Good Old Grove

Good for Andy Grove. The co-founder and former chairman and CEO of Intel has pointed out to the Americans what should be obvious to them: they need more manufacturing jobs.

 

It applies even more so to the UK – where the imbalance of financial services jobs to manufacturing jobs is more out of kilter than in the USA.

 

Grove points out that Foxconn employs 250,000 people in China to manufacture Apple’s products, while Apple employs 25,000 people in America.

 

Trouble is, Grove’s solution – to put a tax on the products of off-shored labour – doesn’t appeal to Americans who still, against compelling contradictory evidence,  think that laissez-faire free markets are the best way to go.

 

“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”, writes Grove for Bloomberg, “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.”

 

It is, of course, impressive that so many Americans, even in low-paid jobs, have in their hearts this cast-iron belief that the country’s Founding Fathers did not want any interference with free markets.

 

Last year a Californian cab driver told me he didn’t want the healthcare bill to pass for exactly that reason.

 

But what do American businessmen do when their businesses are threatened with extinction? They go cap in hand to Uncle Sam.

 

When the Japanese looked like wiping out the US semiconductor industry in the mid-1980s, Charlie Sporck of National and Bob Noyce of Intel went to Washington to get the US government to back Sematech.

 

Government backing for business recurs throughout US history – from President Roosevelt’s New Deal, to President Obama’s bail-out  of  banks, Wall Street, the car industry and the mortgage lenders.

 

To believe free markets are the be-all and end-all is stupid.

 

Free markets fail too often for anyone to believe in them as an absolute good. They occasionally need ‘modification’.

 

Andy Grove is spot on right.

 

 

Tags: andy grove, bloomberg, californian, cap in hand, manufacturing jobs

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24 Comments

  1. David Manners
    July 15, 2010 19:58

    Peter, Yes, but when Japanese car imports looked like wiping out the European car industry the European cars were also inferior in features. So Europe imposed quotas on Japanese car imports while the European manufacturers were prodded to improve their cars. Was that the right thing to do? Well, BMW, Porsche, Mercedes, VW, Renault, Citroen, Peugeot, Fiat and all the people who work in them would say Yes.

  2. July 15, 2010 18:12

    David, don’t mention the motor-bike industry. British bikes had kick starters, rubbish electrics (not electronics then) and leaked oil all over your drive or garage. Japanese bikes were cheap and very consumer friendly by comparison. Electric starters, reliability and cleanliness were just what we wanted, despite the lack of “character”.

  3. David Manners
    July 15, 2010 14:50

    Of course you’re right, El Rupester, but that’s a reductio ad absurdum type of argument. In reality these things are done by tweaks. Remember the ‘local content’ rules we used to have in Europe saying a certain percentage of all finished products had to be made by locally-sourced components? That got foreign companies investing in European manufacturing. Without tweaks, subsidies, tax breaks, preferential loans, grants etc etc we wouldn’t have a European car industry – it would have gone the same way as the European motor-bike industry – wiped out by a heavily subsidised Japanese motor-bike industry. And when does any fab go up without massive subsidies from local sources? So I think it’s legitimate to tweak – as Grove suggests – without it necessarily producing the results you describe.

  4. El Rupester
    July 15, 2010 14:28

    He’s not denying them as middle-class-lifestyle; he’s just denying them a job.
    If American firms should only use American workers, not Chinese, then presumably Japanese firms should only use Japanese workers, not Brits, Germans only employ Germans…
    By your logic, Nissan should close its factory in Sunderland, BMW stop making Minis in Swindon and anyone who works for a foreign company should be sacked..?
    Free-trade makes us better off, around the world. That includes companies sub-contracting, and it includes firms building things in other countries.
    Apple builds in China, BMW builds in UK and we are all better off as a result.
    The answer is not dumb protectionism, but to have productivity and skills that people value.

