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The Next American Economy

U.S. companies can leverage innovation expertise to create new industries - and build employment back up - if the country can get manufacturing right

Applied Materials Chairman and CEO Michael Splinter is both excited and terrified about the future of the U.S. economy. On the one hand, his Silicon Valley company, whose primary business is supplying equipment used to make semiconductor chips, has come up a way to make a new generation of thin film solar panels. These thin film panels represent a clear advantage over solar systems being sold by non-American competitors and go a long way toward proving that solar power can be generated at the same price as traditional fossil fuels. “Companies like ours are investing huge amounts in research and development [R&D] and in developing the next generation of technology,” says Splinter. “We’re making a huge bet that we will be able to drive the cost down.”

That’s obviously positive for both Applied Materials and U.S. technological leadership. The trouble is that so far the only companies buying Applied’s thin film solar panel equipment are outside the U.S., many in China. “If I have a fundamental concern, it’s whether we’ll have large-scale manufacturing in the U.S.,” Splinter says. “If we do only R&D in the U.S., we’ll have a hollow industry herewith all the manufacturing jobs going elsewhere.”

Splinter’s mixed emotions encapsulate a critical debate about America’s future. The domestic economy may be recovering from a devastating recession, but it is a sluggish recovery at best. Many analysts estimate that the U.S. needs to generate 10 million jobs to compensate for the damage that has been done to employment.

To be sure, there is a cyclical economic component to the challenge – reopening credit spigots somewhat so that Americans can buy homes and cars in larger numbers.

But competitiveness experts agree there is also a structural challenge – Americans became so enamored with vast sums of cheap money coursing throughout the dot-com bubble, and then the housing bubble, that they neglected to compete globally. Even in some areas where the U.S. has clearly played a leading innovative role, the jobs are just not there to be had. The ultimate example perhaps is Apple’s iPod, which transformed the world of music and entertainment and earned Apple hefty profits. But the device itself is made by a Taiwanese company in China using Japanese and Korean components. Another highly innovative product, Amazon’s Kindle ebook reader, also cannot be made in the U.S. because the manufacturing infrastructure is not in place.

If I have a fundamental concern, it’s whether we’ll have large-scale manufacturing in the U.S. If we do only R&D here, we’ll have a hollow industry with all the manufacturing jobs going elsewhere.

 Driving Disruption

So where could the jobs come from to sustain a deeper, genuine recovery? Perhaps surprisingly to some pessimists, many CEOs are working to create new industries that could offer hundreds of thousands of jobs. These new industries are what America has traditionally done best – creating new, disruptive technologies. Thin film solar technology is one of them, and Applied Materials is just one of many competitors in that field. Damoder Reddy, a self described “serial” entrepreneur, has created a company called Solexant, in San Jose, Cal., which has licensed nano crystal solar cell technology from Lawrence Berkeley National Laboratory, part of the Department of Energy’s weapons lab system. Reddy is using the nano crystal semiconductors to create a coating that can be applied to other surfaces and turn them into solar electricity-generating devices.

These nano crystals can be produced in very high volumes, and Reddy is building a factory in Silicon Valley to do just that. “Germany and China are ahead of the U.S. in the current technology, but in thin film and nanotechnology, the U.S. is definitely ahead,” says Reddy. It’s in the blending of two different disciplines – solar and nanotechnology, in this case – that American entrepreneurs are world-beaters.

Another key technology of the future appears to be lithium-ion batteries, which Alliance Bernstein projects could become a $150 billion industry in its own right by 2030. The battery systems are expected to be used widely in hybrid and electric vehicles, as well as in devices that store solar and wind energy as part of “smart” electricity grids. The U.S. is behind in this sector, as evidenced by the fact that General Motors turned to LG Chem, a Korean company, for its lithium-ion cell technology for the new Chevrolet Volt, due out later this year. And Ford Motor’s supplier, Johnson Controls Power Solution, turned to a French company, SAFT, for its technology. Both are building factories in Michigan.

But the U.S. has a technology champion in the form of A123 Systems, of Watertown, Mass., which took nano phosphate technology from the Massachusetts Institute of Technology to create high-power lithium-ion batteries. The company’s management consists of technology industry veterans and scientists from leading battery companies and research institutes. General Electric recently invested in the company, and it also has won major new funding from the Obama administration. In January, A123 announced it would build a factory in Michigan to supply its batteries and systems to Fisker Automotive, a new automaker building premium “green” cars, such as the Karma plug-in hybrid electric vehicle.

