Who Stole the American Dream? (38 page)

Suddenly, no career was immune to the Asian challenge, no job safe from offshoring: Computer programmers, systems analysts, white-collar bank and insurance employees, and millions more were as vulnerable as assembly line workers. As Tonelson noted,
the Chinese had shown their mastery not only of routine production jobs, but of skill-intensive jobs, so that among big U.S. multinationals, “not only the production jobs but the research jobs, the development jobs, the engineering [jobs] within those industries are rapidly moving to China as well.”

When Robert Scott at the Economic Policy Institute broke down America’s job loss through trade with China in 2010, by far the
hardest-hit sector was computers and their components, communications, and audio and video equipment. That sector lost 627,000 jobs, one-fourth the total loss nationwide, and this was between 2001 and 2008,
before
the recession. After Scott pinpointed Silicon Valley as ground zero for the worst job losses nationwide, one engineer concurred and emailed Scott: “
We’re now calling it
Skeletal Valley
.”

Even the service sector, another supposedly safe zone for Americans,
was not immune. By 2008, Scott calculated, nearly 140,000 jobs in the high-end services area were wiped out by trade with China and another 153,000 in back-office administration and support. This was China alone. Add offshoring to India and the rest of Asia, and the Hackett Group, which tracks global personnel trends, estimated that from 2000 to 2010,
roughly 2.8 million jobs in finance, IT, HR, and procurement were lost in North America and Europe to “electronic offshoring.”

Contrary to earlier predictions, knowledge economy jobs seemed especially vulnerable because digital work can be flashed across the globe by the click of a mouse. Work in information and finance follows repetitive processes and transactions that can, like assembly line production, be “commoditized,” in the argot of globalization. Since “commoditized” translates as “can be done anywhere cheaply,” it is the kiss of death for American businesses and employees.

With China and India educating more engineers and computer scientists than the United States, no level of education provides protection, according to Princeton economist Alan Blinder. “
Millions of skilled workers in developing countries are educated about as well as Americans are. And those numbers are bound to increase as poor countries, notably China and India, continue to participate more vigorously and effectively in the world economy,” Blinder told Congress in 2007. “There is little doubt that the range and number of jobs that can be delivered electronically is destined to increase greatly as technology improves and as India, China, and other nations educate more and more skilled workers—in the case of India,
English-speaking
workers.”

America’s high-tech problems were partly of our own making. High-level advisers to the Bush administration had warned that U.S. multinationals were themselves eroding the U.S. high-tech base and helping China jump up the high-tech ladder, according to Reagan
trade negotiator Clyde Prestowitz in his book
The Betrayal of American Prosperity
.

In 2003, the Defense Department’s Advisory Group on Electron Devices warned that the offshore migration of U.S. semiconductor chip fabrication plants “must be addressed” or it “will potentially slow the engine for economic growth.” The group’s chairman, Thomas Hartwick, told Congress that America’s global lead in innovation was being put at risk. “The structure of the
U.S. high-tech industry is
coming unglued
,” Hartwick said, “with innovation and design losing their tie to prototype fabrication and manufacturing [emphasis added].” President Bush’s Council of Advisors on Science and Technology warned that the steady offshoring of U.S. production facilities would lead to the loss of research, development, engineering, and design capability, too. “The continuing shift of manufacturing to lower-cost regions, and especially to China,” the council cautioned, “is beginning to pull high-end design and R&D capabilities out of the United States.”

Not “beginning” to happen, it was already happening. Prestowitz reported that foreign corporations, led by U.S. multinationals, have set up
at least 1,160 high-end research installations in China since 1999, plus more in India. The challenge from China, he noted, was sharply different from the Japanese trade challenge in the 1980s. Japan had resisted attempts by American multinationals to set up factories in Japan. By contrast, China welcomed foreign investors as a way to capture their technology and know-how. “
China was much more clever than Japan with its investment policies,” observed C. Fred Bergsten, director of the Peterson Institute for International Economics. “It invited foreign direct investment and then took the American corporations hostage,” requiring them to transfer valuable technologies to China as a price of doing business there.

