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Andy Grove: How America Can Create Jobs - Businessweek

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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 beencreatingmanyjobsoflateunlessyou'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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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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meanwhile,hasabout25,000employeesintheU.S.ThatmeansforeveryAppleworkerintheU.S. thereare10peopleinChinaworkingoniMacs,iPods,andiPhones.Thesameroughly10to1 relationshipholdsforDell,diskdrivemakerSeagateTechnology(STX),andotherU.S.tech companies. Youcouldsay,asmanydo,thatshippingjobsoverseasisnobigdealbecausethehighvaluework andmuchoftheprofitsremainintheU.S.Thatmaywellbeso.Butwhatkindofasocietyarewe goingtohaveifitconsistsofhighlypaidpeopledoinghighvalueaddedworkandmassesof unemployed? SincetheearlydaysofSiliconValley,themoneyinvestedincompanieshasincreaseddramatically, onlytoproducefewerjobs.Simplyput,theU.S.hasbecomewildlyinefficientatcreatingAmerican techjobs.Wemaybelessawareofthisgrowinginefficiency,however,becauseourhistoryofcreating jobsoverthepastfewdecadeshasbeenspectacularmaskingourgreaterandgreaterspendingto createeachposition.Shouldwewaitandnotactonthebasisofearlyindicators?Ithinkthatwouldbea tragicmistake,becausetheonlychancewehavetoreversethedeteriorationisifweactearlyand decisively. Alreadythedeclinehasbeenmarked.Itmaybemeasuredbywayofasimplecalculationanestimate 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,Icheckedwheretheygettheirphotovoltaicpanelsthekeypartof thesystem.AllthepanelstheyusecomefromChina.ASiliconValleycompanysellsequipmentusedto manufacturephotoactivefilms.Theyshipcloseto10timesmoremachinestoChinathanto manufacturersintheU.S.,andthisgapisgrowing(figureD).Notsurprisingly,U.S.employmentinthe makingofphotovoltaicfilmsandpanelsisperhaps10,000justafewpercentofestimatedworldwide 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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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 manufacturingtheideathataslongas"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,isthatthefreemarketisthebestofalleconomicsystemsthefreerthebetter. 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.Beijingwasconvincedoftheimportanceofelectronicnetworksusedfor transactions,communications,andcoordinationinenablingjobcreation,particularlyintheless developedpartsofthecountry.Consequently,theGoldenProjectsenjoyedpriorityfunding.Intime theycontributedtotherapiddevelopmentofChina'sinformationinfrastructureandthecountry's economicgrowth. HowdoweturnsuchAsianexperienceintointelligentactionhereandnow?Longterm,weneedajob centriceconomictheoryandjobcentricpoliticalleadershiptoguideourplansandactions.Inthe meantime,considersomebasicthoughtsfromaonetimefactoryguy. SiliconValleyisacommunitywithastrongtraditionofengineering,andengineersareapeculiarbreed. Theyareeagertosolvewhateverproblemstheyencounter.Ifprofitmarginsaretheproblem,wegoto workonmargins,withexquisitefocus.Eachcompany,ruggedlyindividualistic,doesitsbesttoexpand efficientlyandimproveitsownprofitability.However,ourpursuitofourindividualbusinesses,which ofteninvolvestransferringmanufacturingandagreatdealofengineeringoutofthecountry,has hinderedourabilitytobringinnovationstoscaleathome.Withoutscaling,wedon'tjustlosejobswe 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 andstabilitywemayhavetakenforgranted. IfledHungaryasayoungmanin1956tocometotheU.S.GrowingupintheSovietbloc,Iwitnessed firsthandtheperilsofbothgovernmentoverreachandastratifiedpopulation.MostAmericansprobably aren'tawarethattherewasatimeinthiscountrywhentanksandcavalryweremassedonPennsylvania Avenuetochaseawaytheunemployed.Itwas1932thousandsofjoblessveteransweredemonstrating outsidetheWhiteHouse.Soldierswithfixedbayonetsandliveammunitionmovedinonthem,and herdedthemawayfromtheWhiteHouse.InAmerica!Unemploymentiscorrosive.IfwhatI'm suggestingsoundsprotectionist,sobeit. Everyday,thatPaloAltorestaurantwhereImettheChineseventurecapitalistsisfulloftechnology executivesandentrepreneurs.Manyofthemaremyfriends.Iunderstandthetechnologicalchallenges theyface,alongwiththefinancialpressurethey'reunderfromdirectorsandshareholders.Canwe expectthemtotakeonyetanotherassignment,toworkonbehalfofalooselydefinedcommunityof companies,employees,andemployeesyettobehired?Todosoisundoubtedlynave.Yetthe imperativeforchangeisrealandthechoiceissimple.Ifwewanttoremainaleadingeconomy,we changeonourown,orchangewillcontinuetobeforceduponus. 2012BloombergL.P.AllRightsReserved.MadeinNYCAdChoices

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