President's Science Council Says Future Health Of Technology Sector Is In Jeopardy;

Manufacturing and Technology News ^ | October 3, 2003

[Lessismore]

Decline Of Manufacturing Could Impact Innovation 'Ecosystem'

The Presidential Council of Advisors on Science and Technology (PCAST) has finished the first phase of a study that finds the health of the U.S. high tech industry is in rapid decline. With manufacturing leaving the country, the United States runs the risk of losing the strength of its innovation infrastructure of design, research and development and the creation of new products and industries, warns the PCAST Subcommittee on Information Technology Manufacturing and Competitiveness.

Foreign governments -- and especially China -- have done an effective job of creating a rich environment for the manufacture of electronics and semiconductors, and the implications are that "U.S. high-tech leadership is not guaranteed," said George Scalise, chair of the PCAST subcommittee and president of the Semiconductor Industry Association. "That is all there is to it. We have it. We enjoy it. We have been here forever, but it is not guaranteed going forward. If we lose that leadership and if we don't have that as a driving force in our economy, then it is going to have an impact on the standards of living here. That is a reality."

For the two years ending January 2002, the United States lost 400,000 high-tech jobs, with computer manufacturing employment dropping by 20 percent. Moreover, the United States has lost its sales advantage. Until 2001, 40 percent of the world's semiconductor consumption was in the United States, followed by Europe, Japan and the Asia-Pacific region, each with about 20 percent market share. "Over the past two years, that has flip-flopped as far as the U.S. is concerned," Scalise told a September 9 meeting of PCAST. "We are now one of the three 20 percent groups and Asia-Pacific [which includes China] is now 40 percent of the market. All that manufacturing and outsourcing that has been going on is now really making a major, major presence as far as who is consuming these products and putting them into boards and boxes and things."

In the area of production equipment, the United States now consumes 30 percent of the world's output. "One of the questions that comes out of this is how low can we go and still maintain the ecosystem," whereby manufacturing generates the revenue that supports research and development, innovation and new product design, Scalise asked the group. "I don't know where that transition point is, but I think it is something we have to make certain we never get too close to."

The United States's strength in innovation is degrading slower than manufacturing and sales, making the loss of what is believed to be America's sole remaining advantage "at risk," Scalise said.

The situation is "very, very different" from the one that existed with Japan in the late 1980s and early 1990s, Scalise warned the White House advisory group. "With a small population, Japan reached a saturation point in terms of its ability to take on more of what was going on in the tech world much, much sooner than China will," said Scalise. "It will be a factor of 10 or 15 difference in that regard. So this is going to be a much more prolonged problem to contend with as opposed to Japan."

But an even more important difference is the fact that China has a "cultural tradition" of entrepreneurship, while Japan does not. Because Japan works by management consensus, the country has been unable to topple U.S. high-tech leadership. The United States has successfully out-innovated Japan.

"That is not true with China," said Scalise. "There is a true tradition of entrepreneurial energy in China and we are going to see a lot of companies, a lot of new things, going on there because of that. That is going to be very different."

China has another growing advantage: a very well educated technical workforce. Both China and India are graduating some of the most talented scientists and engineers in the world, Bob Herbold, executive vice president of Microsoft, told the PCAST meeting in a presentation on the future of the science and engineering workforce.

Last year, China graduated 219,600 engineers, representing 39 percent of all bachelor's degrees awarded in the country. By comparison, the United States graduated 59,500 engineers, or 5 percent of all bachelor's degrees (1,253,000). But 58 percent of all degrees awarded last year in China were in engineering and the physical sciences, as compared to 17 percent in the United States (a figure that is dropping by about 1 percent per year).

"We are on the decline in the production of science, technology, engineering and mathematics graduates at the bachelor's level, and the job needs are, in fact, declining equally as fast, if not faster," Herbold told the meeting. "Probably the number-one finding that this group should carry forward and make sure that the President and the White House and the U.S. government and the U.S. citizenry is aware of is the fact that we have a shift here of monumental proportions in terms of jobs and capabilities and competitiveness on the part of other countries to seriously bite into our industrial base," said Herbold in a chilling presentation. "As you stand here and you say, 'Well, what are we going to do about it?' It is not an easy problem...Given all of those statistics, over the short term, it is clear we are going to lose a lot of jobs that are science, technology, engineering and mathematics based. Over the medium term...the only savior here has got to be the incredible innovation capability of this country to create new things because we have seen other industries move out of the country before and it's clear this one [high-tech] is now moving."

