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."

Scaling laws for cities

Shorter Geoff West on cities (isn't math great?): resource consumption scales sub-linearly with population, whereas economic output scales super-linearly.

Uncompressed version follows below and at link ;-)

NYTimes: ... After two years of analysis, West and Bettencourt discovered that all of these urban variables could be described by a few exquisitely simple equations. For example, if they know the population of a metropolitan area in a given country, they can estimate, with approximately 85 percent accuracy, its average income and the dimensions of its sewer system. These are the laws, they say, that automatically emerge whenever people “agglomerate,” cramming themselves into apartment buildings and subway cars. It doesn’t matter if the place is Manhattan or Manhattan, Kan.: the urban patterns remain the same. West isn’t shy about describing the magnitude of this accomplishment. “What we found are the constants that describe every city,” he says. “I can take these laws and make precise predictions about the number of violent crimes and the surface area of roads in a city in Japan with 200,000 people. I don’t know anything about this city or even where it is or its history, but I can tell you all about it. And the reason I can do that is because every city is really the same.” After a pause, as if reflecting on his hyperbole, West adds: “Look, we all know that every city is unique. That’s all we talk about when we talk about cities, those things that make New York different from L.A., or Tokyo different from Albuquerque. But focusing on those differences misses the point. Sure, there are differences, but different from what? We’ve found the what.”

There is something deeply strange about thinking of the metropolis in such abstract terms. [REALLY?!?] We usually describe cities, after all, as local entities defined by geography and history. New Orleans isn’t a generic place of 336,644 people. It’s the bayou and Katrina and Cajun cuisine. New York isn’t just another city. It’s a former Dutch fur-trading settlement, the center of the finance industry and home to the Yankees. And yet, West insists, those facts are mere details, interesting anecdotes that don’t explain very much. The only way to really understand the city, West says, is to understand its deep structure, its defining patterns, which will show us whether a metropolis will flourish or fall apart. We can’t make our cities work better until we know how they work. And, West says, he knows how they work.

West has been drawn to different fields before. In 1997, less than five years after he transitioned away from high-energy physics, he published one of the most contentious and influential papers in modern biology. (The research, which appeared in Science, has been cited more than 1,500 times.) The last line of the paper summarizes the sweep of its ambition, as West and his co-authors assert that they have just solved “the single most pervasive theme underlying all biological diversity,” showing how the most vital facts about animals — heart rate, size, caloric needs — are interrelated in unexpected ways.

... In city after city, the indicators of urban “metabolism,” like the number of gas stations or the total surface area of roads, showed that when a city doubles in size, it requires an increase in resources of only 85 percent.

This straightforward observation has some surprising implications. It suggests, for instance, that modern cities are the real centers of sustainability. According to the data, people who live in densely populated places require less heat in the winter and need fewer miles of asphalt per capita. (A recent analysis by economists at Harvard and U.C.L.A. demonstrated that the average Manhattanite emits 14,127 fewer pounds of carbon dioxide annually than someone living in the New York suburbs.) Small communities might look green, but they consume a disproportionate amount of everything. As a result, West argues, creating a more sustainable society will require our big cities to get even bigger. We need more megalopolises.

But a city is not just a frugal elephant; biological equations can’t entirely explain the growth of urban areas. While the first settlements in Mesopotamia might have helped people conserve scarce resources — irrigation networks meant more water for everyone — the concept of the city spread for an entirely different reason. “In retrospect, I was quite stupid,” West says. He was so excited by the parallels between cities and living things that he “didn’t pay enough attention to the ways in which urban areas and organisms are completely different.”

What Bettencourt and West failed to appreciate, at least at first, was that the value of modern cities has little to do with energy efficiency. As West puts it, “Nobody moves to New York to save money on their gas bill.” Why, then, do we put up with the indignities of the city? Why do we accept the failing schools and overpriced apartments, the bedbugs and the traffic?

In essence, they arrive at the sensible conclusion that cities are valuable because they facilitate human interactions, as people crammed into a few square miles exchange ideas and start collaborations. “If you ask people why they move to the city, they always give the same reasons,” West says. “They’ve come to get a job or follow their friends or to be at the center of a scene. That’s why we pay the high rent. Cities are all about the people, not the infrastructure.”

