I am pretty sure many people will disagree with the conclusion of this article. That's OK -- a healthy debate on this matter will probably help clarify my own thoughts.
I don't really think Silicon Valley is completely dead. Maybe it's just in the emergency room, or attached to a respirator. However, something needs to be done -- not just in Silicon Valley but across the U.S. -- in order for our economy to regain its health and competitiveness across the world.
The good old days
Throughout the latter part of the 20th century, Silicon Valley was a treasure chest of new ideas and fantastic innovations. There was the exciting "guy in the garage" mentality: think up an idea, find a venture capitalist to help with funding, prove viability, take your company public, and hopefully get rich. For the most part, this idea worked well. Companies like Intel (Nasdaq: INTC ) , Sun Microsystems, and Cisco Systems (Nasdaq: CSCO ) are all great examples of what Silicon Valley could help produce; companies rich in mind and healthy in spirit.
But what is often forgotten is that those companies had to build factories, figure out how to make products affordable, and hire droves of new employees. In short, they had to scale up and scale out, and this not only benefited those at the top of the knowledge hierarchy, but also lower-level workers engaged in areas like supply chain management and process control.
Sometime after the tech bubble burst, things changed in Silicon Valley. And unfortunately, the rest of America seemed to follow.
What have you done for me lately?
It should come as no surprise to anyone that the U.S. has become a service-based, high-tech-oriented economy. We ship low-paying jobs abroad, we outsource and subcontract; companies do anything to cut costs and increase margins, and with pride we boast some of the most successful companies in the world.
Between 2001 and 2008, the average high-tech worker in Silicon Valley saw his wage increase by 36% (to $132,351). In addition, this industry generated $57.7 billion in wages in 2008, a 14% increase from 2001. That sounds great, right?
Well, first of all, even though wages increased, jobs fell dramatically. Following the tech boom, employment in Silicon Valley fell by about 17%, which represents a loss of about 86,000 jobs. Of the 11 industries identified by the North American Industry Classification System (NAIS), eight have seen jobs diminished; the only areas to increase employment have been pharmaceuticals, aerospace, and scientific research. Some of the segments that put Silicon Valley on the map, such as semiconductor manufacturing, data processing, and computer equipment manufacturing, have seen jobs evaporate or move across the Atlantic.
Today, manufacturing employment in the U.S. computer industry is about 166,000, less than when the first PC was assembled in 1975! Dell (Nasdaq: DELL ) now makes most of its computers in Malaysia and Cisco Systems has transferred employees to India. Some of the best manufacturing is done in Asia, where government subsidies and support helped spur enormous amounts of economic growth.
Take, for instance, the Taiwanese company Hon Hai Precision Industry, also known as Foxconn. The company manufacturers all the things we used to manufacture, but then decided that high-wage knowledge work should take its place. It makes computers for Dell, cell phones for Nokia, and motherboards for Intel. Last year, its revenue topped $60 billion. That's more than Apple (Nasdaq: AAPL ) , Dell, or Intel.
It employs more than 800,000 people. That's also more than Apple, Dell, Intel, and Sony combined.
There are about 250,000 workers in southern China making iPhones and other Apple products; there are only 25,000 Apple employees here at home. So to break it down, there are 10 workers in China for every one worker here in the U.S. That 10-to-1 relationship holds true for Dell, for data-storage device maker Seagate Technology (Nasdaq: STX ) , and for countless other high-tech companies.
Why does it even matter?
I know what you may be thinking -- as long as our employees are getting paid well, what does it matter if the lower-paid jobs move abroad? Well, with unemployment at 9.5%, I think there are a lot of people out there who care.
It matters not only because there are a vast number of people who are out of work and don't have the wherewithal to obtain a knowledge-based job, but because the U.S. as a whole has forgotten that innovation doesn't just mean high tech. Complex manufacturing and having a presence in mature industries helps provide opportunities for future innovation. Our lack of manufacturing has not only cost us assembly-line jobs, but future knowledge-based jobs as well.
A case in point is the battery. When American companies stopped producing consumer electronic goods, Asian companies took over and ultimately the U.S. lost its lead in battery production (that was about 30 years ago). The problem is that now batteries play an integral part in PC manufacturing, mobile technology, and the automobile market.
Ford Motor (NYSE: F ) will come out with its electric vehicle, the Ford Focus Electric, in 2011, and it will be using Korea-based LG Chem's lithium-ion cell packs. So will Chevrolet when it comes out with the Chevy Volt. Both companies chose not to use Ener1 (Nasdaq: HEV ) , an American-based company that does the same thing as LG Chem.
This is just one example of American companies losing their competitive advantage because of decades of outsourcing, only to have it come back and bite them in the, well, you know what. Other manufacturing capabilities that are currently at risk: flash memory, LEDs for solid state lighting, thin-film solar cells, core network equipment, and much, much more.
The Foolish bottom line
I hate to be the guy complaining about high-tech, high-paying jobs, especially considering I work for an Internet-based company that is far from a job site or assembly line. But I have to believe that there is some kind of middle ground where we can foster places like Silicon Valley that have rich traditions in innovation and problem-solving, while separately building back the manufacturing sector that used to play such an integral role in our economy.
The way I see it, there are three options:
- Continue on the path we are on and let the free market allocate resources.
- Have the government levy taxes on items produced using offshore labor.
- Help subsidize companies that choose to maintain domestic manufacturing.
To me, none of these seems like a fantastic option. I am certainly not a protectionist, so the thought of taxing offshore labor and potentially starting trade wars is not my idea of a good time. However, I also don't think the status quo will produce economic success in the future. As former Intel CEO Andy Grove recently said, "Abandoning today's 'commodity' manufacturing can lock you out of tomorrow's emerging industry."
Should we be focused on reinstating manufacturing or should we concentrate just on high-tech jobs that provide higher incomes? Are they mutually exclusive? I'd love to know what Fools think of the three options listed above?
Sound off in the comments box below!