Tuesday, June 19, 2018
Publication Date: 09/1/2008
Archive >  September 2008 Issue >  Tech-Op-Ed > 

How We Lost Our Edge
Walter Salm, Editor
How has America lost its edge? One quick answer is "It's the stockholders' fault", but that's only a small part of the story. A new must-read book, Winner Take All, written by electronics industry veteran Richard Elkus, Jr., outlines how competitiveness shapes the fate of nations. It has been a real eye-opener, and I highly recommend it.

The author describes important and ultimately harmful decisions that were made by major U.S. companies — companies that had developed the crucial technology that forms the basis of today's surging economies in the Far East. He describes a lot of the action that most of us already know about, but with a wealth of detailed facts that show how the leadership of the worldwide electronics industry has left the U.S. and has become ensconced in Japan, Korea and China, and is now spreading to other parts of the Far East as well. Elkus was in the middle of it all, as CEO or highly placed executive or Board member of at least 15 different companies that were involved in the big giveaway.

According to Elkus, two basic precepts form the foundation of today's electronics industry. The first was outlined by Bruce Henderson, founder of the Boston Consulting Group. His strategy became known as "Stars, cash cows, and dogs", which involved having enough market share to take advantage of the experience curve and ensure business success. The second basic precept cited again and again in the book is Moore's Law, and Elkus points out how it applies not only to semiconductors, but to virtually all of the related technologies involved.

In 1956, Ampex stunned the world with its unveiling of video recording technology. It was intended and priced for broadcasters and used 2-inch wide tape on huge reels. It was definitely not designed for anyone's living room, and Ampex milked this cash cow for years, selling big and pricey VCRs to broadcasters around the world. Ampex ultimately abdicated its position as the world's leader in video recording technology, forming a business partnership with Toshiba and giving that company all of its hard-won technology. Toshiba was in bed with Sony, and out of this technology transfer was born the home VCR. This was the first in a string of corporate abdications by U.S. companies, where short-term profits for the benefit of shareholders were more important than retaining America's technological superiority. Very few American companies, says Elkus, have had the stomach to hang on, work at lower margins and continue to invest in needed new infrastructure, largely due to pressure from their investors.

Japan, in the meantime, was creating a nationwide infrastructure in which technology companies were in partnerships with each other, even though they might be business rivals. This came about from a totally different mind-set than what is found in the U.S. Yes, the Japanese are interested in profits, but are willing to take smaller profits while investing in the corporate infrastructure needed for future growth and development. The escalating cost of setting up a fab for semiconductors or flat panel displays has priced those industries right out of America's markets. The reasoning here is, Let the Japanese foot the bill and we'll buy the results on the cheap.

Today, America no longer has the kind of infrastructure needed for leadership in any technology, even though we invented almost all of it. Strategically, we are in a terrible bind; we have to buy almost everything from the Far East; even "all-American" automobiles have such a high foreign-made content that if sources were to dry up, U.S. automotive production lines would grind to a halt. The DoD insists on 100 percent U.S.-made components for all of its hardware, and for good reason; our military cannot afford to be compromised by dependency on offshore suppliers.

Elkus makes a serious case for getting back some of our infrastructure and to once again make the U.S. competitive in the world market. To be competitive, a nation must have a national strategy for competitiveness, not for short-term profits. Investing in the "dogs" instead of the "cash cows" may be an important part of implementing such a strategy. The cost of building an infrastructure rises exponentially (Moore's Law), thereby making the price of re-entry to those who have lost that infrastructure (the U.S.) overwhelming.

This book is really must reading for anyone in industry, policy making, and business. It's well written, well presented, and scary as hell. It's $27.00 from Basic Books (http://www.basicbooks.com), ISBN 978-0-465-00315-0. A copy should definitely be laid on every desk in Washington. Getting them to read it and act on it is a whole other matter.  

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