For the last several months, several observers including ourselves have noted that whatever is going on at the “lower-value-added” end of the manufacturing and technology scale the real challenge China poses to the US lies not in the area of currency valuations, but in the “higher-value-added” regions of so-called “green” or “clean” technologies.
The general argument here, as always, relates back to the fundamentally different role of the state in the economy in each of the two countries.
In the US, the general consensus, shared by both Democrats and Republicans alike, is that the government should just get out of the way and let the private sector make its own path to whatever brave new world its ingenuity is able to bring forth, letting venture capital take the lead in funding the technological innovation that creates economic growth.
Proponents of this view point to the PC / MicroSoft revolution of the 1980s and the Internet revolution of the 1990s as perfect examples of this approach.
Unfortunately, this was also the attitude that allowed the “ingenuity” of the financial sector to run amok in general, and particularly in the area of derivatives – again, famously termed by St Warren of Buffett, “economic weapons of mass destruction” – creating the global economic mess in which certainly the developed world, ie the US and Europe, find themselves today.
And it also leaves out the key fact that the Internet which most Americans think was invented by the private sector was, in fact, an initiative funded for decades by a research wing of the US government, DARPA: the Defense Advanced Research Projects Agency.
In China, of course, the attitude is just the opposite: the government insists on taking an active role in all major areas of economic activity, notably banking and finance, where it was able to pull off the world’s most successful response to the US-centered Black September 2008 global crisis, but also, as both the current Rio Tinto and Google cases indicate, in sectors ranging from manufacturing and raw material acquisition to the activities of Internet providers, both foreign and domestic, within China.
As these specific instances demonstrate, of course, the structural problems that arise in this context are corruption and significant deficiencies in product / occupational / environmental safety, on the one hand, and, on the other, not just suppression of the free flow of information, but the sheltering of “domestic champions” from global competition, which may bode ill for them in not just the long, but also medium, run, despite their dominance in China’s huge and globally-crucial domestic market.
In this context, observers like Tom Friedmanand Bob Herbert of the New York Times have argued the US is in danger of being outstripped in the areas of advanced / clean / green technology research by China.
And at least one major reason this scenario has strong credibility is precisely the failure of both the government AND the sources of private capital in the US to be willing and able to bankroll the deep-level research and development that leadership in this or any other advancing field requires.
Now, some would argue this failure is in large part due to the resources being sucked up by a “zombie”like financial sector that as in Japan’s Lost Decades since 1989 has taken huge amounts of taxpayer money merely in an effort to avoid having to come to terms with the bad bets they made in the US housing market which were then “derivatized”, that is, exponentially multiplied by the mortgage-backed securities [so called MBS] that have created financial havoc for any country eg, the UK, Iceland etc – whose banks participated in their syndication.
If this argument is correct, it would indeed spell trouble for the ability of the US to compete in any of the “new technologies” that are going to dominate innovative economic activity in the 21st century in precisely the same way Japan’s failure to force its banks to “cowboy up” and state the losses they took when the Tokyo real estate market collapsed in 1989 hampered its ability to compete in the software and networked based growth of the 1990s and first decade of the 21st century.
The active intervention of the state in the Chinese economy whose close regulation of the banking industry has made it possible to AVOID the “banks-leading-the-government-by-the-nose” dynamics of both the US and Japan has, conversely, also shot China to the front rank of countries where clean / green / technological innovation is being militantly promoted on a variety of fronts.
Now, most of the warnings in this area have spoken of potential Chinese domination of this sector IN THE FUTURE.
But recent reports indicate that – however short-sighted and repressive the Chinese government may be in its treatment of Google and sheltering of its national Internet giants like Baidu, tencent, and Alibaba among others – when it comes to clean / green tech, in fact, the future may have already arrived.
The most significant indication this may be the case is the arrival in China of Applied Materials, one of Silicon Valley’s most successful and historically important companies and not just its most advanced lab and research facilities which, while not common, has been going on for a while – but also Mark Pinto, its Chief Technology Officer.
In this sense, we may now be witnessing in very concrete terms the beginnings of a “reverse brain drain” from the US to China.
Ever since the rise of the Nazis led to the departure forced or otherwise of Europe’s leading Jewish / leftist / non-conformist scientific minds, symbolized above all by Albert Einstein, the US has been the beneficiary of the desire of the “best and the brightest” from all over the world to live and work in an atmosphere of intellectual freedom, in many cases supported in comfortable, if not luxurious, fashion by a combination of public and private funding.
Originally, it was mature thinkers at the height of their powers, but the relative openness of America in the years following the war until the rise of the Reagan era in 1980 created a tradition of younger graduate students coming to the US and staying, due to a combination of what Max Weber would call ideal and material interests.
But ever since Reagan, and the right-ward trend in American society he both symbolized and promoted, intensified by the disastrous Cheney / Bush years at the beginning of this century, that openness has slowly but surely been closing and the move of Applied Materials, among others, from Silicon Valley to China marks a significant step in that, for Americans, sad process.
Let’s deal first with Applied Materials.
It supplied equipment used to perfect the first computer chips.
Today, it is the world’s biggest supplier of the equipment used to make semiconductors, solar panels and flat-panel displays.
In addition to moving Mr. Pinto and his family to Beijing in January, Applied Materials, whose headquarters are in Santa Clara, Calif., has just built its newest and largest research labs there.
Last week, it even held its annual shareholders’ meeting in Xi’an …
Applied Materials set up its latest solar research labs here after estimating that China would be producing two-thirds of the world’s solar panels by the end of this year.