The roster of those who went along reads like a corporate
Who’s Who
—GM, IBM, Microsoft, Intel, Cisco, Motorola, Hewlett-Packard, Dell, Applied Materials, and more.
By 2005, GE had twenty-seven labs in China working on projects from composite-materials design to molecular modeling. In November 2010, GE announced plans to
invest an additional $2 billion in R&D, technology, and financial services partnerships in China. Just two months later,
GE disclosed a joint venture agreement to share its most sophisticated avionic systems on the Boeing 787 Dreamliner with the Chinese state-owned firm AVIC.

General Motors broke ground in mid-2010 on its highly touted GM China Advanced Technical Center—science lab, vehicle engineering lab, work on alternative energy vehicles.
Microsoft, already spending $300 million on a research facility in Beijing, committed another $1 billion in late 2008 to more R&D centers around China. Another “milestone” investment was announced by Microsoft in 2010 for a new Shanghai Technology Park to “expand innovations in ‘Cloud Computing’ and green technology” as well as software development.

Symbolically, the most stunning decision came from
Applied Materials of Silicon Valley, the world’s biggest supplier of equipment to make semiconductors, solar panels, and flat-panel displays. In 2010, the company disclosed that it would base its chief technology officer, Mark R. Pinto, in China to head up a new 360-person lab complex in the ancient city of Xi’an.

Some American corporate leaders concede that they are walking a delicate line by sharing know-how with China, but they say that is an unavoidable cost of doing business there. “
China has a carrot and stick strategy—to sell to the Chinese government and state-owned enterprises, you have to make it in China,” Clyde Prestowitz explained. “The Chinese even have a policy of
indigenous innovation
. The idea is that in order to sell to the Chinese government, you have to have R&D and new technology done in China incorporated into your products. It’s a technology transfer requirement.”

The heads of some U.S. multinationals dislike this policy and note that it goes against global trading rules, but they shy away from
strong public comments. Privately, they have told the U.S. Chamber of Commerce that China’s policy is simply “
a blueprint for technology theft on a scale the world has never seen before.” But, said the Chamber of Commerce, many U.S. multinationals are so “increasingly dependent on their China profits” that they “can’t afford to antagonize China.”

They have asked Washington for help. In January 2011, the Chamber of Commerce and corporate CEOs asked President Obama to raise American objections to “
indigenous innovation” when he spoke with President Hu Jintao in Washington. Hu reportedly agreed to end that policy, but U.S. officials were skeptical, noting that in the past, powerful groups in the Chinese military and industry had blocked some of Hu’s pledges and that before Hu came to power, the Communist Party leadership had made “indigenous innovation” a cornerstone of its drive to make China “
a technology powerhouse by 2020.”

Willingly or not, some big
U.S. companies have become integrated into China’s export drive to the United States, as smaller U.S. businesses predicted. Typically, U.S. multinationals try to hide homebound exports, but occasionally word leaks out. Cooper Tire & Rubber Company of Findlay, Ohio, America’s second largest tire company, invested $70 million in 2004 in a Chinese joint venture plant. Only three years later did Cooper Tire admit to the U.S. International Trade Commission that for the first five years, it had agreed that not a single tire would be sold in China; everything would be for export “to North America and Europe.”

“
That kind of thing is the stick part of China’s strategy,” Prestowitz explained. “The carrot is that they offer foreign corporations all kinds of benefits. The Chinese say, ‘Hey, come on over here. To make it here, you have to transfer technology, but if you do, we will make it worth-while.
We will subsidize your factories.’ Intel, Applied Materials, and these companies are getting tax abatements for fifteen to twenty years. They are getting free land or land at very reduced prices. They are getting free infrastructure, getting a break on utility costs, and some are even getting capital grants from the Chinese. This is the carrot side of Chinese policy. I know it very well. I was on Intel’s advisory board. I can’t discuss the details, but there were lots of ‘bennies.’ We don’t have anything like that in America to match it.”

