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Andy Grove Is Right, Industry Needs Its Own Manufacturing

Former Intel (INTC) CEO Andy Grove has developed quite a name lately for suggesting that the U.S. can no longer afford the attitudes that the high tech industry has had. Patents have become products in their own right and competitive weapons, rather than enabling technology. Silicon Valley has forgotten that start-ups that don't scale can't create large numbers of jobs. Today on ZDNet, Jason Hiner wrote that while he admires the civic-mindedness of Grove's view, he doubts that protectionism would work. I'm not so sure.

The country is at a dangerous economic point and we seem to rush headlong to become a place where you can think but not actually do. And yet, the people who would have everyone work in some "knowledge economy" are unrealistic. Only about 25 percent of the country actually attends college, and institutions of higher education simply don't have the room for multiple times that number.

There is also something fundamentally odd about thinking that everyone can sit at a desk. Are other countries supposed to supply everything: plumbing, building supplies, carpenters, electricians, tooling? All goods and manual services? Even if they could, what happens when they're not satisfied and want the higher end design, engineering, and planning jobs? Oh, wait, they already do and are getting them as well.

The anti-protectionist protestations are dangerous largely because, in other circumstances, they'd be right. Trying to lock out a threat never works. It's like depending on ridiculous patent arguments, like the trio that sued Microsoft (MSFT) over multi-user gaming, even though their patent was for devices that were directly connected. It's like Intel (INTC), to invoke irony, trying to freeze out AMD, only to have EU and US regulators come down as hard as you could have expected. It's the Associated Press originally demanding that anyone quoting as few as five words of one of its stories pay for a license. All this is hiding from competition. Even if the hiding place lasts for a while, eventually you get turned out and, suddenly, you're out of practice in taking a punch.

However, anti-protectionism depends on having a robust, vibrant, and varied economy. The idea of competition is to make you smart and inventive, returning with something that is more than an answer. That's not just true for a single company, but for an industry or an economy. Leave yourself without domestic alternatives and you find yourself at the mercy of your collective competitors. I remember a consultant's story of a large domestic company that outsources its IT function to a southeast Asian firm. Things were fine until the outsourcer decided that its profit level wasn't high enough, so it levied a big increase. The client couldn't do anything short-term because it had closed its data processing facilities.

Perhaps my BNET colleague Carter Dougherty is right and that what is necessary is new policy thinking about how to revive manufacturing in this country. My concern is that we're running out of time for kinder and gentler strategies.

Most companies recognize the danger of single-sourcing of anything, but many are closer to the condition than they realize. For example, the high tech industry uses a lot of rare earth metals. According to a Federation of Scientists report (with a tip of the hat to Ars Technica), the United States has zero domestic rare earth mining or even refining facilities. Demand has outstripped production. China is the current dominant supplier, only its domestic needs will eventually consume all it produces, leaving nothing for export. Why would China bother to produce items for companies here, then?

Anyone who has studied systems management will likely have heard of sub-optimization. You improve one part of a system without regard to the part it plays in a larger context. Although the one part thrives, that success may hinder the whole, which, if the problem is bad enough, could languish. It's time for companies to stop assuming that they can cut every corner and horde every penny without paying a price.


Image: user cienpies, site standard license.
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