Andy Grove advocates protectionism and more

[IndependentlyPoor]

This doesn't tell the entire story. You need to see the whole pie, just not percentage of the pie. A lot of the decline in percentage of corporate taxes is from corporations moving operations overseas to maximize profits. They would happily open shop here if we did not have such a oppressive tax system.

Is this really true? I don't know beans about corporate taxation, but would be surprised if Apple could lower its tax bill by manufacturing in the US instead of China. I would assume that they pay taxes on their profits no matter where stuff is made, but this wouldn't be the first time I have been caught with my naivete showing. Maybe they get a break on profits made on products both made and sold in abroad. Anybody know?

 

[haha]

But the converse is not necessarily true. Just because corporate taxes are cut does not automatically mean the products will be cheaper to the consumer. The tax savings could flow through to equity holders.

True, if the industry is somehow protected from competition, hard to see otherwise. The essence of capitalist competition is to force ROE down to the cost of capital.

The first and foremost is to recognize that we have a problem that needs to be solved. We need manufacturing for many of the reasons that Mr. Grove cites and others as well. What manufacturing provides is nothing short of the basis of our economic prosperity. Also, it will cause the demise of our global leadership in the military arena. That's right, it will make us militarily weak and vulnerable to harm and ultimately, domination from our enemies. These are long term trends that are measured in decades and are not easily seen.

Perhaps more later.

Free to canoe

I hope you will post more later. I agree with you that a large contintent-spanning country which is also a world military power must have a strong manufacturing base. I asserted this years ago on this very forum. I would like to see some studies of Sweden, Germany, Finland and Japan and perhas to some extent Norway, though it may be a special case with its oil and gas in the North Sea. A Swedish friend was pointing out to me how many very important world class companies that are not only headquartered in Sweden, but also do much of their manufacturing in Sweden. And this is from a small, rocky, cold country with no or almost no oil and gas, and a population approximately the size of WA and OR together, and who have a very high standard of living. And Germany, a manufacturing lion also with a high standard of living and high wages and very competitive world dominating manufacturing companies. Germany dominates the EU, in spite of paying much higher manufacturing wages than the countries to the south or East. Of course, some industries cannot make low end or mass market goods in a high wage country- look at VW's manufacturing footprint. And Japan has plenty of finance problems but they wrote the book on high quality competitively priced upper-tier manufacturing. It is true that some of this, especially cars has been moved to low wage countries.

IMO, one of our faults here is the US is unusually bad management and leadership at societal levels. For example, though we are very good at training engineers, how many of them are native born Americans? If we just assume that American schools prior to college are run mainly as a make-work project for unionized teachers, why don't we just go all the way and at least make it easier for foreign scientists and engineers to stay here and work? Anyone whose business or job has involved trying to get H1b's for prospective employees knows what an anti-competitive bottleneck this is.

Also, though we can train scientists and engineers very well once they show up at university, how well do we do with machinists and high end production workers? How many people who actually should never even be in a university are there achieving nothing other than the assumption of debt, when quality trade schools could be preparing them for high paying jobs?

IMO, the US has run its race, and if it is not already too late to do much about where we are, that time is getting close.


Ha

 

[HFWR]

True, if the industry is somehow protected from competition, not true otherwise. The essence of capitalist competition is to force ROE down to the cost of capital.

Ha

Excellent point, Ha.

There is a difference between capitalist/corporate policy, and social policy. What's good for GM used to be good for America, because most of the manufacturing was done here, and the money stayed here. Granted, there's a continuum of opinions on whether and how much government industrial planning there should be, and I'm leary of tariffs as the answer. But there are externalities that exist. UE insurance, food stamps, and the like are the more visible of these, but the more subtle effects of a dwindling manufacturing/industrial base -dying small businesses and towns, more crime, lower tax base, no "middle-class", etc. - are what's left after the factory moves to Malaysia. Lots of us on this forum have above average intelligence, and make/made above average money for our efforts. But the average joe/josephine may be less able to get more education, uproot for greener pastures, invent the next widget. These are the folks who work in the manufacturing plants, and the small businesses that support them. And not just suppliers and vendors suffer, but whole communities. The restaurants, car washes, hardware stores, etc. lose their customer base as well.