Paul Otellini, CEO of Intel, which opened a $2.5 billion chip-fabricating plant in Dalian, China, in October 2010, confirmed the power of China’s financial lures. “
It costs $1 billion more per factory for me to build, equip, and operate a semiconductor manufacturing facility in the United States,” Otellini said, because in China, Intel could save that $1 billion. It “wasn’t because the labor costs are lower,” Otellini reported, “it was because the construction costs were a little bit lower, but the cost of operating, when you look at it after tax, was substantially lower.” In short, the Chinese government was offering subsidies and tax breaks that made it cheaper for Intel to operate there. Prestowitz, among others, believes the United States should change tax laws and other incentives to U.S. firms to match and counter the Chinese lures.

Beijing’s strategy has succeeded, economists point out, not only in luring major U.S. multinationals to locate sophisticated plants in China, but also in drawing top American companies into helping China’s high-tech offensive in global trade. In a 2005
BusinessWeek
op-ed tellingly titled “The High-Tech Threat from China-America Inc.,” former undersecretary of commerce Jeffrey Garten warned of the perilous partnerships being formed. “
U.S. companies are understandably seeking the best talent and lowest cost of operations anywhere. But in the process they are sharing America’s intellectual treasures with a foreign rival in unprecedented ways,” Garten asserted. “They are training foreign scientists and engineers and giving them and the omnipresent Chinese government access to their proprietary research programs.”

What’s at work is not only China’s inducements, but also a radical shift in the mind-set of some leading American corporate chiefs. Most of us equate the success of the American economy with the success of American corporations. But many corporate CEOs don’t see it that way. To them, America is no longer ground zero. It is just one of many global markets, and selling here does not necessarily mean producing here.

Alex Trotman, the CEO of Henry Ford’s old company, was among the first to openly sound that theme in the late 1990s. “Ford isn’t even an American company, strictly speaking,” he said. “We’re global.” Ron Rittenmeyer, CEO of EDS, the largest American-based IT services company,
described his firm as “agnostic about specifically where we operate.” In 2005, former Intel CEO Craig Barrett was so bullish about Intel’s global presence and operations in an interview with
New York Times
columnist Thomas Friedman that Friedman paraphrased Barrett as contending that “
Intel can be a totally successful company without ever hiring another American.” In 2006, Cisco CEO John Chambers went further. “What we are trying to do,” he said, “is outline an entire
strategy of becoming a Chinese company.”

Today’s corporate thinking is the opposite of what Charlie Wilson, chairman of General Motors, famously said in the 1950s: “
What’s good for our country is always good for GM and vice versa.” Those days are long gone, says former IBM vice president Ralph Gomory. “In this new era of globalization,
the interests of companies and countries have diverged,” Gomory told Congress in 2007. “In contrast with the past, what is good for America’s global corporations is no longer necessarily good for the American people…. Globalization has now made it possible for global corporations to pursue their profits by building capabilities abroad…. But in creating their profits this way, they are building up the GDP of other countries while breaking their once tight links with America’s own GDP.”

Summarizing the impact of this new corporate mind-set on the American economy, the National Science Board reported that 85 percent of the growth in R&D workers by U.S. multinationals between 2003 and 2009 had been abroad, while American-based employment in high-tech manufacturing had dropped 28 percent since 2000.

No high-tech company epitomizes this mind shift and job shift more than Ralph Gomory’s alma mater—IBM—which now bills itself as the
world’s
largest technology employer and computer services provider. Once the iconic American company, IBM has become the flagship for outsourcing technology services, helping a fleet of U.S. firms to relocate as many as a couple of million high-end IT jobs to Asia, especially to India.

If Wal-Mart pushed consumer manufacturing to China, IBM has been the driving force for pushing IT work offshore. Its own transformation has been stunning, implemented largely out of public view. In seven short years, from 2003 to 2010, IBM fired so many American IT professionals and hired so many engineers and computer programmers in India that IBM India’s workforce is now larger than that of IBM USA.