  5. David Manners
    July 14, 2010 23:25

    Grove is not denying Chinese the right to a middle class lifestyle or a Burberry coat, El Rupester, he is focussing specifically on the case of American firms directly or indirectly employing Chinese workers to make American products, and suggesting a way to get American firms to employ American workers instead. When the Chinese design and make their own products and sell them in China and abroad – that does much more to increase the wealth of Chinese people than making products for American firms. Grove’s proposal, if it meant less American products being made by Chinese workers, might encourage the Chinese to develop and make their own products. So his proposal would help both the Americans and the Chinese.

  6. El Rupester
    July 14, 2010 19:37

    A lot of interesting comments.
    But I think Grove is mostly wrong.
    A couple of points:
    - While labour costs are part of the situation there are other, more important, factors. Germany and Japan are major exporters: not because they have cheap workers (the reverse!), but because they have productive workers (ie efficient ones, well educated ones) and because their companies make things other people want to buy. That is very important.
    - Moaning about “pegging the RMB” is daft. China is only in surplus with the US (it is in balance with the rest of the world), and the cause is American’s spending more than they earn: positive net exports will only be possible when American savings rates grow to match American borrowing. Very different to Germany & Japan…
    - Finally, and most important, I have no problem at all with people in China getting jobs, earning a living and getting richer. In a generation hundreds of millions of people have gone from substinence farming to being middle-class: from being hungry to buying Burberry coats & Apple iPods.
    That is a really wonderful thing.
    Is Andy Grove *really* saying he would prefer they want back to being starving peasants, scratching a living from rice-paddies? No, of course not.
    Free-trade makes us all better off, around the world.
    What we need to do is try to win: invest in productivity, education, and success — not try to cut others off at the knee or pour money into losing causes.

  7. Stooriefit
    July 13, 2010 17:57

    Phil is kind of right, but other preasures have the equivalent effect: pegging encourages wage inflation when the labour supply dries up (as it effectively had in China just before the crunch). Andy Xie writing on Bloomburg has an interesting analysis:
    http://www.bloomberg.com/news/2010-06-29/chinese-yuan-is-sideshow-to-looming-wage-inflation-commentary-by-andy-xie.html
    One way to avoid wage inflation with a pegged currency and finite labour market is to increase interest rates, which may come but would act against investment in automation, and kill growth. Anther way is to effectively remove the peg and then do an ERM style mechanism of central bank buying and selling to maintain a stable exchange rate. The resources available to China might actually break Keynes’ maxim that “The Market can stay irrational longer than you can stay solvent.” This would actually have the effect of lowering the cost of capital in the rest of the world as China would have to spend dollars like water to keep the Yuan low given their balance of trade. That would make the rest of the world more productive, reducing China’s advantage, but with the side effect that we’d be China’s bitch.
    Interesting times – I certainly wouldn’t be setting any factories up in China on the basis of long term low cost of labour, I think that boat sailed about 3 years ago. I don’t know how they are going to manage the economic and social pressures that are gaining real momentum.
    The reason for setting factories up in China now is access to local markets and the growing middle class. The same reasons apply to making stuff in India, Brazil, Turkey, the EU, and north America, just the means by which you achieve economic production vary.
    Governments in the old economies (outside of Germany & Japan) need to understand that the measures needed to keep a healthy balance of trade are local and particular to circumstances. For instance, a loan to a UK manufacturer to make it one of only two companies world wide capable of making critical components for nuclear new build would seem to be healthy for the trade balance, and congruent with EU support of Airbus and US support of Sematech in the 80s, in the usual half arsed UK way of being on a tiny scale. Shame it was axed to make a political point.

  8. David Manners
    July 13, 2010 11:27

    Thanks Phil, excellent point. The sooner everyone realises that China has rigged the market, the better.

