The Post-American World: Release 2.0 (23 page)

The firm Lux, led by Dr. Michael Holman, constructed a matrix to assess countries’ overall nanotech competitiveness. Their analysis looked not just at nanotechnology activity but also at the ability to “generate growth from scientific innovation.”
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It found that certain countries that spend much on research can’t turn their science into business. These “Ivory Tower” nations have impressive research funding, journal articles, and even patents, but somehow don’t manage to translate this into commercial goods and ideas. China, France, and even Britain fall into this category. A full 85 percent of venture capital investments in nanotechnology went to U.S. companies.

Biotechnology—a broad category that describes the use of biological systems to create medical, agricultural, and industrial products—is already a multibillion-dollar industry. It, too, is dominated by the United States. More than $3.3 billion in venture financing went to U.S. biotech companies in 2005, while European companies received just half that amount. Follow-on equity offerings (that is, post-IPO) in the United States were more than seven times those in Europe. And while European IPOs attracted more cash in 2005, IPO activity is highly volatile—in 2004, U.S. IPO values were more than four times Europe’s. As with nanotechnology, American companies excel at turning ideas into marketable and lucrative products. U.S. biotech revenues approached $50 billion in 2005, five times greater than those in Europe and representing 76 percent of global revenues.
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Manufacturing has, of course, been leaving the United States, shifting to the developing world and turning America into a service economy. This scares many Americans and Europeans, who wonder what their countries will make if everything is “made in China.” But Asian manufacturing must be viewed in the context of a global economy in which countries like China have become an important part of the supply chain—but still just a part.

The
Atlantic Monthly
writer James Fallows spent a year in China watching that manufacturing juggernaut up close, and he provides a persuasive explanation—one well understood by Chinese businessmen—of how outsourcing has strengthened American competitiveness. Most Americans, even management experts, have not heard of the “smiley curve.” But Chinese manufacturers know it well. Named for the U-shaped smile on the simple 1970s cartoon of a happy face,
the curve illustrates the development of a product, from conception to sale. At the top left of the curve one starts with the idea and high-level industrial design—how the product will look and work. Lower down on the curve comes the detailed engineering plan. At the bottom of the U is the actual manufacturing, assembly, and shipping. Then rising up on the right of the curve are distribution, marketing, retail sales, service contracts, and sales of parts and accessories. Fallows observes that, in almost all manufacturing, China takes care of the bottom of the curve and America the top—the two ends of the U—which is where the money is. “The simple way to put this—that the real money is in the brand name, plus retail—may sound obvious,” he writes, “but its implications are illuminating.”
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A vivid example of this is the iPhone: it is manufactured mostly outside the United States, but the majority of value added is captured by Apple, Inc. in California. The electronics research firm iSuppli took apart the iPhone 4 released in mid-2010. After analyzing the components, they concluded that the manufacturing costs amounted to $187.51. The unsubsidized price is about $600, meaning Apple made a gross profit margin of nearly 70 percent on each iPhone sold. Chinese manufacturers, by contrast, have margins of a few percent on their products. As Pietra Rivoli, professor of international business at Georgetown University, told the
New York Times
, “the value goes to where the knowledge is.”

America’s Best Industry

“Ah yes,” say those who are more worried, “but you’re looking at a snapshot of today. America’s advantages are rapidly eroding as the country loses its scientific and technological base.” For some, the decline of science is symptomatic of a larger cultural decay. A country that once adhered to a Puritan ethic of delayed gratification has become one that revels in instant pleasures. We’re losing interest in the basics—math, manufacturing, hard work, savings—and becoming a postindustrial society that specializes in consumption and leisure. “More people will graduate in the United States in 2006 with sports-exercise degrees than electrical-engineering degrees,” the CEO of General Electric, Jeffrey Immelt, said a few years ago. “So, if we want to be the massage capital of the world, we’re well on our way.”
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No statistic seems to capture this anxiety better than those showing the decline of engineering. In 2005, the National Academy of Sciences released a report warning that the United States could soon lose its privileged position as the world’s science leader. In 2004, the report said, China graduated 600,000 engineers, India 350,000, and the United States 70,000. These numbers were repeated in hundreds of articles, books, and blogs, including a
Fortune
cover story, the
Congressional Record
, and speeches by technology titans like Bill Gates. And indeed, the figure does seem like cause for despair. What hope does the United States have if for every qualified American engineer there are 11 Chinese and Indian ones? For the cost of one chemist or engineer in the United States, the report pointed out, a company could hire 5 well-trained and eager chemists in China or 11 engineers in India.

