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Andy Grove: How America Can Create Jobs - Businessweek

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BloombergBusinessweek

Magazine

AndyGrove:HowAmericaCanCreateJobs

PostedonJuly01,2010

http://www.businessweek.com/magazine/content/10_28/b4186048358596.htm

RecentlyanacquaintanceatthenexttableinaPaloAlto(Calif.)restaurantintroducedmetohis

companions,threeyoungventurecapitalistsfromChina.Theyexplained,withvisibleexcitement,that

theyweretouringpromisingcompaniesinSiliconValley.I'velivedintheValleyalongtime,and

usuallywhenIseehowtheregionhasbecomesuchadrawforglobalinvestments,Ifeelalittleproud.

Notthistime.Ilefttherestaurantunsettled.Somethingdidnotaddup.BayAreaunemploymentiseven

higherthanthe9.7percentnationalaverage.Clearly,thegreatSiliconValleyinnovationmachinehasn't

beencreatingmanyjobsoflate—unlessyou'recountingAsia,whereAmericantechcompanieshave

beenaddingjobslikemadforyears.

Theunderlyingproblemisn'tsimplylowerAsiancosts.It'sourownmisplacedfaithinthepowerof

startupstocreateU.S.jobs.Americanslovetheideaoftheguysinthegarageinventingsomethingthat

changestheworld.NewYorkTimescolumnistThomasL.Friedmanrecentlyencapsulatedthisviewina

piececalled"Start­Ups,NotBailouts."Hisargument:Lettiredoldcompaniesthatdocommodity

manufacturingdieiftheyhaveto.IfWashingtonreallywantstocreatejobs,hewrote,itshouldback

startups.

Friedmaniswrong.Startupsareawonderfulthing,buttheycannotbythemselvesincreasetech

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Andy Grove: How America Can Create Jobs - Businessweek

employment.Equallyimportantiswhatcomesafterthatmythicalmomentofcreationinthegarage,as

technologygoesfromprototypetomassproduction.Thisisthephasewherecompaniesscaleup.They

workoutdesigndetails,figureouthowtomakethingsaffordably,buildfactories,andhirepeoplebythe

thousands.Scalingishardworkbutnecessarytomakeinnovationmatter.

ThescalingprocessisnolongerhappeningintheU.S.Andaslongasthat'sthecase,plowingcapital

intoyoungcompaniesthatbuildtheirfactorieselsewherewillcontinuetoyieldabadreturnintermsof

Americanjobs.

WhatWentWrong?

ScalingusedtoworkwellinSiliconValley.Entrepreneurscameupwithaninvention.Investorsgave

themmoneytobuildtheirbusiness.Ifthefoundersandtheirinvestorswerelucky,thecompanygrew

andhadaninitialpublicoffering,whichbroughtinmoneythatfinancedfurthergrowth.

Iamfortunatetohavelivedthroughonesuchexample.In1968twowell­knowntechnologistsandtheir

investorfriendsantedup$3milliontostartIntel(INTC),makingmemorychipsforthecomputer

industry.Fromthebeginningwehadtofigureouthowtomakeourchipsinvolume.Wehadtobuild factories,hire,train,andretainemployees,establishrelationshipswithsuppliers,andsortoutamillion otherthingsbeforeIntelcouldbecomeabillion­dollarcompany.Threeyearslaterthecompanywent

publicandgrewtobeoneofthebiggesttechnologycompaniesintheworld.By1980,10yearsafter

ourIPO,about13,000peopleworkedforIntelintheU.S.

NotfarfromIntel'sheadquartersinSantaClara,Calif.,othercompaniesdeveloped.TandemComputers

wentthroughasimilarprocess,thenSunMicrosystems,Cisco(CSCO),Netscape,andonandon.Some

companiesdiedalongthewayorwereabsorbedbyothers,buteachsurvivoraddedtothecomplex

technologicalecosystemthatcametobecalledSiliconValley.

Astimepassed,wagesandhealth­carecostsroseintheU.S.Chinaopenedup.Americancompanies

discoveredthattheycouldhavetheirmanufacturingandeventheirengineeringdonemorecheaply

overseas.Whentheydidso,marginsimproved.Managementwashappy,andsowerestockholders.

Growthcontinued,evenmoreprofitably.Butthejobmachinebegansputtering.

The10XFactor

Today,manufacturingemploymentintheU.S.computerindustryisabout166,000,lowerthanitwas

beforethefirstPC,theMITSAltair2800,wasassembledin1975(figure­B).Meanwhile,avery

effectivecomputermanufacturingindustryhasemergedinAsia,employingabout1.5millionworkers—

factoryemployees,engineers,andmanagers.ThelargestofthesecompaniesisHonHaiPrecision Industry,alsoknownasFoxconn.Thecompanyhasgrownatanastoundingrate,firstinTaiwanand

laterinChina.Itsrevenueslastyearwere$62billion,largerthanApple(AAPL),Microsoft(MSFT),

Dell(DELL),orIntel.Foxconnemploysover800,000people,morethanthecombinedworldwidehead

countofApple,Dell,Microsoft,Hewlett­Packard(HPQ),Intel,andSony(SNE)(figure­C).

