Industrialization
Virtually every politician, Democrat and Republican, seems to hold the same view on the decline of manufacturing in America, pointing to China as a bogeyman that rose to world prominence by means of unfair competition, namely theft of intellectual property and state subsidies. In this narrative, American manufacturing jobs were stolen by the bogeyman, and we need to put an end to it and reestablish American industrial preeminence.
Let’s leave aside for a moment the fact that American courts are constantly filled with companies accusing each other of stealing intellectual property, and overlook the tax subsidies that American corporations routinely pocket from state and local governments, and the grants and cost-plus contracts forked out by Uncle Sam. (Wasn’t the phrase pork barrel invented here?) Because there are far more provocative reasons to question this narrative of China-the-bogeyman.
There is, for example, Taiwan.
We have heard a lot lately about TSMC (Taiwan Semiconductor Manufacturing Corporation), including some stupid talk about the company “stealing our semiconductor industry”. TSMC is a juggernaut, producing nearly all the world’s advanced semiconductors (including Nvidia’s vaunted GPUs), and 50% of integrated circuits generally. Their scale and institutional knowledge are unmatched. They define the leading edge.
Further, Taiwan is home to by far the largest manufacturer-for-hire in the world, Hon Hai Precision, also known as Foxconn, a firm which today builds everything from connectors and circuit boards to servers, smartphones, and satellites, at over a hundred global campuses, plus R&D centers. The company generates $200 billion in annual sales. Compared to Foxconn, all other contract manufacturers are niche players.
Taiwan also hosts the most competitive ODMs in the world. These “Original Design Manufacturers” design and mass-produce high-tech products for large customers who put their own names on the outside, customers like Cisco, Dell, and HPE. Globally, datacenters and enterprises are powered with products designed and built by Taiwanese ODMs. Like TSMC, firms such as Quanta, Pegatron, and Wistron lead the world with scale, institutional knowledge, deep supplier relationships, and a highly-educated workforce. They steam-roll the competition with barely-there profit margins that would embarrass any Western CEO.
There are many differences between Taiwan and the US, as for example the willingness of early investors to tie up capital for many years, the heavy investments made in technical education, the practice of cultivating clusters of related firms, and perhaps the fact that non-competes are very tightly regulated.
In the US, we prize our highly-liquid capital markets, which certainly attract foreign investment, but also help ensure that patient money is much more difficult to secure.
We are famously litigious, and not just with product liability and intellectual property squabbles. As one law firm advises, “Shareholder litigation has long been a cost of doing business in the US,” and hundreds of such lawsuits are filed each year. Litigation is a major distraction, an inevitable drain on time and energy, but the price we pay for being highly sensitive to rights.
We in the US are not a frugal society, a society of obsessive savers. Our economy is notoriously consumption-led. We are the buy-now-pay-later society, famous for the phrase “shop ’til you drop”. Consumer goods and services represent 70% of our economic activity. This is not a new thing, and not many people think it a bad thing.
The US began de-industrializing long before jobs were lost to Taiwan or China. In fact, you can make the argument that US manufacturing jobs were pushed overseas, rather than pulled (or stolen). Most of our labor force was shifted out of manufacturing and into services for the same reasons it was forced out of agriculture decades earlier: overproduction, leading to more attractive returns to capital elsewhere.
We do in fact have our own highly successful industrial policy that has long enjoyed bipartisan support, but has nothing to do with fabricating semiconductors or assembling iPhones: our military-industrial complex. Like TSMC in its own field, this is a juggernaut, with scale, institutional knowledge, and an educated work force unmatched anywhere – the result of patient, decades-long public investment.
Now it seems we have a brand new industrial policy: Artificial Intelligence, aka Stargate. And it will be a poignant irony indeed if this new policy ends up gutting the largest remaining employment sectors of our economy: services and software.
I continue to believe that re-industrialization of the US on a grand scale is a fool’s errand. We have neither the legal, financial, nor political cultures to replicate any of the industrial models found in Asia that favor manufacturing. The road back to the old industrialism of the mid-twentieth century is, in all likelihood, a road to impoverishment.
On the other hand, targeted industrialization could make a great deal of sense – not to assuage popular envy over economies that grew by taking on the things our capitalists no longer wanted to do, but to solve problems that can’t be addressed in any other way. Decrepit infrastructure like roads and bridges, public transportation and power grids, will never be rejuvenated by the free market. Nor will they by throwing money at the fifty states. Nor by subsidizing a few factories and declaring victory. We should of course continue to subsidize research as a good and necessary thing, but as any farmer can tell you, scattering seeds does not by itself produce a crop.
Uniquely American problems (and there are many) require uniquely American solutions. That these problems continue to fester and spread, decade after decade, is a direct consequence of our failing political system – although ‘system’ may be too charitable a description. It’s more a chaos of ignorance and outrage, continually stoked by well-oiled fund-raising machines and a highly-paid industry of political “consultants”.
The first order of business, then, is to get out of our own way.
Image courtesy nerastudio.
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