  9. Phil
    July 13, 2010 11:21

    Why is no one mentioning the elephant in the room here, i.e. that China is only a cheap manufacturing destination because it’s currency is artificially pegged to the dollar!
    I’ve long argued that this single act of deception is worth far more than any subsidy, labour price etc. to China because it effectively guarantees a level of price stability for anyone such as Apple exporting their products back into the US dollar zone as long as the peg lasts.
    I’m sick of reading “the west has to learn to live with lower wages, quality of life, healthcare etc”. This is wrong. Instead, China should learn to live with a freely floating Yuan. Then let’s see how “cheap” it is to manufacture goods there 5 years down the line.
    The Yuan peg is an outright tariff and should be treated with the contempt it deserves. It is the absolute antithesis of free market behaviour, and needs to be highlighted as such!

  10. Robert
    July 13, 2010 03:01

    I’ve noticed that all the talk is about Fabs and the like whereas Andy’s OpEd was focused on mundane low end consumer electronics assembly. Andy’s references were for Foxconn who assembles Apple iphones / ipods as well a Dell laptops….
    The truth is that even Giga fabs do not employ a significant number of workers, a few thousand at most. Whereas the quoted 250K Chinese workers, assembling Apple products, work at solder stations and mechanical assembly + packaging (nothing sexy about this part of the business)
    If manufacturing employment is the real end game, of intervention, than you need to win back these 250K jobs. Big problem is that nobody, in the West, actually wants this type of job.
    There is still another nagging problem, with Andy’s solution. Unfortunately if cheap assembly were not available then I believe you would see a resurgence in the electronic assembly automation industry. The resulting advanced automation techniques, would eat up any expected labor gains.
    This brings us to the crux of the manufacturing problem, namely the apparent Cost of Capital. In Japan manufactures have a 1% cost of capital whereas in the US it is closer to 5%. Taiwan, Korea and China are a little more difficult to directly analyze because of government involvement in the funding process, but suffice to say it is lower than the US.
    For Capital intensive industries like Giga Fabs and Automated assembly lines, the overall equation still strongly favors Asia. So a significant advancement in assembly automation would be China’s gain. opps…..**** snookered again.

  11. David Manners
    July 12, 2010 20:06

    Not quite yet, Dr Bob, the UK is the world’s 7th largest manufacturing nation see: http://www.ft.com/cms/s/0/c4598ffe-7c82-11df-8b74-00144feabdc0.html

  12. Dr Bob
    July 12, 2010 16:42

    A country that does not manufacture goods for export dies and becomes a tourist destination. Financial services can relocate anywhere. Service industries in general are not wealth producing for a country and tend to be wealth distribution within a country. Foreign owned companys export wealth from a country. In the words of Private Fraser, We’re doomed!

  13. Stooriefit
    July 12, 2010 16:12

    I think bringing in Thatcher and Regan in here is the Monetary Policy equivalent Hitler/Nazism in Godwin’s law: “As an online discussion grows longer, the probability of a comparison involving Nazis or Hitler approaches 1.”
    It was Mrs T’s “Big Bang” which really got this Financial Services hocus pocus economy going that we’re supposed to be re-balancing away from …

  14. dbs
    July 12, 2010 15:40

    I agree with Ian’s assessment of Globalism. But the U.S. is playing the game stupidly. We have the “tax code”, which I frequently refer to as “the root of all evil” — full of disincentives to a workable free market economy. It would take only a few pages of legislation to tweak even the existing tax code to encourage investment in American-based enterprises and to encourage those businesses to engage in healthy behavior.
    America’s problem is a severe lack of leadership towards this end, with a Reagan/Thatcher mindset. Instead, we have Michael Foot in the leadership positions at all levels of government. Not to mention large corporations, who engage in an unholy alliance with the Feds for short-term benefit, but at long-term detriment to business in general.

  15. Ian Dedic
    July 12, 2010 14:46

    Except that erecting trade barriers like Grove suggested (taxing the produce of off-shore labour) is what leads to tit-for-tat trade wars, never mind being illegal according to the WTO.
    Fight fire with fire — if other governments are directly or indirectly subsidising infrastructure costs, they can’t object if the USA (for example) does the same, since this then just levels the playing field.
    Oh dear, I’ve just spotted the snag — taxing imports *makes* money for the government, subsidising infrastructure *costs* it money.
    I guess if you haven’t got a government willing to spend money to support its own industry — which has to be paid for somehow, like raising taxes — you’ve had it.
    But then people don’t want their taxes to go up either — they want someone to wave a magic wand which gives them safe jobs *and* cheap products but which nobody has to pay for…
    Ian
    P.S. Before anyone says “why doesn’t the government save money by cutting out waste?” — guess what, that “waste” is usually somebody else’s job, where do you think most government spending goes in the end?