UntilarecentspateofsuicidesatFoxconn'sgiantfactorycomplexinShenzhen,China,fewAmericans hadheardofthecompany.Butmostknowtheproductsitmakes:computersforDellandHP,Nokia

(NOK)cellphones,MicrosoftXbox360consoles,Intelmotherboards,andcountlessotherfamiliar

gadgets.Some250,000FoxconnemployeesinsouthernChinaproduceApple'sproducts.Apple,

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Andy Grove: How America Can Create Jobs - Businessweek

meanwhile,hasabout25,000employeesintheU.S.ThatmeansforeveryAppleworkerintheU.S.

thereare10peopleinChinaworkingoniMacs,iPods,andiPhones.Thesameroughly10­to­1

relationshipholdsforDell,disk­drivemakerSeagateTechnology(STX),andotherU.S.tech

companies.

Youcouldsay,asmanydo,thatshippingjobsoverseasisnobigdealbecausethehigh­valuework—

andmuchoftheprofits—remainintheU.S.Thatmaywellbeso.Butwhatkindofasocietyarewe

goingtohaveifitconsistsofhighlypaidpeopledoinghigh­value­addedwork—andmassesof

unemployed?

SincetheearlydaysofSiliconValley,themoneyinvestedincompanieshasincreaseddramatically,

onlytoproducefewerjobs.Simplyput,theU.S.hasbecomewildlyinefficientatcreatingAmerican

techjobs.Wemaybelessawareofthisgrowinginefficiency,however,becauseourhistoryofcreating

jobsoverthepastfewdecadeshasbeenspectacular—maskingourgreaterandgreaterspendingto

createeachposition.Shouldwewaitandnotactonthebasisofearlyindicators?Ithinkthatwouldbea

tragicmistake,becausetheonlychancewehavetoreversethedeteriorationisifweactearlyand

decisively.

Alreadythedeclinehasbeenmarked.Itmaybemeasuredbywayofasimplecalculation—anestimate oftheemploymentcost­effectivenessofacompany.First,taketheinitialinvestmentplustheinvestment

duringacompany'sIPO.Thendividethatbythenumberofemployeesworkinginthatcompany10

yearslater.ForIntelthisworkedouttobeabout$650perjob—$3,600adjustedforinflation.National

Semiconductor(NSM),anotherchipcompany,wasevenmoreefficientat$2,000perjob.Makingthe

samecalculationsforanumberofSiliconValleycompaniesshowsthatthecostofcreatingU.S.jobs

grewfromafewthousanddollarsperpositionintheearlyyearstoahundredthousanddollarstoday

(figure­A).Theobviousreason:Companiessimplyhirefeweremployeesasmoreworkisdoneby

outsidecontractors,usuallyinAsia.

Thejobmachinebreakdownisn'tjustincomputers.Consideralternativeenergy,anemergingindustry wherethere'splentyofinnovation.Photovoltaics,forexample,areaU.S.invention.Theiruseinhome energyapplicationswasalsopioneeredbytheU.S.Lastyear,Idecidedtodomybitforenergy conservationandsetouttoequipmyhousewithsolarpower.MywifeandItalkedwithfourlocalsolar firms.Aspartofourduediligence,Icheckedwheretheygettheirphotovoltaicpanels—thekeypartof thesystem.AllthepanelstheyusecomefromChina.ASiliconValleycompanysellsequipmentusedto

manufacturephoto­activefilms.Theyshipcloseto10timesmoremachinestoChinathanto

manufacturersintheU.S.,andthisgapisgrowing(figure­D).Notsurprisingly,U.S.employmentinthe

makingofphotovoltaicfilmsandpanelsisperhaps10,000—justafewpercentofestimatedworldwide

employment.

There'smoreatstakethanexportedjobs.Withsometechnologies,bothscalingandinnovationtake

placeoverseas.

Suchisthecasewithadvancedbatteries.Ithastakenyearsandmanyfalsestarts,butfinallyweare

abouttowitnessmass­producedelectriccarsandtrucks.Theyallrelyonlithium­ionbatteries.What

microprocessorsaretocomputing,batteriesaretoelectricvehicles.Unlikewithmicroprocessors,the

U.S.shareoflithium­ionbatteryproductionistiny(figure­E).