Scalise noted that in today's world a comparative advantage has little to do with physical assets such as ports and more to do with human capital -- a "very transportable element," he said. "Therefore, that comparative advantage is fragile and has to be addressed as being a fragile comparative advantage. If it is ignored, then we don't necessarily ever get the advantage from all the work, all the investment that we have been putting in."

Bobbie Kilberg, a PCAST committee member and president of the Northern Virginia Technology Council, relayed a story to the group from a discussion that she had with an executive from a major high-tech firm. He told her that by 2010, 90 percent of his company's R&D, design and manufacturing will be conducted either in China or India. "I said, 'Well, what can we do about that?' And this guy said, 'Not much. We are not coming back. Unless the government prohibits us from going, we are gone,' " Kilberg said. Tax incentives would not keep his company in the United States and there is little the United States can do to compete with low-cost and highly trained labor in India and China. "I was really at a loss when this fellow said that the tax policy is not going to make any difference and that labor is better educated and cheaper," said Kilberg. "How you deal with that is a real key challenge."

Former National Science Foundation director Erich Bloch and MIT president Charles Vest both called Scalise's presentation "disconcerting."

Ralph Gomery, president of the Alfred P. Sloan Foundation, said: "I don't think the federal government can just stand by and watch this happen."

Wayne Clough, president of Georgia Tech, said it is important for PCAST to note the tie-in to the U.S. defense capability. "If we don't mention the 'defense' word and we just focus on economic competitiveness, we probably are missing a piece that we should address," said Clough. He added later: "We need to also remember as we write this report that this transfer of jobs is going on in other sectors as well. We are seeing this happen in any service sector, technical services, engineering, design, accounting -- many other sectors. That is where you really get nervous. How many of these sectors is it really going on in?"

[oceanview]

maybe somewhere, someplace, somebody in the administration will start taking this seriously.

I give Lou Dobbs credit, he has been talking about it.

and this article is correct, its going on everywhere it can take place in, and probably in new areas we haven't thought of yet. these monthly jobs reports will continue to reflect this.

when corporation put their 2004 plans into effect in January, expect alot more layoff anouncements.

[DannyTN]

Yeah, at least it's starting to get noticed. But the bureacracy better kick it in high gear if they hope to have a plan, much less implement one before it's too late.

[oceanview]

right now, the government is not just standing by and watching this happen. its a willing accomplice.

notice that the "executive" giving the statement has no fear of losing his job, his compensation is likely skyrocketing.

this issue, and the corresponding job dislocations, gets Hillary elected in 2008.

[RLK]

Last year, China graduated 219,600 engineers, representing 39 percent of all bachelor's degrees awarded in the country. By comparison, the United States graduated 59,500 engineers, or 5 percent of all bachelor's degrees (1,253,000). But 58 percent of all degrees awarded last year in China were in engineering and the physical sciences, as compared to 17 percent in the United States (a figure that is dropping by about 1 percent per year).

-----------------------------

WOW! I knew China was gearing up a program to graduate top grade engineers and scientists, but I didn't know it was moving this quickly.

[RLK]

maybe somewhere, someplace, somebody in the administration will start taking this seriously.

--------------------------

I don't believe George Bush has been serious about anything in his life. He doesn't have the mind to see implications or consequences.

[Lessismore]

From "The Economic Rise of China: Threat or
Opportunity?" by Nicholas R.Lardy, http://www.clevelandfed.org/Research/Com2003/0801.pdf

...