Not sure what the answers are, or if government is particularly suited to answering these questions/solving these problems. And for anyone to succeed beyond their wildest dreams, there must also exist the possibility that one can fail beyond their wildest dreams... For all the focus on small businesses as the engine of growth, some of these small businesses need to actually make something. We can't just mow each others' yards...

 

[dex]

A Swedish friend was pointing out to me how many very important world class companies that are not only headquartered in Sweden, but also do much of their manufacturing in Sweden. And this is from a small, rocky, cold country with no or almost no oil and gas, and a population approximately the size of WA and OR together, and who have a very high standard of living. And Germany, a manufacturing lion also with a high standard of living and high wages and very competitive world dominating manufacturing companies. Germany dominates the EU, in spite of paying much higher manufacturing wages than the countries to the south or East. Of course, some industries cannot make low end or mass market goods in a high wage country- look at VW's manufacturing footprint. And Japan has plenty of finance problems but they wrote the book on high quality competitively priced upper-tier manufacturing. It is true that some of this, especially cars has been moved to low wage countries.

I think the idea you are pointing out is that in the countries you mention there is strong identification by the business with the nation and its goals, business is not demonized, and governments have a long term stable business strategy.

why don't we just go all the way and at least make it easier for foreign scientists and engineers to stay here and work? Anyone whose business or job has involved trying to get H1b's for prospective employees knows what an anti-competitive bottleneck this is.

If the jobs of college professors, journalist, social workers, etc could be filled by (or influenced their income down) illegal immigrants, no one would be for illegal immigration. People with influence do not want more foreign engineers in the USA for the same reasons.

How many people who actually should never even be in a university are there achieving nothing other than the assumption of debt, when quality trade schools could be preparing them for high paying jobs?

Research NYC colleges when they went to open admissions. It pulled a lot of things down with it.

IMO, the US has run its race, and if it is not already too late to do much about where we are, that time is getting close.

It is too late.

 

[FinanceGeek]

Smart guy maybe, but his article screams of hypocrisy.

In the town I live, Intel has closed not just 1 but 2 facilities and moved them both to China. Nearly 5000 primary US jobs were lost.

I was not aware that Mr. Grove attempted to stop those actions (I believe both occurred under his tenure). Maybe the company he founded could lead by example?

 

[chinaco]

GE apparently thinks China is not not playing fair. He made a retraction of his statement publicly because GE doesn't want to alienate the chicom govt... but he sent a message.

GE CEO Jeffrey Immelt on China: They Won't Let Us Win - China Real Time Report - WSJ

 

[clifp]

Smart guy maybe, but his article screams of hypocrisy.

In the town I live, Intel has closed not just 1 but 2 facilities and moved them both to China. Nearly 5000 primary US jobs were lost.

I was not aware that Mr. Grove attempted to stop those actions (I believe both occurred under his tenure). Maybe the company he founded could lead by example?

When I left the company in 2000 there were 86,000 employee approximately 60% based in the US now they are down to 80,000 55% in the US. So yes jobs are moving overseas.

To be fair to Intel it isn't just US facilities they have been closed, the recently shut down a long time facility in the Philippines. Interestingly when I started in the chip business with AMD, they had recently opened a facility in the Philippines. It employed several thousand woman, who's job it was to manually attached the silicon chip to the package. Now ostensibly the reason AMD chose the locations was because the Filipino girls had small hands and had the manual dexterity. Being older and more cynical I now realize and even more important reason is they the girls were willing to work long hours for little money.

