By Kevin Meyer
This past week has seen a trio of articles explicitly lay out the crisis, misperception, and opportunity of manufacturing in America. Two great articles by Steve Denning sandwiching a piece by software venture capitalist Marc Andreesen. If you get a chance I'd suggest you read them in this order, but I'll do my best to summarize below.
- Why Amazon Can't Make a Kindle in the USA (Steve Denning, Forbes)
- Why Software is Eating the World (Mark Andreesen, WSJ)
- Does it Really Matter that Amazon Can't Make a Kindle in the USA? (Steve Denning, Forbes)
So to kick it off, let's tackle the first article. Steve Denning bluntly lays out the problem, building on a previous article of his on How Do You Explain Radical Management to a CFO.
Decades of outsourcing manufacturing have left US industry without the means to invent the next generation of high-tech products that are key to rebuilding its economy, as noted by Garry Pisano and Willy Shih in a classic article Thus in “Restoring American Competitiveness”. The US has lost or is on the verge of losing its ability to develop and manufacture a slew of high-tech products. Amazon’s Kindle 2 couldn’t be made in the US, even if Amazon wanted to.
– The flex circuit connectors are made in China because the US supplier base migrated to Asia.
– [article goes on to detail five additional key components]
Pisano and Shih continue:
“So the decline of manufacturing in a region sets of a chain reaction. Once manufacturing is outsourced, process-engineering expertise can’t be maintained, since it depends on daily interactions with manufacturing. Without process-engineering capabilities, companies find it increasingly difficult to conduct advanced research on next-generation process technologies. Without the ability to develop such new processes, they find they can no longer develop new products. In the long term, then, an economy that lacks an infrastructure for advanced process engineering and manufacturing will lose its ability to innovate.”
In the same way that cost accounting and short-term corporate profits don’t reflect the true health of corporations, the economists’ reckoning of the impact of outsourcing production overseas misses the point. Americans are left with shipping the goods, selling the goods, marketing the goods. But the country is no longer to compete in the key task of actually making the goods.
Denning goes on to list a host of industries that have already been lost – too lengthy to appropriately duplicate here. He then details what various types of leaders and functions need to do. Here are just a couple:
Accountants: Accountants need to get beyond the mental prison of cost accounting and embrace the thinking in throughput accounting that puts the emphasis on how companies can add new value, rather than just cutting costs.
Economists: Economists need to realize that merely adding up the numbers is not enough. They have to look at the meaning behind the numbers. When they trumpet their finding that “Chinese goods are only 1% of the U.S. economy”, it’s akin to saying “we kept the house but gave away the keys.”
Next, Marc Andreesen tries to convince us that all of this doesn't matter. Software innovation will save the day, as software is supposedly the linchpin of everything in life.
This week, Hewlett-Packard (where I am on the board) announced that it is exploring jettisoning its struggling PC business in favor of investing more heavily in software, where it sees better potential for growth. Meanwhile, Google plans to buy up the cellphone handset maker Motorola Mobility. Both moves surprised the tech world. But both moves are also in line with a trend I've observed, one that makes me optimistic about the future growth of the American and world economies, despite the recent turmoil in the stock market.
In short, software is eating the world. My own theory is that we are in the middle of a dramatic and broad technological and economic shift in which software companies are poised to take over large swathes of the economy.
Ok… anyone else have visions of SkyNet?
Six decades into the computer revolution, four decades since the invention of the microprocessor, and two decades into the rise of the modern Internet, all of the technology required to transform industries through software finally works and can be widely delivered at global scale.
He goes on to describe how every major industry – from book selling to music to health care to defense to even oil production – now has software as the supposed key component.
Instead of constantly questioning their valuations, let's seek to understand how the new generation of technology companies are doing what they do, what the broader consequences are for businesses and the economy and what we can collectively do to expand the number of innovative new software companies created in the U.S. and around the world.
That's the big opportunity. I know where I'm putting my money.
It's all about the software, stupid! But keep in mind Steve Denning's original article on how the receptacle of the miraculous software can't be built in the USA. Which is why he quickly followed up his article.
Marc Andreessen’s article in the Wall Street Journal is certainly right to point out that software development is a huge part of both the present and the future economy.
But software per se is not the solution. Saying that “software is the solution” is like saying that the winning firms of the early 20th Century were successful because of electricity. The difference wasn’t electricity. The difference was more imaginative management that took advantage of the opportunities that electricity presented.
In any event, the idea that software development is immune from the experience of being undermined by disruptive innovation from low cost producers is a comforting but dangerous illusion, particularly in fields where software and hardware development is intimately intertwined.
Similarly, the idea that the USA has a perpetual lock on software development is as solid as the idea that Detroit owns auto manufacture or that the IBM [IBM] owns the PC.
Bingo. So what's the solution?
I agree that the idea that there is a lot of outsourcing going on is hardly news. The idea that it is irreversible and destructive of the economy’s ability to grow is less well known. Even so, it’s not exactly new news: the HBR article that I cite is two years old.
What is really new news is that (1) these fairly obvious truths haven’t yet dawned on economists at the Federal Reserve Bank of San Francisco, CEOs, accountants, politicians, among others and (2) the way to manage in a radically different way to deal with these issues is now more fully articulated than it has been before.
The issue is not hardware or software. The issue is how the firm is managed. Traditional management is killing both the firm and the economy. The statistics of the decline are well-documented.
Good work Steve. There are a bunch of Evolving Excellence readers equally convinced that this situation needs to change – and can change.