"But the mainland ’s production of infor-
mation technology hardware is based
on the import of high-valued-added
parts and components, almost all of
which originate within Asia.The
production of liquid crystal display
monitors in China, for example, now is
based largely on liquid crystal modules
imported from Taiwan, South Korea, or
Japan. Thus, even as China displaces
other Asian sources of supply of finished goods in third-country markets, it
is emerging as a huge market for high-
value-added parts and components pro-
duced mostly in Asia. The result is a
pattern of triangular trade. China
imports huge quantities of parts, com-
ponents, and electronic assemblies
from other Asian countries, in the
process running very large bilateral
deficits. China ’s deficit with Taiwan
last year was $31.5 billion. And China
runs a surplus in its trade with countries
like the United States that have a large
number of consumers of these elec-
tronic products. But overall, its result-
ing global trade surplus is relatively
small."

Note that the United States is not mentioned as the source of high-tech components going into goods manufactured in China.

[oceanview]

the degree imbalance is not the total issue. if china were graduating these people, but the US wasn't shipping off our own industries and jobs to china, these engineers would be working at Walmart like many US engineers are now. the real issue is the costs, its not that these engineers are better, they aren't, but when you can hire 4 of them for less then 1 US engineer makes, the management drones running US corporations will send the jobs right over.

[Lessismore]

this issue, and the corresponding job dislocations, gets Hillary elected in 2008.

Our Eva Peron!

[oceanview]

but look at few freepers even take this issue seriously. what do we have here, the same nucleus of 20-30 people posting about this. i would guess that most freepers will cling to the "free trade" mantra to the bitter end, no matter how many industries and jobs we lose, replaced by low paid service sector jobs.

[concerned about politics]

With manufacturing leaving the country,

The environmental laws and the cost of union labor is too high. Cut them both, and the businessess might stick around.
As long as the Socialist Workers Party is running the show, things aren't going to be changing soon.

[sourcery]

[Lessismore]

WOW! I knew China was gearing up a program to graduate top grade engineers and scientists, but I didn't know it was moving this quickly.

But they can't compete with us in BA Communications or in Pre-Law!

[oceanview]

even if we eliminated every EPA law we had on the books, it would not matter, so long as we have currency and trade issues with china that give them HUGE advantages at the expense of american jobs.

[oceanview]

and the law school application are piling up. All of my tech friends with college bound kids, they won't be sending them to school for engineering, they see the handwriting on the wall.

[sarcasm]

If we don't mention the 'defense' word and we just focus on economic competitiveness, we probably are missing a piece that we should address,"

Probably?

[RLK]

This area has volunteer fire departments. About a year ago the house across the street caught fire and nobody bothered to show up with fire trucks until it was almost too late.

That's the way the Bushs are about econonomics and the future of this nation. The writing is clearly on the wall here. We're through while this vacant-faced what-me-worry president congratulates himself over Saddam Hussein. What we are losing will hit us long after Hussein has died of old age. This is a cross between a Peter Sellers movie and grotesque science fiction. What is worse, people on this forum are ecstatic about it. Coming to this place any more is like getting hit in the head with a hammer.

[superloser]

I agree. Most freepers seem to be more interested in "free trade" because it lets them buy a $2 widget at Wally World.

"What right do you have to tell me who I can't buy from!" seems to be the mantra around here.

I've been saying for some time now that the bill will come due when the marginal tax rate hits 90% to pay for welfare programs as more and more people are unable to earn a living.

They just laugh and say it will never happen. I don't know what reality they are living in where you can just say "never" and it comes to pass.

Reality as always is something different, alas, and we, as a country, will eventually reap the bitter fruit of our own shortsightedness.

[oceanview]

the people warning about this, like those in the article, are desperate now. they see the trend, and realize that the "no turning back" point is not far off. they (we) see an administration that should be honest enough to care and do something about this, yet we are saddled with clueless treasury and commerce sec'ys, and a generally totally incompetent economic team. When Lou Dobbs is the leading voice on the national stage on this issue, we've got trouble.

Use the "national defense" issue is a hail mary pass to try and get someone to listen.

[sarcasm]

I've been saying for some time now that the bill will come due when the marginal tax rate hits 90% to pay for welfare programs as more and more people are unable to earn a living.

They are blind to reality.