Monday, January 12, 2009

Mind the High-Tech Gap

NEW YORK, New York -- Imagine having your iPhone on your wrist. LG unveiled just that -- a watch that functions as a smart phone -- at last week's Consumer Electronics Show in Las Vegas.

For their parts, Sony, Samsung and Panasonic introduced 3-D television sets and Hitachi rolled out a prototype for motion-controlled TVs (like cathode-ray Wiis) at the show. Meanwhile, this week's North American Auto Show in Detroit will see a Chinese battery maker called BYD roll out its electric car (not a typo).

Watch me some 3-D Becks

As the US demands Barack Obama's somewhat-hazily defined "change" and appears set to embark on a massive hunt for ever-larger deficits without knowing what to spend money on, the wonders of these industry conventions could be educational. For all of these products are made by East Asian companies: Sony, Hitachi and Panasonic hail from Japan; Samsung and LG from Korea; and BYD from China.

America, meanwhile, is losing its edge in research and development spending in the private sector, as The Economist recently reported.

There are many caveats to add: the big electronics companies have been Japanese and Korean for years (when did you last buy a TV made by a US firm?); plenty of US companies grabbed headlines at the CES (like Palm, with its Pre smart phone); and the quality of BYD's product is highly, highly suspect (although Warren Buffett has bought a solid stake in the company).

But the trends are alarming. Samsung now has the second-largest number of new US patents, The Economist notes. Its R&D spending outstrips American heavyweight IBM. And while US firms' spending on R&D in computers fell by 33% between 1996 and 2005, Japanese firms' doubled -- to the number that their US competitors used to spend ($13 billion).

Much of the money US firms once spent on innovative technologies now goes to services. So a computer company may invest in servicing office equipment instead of creating better products. This makes business sense to shareholders, since services are more profitable than hardware in a large range of industries.

But when it comes to the long-term viability of a company, cutting investment in what you actually sell to the people you then service could be a disaster. Why would anyone want to buy a Acer computer, for instance, if it was seen to be cutting costs and producing lesser products with a perceptible lag time behind its competitors? And if your business doesn't operate Acers, why would you ever need Acer to service your HP laptops?

Is it really worth it to kill off the nerd jobs for quick profits, Ogre? (Note: This is NOT Carly Fiorina)

Clearly, the US, like any advanced economy, will be in a pinch if it can't come up with new sources of growth and revenues. Current-account deficits have reached staggering levels, and they may ultimately threaten the country's credit ratings, which in turn would impact America's interest rates, appeal for investors as a destination of capital, and ability of citizens to borrow money from banks at reasonable rates.

While Obama's stimulus has become an attention hog as a panacea to the short-term recessionary problems, long term, as Robert Samuelson of the Washington Post has argued, what's needed is export-led growth. That, naturally, is easier done when the leading high-tech companies aren't cutting back on R&D in order to amp up their "services" offerings.

But one of the underlying problems is that too few Americans have opted to become engineers -- the people who dream up, design and build things -- choosing instead to work as bankers and traders in recent years. There are two ways to fix this problem by creating a larger body of engineers likely to invent things, start companies and create an abundant supply of talent to encourage companies to invest more in R&D. The first is to stop sending home all of the foreign students who study engineering in the US. They should all be given a three-year work permit upon graduating and a green card afterward, since they're scientists, not terrorists.

Beware that offer from Morgan Stanley (circa 2005)

The second is for the government to actually fund and prioritize mathematics and science. The Bush administration, which cut and distorted all sorts of science programs, didn't do much of this. The Obama administration has promised to increase funding for scientific research, and I hope it follows through. Additionally, given the shortage of quality math and science teachers (compared with English or history teachers), higher salaries should be offered in public schools to teachers of these subjects.

But with improved science education, what can be produced competitively? Wind turbines and solar panels are often seen as "non-outsourceable" jobs. The enormous space required to store any number of turbines or solar panels large enough to generate serious amounts of electricity helps to explain why this is so.

The automobile industry has long been considered the heart of US manufacturing, and hopefully Detroit's fortunes will turn upward. But even if that does happen in a dramatic way, plenty of old Michigan and Indiana factories will remain unused. Given the utterly undeveloped state of mass transit in the US -- something almost without parallel among other large economies -- a move to embrace trains, subways, light rails and ferries could create large amounts of orders that might be met in retooled auto factories (though increased light rail usage would likely dampen car sales).

And finally, recent weeks have seen a huge uptick in talk about manufacturing lithium-ion batteries for electric cars. Now, I am immediately skeptical when somebody says, "Let's build the economy of the future around making batteries." It makes me think of middle schools (like the Legionnaire's) built on old battery factories, and health hazards. It's the industrial counterpart to Indian grave sites, almost.

Probably not...........................Closer......................................Chrysler?

Nonetheless, as the Detroit Auto Show indicates, car companies are betting heavily on electric cars, though it's unclear if this will just lead to colossal failures down the line. Already, as noted above, Chinese battery maker BYD is moving up a notch into electric cars with the intention of entering the US market -- though its technology looks suspiciously similar to one developed by MIT-based startup A123 (BYD claims it came up with the technology in 1998; though it seems a dubious claim at best that a then-tiny Chinese battery company was looking into making complex electric-car lithium ion batteries at a time when oil was at all-time lows and only a few Jetsons fans and futurists were even thinking about electric cars).

Given the dominance of Asian battery-makers (in China 40+ factories are under construction, and heavyweights Panasonic and others are heavily invested in the industry), US executives are warning that if America continues to lag, a new era of carmaking could trade dependence on Saudi oil for dependence on Chinese batteries. And, as they point out, those battery-makers could potentially provide their own domestic carmakers with the batteries, putting US car companies at a disadvantage. To this end, as the WSJ noted, a consortium of US firms is pooling resources to kick start a domestic battery industry. Since that time, GM has announced plans to open the nation's first lithium-ion battery factory to power its Chevy Volt. Already, the industry seems to be heating up, concentrated around the Detroit show. Given that the US currently spends about $700 billion on gasoline for transportation, batteries could be a huge industry, and as many are beginning to say, controlling battery production could be the key to dominating the auto industry in the future.

Increased spending on R&D and science education are two things Obama can do in the long-term. But regarding the hot battery-making industry, while gaining leadership in this market could well be crucial, let's also make sure we aren't building our homes on any Mohawk cemeteries. You don't need Craig T. Nelson to warn you of the pitfalls of that.

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