To: H-1B/L-1/offshoring e-newsletter 191

Guess what--an op-ed by a former prominent Silicon Valley CEO that does
NOT claim American kids can't do math and science!  And it does NOT talk
about the large numbers of foreign students in U.S. engineering
programs!  And it does NOT talk about a "need" for H-1Bs and fast-track
green cards.

If not "the usual suspects," then what IS the target of Andy Grove's
strongly-word criticism below?  Lo and behold, it's on corporate greed!
And globalism.  And what do you know, he disagrees with Thomas Friedman.

Though Grove's points are largely focused on the manufacturing side of
the tech industry, his point that an integrated "ecosystem" being vital
for a tech firm applies more generally.  For instance, his comments on
technological progress in batteries buttress a point I've often made
that innovation comes serendipitously, from "ordinary" work--not people
who are told to "sit down and innovate."  Thus the idea of offshoring
programming and engineering work and keeping only R&D here is quite
shortsighted.

Unfortunately, it may be too little, too late from Andy Grove.  There's
a lot more he'd say if he only were given the relevant information, such
as our government's deliberate adoption of policies that it knew would
reduce the number of domestic students pursuing PhDs in engineering and
science.

Norm

http://www.bloomberg.com/news/2010-07-01/how-to-make-an-american-job-before-it-s-too-late-andy-grove.html

How to Make an American Job Before It's Too Late: Andy Grove

By Andy Grove - Jul 1, 2010
Bloomberg Opinion
Andrew "Andy" Grove, co-founder of Intel Corp.

Andrew "Andy" Grove, co-founder and senior adviser to Intel Corp.,
listens during an interview in his office in Los Altos, California.
Photographer: Tony Avelar/Bloomberg News

Recently an acquaintance at the next table in a Palo Alto, California,
restaurant introduced me to his companions: three young venture
capitalists from China. They explained, with visible excitement, that
they were touring promising companies in Silicon Valley. I've lived in
the Valley a long time, and usually when I see how the region has
become such a draw for global investments, I feel a little proud.

Not this time. I left the restaurant unsettled. Something didn't add
up. Bay Area unemployment is even higher than the 9.7 percent national
average. Clearly, the great Silicon Valley innovation machine hasn't
been creating many jobs of late -- unless you are counting Asia, where
American technology companies have been adding jobs like mad for years.

The underlying problem isn't simply lower Asian costs. It's our own
misplaced faith in the power of startups to create U.S. jobs. Americans
love the idea of the guys in the garage inventing something that
changes the world. New York Times columnist Thomas L. Friedman recently
encapsulated this view in a piece called "Start-Ups, Not Bailouts." His
argument: Let tired old companies that do commodity manufacturing die
if they have to. If Washington really wants to create jobs, he wrote,
it should back startups.

Mythical Moment

Friedman is wrong. Startups are a wonderful thing, but they cannot by
themselves increase tech employment. Equally important is what comes
after that mythical moment of creation in the garage, as technology
goes from prototype to mass production. This is the phase where
companies scale up. They work out design details, figure out how to
make things affordably, build factories, and hire people by the
thousands. Scaling is hard work but necessary to make innovation
matter.

The scaling process is no longer happening in the U.S. And as long as
that's the case, plowing capital into young companies that build their
factories elsewhere will continue to yield a bad return in terms of
American jobs.

Scaling used to work well in Silicon Valley. Entrepreneurs came up with
an invention. Investors gave them money to build their business. If the
founders and their investors were lucky, the company grew and had an
initial public offering, which brought in money that financed further
growth.

Intel Startup

I am fortunate to have lived through one such example. In 1968, two
well-known technologists and their investor friends anted up $3 million
to start Intel Corp., making memory chips for the computer industry.
>From the beginning, we had to figure out how to make our chips in
volume. We had to build factories; hire, train and retain employees;
establish relationships with suppliers; and sort out a million other
things before Intel could become a billion-dollar company. Three years
later, it went public and grew to be one of the biggest technology
companies in the world. By 1980, which was 10 years after our IPO,
about 13,000 people worked for Intel in the U.S.