However, jobs that require manual dexterity disappeared in the chip industry decades ago and aren't coming back. Looking at the Intel's website, I see that a new Oregon Fab (chip factory) costs $3 billion (more than 1/2 for equipment) and employees 1,000 workers. The first number didn't surprise but the 2nd did being roughly 1/3 of the number of employees I remember. So yes US manufacturing workers can compete if you provide them with enough capital. 3 Billion divided 1,000 worker is $3 million/worker. With those type of capital spending it doesn't matter a lot if you pay the workers $10,000 a year or $10,000 a month!.

However, if you spend $10 million (IIRC a typical price for Chinese factory) for a factory that employees 1,000 worker that is $10K in capital per worker and the wages matter a lot.

As far as Andy's article being hypocritical, that is somewhat true but that is also the point. It is unreasonable to expect a corporation to act against the interest of its shareholders. Clearly corporations can save money by moving manufacturing offshore, perhaps more scary they also seem to be able to do it, by moving programming, accounting, and customer service operations. However, what is good for the corporation individually may very well be bad for the country collectively.
This is a classic "tragedy of the commons" situation.

Now is saving manufacturing jobs, worth abandoning free trade for I'm not sure? Should there be a Scaling bank to subsidize US manufacturing, I am even more skeptical? Should we dismiss this idea with simple slogans? Free trade is the best, industrial policies always fail, that would be foolish.

 

[clifp]

I was hoping you could comment on this, clifp. I honestly couldn't remember just how much interaction you had with Andy Grove, so thanks for sharing this insight.

Whew - your comments make this even more sobering...

Don't worry too much, Grove richly deserved his association with phrase "only the paranoid survive." No matter how high the stock prices, and how much money the company made, Grove was sure to give us a scary lecture about how if we didn't keep running, some company, consortium, or an entire country was going catch us and have us for lunch. As an elder statesman I think he is happy performing that role for the country .

I want to agree with you that maybe manufacturing jobs really are not a requirement for growth in the USA. I spent my career supporting manufacturing operations, and it sure seems that is what we need, but maybe there is another way? I've read that Apple makes far more on an iPod sale than any of the suppliers or manufacturers. I guess I just don't have a good enough grasp of macro-economics to figure out if that can play long-term.

I often saw the cartoon hanging in someone's office of two guys in MBA school, the proff making opening remarks for a Manufacturing Operations class - one of the MBAs-to-be says to the other "We don't want to learn to make things, we want to learn to make money!"

...

On a happier note, if we can maintain something even close to what we have, we will all be fine. Life is pretty darn good for most of us, and a life 80% as good would still be pretty cushy.

-ERD50

I have made that argument on this board and other places about the iPod, look "all the hard work and pollution is done in China and Apple gets the profit. sweet". However, I've had some nagging doubts, which your comments and the Grove article heightened.

First there is just a limited number of people who have the talents and training, to be an Apple industrial designer, Pixar animator, Google software engineer, or a researchers at biotech company. Even outside the technology, there are limited number of people who have the temperament to work at a start-up , much less the entrepreneurial drive to start their own company. Half the people in this country have below average intelligence, and while many of them have other skills, know a trade, are good with their hands, good service orientation, attention to detail, etc. a heck of lot of them don't have particular marketable skill and need to be taught something. What happens to those people is open question in an outsourced economy.

The interesting point you and Grove raise is what happens if we as a country have little or no contact with manufacturing. I didn't have a lot of exposure to manufacturing in my career, although more than many folks in Silicon Valley. I am sure their are many Silicon Valley engineer who the closest they've got to a factory or a farm, is a server farm .

I remember when I was in corporate marketing, that we had some woman who had spent her career in Intel manufacturing assigned to our organization. Now I could understand, why a manufacturing person would be useful in a design engineer group, but a marketing group. What the heck could she add?. She sat quietly observing us for several weeks, finally after hearing us argue for the umpteenth time, I argued we should do A, no B, no C, and our boss struggle to triangulate, she acted. Using flip charts, and whiteboards, she collected all of the arguments and they walked us through a process of making a decision. I remember disagreeing with decision but being very impressed by the process. When the second manufacturing person joined the group and brought the same discipline to collecting data and making decisions, I realized that there was a lot we could learn from those boring, by the book, manufacturing types.

