A “Factoryless” America?

Will the economic crisis mark the end of an extraordinary period of globalization which began just over 20 years ago? International trade has already suffered an even worse collapse than the rest of the economy. As the economist Thierry Verdier pointed out during an economic conference in Lyon last week, the volume of international trade has slumped by 30 percent, whereas global production calculated by GDP has “only” contracted by 8 percent. The main explanation for this “overreaction” lies in the rise of China and India, which has enabled large multinational corporations to break up their value chains by entrusting more and more tasks to those countries and taking advantage of their cheap labor. This process has gradually resulted in an international division of tasks and labor. Production tasks have gone to Taiwan and Beijing, while the tasks of design, marketing and distribution of the products in question have gone to Europe and America. High-tech manufacturers like Apple, HP and IBM have applied this formula in a more comprehensive way than any other sector.

Prosperity made us accustomed to what Verdier calls the “pleasures” of globalization: low prices, choice and innovation. The advent of the economic crisis, with its accompanying unemployment, has presented us with its pains: loss of jobs, factories and industries.

Increasing numbers of American manufacturers and commentators are becoming alarmed by the negative effects of delocalization. For example, a debate has broken out around a controversial article* by Gary Pisano and William Shih, two professors at Harvard University, on America’s loss of competitiveness. Two incontrovertible facts support their argument. First, there is the continuing decline of America’s trade balance, which is in heavy deficit, including in the key sector of information technology: the overall trade balance has fallen from a surplus of $28 billion in 2000 to a deficit of $53 billion in 2007. Secondly, average salaries have been stagnant since 1980. A country which imports more than it exports and where salaries are not rising is a country which is losing its competitiveness, say the professors.

For Pisano and Shih it is clear that the main culprit in all this is massive delocalization, which has led to a loss, not just of jobs, but of whole sections of industry. The U.S. no longer manufactures LCD screens, LED diodes, or carbon fiber components for the Boeing 787. Innovation is increasingly confined to a narrow dialogue between researchers and producers. Furthermore, in certain fields, key components can become the bearers of technological revolution. This has happened with new generation batteries, which America no longer manufactures and which are going to be essential as the electric car goes mainstream. Ultimately, when the need for these technical skills has finally disappeared, a whole field of education and training will die with it. According to Pisano and Shih, the manufacturers’ decisions may be rational on an individual level, but their collective effect is to destroy what they call the “industrial commons,” which is strategically necessary for the country’s competitiveness and its inhabitants’ well being.

Since the article’s publication, the Harvard Business Review blog devoted to the subject* has been full of reactions from anonymous readers, well-known industrialists and senior academics. According to the celebrated economist Laura d’Andrea Tyson, a former advisor to Bill Clinton, Pisano and Shih’s apocalyptic view is not born out by the facts. She points out that the global domination of American high-tech companies remained overwhelming from 1995 to 2005, with a global market share of around 40 percent, and that economic research has proved that delocalization allowed businesses to considerably develop their turnover and thus also to increase employment and activity within America. David Yoffie, another Harvard professor, says that in the field of electronic components the rise of specialist microelectronics subcontractors in Taiwan enabled the development in the U.S. of “factory-less” electronic engineers like Qualcomm, which would never have gotten off the ground if they had had to invest the several billion dollars a factory would require. Likewise, Apple has undergone extraordinary development, increasing its turnover by more than six times, since it ceased manufacturing activity and relied instead on Chinese subcontractors. However, without dismissing the potential usefulness of outsourcing for the most routine tasks, Pisano and Shih still remain convinced that the situation is rapidly deteriorating. They are therefore calling for state aid to rebuild industry.

This lively debate recalls that which was sparked by the work of researchers at MIT during the late 1980s, when there were similar fears of the United States’s loss of competitiveness, that time in relation to Japan. And yet, 20 years later, Japan has lost a significant proportion of its technological and information know-how, while America has single-handedly led the Internet revolution. Japan’s problem is that the pace has accelerated in recent years, with the emergence of local competitors such as Huawei in telecoms or Acer in microcomputers. Its response represents something of a challenge for western businesses: it is trying to bring about the controlled development of its own commercial activity, balancing the tasks that western businesses are delocalizing and those they want to keep at home. This requires an ability to take both a long-term view, seeing beyond quarterly financial constraints, and a broad view, thinking systemically while taking care to sustain the fabric of local industry. Seeing far and wide while we’re lost in the fog won’t be easy, but it’s never been more necessary.

*“Restoring American Competitiveness”, Harvard Business Review, July-August 2009

**http://blogs.harvardbusiness.org/hbr/restoring-american-competitiveness