Defensive Innovation

Defense spending is also driving a part of the country’s incipient innovation boom. The Department of Defense spends $5 billion a year in Orlando, for example, on simulation and training programs, which has helped foster a simulation industry consisting of 100 companies there. These companies have taken advantage of the presence of Disney and Universal, and a major office of Electronic Arts, to create programs that borrow liberally from entertainment and the computer gaming industry. Their products are aimed at helping the military train tens of thousands of new recruits each year to fight in Iraq and Afghanistan.

But many of the companies, like Apex Productivity Systems and I-DE-A-S, are leveraging their business with the military and the National Aeronautics and Space Administration (NASA) to launch products for the civilian economy in education, medicine and logistics. If they are successful, their programs could result in huge productivity gains for these sectors of the economy.

Similarly, in Pittsburgh, the Pentagon’s hunger for remotely controlled vehicles is helping fuel a cluster of 40 different advanced robotics companies, most associated with Carnegie Mellon University. When the Defense Advanced Research Projects Agency (DARPA) sponsored a 55-mile race to challenge researchers across the country to come up with vehicles that could drive themselves, a Carnegie team won.

Researchers equipped their vehicle with lasers, cameras and radar and knitted the resulting information flows together into a single coherent image of what was happening on all sides of the vehicle. Then they equipped the vehicle’s “brains,” or computers, with the algorithms to respond to unforeseen obstacles and make decisions about when to pass another vehicle, for example.

That autonomous driving technology has not yet been commercialized, but dozens of other companies are deploying robots to inspect sewers (RedZone), operate warehouses (See Grid) and conduct minimally invasive surgery on the heart and other parts of the human body (Cardio robotics). These systems represent a technological leapfrog over the current robot industry dominated by Japanese giants such as Fanuc, whose robots function only repetitively in a stable environment, as in the paint shop of an auto factory. The next generation of robots can “sense” their environment and adapt.

The best aspect of the U.S. is the breadth of the thinking… This is the place where you get the really far-out ideas that turn out to be important.

The military does not completely dominate innovation, of course. The Pentagon obviously has a stake in the realm of new materials for weapons systems, but Corning’s development of a new Gorilla glass for the consumer electronics industry was completely driven by the needs of the commercial marketplace. The company noticed that owners of mobile telephones and other handheld devices were frustrated because their devices broke so easily after being dropped. The company, located in the upstate New York town that bears its name, dug into its treasure trove of glass formulations and found a super-hard glass product it had tried unsuccessfully to introduce in 1962 for the automotive market. Corning reintroduced the product under a new name and created a $100 million business – one the company estimates will grow into a $500 million-a-year business. No other company in the world has a competitive product. 

Best in Breakthroughs

James R. Steiner, Corning’s senior vice president and general manager of the specialty materials division, who spent four years in Germany for Corning and who travels extensively in Japan and China, argues that Americans are the best in the world at working with customers to create breakthrough products. “Our German competitors are extremely structured,” Steiner explains. “They want to take an existing solution and tell people that’s the way it needs to be used. We do a better job of working closely with the customer to meet the customer’s needs. We do that better than the Asians also.”

And so it goes. In field after field, ranging from biodegradable plastics to new forms of bio fuel and ethanol, from lasers to artificial hands and limbs, American CEOs are attempting to give birth to new industries. “The best aspect of the U.S. is the breadth of the thinking,” says Willy C. Shih, a professor at Harvard Business School and veteran of 28 years at IBM, Digital Equipment, Silicon Graphics and Eastman Kodak. “Because of the intellectual environment, we have the most wide-open big thinkers. This is the place where you get the really far-out ideas that turn out to be import ant – Face book and Google but also the transistor and the integrated circuit.”

Creating Competitiveness

In many ways, the debate about how America can recover economically mirrors the debate about U.S. competitiveness in the late 1980s, when Japan appeared to be coming on strong in many key industries. Those concerns faded partly because of the perception that Japan’s “lost decade” of the 1990s meant it was no longer competitive but also because easy money fueled a U.S. stock market rally that created huge wealth – at least on paper.

Now, as then, there are several key challenges to restoring national competitiveness:

  • Lack of consensus that manufacturing matters. Many economists actually argue that the U.S. should concentrate on the service sector. This is an intellectual challenge.
  • Federal and state policymakers paralyzed by ideological and political gridlock. The phrases “industrial policy” and “picking winners and losers” set off firestorms of polarizing commentary, even though that’s precisely what Asia and Europe are doing.
  • U.S. tax policies regarding R&D and manufacturing are not as welcoming as those of most East Asian nations. There is also intense environmental opposition to new factories, particularly those handling hazardous chemicals. 
  • A dearth of qualified workers. Both skilled factory-level workers and university graduates with degrees in engineering, math or science are in short supply. Harvard Business School Professor Willy C. Shih recounts a friend with a factory in Silicon Valley who reports that “97 percent of the faces are Asian or Latin American. Even though we are paying a good wage, we can’t find enough Americans willing to do that type of work.” Community colleges are attempting to fill the training and retraining vacuum, and the Obama administration is encouraging them with new funding. But it remains a major issue.
  • Visa shortages. Partly due to security issues, but also because of fears that foreigners were “taking American jobs,” the enforcement climate regarding foreigners has toughened considerably. This deters foreigners from coming to the U.S. to work or study and encourages a reverse brain drain. “We are a nation of immigrants,” Shih argues. “We could go a long way to addressing this problem of competitiveness if we realized how many startups in the technology sector were started by immigrants – small companies like Intel.”

Shih notes that U.S. researchers tend to be very good at systematic thinking, meaning that they integrate diverse technologies and diverse ideas. The whole genomics industry currently creating thousands of jobs in San Diego represents a blending of the biotech industry with massive computing power, he adds. Researchers are using supercomputers to map out the genetic codes of single individuals, which promises many breakthroughs in medical treatment.

Shih, an American-born Chinese who moves easily between East and West, in many ways encapsulates the debate about America’s technological strengths. He attracted attention in the summer of 2009 by co-authoring an article entitled, “Restoring American Competitiveness” in the Harvard Business Review. Shih argues that Americans have allowed their industrial “commons” to deteriorate in recent years. By that term, he means the supplier base, toolmakers and the labor and engineering pools – “all that stuff you tap into when you’re trying to put together a company to make something.”

He tells the story of working at Kodak in Rochester, New York, beginning in the late 1990s. The company was desperate for new products because it had been so slow to move away from silver halide film and embrace the digital era, and thus was losing money at a rapid clip. A researcher came up with a breakthrough in organic electroluminescence, which uses organic material to create brightness, that could have been a new way to make electronic displays.

Shih was excited and wanted to gear up experiments on a pilot production line to perfect the idea. “But there were no flat panel display makers in the U.S.,” Shih recalls. “To turn it into product, we had to go to Japan. You could not commercialize it in the U.S. because none of the manufacturing infrastructure was still left.” 

Competitive Commercialization

Those are precisely the capabilities that Japan, China, Taiwan, South Korea, Singapore, Malaysia and others have consciously targeted through a combination of government policies such as tax breaks and strong engineering educational programs. Executives of East Asian companies tend to look at the U.S. as a “research funnel” – a source of ideas they can commercialize.

Shih recalls having dinner with the CEO of a South Korean company, who told him, “You guys are very good at the front-end R&D. We’ll just take all that stuff and commercialize it and we’ll make all the money.” Shih adds ruefully: “Even though we have the primary technology, there is a lot involved in manufacturing these things at a reasonable cost. That’s where Asians have the lead.”

This is the heart of the issue, most American executives agree. How can Americans take their highly innovative ideas and scale them into industries that create jobs at home? “I don’t worry about our ability to innovate,” says Corning’s Steiner, “as much as our ability to maintain a strong manufacturing base, partly because these industries just aren’t in the U.S. anymore. Even the U.S. companies that are still here tend to have everything made in Asia. For Dell and for Apple, the entire supply base is in Asia.

What’s more, new industries alone won’t be able to restore the U.S. economy. Even the most ardent optimists realize that other mature industries such as autos and construction equipment must continue to be transformed to become globally competitive, or remain so. As painful as bankruptcy has been for General Motors, the fact remains that it has dramatically transformed its relationship with the United Auto Workers and slashed its costs, while revving up its design and technology clout. Other industrial giants, such as Deere & Co. and Caterpillar, have gone through similar transformations.

We could go a long way to addressing this problem of competitiveness if we realized how many startups in the technology sector were started by immigrants – small companies like Intel.

Other traditional sectors remain critical, such as aerospace, where Boeing is increasingly playing the role of a systems integrator as much as manufacturer. The U.S. information technology sector, whether Intel, Cisco, Hewlett-Packard, IBM, Microsoft or Dell, is quite strong but also thoroughly globalized, meaning those companies don’t necessarily create huge employment gains at home.

In the end, the biggest employment gains could come from new industries and from smaller companies in those industries. This is a skill that America has displayed in the past, but one that has been largely forgotten amid the booms of recent years. It’s clearly not too late, however. “I’m optimistic,” says Shih. “These things can be overcome if we get a grip on the causes.”

William J. Holstein, the author of Why GM Matters: Inside the Race to Transform an American Icon, is working on a new book, The Next American Economy: A Blueprint for a Sustainable Recovery.


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