It’s when West switches the conversation from infrastructure to people that he brings up the work of Jane Jacobs, the urban activist and author of “The Death and Life of Great American Cities.” Jacobs was a fierce advocate for the preservation of small-scale neighborhoods, like Greenwich Village and the North End in Boston. The value of such urban areas, she said, is that they facilitate the free flow of information between city dwellers. To illustrate her point, Jacobs described her local stretch of Hudson Street in the Village. She compared the crowded sidewalk to a spontaneous “ballet,” filled with people from different walks of life. School kids on the stoops, gossiping homemakers, “business lunchers” on their way back to the office. While urban planners had long derided such neighborhoods for their inefficiencies — that’s why Robert Moses, the “master builder” of New York, wanted to build an eight-lane elevated highway through SoHo and the Village — Jacobs insisted that these casual exchanges were essential. She saw the city not as a mass of buildings but rather as a vessel of empty spaces, in which people interacted with other people. The city wasn’t a skyline — it was a dance.

If West’s basic idea was familiar, however, the evidence he provided for it was anything but. The challenge for Bettencourt and West was finding a way to quantify urban interactions. As usual, they began with reams of statistics. The first data set they analyzed was on the economic productivity of American cities, and it quickly became clear that their working hypothesis — like elephants, cities become more efficient as they get bigger — was profoundly incomplete. According to the data, whenever a city doubles in size, every measure of economic activity, from construction spending to the amount of bank deposits, increases by approximately 15 percent per capita. It doesn’t matter how big the city is; the law remains the same. “This remarkable equation is why people move to the big city,” West says. “Because you can take the same person, and if you just move them to a city that’s twice as big, then all of a sudden they’ll do 15 percent more of everything that we can measure.” While Jacobs could only speculate on the value of our urban interactions, West insists that he has found a way to “scientifically confirm” her conjectures. “One of my favorite compliments is when people come up to me and say, ‘You have done what Jane Jacobs would have done, if only she could do mathematics,’ ” West says. “What the data clearly shows, and what she was clever enough to anticipate, is that when people come together, they become much more productive.” ...

Location, location, location

The Sunday Times on innovation and Silicon Valley. It's all true, although the author is a bit too sanguine for my taste -- he's ignoring Skype, Baidu, and a host of others. Nevertheless, if you're starting a tech company, consider moving it to the bay area. Otherwise, be prepared for the sickening feeling that you're running a race in the outside lane on a circular track.

NYTimes: In our celebrity-studded world, where we make a cult of genius and individual achievement, the mind rebels at the notion that geography trumps personality. Yet the inescapable lesson of the iPod, Google, eBay, Netflix and Silicon Valley in general is that where you live often trumps who you are.

Just ask Sim Wong Hoo. About seven years ago, I met Mr. Sim in Singapore, where he was born and was then living. He talked about the rising creativity of Singaporeans and with a flourish, as if to dramatically make his point, he pulled out a prototype of a hand-held music player that he insisted would replace Sony’s famous Walkman.

Mr. Sim’s device was breathtaking, possessing all the elements of what we now know as the MP3 player. Yet today, a Silicon Valley icon, Apple, dominates the market for MP3 players with the iPod. In recognition of its emergence as a music powerhouse, last month Apple dropped the word “computer” from its name.

Some months after my Singapore encounter, I visited the thriving code-writing communities in Tallinn, Estonia; Reykjavik, Iceland; and Helsinki, Finland, three Nordic cities that were being transformed by advances in cellphones, mobile computing and the Internet. Their tight-knit network of engineers seemed poised to create the tools required to make good on a much-hyped prediction: the death of distance. After all, if necessity is the mother of invention, no one had more need than the hardy Estonians, Icelanders and Finns, living on the frozen edge of Europe, when it came to killing distance as a barrier.

Yet these Nordic innovators were blindsided by two Silicon Valley engineers whose tools we experience whenever we “Google” the Web. Their company, Google Inc., posted a quarterly profit of $1 billion on Jan. 31.