Not far from Intel's headquarters in Santa Clara, California, other
companies developed. Tandem Computers Inc. went through a similar
process, then Sun Microsystems Inc., Cisco Systems Inc., Netscape
Communications Corp., and on and on. Some companies died along the way
or were absorbed by others, but each survivor added to the complex
technological ecosystem that came to be called Silicon Valley.

As time passed, wages and health-care costs rose in the U.S., and China
opened up. American companies discovered they could have their
manufacturing and even their engineering done cheaper overseas. When
they did so, margins improved. Management was happy, and so were
stockholders. Growth continued, even more profitably. But the job
machine began sputtering.

U.S. Versus China

Today, manufacturing employment in the U.S. computer industry is about
166,000 -- lower than it was before the first personal computer, the
MITS Altair 2800, was assembled in 1975. Meanwhile, a very effective
computer-manufacturing industry has emerged in Asia, employing about
1.5 million workers -- factory employees, engineers and managers.

The largest of these companies is Hon Hai Precision Industry Co., also
known as Foxconn. The company has grown at an astounding rate, first in
Taiwan and later in China. Its revenue last year was $62 billion,
larger than Apple Inc., Microsoft Corp., Dell Inc. or Intel. Foxconn
employs more than 800,000 people, more than the combined worldwide head
count of Apple, Dell, Microsoft, Hewlett-Packard Co., Intel and Sony
Corp.

10-to-1 Ratio

Until a recent spate of suicides at Foxconn's giant factory complex in
Shenzhen, China, few Americans had heard of the company. But most know
the products it makes: computers for Dell and HP, Nokia Oyj cell
phones, Microsoft Xbox 360 consoles, Intel motherboards, and countless
other familiar gadgets. Some 250,000 Foxconn employees in southern
China produce Apple's products. Apple, meanwhile, has about 25,000
employees in the U.S. -- that means for every Apple worker in the U.S.
there are 10 people in China working on iMacs, iPods and iPhones. The
same roughly 10-to-1 relationship holds for Dell, disk-drive maker
Seagate Technology, and other U.S. tech companies.

You could say, as many do, that shipping jobs overseas is no big deal
because the high-value work -- and much of the profits -- remain in the
U.S. That may well be so. 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?

Since the early days of Silicon Valley, the money invested in companies
has increased dramatically, only to produce fewer jobs. Simply put, the
U.S. has become wildly inefficient at creating American tech jobs. We
may be less aware of this growing inefficiency, however, because our
history of creating jobs over the past few decades has been spectacular
-- masking our greater and greater spending to create each position.

Tragic Mistake

Should we wait and not act on the basis of early indicators? I think
that would be a tragic mistake because the only chance we have to
reverse the deterioration is if we act early and decisively.

Already the decline has been marked. It may be measured by way of a
simple calculation: an estimate of the employment cost- effectiveness
of a company. First, take the initial investment plus the investment
during a company's IPO. Then divide that by the number of employees
working in that company 10 years later. For Intel, this worked out to
be about $650 per job -- $3,600 adjusted for inflation. National
Semiconductor Corp., another chip company, was even more efficient at
$2,000 per job.

Making the same calculations for a number of Silicon Valley companies
shows that the cost of creating U.S. jobs grew from a few thousand
dollars per position in the early years to $100,000 today. The obvious
reason: Companies simply hire fewer employees as more work is done by
outside contractors, usually in Asia.

Alternative Energy

The job-machine breakdown isn't just in computers. Consider alternative
energy, an emerging industry where there is plenty of innovation.
Photovoltaics, for example, are a U.S. invention. Their use in
home-energy applications was also pioneered by the U.S.