That'saproblem.Anewindustryneedsaneffectiveecosysteminwhichtechnologyknowhow

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Andy Grove: How America Can Create Jobs - Businessweek

accumulates,experiencebuildsonexperience,andcloserelationshipsdevelopbetweensupplierand

customer.TheU.S.lostitsleadinbatteries30yearsagowhenitstoppedmakingconsumerelectronics

devices.Whoevermadebatteriesthengainedtheexposureandrelationshipsneededtolearntosupply

batteriesforthemoredemandinglaptopPCmarket,andafterthat,fortheevenmoredemanding

automobilemarket.U.S.companiesdidnotparticipateinthefirstphaseandconsequentlywerenotin

therunningforallthatfollowed.Idoubttheywillevercatchup.

TheKeytoJobCreation

Scalingisn'teasy.Theinvestmentsrequiredaremuchhigherthanintheinventionphase.Andfunds needtobecommittedearly,whennotmuchisknownaboutthepotentialmarket.Anotherexamplefrom

Intel:Theinvestmenttobuildasiliconmanufacturingplantinthe'70swasafewmilliondollars.Bythe

early'90sthecostofthefactoriesthatwouldbeabletoproducethenewPentiumchipsinvolumerose

toseveralbilliondollars.Thedecisiontobuildtheseplantsneededtobemadeyearsbeforeweknew

whetherthePentiumchipwouldworkorwhetherthemarketwouldbeinterestedinit.

Lessonswelearnedfrompreviousmisstepshelpedus.Someyearsearlier,whenIntel'sbusiness

consistedofmakingmemorychips,wehesitatedtoaddmanufacturingcapacity,notbeingallthatsure

aboutthemarketdemandinyearstocome.OurJapanesecompetitorsdidn'thesitate:Theybuiltthe

plants.Whenthedemandformemorychipsexploded,theJapaneseroaredintotheU.S.marketand

Intelbeganitsdescentasamemorychipsupplier.Despitebeingsteeledbythatexperience,Istill

rememberhowafraidIwasasIaskedtheInteldirectorsforauthorizationtospendbillionsofdollarsfor

factoriestoproduceaproductthatdidnotexistatthetimeforamarketwecouldnotsize.Fortunately,

theygavetheirO.K.evenastheygulped.Thebetpaidoff.

Mypointisn'tthatIntelwasbrilliant.Thecompanywasfoundedatatimewhenitwaseasiertoscale

domestically.Foronething,Chinawasn'tyetopenforbusiness.Moreimportantly,theU.S.hadnotyet

forgottenthatscalingwascrucialtoitseconomicfuture.

HowcouldtheU.S.haveforgotten?Ibelievetheanswerhastodowithageneralundervaluingof

manufacturing—theideathataslongas"knowledgework"staysintheU.S.,itdoesn'tmatterwhat

happenstofactoryjobs.It'snotjustnewspapercommentatorswhospreadthisidea.Considerthis

passagebyPrincetonUniversityeconomistAlanS.Blinder:"TheTVmanufacturingindustryreally

startedhere,andatonepointemployedmanyworkers.ButasTVsetsbecame'justacommodity,'their

productionmovedoffshoretolocationswithmuchlowerwages.Andnowadaysthenumberof

televisionsetsmanufacturedintheU.S.iszero.Afailure?No,asuccess."

Idisagree.Notonlydidweloseanuntoldnumberofjobs,webrokethechainofexperiencethatisso

importantintechnologicalevolution.Ashappenedwithbatteries,abandoningtoday's"commodity"

manufacturingcanlockyououtoftomorrow'semergingindustry.

Wanted:Job­CentricEconomics

Ourfundamentaleconomicbeliefs,whichwehaveelevatedfromaconvictionbasedonobservationto

anunquestionedtruism,isthatthefreemarketisthebestofalleconomicsystems—thefreerthebetter.

Ourgenerationhasseenthedecisivevictoryoffree­marketprinciplesoverplannedeconomies.Sowe

stickwiththisbelief,largelyoblivioustoemergingevidencethatwhilefreemarketsbeatplanned

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economies,theremayberoomforamodificationthatisevenbetter.

SuchevidencestaresatusfromtheperformanceofseveralAsiancountriesinthepastfewdecades.

ThesecountriesseemtounderstandthatjobcreationmustbetheNo.1objectiveofstateeconomic

policy.Thegovernmentplaysastrategicroleinsettingtheprioritiesandarrayingtheforcesand organizationnecessarytoachievethisgoal.TherapiddevelopmentoftheAsianeconomiesprovides numerousillustrations.InathoroughstudyoftheindustrialdevelopmentofEastAsia,RobertWadeof theLondonSchoolofEconomicsfoundthattheseeconomiesturnedinprecedent­shatteringeconomic

performancesoverthe'70sand'80sinlargepartbecauseoftheeffectiveinvolvementofthegovernment

intargetingthegrowthofmanufacturingindustries.

