Why the U.S. Tech Sector Doesn’t Need Domestic Manufacturing

In their article “Restoring American Competitiveness,” my colleagues Gary Pisano and Willy Shih assert that excessive outsourcing has undermined the competitiveness of the U.S. high tech sector. I disagree. The loss of some manufacturing in a high cost country such as the U.S. is inevitable and need not lead to a decline in competitiveness. Indeed, the future of U.S. competitiveness in high tech industries such as computers, software, communications, and electronics may depend more on the transition to services than trying to retain the country’s manufacturing base.

Some of the very examples of harmful outsourcing cited by Pisano and Shih prove my point:

Apple. It was one of the most vertically integrated manufacturers in the computer industry through the mid-1990s, which almost bankrupted it. While much has rightfully been made of Apple’s outstanding design capabilities, Steve Jobs’s brilliant move to outsource all manufacturing and to incorporate as many industry-standard components as possible has been a key driver of Apple’s profitability. And while still predominantly a product company, Apple has become highly successful in services, ranging from its bricks-and-mortar retail stores to its iTunes website that distributes songs, video, and applications.

Hewlett-Packard. HP has become the world’s leading computer company by focusing on sales, marketing, and distribution of computers made at very low cost in Taiwan and China. In comparison, archrival Dell, which was widely celebrated 10 years ago as one of the world’s best manufacturers, is now saddled with high cost factories and is struggling to compete.

Semiconductors. Pisano and Shih lament the “migration of semiconductor foundries to Asia.” In fact, companies like Taiwan Semiconductor Manufacturing Corporation, the world’s leading foundry, enabled the creation of an entirely new business in the U.S: the fabless semiconductor industry. Some of America’s (and the world’s) most successful semiconductor companies, such as Qualcomm, Broadcom, and Nvidia, may never have existed without the capabilities that TSMC brought to the market.

Maybe the most important point to make is that U.S. has been moving towards a service economy for the last 100 years. In the long run, services will become the core of the U.S. tech world as well. The most successful U.S. computer, software, communications, and electronics companies are adding services on a global scale to complement and, in some cases, replace their core product businesses. IBM, for example, has moved from being a product company to the world’s largest technology-services company. Google, which is widely perceived to be the leading technology company in the world today, generates all of its global revenues as a service. And Amazon and Salesforce.com are but two of the many U.S. firms positioned to prosper as cloud computing and software-as-a-service (SaaS) cause high tech services to accelerate.

In short, the decline of manufacturing in the U.S. will not necessarily bring about the decline of the U.S. high tech sector. Ultimately, more and more technology will be delivered via services, where American firms can and should play a world-leading role.