Last year, I decided to do my bit for energy conservation and set out
to equip my house with solar power. My wife and I talked with four
local solar firms. As part of our due diligence, I checked where they
get their photovoltaic panels -- the key part of the system. All the
panels they use come from China. A Silicon Valley company sells
equipment used to manufacture photo-active films. They ship close to 10
times more machines to China than to manufacturers in the U.S., and
this gap is growing. Not surprisingly, U.S. employment in the making of
photovoltaic films and panels is perhaps 10,000 -- just a few percent
of estimated worldwide employment.

Advanced Batteries

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.

That's a problem. A new industry needs an effective ecosystem in which
technology knowhow accumulates, experience builds on experience, and
close relationships develop between supplier and customer. The U.S.
lost its lead in batteries 30 years ago when it stopped making
consumer-electronics devices. Whoever made batteries then gained the
exposure and relationships needed to learn to supply batteries for the
more demanding laptop PC market, and after that, for the even more
demanding automobile market. U.S. companies didn't participate in the
first phase and consequently weren't in the running for all that
followed. I doubt they will ever catch up.

Job Creation

Scaling isn't easy. The investments required are much higher than in
the invention phase. And funds need to be committed early, when not
much is known about the potential market. Another example from Intel:
The investment to build a silicon manufacturing plant in the 1970s was
a few million dollars. By the early 1990s, the cost of the factories
that would be able to produce the new Pentium chips in volume rose to
several billion dollars. The decision to build these plants needed to
be made years before we knew whether the Pentium chip would work or
whether the market would be interested in it.

Lessons we learned from previous missteps helped us. Years earlier,
when Intel's business consisted of making memory chips, we hesitated to
add manufacturing capacity, not being sure about the market demand in
years to come. Our Japanese competitors didn't hesitate: They built the
plants. When the demand for memory chips exploded, the Japanese roared
into the U.S. market and Intel began its descent as a memory-chip
supplier.

Intel Experience

Though steeled by that experience, I remember how afraid I was as I
asked the Intel directors for authorization to spend billions of
dollars for factories to make a product that didn't exist at the time
for a market we couldn't size. Fortunately, they gave their OK even as
they gulped. The bet paid off.

My point isn't that Intel was brilliant. The company was founded at a
time when it was easier to scale domestically. For one thing, China
wasn't yet open for business. More importantly, the U.S. hadn't yet
forgotten that scaling was crucial to its economic future.

How could the U.S. have forgotten? I believe the answer has to do with
a general undervaluing of manufacturing -- the idea that as long as
"knowledge work" stays in the U.S., it doesn't matter what happens to
factory jobs. It's not just newspaper commentators who spread this
idea.

Offshore Production

Consider this passage by Princeton University economist Alan S.
Blinder: "The TV manufacturing industry really started here, and at one
point employed many workers. But as TV sets became `just a commodity,'
their production moved offshore to locations with much lower wages. And
nowadays the number of television sets manufactured in the U.S. is
zero. A failure? No, a success."

I disagree. Not only did we lose an untold number of jobs, we broke the
chain of experience that is so important in technological evolution. As
happened with batteries, abandoning today's "commodity" manufacturing
can lock you out of tomorrow's emerging industry.

Our fundamental economic beliefs, which we have elevated from a
conviction based on observation to an unquestioned truism, is that the
free market is the best economic system -- the freer, the better. Our
generation has seen the decisive victory of free-market principles over
planned economies. So we stick with this belief, largely oblivious to
emerging evidence that while free markets beat planned economies, there
may be room for a modification that is even better.

No. 1 Objective

Such evidence stares at us from the performance of several Asian
countries in the past few decades. These countries seem to understand
that job creation must be the No. 1 objective of state economic policy.
The government plays a strategic role in setting the priorities and
arraying the forces and organization necessary to achieve this goal.

The rapid development of the Asian economies provides numerous
illustrations. In a thorough study of the industrial development of
East Asia, Robert Wade of the London School of Economics found that
these economies turned in precedent- shattering economic performances
over the 1970s and 1980s in large part because of the effective
involvement of the government in targeting the growth of manufacturing
industries.

