a “job-centric economic theory,” but we are so not there at the moment. We’re still in era of “corporate-centric economic theory.”

    July 8, 2010

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