October 3, 2003    Volume 10, No. 18

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President's Science Council Says Future Health Of Technology Sector Is In Jeopardy; Decline Of Manufacturing Could Impact Innovation 'Ecosystem'

The Presidential Council of Advisors on Science and Technology (PCAST) has finished the first phase of a study that finds the health of the U.S. high tech industry is in rapid decline. With manufacturing leaving the country, the United States runs the risk of losing the strength of its innovation infrastructure of design, research and development and the creation of new products and industries, warns the PCAST Subcommittee on Information Technology Manufacturing and Competitiveness.

Foreign governments -- and especially China -- have done an effective job of creating a rich environment for the manufacture of electronics and semiconductors, and the implications are that "U.S. high-tech leadership is not guaranteed," said George Scalise, chair of the PCAST subcommittee and president of the Semiconductor Industry Association. "That is all there is to it. We have it. We enjoy it. We have been here forever, but it is not guaranteed going forward. If we lose that leadership and if we don't have that as a driving force in our economy, then it is going to have an impact on the standards of living here. That is a reality."

For the two years ending January 2002, the United States lost 400,000 high-tech jobs, with computer manufacturing employment dropping by 20 percent. Moreover, the United States has lost its sales advantage. Until 2001, 40 percent of the world's semiconductor consumption was in the United States, followed by Europe, Japan and the Asia-Pacific region, each with about 20 percent market share. "Over the past two years, that has flip-flopped as far as the U.S. is concerned," Scalise told a September 9 meeting of PCAST. "We are now one of the three 20 percent groups and Asia-Pacific [which includes China] is now 40 percent of the market. All that manufacturing and outsourcing that has been going on is now really making a major, major presence as far as who is consuming these products and putting them into boards and boxes and things."

In the area of production equipment, the United States now consumes 30 percent of the world's output. "One of the questions that comes out of this is how low can we go and still maintain the ecosystem," whereby manufacturing generates the revenue that supports research and development, innovation and new product design, Scalise asked the group. "I don't know where that transition point is, but I think it is something we have to make certain we never get too close to."

The United States's strength in innovation is degrading slower than manufacturing and sales, making the loss of what is believed to be America's sole remaining advantage "at risk," Scalise said.

The situation is "very, very different" from the one that existed with Japan in the late 1980s and early 1990s, Scalise warned the White House advisory group. "With a small population, Japan reached a saturation point in terms of its ability to take on more of what was going on in the tech world much, much sooner than China will," said Scalise. "It will be a factor of 10 or 15 difference in that regard. So this is going to be a much more prolonged problem to contend with as opposed to Japan."

But an even more important difference is the fact that China has a "cultural tradition" of entrepreneurship, while Japan does not. Because Japan works by management consensus, the country has been unable to topple U.S. high-tech leadership. The United States has successfully out-innovated Japan.

"That is not true with China," said Scalise. "There is a true tradition of entrepreneurial energy in China and we are going to see a lot of companies, a lot of new things, going on there because of that. That is going to be very different."

China has another growing advantage: a very well educated technical workforce. Both China and India are graduating some of the most talented scientists and engineers in the world, Bob Herbold, executive vice president of Microsoft, told the PCAST meeting in a presentation on the future of the science and engineering workforce.

Last year, China graduated 219,600 engineers, representing 39 percent of all bachelor's degrees awarded in the country. By comparison, the United States graduated 59,500 engineers, or 5 percent of all bachelor's degrees (1,253,000). But 58 percent of all degrees awarded last year in China were in engineering and the physical sciences, as compared to 17 percent in the United States (a figure that is dropping by about 1 percent per year).

"We are on the decline in the production of science, technology, engineering and mathematics graduates at the bachelor's level, and the job needs are, in fact, declining equally as fast, if not faster," Herbold told the meeting. "Probably the number-one finding that this group should carry forward and make sure that the President and the White House and the U.S. government and the U.S. citizenry is aware of is the fact that we have a shift here of monumental proportions in terms of jobs and capabilities and competitiveness on the part of other countries to seriously bite into our industrial base," said Herbold in a chilling presentation. "As you stand here and you say, 'Well, what are we going to do about it?' It is not an easy problem...Given all of those statistics, over the short term, it is clear we are going to lose a lot of jobs that are science, technology, engineering and mathematics based. Over the medium term...the only savior here has got to be the incredible innovation capability of this country to create new things because we have seen other industries move out of the country before and it's clear this one [high-tech] is now moving."

Scalise noted that in today's world a comparative advantage has little to do with physical assets such as ports and more to do with human capital -- a "very transportable element," he said. "Therefore, that comparative advantage is fragile and has to be addressed as being a fragile comparative advantage. If it is ignored, then we don't necessarily ever get the advantage from all the work, all the investment that we have been putting in."

Bobbie Kilberg, a PCAST committee member and president of the Northern Virginia Technology Council, relayed a story to the group from a discussion that she had with an executive from a major high-tech firm. He told her that by 2010, 90 percent of his company's R&D, design and manufacturing will be conducted either in China or India. "I said, 'Well, what can we do about that?' And this guy said, 'Not much. We are not coming back. Unless the government prohibits us from going, we are gone,' " Kilberg said. Tax incentives would not keep his company in the United States and there is little the United States can do to compete with low-cost and highly trained labor in India and China. "I was really at a loss when this fellow said that the tax policy is not going to make any difference and that labor is better educated and cheaper," said Kilberg. "How you deal with that is a real key challenge."

Former National Science Foundation director Erich Bloch and MIT president Charles Vest both called Scalise's presentation "disconcerting."

Ralph Gomery, president of the Alfred P. Sloan Foundation, said: "I don't think the federal government can just stand by and watch this happen."

Wayne Clough, president of Georgia Tech, said it is important for PCAST to note the tie-in to the U.S. defense capability. "If we don't mention the 'defense' word and we just focus on economic competitiveness, we probably are missing a piece that we should address," said Clough. He added later: "We need to also remember as we write this report that this transfer of jobs is going on in other sectors as well. We are seeing this happen in any service sector, technical services, engineering, design, accounting -- many other sectors. That is where you really get nervous. How many of these sectors is it really going on in?"

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