Consider the "Golden Projects," a series of digital initiatives driven
by the Chinese government in the late 1980s and 1990s. Beijing was
convinced of the importance of electronic networks -- used for
transactions, communications and coordination -- in enabling job
creation, particularly in the less developed parts of the country.
Consequently, the Golden Projects enjoyed priority funding. In time,
they contributed to the rapid development of China's information
infrastructure and the country's economic growth.

Job-Centric Economy

How do we turn such Asian experience into intelligent action here and
now? Long term, we need a job-centric economic theory -- and
job-centric political leadership -- to guide our plans and actions. In
the meantime, consider some basic thoughts from a onetime factory guy.

Silicon Valley is a community with a strong tradition of engineering,
and engineers are a peculiar breed. They are eager to solve whatever
problems they encounter. If profit margins are the problem, we go to
work on margins, with exquisite focus. Each company, ruggedly
individualistic, does its best to expand efficiently and improve its
own profitability. However, our pursuit of our individual businesses,
which often involves transferring manufacturing and a great deal of
engineering out of the country, has hindered our ability to bring
innovations to scale at home. Without scaling, we don't just lose jobs
-- we lose our hold on new technologies. Losing the ability to scale
will ultimately damage our capacity to innovate.

Blade Didn't Drop

The story comes to mind of an engineer who was to be executed by
guillotine. The guillotine was stuck, and custom required that if the
blade didn't drop, the condemned man was set free. Before this could
happen, the engineer pointed with excitement to a rusty pulley, and
told the executioner to apply some oil there. Off went his head.

We got to our current state as a consequence of many of us taking
actions focused on our own companies' next milestones. An example: Five
years ago, a friend joined a large VC firm as a partner. His
responsibility was to make sure that all the startups they funded had a
"China strategy," meaning a plan to move what jobs they could to China.
He was going around with an oil can, applying drops to the guillotine
in case it was stuck. We should put away our oil cans. VCs should have
a partner in charge of every startup's "U.S. strategy."

Financial Incentives

The first task is to rebuild our industrial commons. We should develop
a system of financial incentives: Levy an extra tax on the product of
offshored labor. (If the result is a trade war, treat it like other
wars -- fight to win.) Keep that money separate. Deposit it in the
coffers of what we might call the Scaling Bank of the U.S. and make
these sums available to companies that will scale their American
operations. Such a system would be a daily reminder that while pursuing
our company goals, all of us in business have a responsibility to
maintain the industrial base on which we depend and the society whose
adaptability -- and stability -- we may have taken for granted.

I fled Hungary as a young man in 1956 to come to the U.S. Growing up in
the Soviet bloc, I witnessed first-hand the perils of both government
overreach and a stratified population. Most Americans probably aren't
aware that there was a time in this country when tanks and cavalry were
massed on Pennsylvania Avenue to chase away the unemployed. It was
1932; thousands of jobless veterans were demonstrating outside the
White House. Soldiers with fixed bayonets and live ammunition moved in
on them, and herded them away from the White House. In America!
Unemployment is corrosive. If what I'm suggesting sounds protectionist,
so be it.

Choice Is Simple

Every day, that Palo Alto restaurant where I met the Chinese venture
capitalists is full of technology executives and entrepreneurs. Many of
them are my friends. I understand the technological challenges they
face, along with the financial pressure they are under from directors
and shareholders. Can we expect them to take on yet another assignment,
to work on behalf of a loosely defined community of companies,
employees, and employees yet to be hired? To do so is undoubtedly
naive. Yet the imperative for change is real and the choice is simple.
If we want to remain a leading economy, we change on our own, or change
will continue to be forced upon us.

(Andy Grove, senior adviser to Intel, was the company's chief executive
officer or chairman from 1987 until 2005. The opinions expressed,
featured in the July 5 issue of Bloomberg Businessweek, are his own.)