The only problem is that the numbers are wildly off the mark. A journalist, Carl Bialik of the
Wall Street Journal
, and several academics investigated the matter. They quickly realized that the Asian totals included graduates of two- and three-year programs—people getting diplomas in simple technical tasks. A group of professors at the Pratt School of Engineering at Duke University traveled to China and India to collect data from governmental and nongovernmental sources and interview businessmen and academics. They concluded that eliminating graduates of two- or three-year programs halves the Chinese figure, to around 350,000 graduates, and even this number is probably significantly inflated by differing definitions of “engineer” that often include auto mechanics and industrial repairmen. Bialik notes that the National Science Foundation, which tracks these statistics in the United States and other nations, puts the Chinese number at about 200,000 degrees per year. Ron Hira, a professor of public policy at the Rochester Institute of Technology, puts the number of Indian graduates at 120,000–130,000 a year. That means the United States actually trains more engineers per capita than either India or China does.
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And the numbers don’t address the issue of quality. As someone who grew up in India, I have a healthy appreciation for the virtues of its famous engineering academies, the Indian Institutes of Technology (IIT). Their greatest strength is that they administer one of the world’s most ruthlessly competitive entrance exams. Three hundred thousand people take it, five thousand are admitted—an acceptance rate of 1.7 percent (compared with 9 to 10 percent for Harvard, Yale, and Princeton). The people who make the mark are the best and brightest out of one billion. Place them in any educational system, and they will do well. In fact, many of the IITs are decidedly second-rate, with mediocre equipment, indifferent teachers, and unimaginative classwork. Rajiv Sahney, who attended IIT and then went to Caltech, says, “The IITs’ core advantage is the entrance exam, which is superbly designed to select extremely intelligent students. In terms of teaching and facilities, they really don’t compare with any decent American technical institute.” And once you get beyond the IITs and other such elite academies—which graduate under ten thousand students a year—the quality of higher education in China and India remains extremely poor, which is why so many students leave those countries to get trained abroad.

The data affirm these anecdotal impressions. In 2005, the McKinsey Global Institute did a study of “the emerging global labor market” and found that a sample of twenty-eight low-wage countries had approximately 33 million young professionals
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at their disposal, compared with just 15 million in a sample of eight higher-wage nations (the United States, United Kingdom, Germany, Japan, Australia, Canada, Ireland, and South Korea).
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But how many of these young professionals in low-wage countries had the skills necessary to compete in a global marketplace? “Only a fraction of potential job candidates could successfully work at a foreign company,” the study reported, pointing to several explanations, chiefly poor educational quality. In both India and China, it noted, beyond the small number of top-tier academies, the quality and quantity of education is low. Only 10 percent of Indians get any kind of postsecondary education. Thus, despite enormous demand for engineers, there are relatively few well-trained ones. Wages of trained engineers in both countries are rising by 15 percent a year, a sure sign that demand is outstripping supply. (If you were an employer and had access to tens of thousands of well-trained engineers coming out of colleges every year, you would not have to give your employees 15 percent raises year after year.)

Higher education is America’s best industry. There are two rankings of universities worldwide. In one of them, a purely quantitative study done by Chinese researchers, eight of the top ten universities in the world are in the United States. In the other, more qualitative one by
London’s Times Higher Educational Supplement
, it’s seven. The numbers flatten out somewhat after that. Of the top twenty, seventeen or fifteen are in America; of the top fifty, thirty-seven or twenty-seven. Still, the basic story does not change. With 5 percent of the world’s population, the United States absolutely dominates higher education, having either 74 or 54 percent of the world’s top fifty universities (depending which study you look at). In no other field is America’s advantage so overwhelming.
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A 2006 report from the London-based Centre for European Reform, “The Future of European Universities,” points out that the United States invests 2.6 percent of its GDP in higher education, compared with 1.2 percent in Europe and 1.1 percent in Japan. The situation in the sciences is particularly striking. A list of where the world’s 1,000 best computer scientists were educated shows that the top ten schools are all American. U.S. spending on R&D remains higher than Europe’s, and its collaborations between business and educational institutions are unmatched anywhere in the world. America remains by far the most attractive destination for students, taking 30 percent of the total number of foreign students globally. All these advantages will not be erased easily, because the structure of European and Japanese universities—mostly state-run bureaucracies—is unlikely to change. And while China and India are opening new institutions, it is not that easy to create a world-class university out of whole cloth in a few decades. Here’s a statistic about engineers that you might not have heard. In India, universities graduate between 35 and 50 Ph.D.’s in computer science each year; in America, the figure is 1,000.

Learning to Think

If American universities are first-rank, few believe that the same can be said about its schools. Everyone knows that the American school system is in crisis and that its students do particularly badly in science and math, year after year, in international rankings. But the statistics here, while not wrong, reveal something slightly different. America’s real problem is one not of excellence but of access. Since its inception in 1995, the Trends in International Mathematics and Science Study (TIMSS) has become the standard for comparing educational programs across nations. The most recent results, from 2007, put the United States in the middle of the pack. The United States beat the average score of the forty-eight countries included in the study, but many of the countries ranked below it were developing nations like Morocco, Tunisia, and Armenia. Eighth-graders did better than fourth-graders (the two grades measured) but still lagged behind their counterparts in countries like Holland, Japan, and Singapore. The media report such news with a predictable penchant for direness: “Economic time bomb: U.S. teens are among worst at math,” declared the Wall Street Journal after the previous TIMSS study, in 2003, which revealed similar results.

But even if the U.S. scores in math and science fall well below leaders like Singapore and Hong Kong, the aggregate scores hide deep regional, racial, and socioeconomic variation. Poor and minority students score well below the American average, while, as one study noted, “students in affluent suburban U.S. school districts score nearly as well as students in Singapore, the runaway leader on TIMSS math scores.”
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These are the students who then go on to compete for and fill the scarce slots in America’s top universities. The difference between average science scores in poor and wealthy school districts within the United States, for instance, is four to five times greater than the difference between the U.S. and Singaporean national averages. In other words, America is a large and diverse country with a real inequality problem. This will, over time, translate into a competitiveness problem, because if we cannot educate and train a third of the working population to compete in a knowledge economy, it will drag down the country. But we do know what works. The large cohort of students in the top fifth of American schools rank along with the world’s best. They work hard and have a highly scheduled academic and extracurricular life, as anyone who has recently been to an Ivy League campus can attest.