Wednesday, October 05, 2011

Hollowing out

How the US lost much of its manufacturing capability, step by step. Each business decision along the way may have been rational for the individual company making it, but the cumulative effect has been a hollowing out of US technological capabilities.

Forbes: ... The U.S. has lost or is on the verge of losing its ability to develop and manufacture a slew of high-tech products. Amazon’s Kindle 2 couldn’t be made in the U.S., even if Amazon wanted to:

The flex circuit connectors are made in China because the US supplier base migrated to Asia.

The electrophoretic display is made in Taiwan because the expertise developed from producting flat-panel LCDs migrated to Asia with semiconductor manufacturing.

The highly polished injection-molded case is made in China because the U.S. supplier base eroded as the manufacture of toys, consumer electronics and computers migrated to China.

The wireless card is made in South Korea because that country became a center for making mobile phone components and handsets.

The controller board is made in China because U.S. companies long ago transferred manufacture of printed circuit boards to Asia.

The Lithium polymer battery is made in China because battery development and manufacturing migrated to China along with the development and manufacture of consumer electronics and notebook computers.

An exception is Apple [AAPL], which “has been able to preserve a first-rate design capability in the States so far by remaining deeply involved in the selection of components, in industrial design, in software development, and in the articulation of the concept of its products and how they address users’ needs.” [Sure, but they meet with Taiwanese engineers who are the ones who know what is actually feasible.]

... So the decline of manufacturing in a region sets off a chain reaction. Once manufacturing is outsourced, process-engineering expertise can’t be maintained, since it depends on daily interactions with manufacturing. Without process-engineering capabilities, companies find it increasingly difficult to conduct advanced research on next-generation process technologies. Without the ability to develop such new processes, they find they can no longer develop new products. In the long term, then, an economy that lacks an infrastructure for advanced process engineering and manufacturing will lose its ability to innovate.

... “already lost” to the USA:

“Fabless chips”; compact fluorescent lighting; LCDs for monitors, TVs and handheld devices like mobile phones; electrophoretic displays; lithium ion, lithium polymer and NiMH batteries; advanced rechargeable batteries for hybrid vehicles; crystalline and polycrystalline silicon solar cells, inverters and power semiconductors for solar panels; desktop, notebook and netbook PCs; low-end servers; hard-disk drives; consumer networking gear such as routers, access points, and home set-top boxes; advanced composite used in sporting goods and other consumer gear; advanced ceramics and integrated circuit packaging.

This is from a multi-part series. See further down this page for links to the first 10 articles.

See also this earlier post, on conversations with an in-law who is a senior executive at Foxconn (makers of the iPhone and iPad, among other things).

... My uncle is worried about prospects for the US -- he sees the technology gap between China and the US as almost closed and wonders how America can compete against Chinese workers making much lower wages. He didn't deny that the US is still more innovative, but noted that the gains from this innovation (i.e., jobs and commercial industries) are now captured by those with manufacturing capability. In other words, a key bit of innovation might make a few people (e.g., at a startup) rich, but down the line someone has to actually manufacture and ship products, which creates jobs and wealth at a much larger scale. He is certain that will be done in China. I tried to point out that this is counter to the conventional US mythology (Apple gets the big margins, Foxconn's profit is pennies per iThingy shipped), but he just said "It's a matter of time."


RKU1 said...

I think it's quite an interesting indicator that a fellow in Taiwan seems more concerned for what America is doing to its future than America's own leaders are...

Luke Nguyen said...

Not to worry, the dollar being world reserve currency and medium of exchange means the US will get it's cake and eat it too.  No country in the world runs endless trade deficits like we do and still maintains such high standard of living.  We can ship all manufacturing oversees and it's still structurally possible to maintain living standards.  

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