How to create jobs in America, not in China?

on June 5th, 2011

Andy Grove, Apple, China, developing countries, Economy, Foxconn, Intel, jobs, Silicon Valley, stagnating economy Follow @SebastianAulich

I found this interesting article in Business Week by Andy Grove, the former CEO of Intel, who at the age of 20 fled from communist Hungary, came to America and co-founded Intel in 1968 with $3 million of venture capital investment. Since then, Intel grew to become a giant technology company employing over 82.500 people. However, in the recent decades the global economic landscape has changed tremendously and China has opened up to foreign investments. Andy Grove claims that the opening of China has forced U.S. companies to ship manufacturing jobs abroad, what has had a very negative impact on technological innovation in America and the jobs market. For example, Foxconn which is mostly known in the West for numerous suicides of its employees in the factory complex in Shenzhen, China, is manufacturing goods for Apple, Microsoft, Nokia, Intel, Dell and HP. Foxconn employs 850.000 workers, which is more than the combined number of employees of all of the above-mentioned companies in the U.S. and Europe taken together. Grove says, that Apple employs around 25.000 people in the U.S., however the production of its gadgets (iPods, iPads) is being done in China by 250.000 workers. As a result, for every job in the U.S., the Apple company creates 10 jobs in China. Is it good for the U.S. economy?

And because the U.S. companies are shipping manufacturing jobs abroad, they keep only hi-tech jobs in the U.S. The result is that the cost of creating a single job in Silicon Valley has increased from a few thousand dollars per position to a hundred thousand dollars today. For example, a cost of creating one position at Google is currently above $100K. Andy Grove says that the biggest challenge for the start-up companies is how to scale their operations so that they become large companies. In the past, it was that scaling process which was creating millions of jobs in the U.S. Today, however, an easier opportunity is to ship jobs abroad and transfer the scaling process to the developing countries like China.

In Andy Grove’s opinion, it is also the scaling process, which creates technological innovation because the start-up companies need to figure out how to produce in large quantities and do it cheaply in order to remain competitive. So if the scaling process will continue to be done in China, then the most technological development will eventually happen in China and the U.S. economy will lose its competitiveness.

Andy Grove proposes to create incentives for U.S. companies to do the scaling within the U.S. and penalize those companies which are shipping the scaling process abroad. Unfortunately, that’s where I disagree. Penalizing companies, which are creating jobs abroad, will not take the U.S. economy far. Europe and Asia would respond with similar actions and punish their own companies which are creating jobs in the U.S. (and there are many of them). So in my opinion, the way to improvement is through the creation of appropriate economic incentives by the federal government. The U.S. government would need to come up with tax credits for companies which decide to do the scaling process within the U.S., rather than in the developing countries. And those tax credits would need to be significant enough to keep the U.S. companies competitive on a global scale. The immigration reform is another possible solution. If the labor costs are too high in the U.S., then the government should allow immigrants from less developed countries to come and work in the U.S. for some limited period of time. In such a way the labor costs could go down making it more profitable for the U.S. companies to build manufacturing plants in the U.S. and not in other countries. Anyway, take a look at Andy Grove’s article – it is a very good read on a very pertinent issue today: the job creation