 

[dex]

The interesting point you and Grove raise is what happens if we as a country have little or no contact with manufacturing. I didn't have a lot of exposure to manufacturing in my career, although more than many folks in Silicon Valley. I am sure their are many Silicon Valley engineer who the closest they've got to a factory or a farm, is a server farm .

I remember when I was in corporate marketing, that we had some woman who had spent her career in Intel manufacturing assigned to our organization. Now I could understand, why a manufacturing person would be useful in a design engineer group, but a marketing group. What the heck could she add?. She sat quietly observing us for several weeks, finally after hearing us argue for the umpteenth time, I argued we should do A, no B, no C, and our boss struggle to triangulate, she acted. Using flip charts, and whiteboards, she collected all of the arguments and they walked us through a process of making a decision. I remember disagreeing with decision but being very impressed by the process. When the second manufacturing person joined the group and brought the same discipline to collecting data and making decisions, I realized that there was a lot we could learn from those boring, by the book, manufacturing types.

What happens is that the countries with manufacturing:
- increase the number of patents - and revenue
- have diverse employment options
- a path to the middle class
- increased number of inventors
- hope for an improved future
- people who work together as a team
- increase in research and development

The elimination of mfg in the USA that started with the 80's recession was the beginning of the end for the USA - in 87 when the USA became a debtor nation.

 

[Free To Canoe]

I hope you will post more later.
Ha

Thanks for the encouragement. I think I need it. There are so many good thoughts going on in this thread.
Where does one start?
1 ) The viability of the manufacturing model for the economic success in global competition?

2) Does a strong manufacturing base in this day and age ensure a high employment rate?

3) Is the dominance of other countries in many areas of manufacturing causing the erosion of the US dominance of the military hardware development and manufacturing?

There are many more questions.
With some of these, I envision that good answers involve a project that results in something like The Birth of Plenty by Bernstein. Kind of the history of (most) everything or the Grand Unification Theory. I hope I am up to it or at least something.

Thinking about some of the comments on this thread has caused to reevaluate what I thought were fairly firm stands on some of these manufacturing related topics. I even now question my comment about manufacturing types being under represented on the forum. Maybe the opposite is true.

Free to canoe

 

[ERD50]

Here's a response to Grove's article:

Andy Grove from Intel is Wrong - Financial Adviser - WSJ

If we bring the jobs back here, would the iPhone suddenly become twice as expensive?

I didn't find any estimates with a quick google, but I doubt that the labor content is a very large % of the cost. Current US wages would increase the cost for sure, and make it less competitive in the marketplace, but I'd be surprised if it even raised it 20% in price.

Talking with people who have been to the Foxconns of the world, one big advantage I see is that the suppliers are all located in close proximity. I think that really cuts down on lead times, responses to changes, etc. Tough to put a number to it though.

In a competitive marketplace, a 5% cost adder is the difference between a successful product and just breaking even. So there is a lot of pressure to outsource and capture the cheaper wages, even if it only means a few % overall. I'm still thinking that Andy Grove is fighting a losing battle by enlisting protectionism as a defense. I think we need to be nimble and adapt. In the early 1900's, I'd think it would be better to start gearing up to make leather car seats for the fledgling auto industry than to keep investing resources into making better buggy-whips. Maybe there is no good alternative though - I dunno.

-ERD50

 

[dex]

In the early 1900's, I'd think it would be better to start gearing up to make leather car seats for the fledgling auto industry than to keep investing resources into making better buggy-whips. Maybe there is no good alternative though - I dunno.

-ERD50

A government would need to make a concerted effort to maintain a diverse mfg base - somehow balancing labor costs, environmental concerns, power and shortages of labor and material.

The canary in the mine is textiles. England was the king, then it moved along the following road- Northeast USA, Southeast USA, India, Southeast Asia, China (I might have the last two out of order).
A diverse mfg base is key to a long term healthy economy. The fallacy a large service economy is viable for the USA is being exposed.

