And more from this week...
RECOMMENDED READING
Greg Ip had a really important column in the Wall Street Journal on Monday, and it is your one thing to read this week: Crises at Boeing and Intel Are a National Emergency
On one hand, all credit to Greg for tackling this crucial topic. I talk and write frequently about the disasters that are Boeing and Intel, once America’s industrial crown jewels. American Compass has done in-depth case studies on both (see America’s Microchip Slip and How Airbus Took Flight). So I’m delighted to see feature coverage in the Journal, seeking to connect the dots between these specific failures and America’s broader economic challenges.
On the other hand, in its specifics, the piece has an Inspector Clouseau quality in its baffling failure to connect the most obvious dots, even as it lands eventually at the right conclusion. So as a service to you, dear readers, I’ve endeavored here to review the case and fill in some of the blanks in the investigation.
Greg frames the fundamental problem as:
The U.S. is in a geopolitical contest with China defined not just by military power but economic and technological prowess. Leaders from both U.S. political parties say they are on the case, pushing for tariffs and subsidies.
Whatever their merits, these measures don’t address the fundamental problem that Boeing and Intel represent. The U.S. still designs the world’s most innovative products, but is losing the knack for making them.
This disconnect between design and production is indeed the heart of the problem. It is also precisely the issue that the aforementioned tariffs and subsidies do address. The premise in either case is to make investment in domestic production relatively more attractive, in turn creating both the demand and a source of supply for other things that can then be made domestically. As we’ll see, Greg gets around to acknowledging all this later on—for instance, Boeing failed in part because it outsourced production… production that would have made much more economic sense to keep in-house or close to home if it were subsidized, or if imports were tariffed. Intel failed in part because of an exodus of engineering talent or, more precisely, the collapse of the domestic engineering pipeline as cutting-edge fab work moved to countries that were aggressively subsidizing it themselves.
One can argue that tariffs and subsidies won’t work in the sense that they won’t succeed in altering investment incentives. I disagree, but it’s an interesting and important argument. What you can’t say is that tariffs and subsidies don’t address our loss of manufacturing expertise—the loss occurred because other countries were using these tools and we were not, it will be reversed if and only if we counter those distortions and restore the incentives to invest in making things here. That’s where the knack comes from and, to quote Don Draper, that’s what the money is for. Back to Greg:
At the end of 1999, four of the 10 most valuable U.S. companies were manufacturers. Today, none are. The lone rising star: Tesla, which ranked 11th.
Just a quick observation: Tesla doesn’t really belong on the list, or won’t for long. It now does most of its manufacturing in China (thanks to, you guessed it, tariffs and subsidies!). China worked so hard to lure Tesla over because it could then induce technology transfer to Chinese firms, which are now eating Tesla’s lunch. In fact, Elon Musk is already begging American policymakers for protection from Chinese producers, which he calls “the most competitive car companies in the world,” predicting “if there are not trade barriers established, they will pretty much demolish most other car companies in the world.” I tell this story in detail in my recent essay, The Electric Slide.
Intel and Boeing were once the gold standard in manufacturing groundbreaking products to demanding specifications with consistently high quality. Not any longer.
Neither fell prey to cheap foreign competition, but to their own mistakes. Their culture evolved to prioritize financial performance over engineering excellence, which also brought down another manufacturing icon, General Electric.
I’m delighted to see focus in the Journal on the problem of financialization and forthright acknowledgment that the effort “to prioritize financial performance” does not in fact lead to better financial performance. That’s absolutely part of the story, but it’s not the whole story. “Falling prey to cheap foreign competition” is one potential danger of globalization, but hardly the only one, as these case studies make clear.
Intel passed on making the chips for Apple’s first iPhone, thinking it wouldn’t be profitable enough. It was late to adopt the latest technology for etching the tiniest circuits, and it missed the boom in artificial intelligence.