  16. David Manners
    July 12, 2010 13:32

    A nice point, Ian, which suggests that Grove’s suggestions may help level the playing field rather than skew it.

  17. Ian Dedic
    July 12, 2010 12:51

    The main cost of IC manufacture is not labour, it’s equipment first (which is the same everywhere) and then infrastructure costs like power and water. These costs are effectively (or sometimes directly) government-subsidised in places like Taiwan and China which is why chip manufacture is cheaper there than in Japan/Europe/USA– such subsidies are illegal in most Western countries.
    So the playing field isn’t level even in high-tech industries.
    Ian

  18. Stooriefit
    July 12, 2010 12:11

    Brings to mind the Milton Freidman quote: “With some notable exceptions, businessmen favour free enterprise in general but are opposed to it when it comes to themselves.”
    And this from a man so “Free Market” bonkers he also said: “I say thank God for government waste. If government is doing bad things, it’s only the waste that prevents the harm from being greater.”
    At least Grove is owning up to the fact that he has a preference for fixing markets!
    I follow FTM’s logic but, when considering the high tech market rather than trainers and t-shirts, it is based on a false premis. The assumtion is that the bulk of the cost of manufacture of high-tech goods is labour, which isn’t true – why else would Foxcon and others be moving out of China and in to Taiwan? worldsalaries.org has Manufacturing monthly salaries as UK $2583, US $2372, Taiwan $2162, and China $586. Admittedly these will be a couple of years out of date and I think salary inflation in China is pretty ferocious, so it might be nearer $800 p.m now (a pure guess). A more telling comparison would be the unit cost of labour, which takes in to account the productivity per dollar. I can’t find a free source of this data though!
    I think Taiwan is attractive to automation-friendly production because it has a government who want to do manufacturing, private investors who aren’t afraid of it, a technically advanced workforce and an international outlook. Having only three from four of these factors doesn’t cut it, in my opinion.

  19. David Manners
    July 12, 2010 11:26

    Sematech, in the mid-80s, was criticised for being a big boys club, Robert, but it did the business for America when it had fallen behind Japan in IC processing technology. Japan, of course, had got its advantage in ICs by government subsidy of the Japanese IC industry. So it was perfectly fair for the US government to subsidise the US IC industry in response. We have a car industry in Europe – fair trade would have killed that in the face of Japanese competition in the 1980s. We have a commercial aircraft building industry in Europe – Boeing would have killed that off in a fair trade world. So fair trade has often taken a back-seat behind expediency. And that, I think, is how it will always be.

  20. David Manners
    July 12, 2010 11:18

    Yes FTM you are right, of course, in the macro world view. But to take the argument back specifically to chips, the industry has preached free markets but lobbied government for help when needed. The SIA was founded in 1977 to meet the challenge of the Japanese. When the Japanese got 50% of the world market in 1985/6, Sematech was founded and the US-Japan Trade Agrrment mandated that the USA should have 20% market share in Japan. Was that fair? Yes it was fair because the Japanese government had subsidised the Japanese chip industry with the VLSI programme of the late 1970s and early 80s which had led to the Japanese getting ahead in the technology. So free trade is like virtue – we preach it, and say we want it – but not all the time.

  21. David Manners
    July 12, 2010 11:02

    Yes, Ian, you’re right. Interfering with the different national pay levels is counter-productive. But Grove’s point that there are 250,000 workers dedicated to producing Apple products in China when unemployment is high in the USA, leads one to think that maybe, just maybe, there could be a better way of organising things for the benefit of the US economy.