That’s THIS year – 2010 – boys and girls, well before you’ll ever see a lot of the promised “health care reforms”.
“We’re obviously not giving up on the U.S.,” Mr. Pinto said. “China needs more electricity. It’s as simple as that” …
President Obama has often spoken about creating clean-energy jobs in the United States.
But China has shown the political will to do so, said Mr. Pinto, 49, who is also Applied Materials’ executive vice president for solar systems and flat-panel displays …
And that, of course, is our key point: even someone as enlightened as President Obama may TALK about the creation of clean energy jobs in the US – but, at least so far, China is the only one actually doing it !!!
Now, Mr. Pinto said, researchers from the United States and Europe have to be ready to move to China if they want to do cutting-edge work on solar manufacturing because the new Applied Materials complex here is the only research center that can fit an entire solar panel assembly line …
Locally, the Xi’an city government sold a 75-year land lease to Applied Materials at a deep discount and is reimbursing the company for roughly a quarter of the lab complex’s operating costs for five years, said Gang Zou, the site’s general manager.
The two labs, the first of their kind anywhere in the world, are each bigger than two American football fields.
Applied Materials continues to develop the electronic guts of its complex machines at laboratories in the United States and Europe.
But putting all the machines together and figuring out processes to make them work in unison will be done in Xi’an.
The two labs, one on top of the other, will become operational once they are fully outfitted late this year.
Applied Materials has built a 360-employee operation here in Xi’an after announcing an 18-month program last year to reduce employment by 10 to 12 percent, or 1,300 to 1,500 jobs, including layoffs in the United States and Europe.
Mr. Pinto said that the company was readjusting its work force as manufacturing shifted to Asia, but that the Xi’an facility involved a new approach to researching the design of an entire assembly line and was not replacing laboratories elsewhere.
Mr. Pinto is a well-known figure in Silicon Valley in his own right.
While still a doctoral student at Stanford in the early 1980s, he wrote the first widely used two-dimensional computer simulation of how semiconductors work.
This allowed engineers to test each one on a computer before building prototypes, shortening the semiconductor development process.
Later, he became a celebrated researcher at Bell Labs.
Of course, it’s not all fun and games in China, as anyone who’s been there, or even heard about it, well knows.
Applied Materials has challenges, including fighting technological theft, a chronic problem in China.
The company has taken measures, including sealing its computers’ ports here, to prevent the easy use of flash drives to record data.
Employees are not allowed to take computers from the building without special permission, and an elaborate system of computer passwords and electronic door keys limits access to certain technological secrets.
But none of that changes the sense that tectonic shifts are under way.
Because Applied Materials is hardly the ONLY American company that is moving its most advanced research and development operations to China.
Companies and their engineers are being drawn here more and more as China develops a high-tech economy that increasingly competes directly with the United States.
A few American companies are even making deals with Chinese companies to license Chinese technology.
The Chinese market is surging for electricity, cars and much more, and companies are concluding that their researchers need to be close to factories and consumers alike …
China has become the world’s largest auto market, and General Motors has a large and growing auto research center in Shanghai.
The country is also the biggest market for desktop computers and has the most Internet users.
Intel has opened research labs in Beijing for semiconductors and server networks.
Not just drawn by China’s markets, Western companies are also attracted to China’s huge reservoirs of cheap, highly skilled engineers and the subsidies offered by many Chinese cities and regions, particularly for green energy companies …
Again, the absolute centrality of political will to create innovative economic conditions.
And while many dispute the very idea of “clean coal” which remains the world’s largest potential source of fossil fuels – there are some things going on in China that might challenge that assertion.
On the other side of Xi’an from Applied Materials sits Thermal Power Research Institute, China’s world-leading laboratory on cleaner coal.
The company has just licensed its latest design to Future Fuels in the United States.
The American company plans to pay about $100 million to import from China a 130-foot-high maze of equipment that turns coal into a gas before burning it.
This method reduces toxic pollution and makes it easier to capture and sequester gases like carbon dioxide under ground.
Future Fuels will ship the equipment to Pennsylvania and have Chinese engineers teach American workers how to assemble and operate it.
So now Chinese experts will be coming to Pennsylvania where oil was first discovered in North America, and the heart of coal country to teach US workers how to run the clean coal technology invented and developed in China.
How things have changed, especially since it’s not JUST the big boys – although the fact that it IS the big boys is of prime significance.
Small clean-energy companies are headed to China, too.
NatCore Technology of Red Bank, N.J., recently discovered a way to make solar panels much thinner, reducing the energy and toxic materials required to manufacture them.
Now you would think that a discovery like this would have all sorts of people from government officials to venture capitalists beating a path to Red Bank.
American companies did not even come LOOK at the technology.
So NatCore reached a deal with a consortium of Chinese companies to finish developing its invention and mass-produce it in Changsha, China.
“These other countries — China, Taiwan, Brazil — were all over us,” said Chuck Provini, the company’s chief executive.
But, not, apparently, anyone in the US.
And therein lies the true tragedy for Americans. As we go blithely prattling on about being the greatest and richest country in the world, less self-impressed countries are actually taking the best of America, and using it to improve their own situations.
Well, good for them and too bad for the US, which, a recent “victory” for some kind of health “care” “reform” aside has left ITSELF behind in the race for the future.
And for that, Americans have no one but themselves to blame.
David Caploe PhD
Chief Political Economist