This is not the story of what happened to Intel. It is an accurate description of opportunities missed, as far as that goes, but it lacks explanatory power. Passing on the iPhone was obviously a massive mistake. But why didn’t it adopt the latest technology? Why did it miss out on artificial intelligence? The answer comes from none other than Andy Grove, Intel’s legendary engineer-turned-CEO from its days as the world’s leading technology company. I quote Grove on this point constantly, but it’s worth doing here again. In 2010, long after he retired, with Intel in the early stages of decline, he described what globalization was doing to Silicon Valley:
“Silicon Valley is a community with a strong tradition of engineering, and engineers are a peculiar breed. They are eager to solve whatever problems they encounter. If profit margins are the problem, we go to work on margins, with exquisite focus. Each company, ruggedly individualistic, does its best to expand efficiently and improve its own profitability. However, our pursuit of our individual businesses, which often involves transferring manufacturing and a great deal of engineering out of the country, has hindered our ability to bring innovations to scale at home. Without scaling, we don’t just lose jobs — we lose our hold on new technologies. Losing the ability to scale will ultimately damage our capacity to innovate.”
This is precisely what Intel was doing. At a 2004 Hoover Institution event titled “What, U.S. Worry? Is the United States Losing Its Competitive Edge?”, Grove’s successor, Craig Barrett, gloated that “capitalism has won and economy trumps all going forward. … We are the biggest high-tech venture capital company in the world. Half of our investments on a runway, going forward are in Asia.” Grove was prescient as to the consequences.
And no, it didn’t help that, in what is one of the world’s most capital-intensive industries, Taiwan and South Korea were committing virtually unlimited resources toward subsidizing investments by TSMC and Samsung to establish them as the leading chipmakers.
Boeing thought it would be cheaper and faster to add more efficient engines to its bestselling 737 with the help of software rather than completely redesign or replace the plane. That contributed to two fatal crashes. Outsourcing of its supply chain and an exodus of experienced machinists during the pandemic contributed to quality problems and delays. … While Elon Musk’s SpaceX has outclassed Boeing when it comes to space transport, there are no homegrown alternative suppliers of large commercial airliners. Without Boeing, that business would go to Airbus and, eventually, China’s state-owned Comac, which is now delivering its own competitor to the 737 and Airbus’ A320, the C919.
As noted above, and finally articulated by Greg here, outsourcing the supply chain is a huge part of the Boeing story. This is not hindsight; the consequences were predicted as it was happening. All the way back in 2005, writing in The American Conservative, Eamonn Fingleton warned:
“The key to the new Boeing is a Faustian bargain with Japan. In a rerun of earlier American industrial implosions, Boeing has come to rely more and more on Japanese contractors for its most advanced engineering and manufacturing. Heavily subsidized by the Tokyo government, Boeing’s Japanese partners are delighted to lowball their contract prices and spend heavily on the sort of advanced research and development that in happier times Boeing would have eagerly—indeed jealously—reserved for itself. … In effect, Boeing is burning the family heirlooms to keep the house warm.”
If that metaphor sounds familiar, it’s because it echoes the one Warren Buffett had used two years earlier to describe America’s trade-deficit-fueled economic model in the new millennium: “We have, day by day, been both selling pieces of the farm and increasing the mortgage on what we still own.” There is no separating the failure of an Intel or a Boeing from the forces unleashed by globalization and the folly of American economic policy that disclaimed any concern for where things were made or whether we made anything in America at all.
The loss of either company would have industrywide repercussions. Each supports a multilayered ecosystem of designers, workers, managers and suppliers. Once that ecosystem moves offshore, it is almost impossible to bring back.
So, two things here. First, I think we need a law—maybe just a Dear Colleague letter from the Council of Economic Advisers would suffice—requiring any economist reciting free trade dogma to get “once that ecosystem moves offshore, it is almost impossible to bring back” tattooed on his chest. This is the crux of the matter, and the proof that a robust industrial base has enormous spillover effects and positive externalities that multinational corporations will ignore but a nation must protect.
What’s endlessly insulting to the millions of Americans who have seen their communities decimated by our economic policy is that while industry is leaving, economists shrug and say it doesn’t matter. But ask whether it can be brought back, and they’ll chuckle that “once that ecosystem moves offshore, it is almost impossible to bring back.” That’s why you don’t let it leave! Which brings us to…
Recommended Reading
Is Our Children Learning? Apparently Not.
Plus, Sam Altman as ShamWow Guy, and more from this week…
The One Thing You Should Be Reading This Week, and Every Week
A brief departure from our standard Friday format…
Notes from an Inauguration
Or, the Canadian Girlfriend Theory of Executive Power