  22. Ian Dedic
    July 12, 2010 10:43

    The real problem is that most people are both producers and consumers, and the best interests of the two don’t coincide…
    If you’re a worker in the West you’d like a well-paid job (to maximise income), preferably in a company which isn’t undermined by “unfair” competition i.e. from countries where the wages are much lower.
    If you’re a consumer in the West you want your goods to be as cheap as possible (to minimise expenditure) — this includes not only consumer goods (like $25 DVD players) but also imported food produced where labour is much cheaper than transport costs.
    You can’t have both. If you want the cheap goods then your mass manufacturing industry is dead, leaving you with service industries (you can’t flip a burger from the other side of the world) and a high-tech/financial sector which diminishes as the education level in the rest of the world catches up.
    If you want local manufacturing jobs protected by high import tariffs, be prepared for the cost of almost everything you buy to go through the roof — because to protect against countries with 10x lower wages the tariffs have to be *really* high.
    Do you want a secure job or cheap goods? Your choice…
    Welcome to the free market economy ;-)
    Ian

  23. FTM
    July 12, 2010 07:57

    Now this is a blog post that can get a hedgehog out of hibernation!
    Free markets while they help me, closed market when they don’t. David, either you have the cake, or you eat it. But let me not conclude too quickly.
    Consider a world separated at the seams. The western world manufactures all it’s goods and the eastern world survives on local consumption only. (neither of these are practical, but let’s assume a hypothetical case).
    The eastern world will suffer from loss of export revenues. Nevertheless, there is still significant local demand (even if only for the non-luxury items). Also life is a lot less expensive in the east. It is amazing on how little people can survive – and this requires not mere frugality. but a philosophy of minimalism, an existential mindset. (Something that most westerners cannot even recognize as being possible). In the worst case, there will be “human tragedies” in the east, but they will be “tolerated” and life goes on for the more-fit.
    Now look at the west – trying to stand on it’s own feet, independent of cheap imports from the east.
    You will likely see people demanding a 10 times (=1000%)hike in wages. Essential services (transport, health, schooling) on the brink of existence, if not shutdown. Heads-of-states being hunted (literally). In about a month (max 100 days), the governments, if they still exist will have declared emergency.
    The current lifestyle of the average westerner is not (self-)sustainable. Period. Changing to a sustainable lifestyle is not impossible, but it will not happen overnight. And no one would like it.
    How many people can give up their cars for a week? How many would be willing to pay for (unsubsidized) education or health? How many would be willing to pay (several times higher) for locally produced groceries?
    No, none of this is about chips. But you cannot take just one aspect of life (or one industry) and plant it in a “thought island”. I agree you have to start somewhere. But unless there is a larger, more inclusive perspective, attempts at self-sustenance will not bear fruit.
    The west needs east more than the other way round. Because west puts a much higher premium on life and conveniences. This dependency (of the west) cannot be undone without severe consequences.
    I know you are suggesting a mid-way. Free markets that are not free beyond a point. This will simply not work in the democratic, liberal west. Such systems can work with limited success in closed, dictatorial regimes. But the west abhors such systems a lot more than the consequences of free markets.
    We need to stop living in the past. It was glorious, but it is now gone. Not unlike the mines, the textiles, the heavy machinery.
    Find a new game to play.

  24. Robert
    July 12, 2010 03:33

    It is great to see someone of Andy’s stature weigh in on the plight of High tech manufacturing in the US. Trouble is his proposal comes 10 years too late and is incredibly naive.
    I simply can’t see the dynamism of the valley being funneled into some pointless EU style high tech quango. It’ll just combine the worst of both worlds.
    The valley succeeded because of its do or die focus coupled, with ruthless VC financing and an IPO growth / exit strategy. Together these forces created an efficient idea incubator, which could scale its successes by providing access to enormous amounts of capital, for the winners.
    By contrast EU style “funding” invariably flows into the coffers of “old boys” who are the least efficient participants. It promotes the politically connected, and creates the worst possible environment for entrepreneurship.
    Sorry to say it, but if Andy has found the solution, then we’re all done for.

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