How Outsourcing Impedes Recovery

Andy Grove, former CEO of Intel, the world’s largest maker of computer chips, knows that outsourcing is destroying Middle America and our economy.

In the July 1 issue of BusinessWeek, he writes, “You could say that shipping jobs overseas is no big deal because the high-value work -- and much of the profits -- remain in the U.S. 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?"

This is not man to ignore. In 1997, he earned Time Magazine’s Man of the Year, CEO magazine’s CEO of the Year and Industry Week’s Technology Leader of the Year. In 2001, he won the Strategic Management Society's Lifetime Achievement Award. Furthermore, according to a cited Wikipedia entry, “Grove is credited with having transformed Intel from a manufacturer of memory chips into one of the world's dominant producers of microprocessors. During his tenure as CEO, Grove oversaw a 4,500 percent increase in Intel's market capitalization from $4 billion to $197 billion, making it, at the time, the world's most valuable company.”

So what does such an accredited Andy Grove have to say about the American economy and its abysmal presence of manufacturing jobs and infrastructure?

Grove says that we cannot rely on startups to bring innovation to America. Sure, they are great, but in the end we need to have a manufacturing infrastructure in the U.S. to “scale up” when the innovation goes from prototype to mass production. During the scale up process, “The [companies] work out design details, figure out how to make things affordable, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter.”

Even if the creation of a product occurs in the U.S., it creates nothing in terms of U.S. jobs if U.S. companies send all of the capital to foreign companies.

Proponents of outsourcing argue that it doesn’t matter where stuff is built, as long as the initial prototype and the maker reside here. However, such logic and practices has led the U.S. economy to erode and has only succeeded in improving the short-term margins of companies as the U.S. job machine continues sputtering.

Grove points out that in the U.S, manufacturing employment in the computer industry, currently at 166,000 jobs, is actually lower now than it was in 1975, before the first PC was ever assembled. Meanwhile, Foxconn, an Asian computer manufacturing industry has emerged in Asia and employs more than Apple, Dell, Microsoft, Hewlett-Packard, Intel and Sony combined worldwide. Foxconn’s revenues last year were $62 billon, larger than Microsoft, Dell, or Intel.

Grove highlights that there’s more at stake than exported jobs.

“With some technologies, both scaling and innovation take place overseas. Such is the case with advanced batteries. It has taken years and many false starts, but finally we are about to witness mass-produced electric cars and trucks. They all rely on lithium-ion batteries. What microprocessors are to computing, batteries are to electric vehicles. Unlike with microprocessors, the U.S. share of lithium-ion battery production is tiny.”

This is a problem. Without an effective ecosystem to accumulate the technology, no experience is gained or built, and no relationship is made between supplier and customer. When this new trend of electric cars charged by batteries really takes off, the U.S. is going to be left in the dust.
“U.S. companies did not participate in the first phase [of battery development] and consequently were not in the running for all that followed. I doubt they will ever catch up,” Grove writes.

If the U.S. ever plans to recover from our economic tailspin, we need to focus our efforts on job creation. The rapid development of Asian economies can be accounted for by their state economic policy, which places job creation as the number one priority. As Grove says, “the government plays a strategic role in setting the priorities and arraying the forces and organization necessary to achieve this goal [job creation].” Our government better get on the right track, because their current strategies are not working.