On feudal capitalism
Willy Shih fears that the U.S. is headed towards feudal capitalism. He doesn’t say that directly in The U.S. Can’t Manufacture the Kindle And That’s a Problem, but it’s what he means. By innovating without manufacturing, we cede the future of our economy, and with it the fate of most of our citizens.
Shih may be affected by his background: he was long a high-ranking executive at IBM, Digital and Kodak, all of which at some point failed as manufacturers, if not for the same reasons. His builds his case not around these firms but around the Kindle, the current darling of the innovation set. In the Kindle, Amazon.com has packaged a clever technology innovation from a company called E-Ink into the first device to make electronic reading feel like a natural human act.
Shih does some speculative arithmetic and argues that the bulk of the Kindle’s profits really go to its Asian component suppliers. While E-Ink looks like an American success story, he expects its presence in the U.S., especially its manufacturing, to go overseas. That’s because E-Ink has been acquired by a Taiwanese partner, PVI. So E-Ink’s loss of control means fewer U.S. jobs, and thus very little direct benefit for this innovation.
If Shih is correct, it would follow the trend set in VCRs, CDs, computers, many types of semiconductors, cell phones and other high-tech products: U.S. companies invent something, but either never make it or can’t make it profitably.
Thus these U.S. firms become subject to feudal capitalism. They create intellectual fiefs, based on an innovation and the people that are needed to help spread it. Such fiefs depend on manufacturing guilds to actually create the innovative new product. If, as in high tech, the manufacturing guilds sit in a different country than the intellectual fief, Shih argues that innovation will move there, too. In other words, the manufacturing guilds will naturally want to strengthen themselves by co-opting the most profitable part of the process, the innovation. Any country that only has intellectual fiefs will find itself growing weaker over time.
Shih could be wrong. David Yoffie thinks so. So does the respected venture capitalist Andy Rappaport. Both look at Apple, Nvidia, Qualcomm and other virtual high-tech firms as examples of how knowledge work is far more profitable for U.S. firms, and how the Japanese, Korean and Chinese firms that now make everything from televisions, memory chips and iPods get stuck in a low-margin cesspool. Look at Dell, they say, once lauded for its manufacturing prowess, now stuck with albatross factories.
That Dell argument misleads. Dell never made its own laptops, for instance, and its direct distribution model drew on its ability to control production. Even so, the arguments for Silicon Valley-style knowledge companies that avoid costly investments in manufacturing are beguiling, especially when you look at the kinds of problems affecting Shih’s former employers. Factories are like fortresses — they need guarding and constant investment, limiting your ability to invest in something new.
Still, Silicon Valley’s prowess as a source of innovative ideas masks the truth that it doesn’t create many new jobs. It’s better in some ways at destroying existing jobs. The same is true for Massachusetts, home to E-Ink and a perennial in the top three places for innovation in the U.S.
So what, you may ask. In the last 60 years, the U.S. has an incredible track record of creating new jobs. Yes, we’re in the process of dumping lots of highly-paid manufacturing jobs. Those are fortress jobs that create little of real economic value, hence it makes sense to cede them to foreign manufacturing guilds.Perhaps. But the miracle of modern capitalism is not the Kindle or any other individual innovation; it’s that entire societies moved past hand-to-mouth survival. Fortress jobs had a lot to do with that success. Sixty years is not enough time to tell much of anything about human history; it took hundreds of years for industrial capitalism to lift people out of Malthusian squalor, and it will take more than 60 for feudal capitalism to drive them back. I hope Shih is wrong, but that is the stakes of the debate.