U.S. Innovation Strategy: The Case for Domestic Manufacturing

July 8, 2010 | Yael Borofsky,

Political confusion surrounding "green" jobs, clean tech, and outsourced manufacturing (largely to Asia) has caused those looking to clean energy as the next U.S. growth sector and those seeking to raise the U.S. out of a growth-numbing recession to lose sight of what has fueled U.S. technological and economic leadership in the past - public support for innovation and large scale high tech manufacturing. Recently, Alexis Madrigal posed the critical question arising from this confusion to the readers of the Atlantic: "Can the US Innovate Without Manufacturing?"

As Breakthrough and numerous high tech leaders argue, the answer is "NO."

According to Madrigal:

The premise behind the question, as [Applied Materials CEO Mike] Splinter explained, is that manufacturing isn't just where ideas are put into practice, but a key part of the innovation ecosystem. (He should know: he once ran Intel's top chip fab.)

...That view is a challenge to the simplified idea that research, product development, and manufacturing are discrete steps. But it's close to the nuanced theories of innovation that researchers like Peter Karnøe at Copenhagen Business School and [Breakthrough Senior Fellow] Gregory Nemet at the University of Wisconsin have put forth about how technologies actually improve.

Karnoe's work, for example, focused on why the tiny Danish wind industry was able to successfully compete with the U.S. wind companies of the 1980s. It turned out that their manufacturing and operations people had greater influence over R&D decisions than in the American companies. Information about best practices and problems passed easily between pieces of the operation, so improvements came steadily, and bad surprises were limited.

The argument that the U.S. cannot simply ship high tech manufacturing - particularly clean tech - offshore without real impacts on clean tech innovation, not to mention job creation, was central to Breakthrough's assessment of clean tech competitiveness between the U.S., China, South Korea, and Japan in "Rising Tigers, Sleeping Giant." As the report argued, China is rapidly forming highly innovative clusters of R&D centers and clean tech manufacturing facilities that draw private investment from corporations as well as high quality researchers and engineers, many from the U.S.:

Direct government investments will help Asia's clean tech tigers form industry clusters, like Silicon Valley in the United States, where inventors, investors, manufacturers, suppliers, universities, and others can establish a dense network of relationships. Even in an era of increasingly globalized commerce, enduring competitive advantages lie increasingly in the structure of these regional economies.

Andy Grove, co-founder and Senior Advisor of Intel, further dismisses the idea that the U.S. can remain innovative leaders without a strong manufacturing base in a recent essay published in Bloomberg. According to Grove, not only is innovation and manufacturing intricately connected, both are necessary for the kind of large scale, long-term job growth the U.S. needs to rise out of recession.

Grove explains:

Clearly, the great Silicon Valley innovation machine hasn't been creating many jobs of late -- unless you are counting Asia, where American technology companies have been adding jobs like mad for years.

The underlying problem isn't simply lower Asian costs. It's our own misplaced faith in the power of startups to create U.S. jobs. Americans love the idea of the guys in the garage inventing something that changes the world. New York Times columnist Thomas L. Friedman recently encapsulated this view in a piece called "Start-Ups, Not Bailouts." His argument: Let tired old companies that do commodity manufacturing die if they have to. If Washington really wants to create jobs, he wrote, it should back startups...

Friedman is wrong. Startups are a wonderful thing, but they cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. This is the phase where companies scale up... Scaling is hard work but necessary to make innovation matter.

The scaling process is no longer happening in the U.S. And as long as that's the case, plowing capital into young companies that build their factories elsewhere will continue to yield a bad return in terms of American jobs.

Breakthrough's Jesse Jenkins made a similar point responding to the common political tagline that pending climate legislation will create "jobs that can't be shipped overseas." As Jenkins argued, not only can they be shipped overseas, they are being created there in the first place:

So forget the notion that clean energy jobs can't be outsourced. Recent research by the office of Senator Ron Wyden (D-OR) showed that in the last five years the U.S. trade deficit in renewable energy goods has ballooned by 1,400 percent to $5.7 billion in 2009. Roughly 70 percent of the renewable energy systems and components installed in America are now manufactured by workers overseas, according to estimates from the Apollo Alliance. And even the American Wind Energy Association, the industry's trade group, concedes that about 50 percent of the components installed in American wind farms are manufactured abroad.

If things don't change, cleantech scientists and researchers will be the next to follow the cleantech factory worker overseas. Jobs in clean energy research, innovation, and new product development--traditional areas of U.S. leadership--are already on their way abroad as high tech giants and startups alike shift innovation activities to be close to vibrant clean energy manufacturing centers and markets overseas.

Applied Materials, the leading producer of the equipment used to manufacturing solar cells, recently opened the world's largest and most advanced solar energy R&D center in Xi'an, China, creating hundreds of high-tech jobs there and shipping out their Chief Technology Officer and Silicon Valley luminary, Mark Pinto, to oversee the project. IBM recently announced a $40 million investment in a new "energy and utility solutions" lab in China that will perform cutting edge work on smart grid and other clean technologies. And U.S. technology powerhouse GE is putting their Chinese research centers in the lead developing new clean tech products like wind turbines and power control electronics.

And, as Grove points out, exported jobs are not the only economic fallout. Ceding the manufacturing and innovation in one type of technology could lock the U.S. out of future, unpredicted technology innovations that build out of a current technology. He offers the case of advanced batteries as an example:

With some technologies, both scaling and innovation take place overseas. Such is the case with advanced batteries. It has taken years and many false starts, but finally we are about to witness mass- produced electric cars and trucks. They all rely on lithium-ion batteries. What microprocessors are to computing, batteries are to electric vehicles. Unlike with microprocessors, the U.S. share of lithium-ion battery production is tiny.

That's a problem. A new industry needs an effective ecosystem in which technology knowhow accumulates, experience builds on experience, and close relationships develop between supplier and customer. The U.S. lost its lead in batteries 30 years ago when it stopped making consumer-electronics devices. Whoever made batteries then gained the exposure and relationships needed to learn to supply batteries for the more demanding laptop PC market, and after that, for the even more demanding automobile market. U.S. companies didn't participate in the first phase and consequently weren't in the running for all that followed. I doubt they will ever catch up.

As Breakthrough reported in "Rising Tigers," as of 2008 China controlled 41% of the global market for the production of lithium ion batteries and houses the top ten global battery manufacturers, placing China in excellent position to compete in the plug-in hybrid and electric vehicle markets.

Neither high tech manufacturing nor innovation occurs in a vacuum. Continuing to cede clean technology manufacturing capacity will not just send factory jobs overseas, but also the future innovation and associated jobs that Americans value so highly. Neither innovation nor job growth happen in garages, alone, but also as innovative technologies get scaled for mass consumption and as first-movers reap the advantages of learning-by-doing. It's time to accelerate and invest in all aspects of the innovation pipeline or risk losing the opportunity that clean tech offers to create a vibrant market that will help the U.S. grow its way out of the recession.

Both Madrigal's post and Grove's opinion essay are must-reads in their entirety for anyone who is thinking about ways to build a green economy in the United states.

Related Breakthrough Reports:

"Rising Tigers, Sleeping Giant: Asian Nations Set to Dominate Clean Energy Race by Out-Investing the United States"

"The Power to Compete: Benchmarking the Kerry-Lieberman American Power Act on Clean Energy Innovation and Competitiveness"

"Strengthening Clean Energy Competitiveness: Opportunities for America COMPETES Reauthorization"