 

[FinanceDude]

There is no "magic pill" to fix the manufacturing losses, and economic policies that vie tax breaks and such are helpful but not the answer.

Someone I know personally is a big hitter at a company that makes mining equipment. It is a feast or famine business. A few years ago, China tried to put the other mining equipment companies globally out of business. They undercut pricing severely, and were making the equipment in China, so the labor costs were much less than in the US and Sweden who also produced the same type of equipment.

The Chinese govt purchased a big order of equipment from their own company and used it as a photo op with all the govt bigwigs and politicians there. Two days later, my friend's company gets an urgent call from China. It seems their cheaper" equipment broke, and could his company expedite equipment to replace it ASAP?

They produced the equipment needed and sent it out 6 weeks later. The US produced equipment was far superior in quality to the Chinese product. The Chinese govt was so impressed they ordered a bunch more, and now have a long-term contract to produce mining equipment for China. The Chinese have now stated they will only buy mining equipment for their most productive mines from the US and Sweden, as that is the only products that have enough quality to stand up to the demands of the mining operation.

It is an example of how the US can compete on a global scale. There is quite a lot of business going on this way right now. We can't compete on PRICE, we CAN compete on quality in some areas. As fas as I know, the US is still the world leader in R&D and enw technologies, now we have to be smart and use it to our advantage.........

Great posts regarding Intel, clifp........

 

[dex]

It is an example of how the US can compete on a global scale. There is quite a lot of business going on this way right now. We can't compete on PRICE, we CAN compete on quality in some areas. As fas as I know, the US is still the world leader in R&D and enw technologies, now we have to be smart and use it to our advantage.........

Great posts regarding Intel, clifp........

For how much longer
Steel mfg.
Automobiles
Computers
Clothing
Medical Equipment - search for India news stories about it
Are examples of areas that have left the USA. Automobiles are an example where quality was and issue with non-USA mfg. early on. People learn and the knowledge to improve quality is can be learned.

Competitive advantage can only be maintained through price (except for monopolies, patents, scarcity and government controls/laws/policies).

 

[ERD50]

A government would need to make a concerted effort to maintain a diverse mfg base - somehow balancing labor costs, environmental concerns, power and shortages of labor and material.

The canary in the mine is textiles. England was the king,....

The fallacy a large service economy is viable for the USA is being exposed.

This is probably true. Now while I proposed that *maybe* there is some way for the US to make money by managing these overseas manufacturing resources, I'm sure not confident that is can be done in enough areas to fuel the nation. However, I'm pretty sure that protectionism is not a viable answer either. Would protectionism have saved England's textile industry?

I suspect that this will all come into balance over the years. Overseas wages will rise, ours will lower, and hopefully with good infrastructure and other things in place here, our productivity will be high enough so that wages remain relatively high. But who knows?

I agree with you on your response to FD's post - yes, in many areas we may produce superior product and it may be a superior value. But I doubt we can maintain that advantage, these other countries are not standing still.

-ERD50

 

[samclem]

I suspect that this will all come into balance over the years. Overseas wages will rise, ours will lower, and hopefully with good infrastructure and other things in place here, our productivity will be high enough so that wages remain relatively high. But who knows?

Yes. The trick will be maintaining the underlying economic system that will allow our economy to have a productivity edge once the dust settles. If we can keep/regain a lean, market-based economy (not just for goods and services, but the "inputs" of labor and capital as well) and keep/improve our information infrastructure, physical infrastructure, and labor-pool skills (education) at world-class levels, then we'll be fine in the long term. But, if growing economic uncertainty and belt-tightening causes us to cry for more "protection" from the tough medicine of foreign competition and the laws of supply/demand (more govt assistance payments, higher govt spending, more centralized planning, restrictive legislation, etc) , then we won't be in a position to compete and we'll be in a well-earned very tough spot.