Considerthe"GoldenProjects,"aseriesofdigitalinitiativesdrivenbytheChinesegovernmentinthe

late1980sand1990s.Beijingwasconvincedoftheimportanceofelectronicnetworks—usedfor

transactions,communications,andcoordination—inenablingjobcreation,particularlyintheless

developedpartsofthecountry.Consequently,theGoldenProjectsenjoyedpriorityfunding.Intime

theycontributedtotherapiddevelopmentofChina'sinformationinfrastructureandthecountry's

economicgrowth.

HowdoweturnsuchAsianexperienceintointelligentactionhereandnow?Longterm,weneedajob­

centriceconomictheory—andjob­centricpoliticalleadership—toguideourplansandactions.Inthe

meantime,considersomebasicthoughtsfromaonetimefactoryguy.

SiliconValleyisacommunitywithastrongtraditionofengineering,andengineersareapeculiarbreed.

Theyareeagertosolvewhateverproblemstheyencounter.Ifprofitmarginsaretheproblem,wegoto

workonmargins,withexquisitefocus.Eachcompany,ruggedlyindividualistic,doesitsbesttoexpand

efficientlyandimproveitsownprofitability.However,ourpursuitofourindividualbusinesses,which

ofteninvolvestransferringmanufacturingandagreatdealofengineeringoutofthecountry,has

hinderedourabilitytobringinnovationstoscaleathome.Withoutscaling,wedon'tjustlosejobs—we

loseourholdonnewtechnologies.Losingtheabilitytoscalewillultimatelydamageourcapacityto

innovate.

Thestorycomestomindofanengineerwhowastobeexecutedbyguillotine.Theguillotinewasstuck,

andcustomrequiredthatifthebladedidn'tdrop,thecondemnedmanwassetfree.Beforethiscould

happen,theengineerpointedwithexcitementtoarustypulley,andtoldtheexecutionertoapplysome

oilthere.Offwenthishead.

Wegottoourcurrentstateasaconsequenceofmanyofustakingactionsfocusedonourown

companies'nextmilestones.Anexample:FiveyearsagoafriendjoinedalargeVCfirmasapartner.

Hisresponsibilitywastomakesurethatallthestartupstheyfundedhada"Chinastrategy,"meaninga

plantomovewhatjobstheycouldtoChina.Hewasgoingaroundwithanoilcan,applyingdropstothe

guillotineincaseitwasstuck.Weshouldputawayouroilcans.VCsshouldhaveapartnerinchargeof

everystartup's"U.S.strategy."

Thefirsttaskistorebuildourindustrialcommons.Weshoulddevelopasystemoffinancialincentives:

Levyanextrataxontheproductofoffshoredlabor.(Iftheresultisatradewar,treatitlikeotherwars—

fighttowin.)Keepthatmoneyseparate.DeposititinthecoffersofwhatwemightcalltheScalingBank

oftheU.S.andmakethesesumsavailabletocompaniesthatwillscaletheirAmericanoperations.Such

asystemwouldbeadailyreminderthatwhilepursuingourcompanygoals,allofusinbusinesshavea

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responsibilitytomaintaintheindustrialbaseonwhichwedependandthesocietywhoseadaptability—

andstability—wemayhavetakenforgranted.

IfledHungaryasayoungmanin1956tocometotheU.S.GrowingupintheSovietbloc,Iwitnessed

first­handtheperilsofbothgovernmentoverreachandastratifiedpopulation.MostAmericansprobably aren'tawarethattherewasatimeinthiscountrywhentanksandcavalryweremassedonPennsylvania

Avenuetochaseawaytheunemployed.Itwas1932;thousandsofjoblessveteransweredemonstrating

outsidetheWhiteHouse.Soldierswithfixedbayonetsandliveammunitionmovedinonthem,and

herdedthemawayfromtheWhiteHouse.InAmerica!Unemploymentiscorrosive.IfwhatI'm

suggestingsoundsprotectionist,sobeit.

Everyday,thatPaloAltorestaurantwhereImettheChineseventurecapitalistsisfulloftechnology

executivesandentrepreneurs.Manyofthemaremyfriends.Iunderstandthetechnologicalchallenges

theyface,alongwiththefinancialpressurethey'reunderfromdirectorsandshareholders.Canwe

expectthemtotakeonyetanotherassignment,toworkonbehalfofalooselydefinedcommunityof

companies,employees,andemployeesyettobehired?Todosoisundoubtedlynaïve.Yetthe

imperativeforchangeisrealandthechoiceissimple.Ifwewanttoremainaleadingeconomy,we

changeonourown,orchangewillcontinuetobeforceduponus.

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