Google’s astonishing rise and Apple’s reinvention are reminders that, when it comes to great ideas, location is crucial. “Face-to-face is still very important for exchange of ideas, and nowhere is this exchange more valuable than in Silicon Valley,” says Paul M. Romer, a professor in the Graduate School of Business at Stanford who is known for studying the economics of ideas.

In short, “geography matters,” Professor Romer said. Give birth to an information-technology idea in Silicon Valley and the chances of success seem vastly higher than when it is done in another ZIP code.

No wonder venture capitalists, who finance bright ideas, remain obsessed with finding the next big thing in the 50-mile corridor between San Jose and San Francisco. About one-quarter of all venture investment in the United States goes to Silicon Valley enterprises. And, according to a new report from Joint Venture: Silicon Valley Network, a regional business group, the percentage has risen, to 27 percent in 2005 from 21 percent in 2000.

Many times in the past, pundits have declared an end to Silicon Valley’s hegemony, and even today there are prognosticators who see growing threats from innovation centers in India and China. Certainly, great technology ideas can come from anywhere, but they keep coming from Silicon Valley because of two related factors: increasing returns and first-mover advantage.

These twin principles, debated in head-scratching terms by professional economists, essentially explain why Intel maintains a lead in high-performance chips, why Apple sustains a large lead in music players and why Google’s search engine remains a crowd pleaser.

On a gut level, we all can understand how these two factors work. Who wouldn’t want to play for a perennial contender? For the same reason that Andy Pettitte signs with the Yankees, the best and the brightest technologists from around the world make their way to northern California.

“All that venture capital attracts a lot of ideas — and the people who are having those ideas,” said Stephen B. Adams, an assistant professor of management at the Franklin P. Perdue School of Business at Salisbury University in Maryland who has studied the rise of Silicon Valley.

Newcomers plug into an existing network of seasoned pros that “isn’t matched anywhere else in the world,” says AnnaLee Saxenian, dean of the School of Information at the University of California, Berkeley, and author of “Regional Advantage,” a book about the competitive edge held by tech centers like Silicon Valley and the Route 128 suburbs near Boston. “That allows people to recombine technical ideas much more quickly here than anywhere else,” Professor Saxenian added.

“In terms of creativity, the Valley remains as far ahead of the rest of the world as ever,” she said. “People in the Valley generate new ideas and test them much more quickly than anywhere else. They aren’t a super race; it’s their environment.”

Silicon Valley is not invincible. The logic of increasing returns and the first-mover advantage can be overdrawn. Other clusters in the United States and around the world will commercialize great ideas, and the Valley will endure down cycles again, as it has in the past. Remember how the Japanese conquered memory-chip manufacturing in the 1980s, until then a staple of the Valley’s business? And, of course, the dot-com bust of five years ago remains a painful reminder of how success breeds hubris and humiliating failure.

Americans naturally harbor many fears about losing their edge, especially with the nation mired in war, the dollar’s value sliding and the health care system strained. Rivals, notably in India and China, see Silicon Valley’s pre-eminent position as a prize that they will inevitably take. Yet they face an elusive foe. Every time Silicon Valley recovers from failure, it seems to grow more durable, almost in the same way a person becomes “immune” to a disease after a brush with it.

Fifty years ago, chips were the engine of Silicon Valley. In the late 1970s came the personal computer and data-storage drives, then software, and more recently the dynamic vortex of the Web, new media and online commerce. (EBay, Netflix and, of course, Google and Yahoo are among the names that come to mind.)

These serial renewals are a marvel.

SIR PETER HALL, the British scholar of urban clusters, asks in “Cities in Civilization,” his history of geography and business innovation: “What makes a particular city, at a particular time, suddenly become immensely creative, exceptionally innovative? Why should this spirit flower for a few years, generally a decade or two at most, and then disappear as suddenly as it came?”

Sir Peter’s words highlight an enduring human mystery. In the case of Silicon Valley, the world rightly waits for the flame of creativity to burn out. That’s fair enough. To each, a season (or maybe a few). Living long and large, Silicon Valley surely will wither like a dead flower someday. My advice, though, is: Don’t hold your breath.

G. Pascal Zachary teaches journalism at Stanford and writes about technology and economic development.