Intel's Andy Grove on manufacturing in America

Among the scores of fabless chip companies and product design houses in Silicon Valley, Intel is a standout. It's an American high-tech company that not only creates but builds some of the most sophisticated tech products in the world here. That contrasts with others, like Apple and Hewlett-Packard, that consign virtually all product manufacturing and assembly abroad.

Last week, I asked Intel co-founder Andy Grove how the chipmaker became one of the last, great high-tech manufacturing giants in the U.S. and why many Silicon Valley icons haven't done the same. Grove was Intel's chairman from May 1997 to May 2005 and served as chief executive from 1987 to 1998.

Intel's manufacturing strategy was underscored by a recent announcement to invest as much as $8 billion in new factories and facilities in the U.S. That's in addition to the roughly $34 billion it has already invested in its U.S. factories, including investment in a joint flash chip manufacturing venture with Micron Technology.

Grove says Intel has been making, or "fabbing," chips in the U.S. since its founding in 1968--for practical reasons, mind you. "That was not a result of us wanting to be patriotic. Operationally that was the most logical thing for us to do," he said, in a phone interview.

Why, historically, has it been practical for Intel? "The people doing the technology manufacturing were highly trained, highly disciplined staff. And there was a lot of desire to not start manufacturing operations willy-nilly all over the place," he said.

Job creation in the U.S.
The job-creating value of made-in-America strategies are getting renewed attention now with chronic unemployment problems in the U.S. The Obama administration's efforts to save General Motors and Chrysler--whether you agree with the strategy or not--was an effort to maintain a critical manufacturing base in the U.S. Something Intel has been doing all along.

The Intel investment "is a vote of confidence in America with real money rather than talk," said Dan Hutcheson, CEO and chairman of VLSI Research. "They have great infrastructure in the U.S. Skill sets are already in place and don't have to be developed."

And the multibillion plants Intel builds spawn a satellite of sub-contractors, services, and other businesses that results in a virtuous cycle of job creation. In the case of Arizona, where Intel has manufacturing facilities, the company contributes more than $2.6 billion in economic impact to Arizona, including more than 20,000 jobs as a result of operations there. And that is just Arizona. This positive impact is more or less duplicated in New Mexico and Oregon too, according to Intel.

Conversely, that virtuous cycle is moved to foreign countries when companies shift production offshore. "Foxconn has 1 million people doing manufacturing," Grove says, referring to the Chinese manufacturing Goliath that builds products for a host of computer and device companies in the U.S.

"Look at the ramp of the Foxconn headcount. Foxconn was practically zero on that scale. Then this decade they took off."

And, who are Foxconn customers? Apple makes a number of high-profile products at China-based manufacturing companies like Foxconn, as Apple states in its Form 10-K. "Sole-sourced third-party vendors in China perform final assembly of substantially all of the Company's Macs, iPhones, iPads and iPods."

Apple illustrates the difference between creation in the U.S. and carrying that creation to fruition abroad. Apple CEO Steve Jobs, speaking during Apple's fourth-quarter earnings conference call, had a lot to say about what Apple creates. "We create our own A4 chip, our own software, our own battery chemistry, our own enclosure, our own everything," he said. And, later in the call, he said: "We engineer so much of it ourselves. The A4 chip inside it is an Apple creation...We develop a lot of our own components."

But on the manufacturing side, like Dell, Hewlett-Packard, and others, Apple makes key products overseas. Previously, all of those companies at one time built computers in the U.S. Compaq--acquired by HP in 2001--for a long time built PCs in Houston and even made its own circuit boards there. Apple used to assemble its computers in the U.S. And Jobs' former company, Next, opened a high-tech plant to great fanfare in Fremont, Calif., in the late '80s. And IBM assembled PCs in North Carolina, before it got out of the PC business.

On this point, Grove says it's important to judge companies by what they do, not what they say.

"U.S. companies move jobs, move production, move added value abroad. Judge from the actions."

The problem is U.S. companies are left to their own devices because of the lack of government policies or incentives to mitigate the behavior, he said. "I was basically left to decide. Every American CEO gets to decide what's good for the company. Because the U.S. does not provide preferences, priorities, or directions. On the other hand, we are competing with a very effective country [China] that's beating the shit out of us," according to Grove. "And I don't blame them. I blame us." A Chinese phrase that roughly translates as "indigenous innovation" says it all, according to Grove. "That is the byword."

U.S. businesses "follow the invisible hand. And the United States follows the black vortex into the abyss, as a result," he continued. U.S. businesses "just follow their own optimum outcome."

Government needs to do something dangerous
So, what's the solution? "Come up with a policy that mitigates or reduces the incentives to move all scaling work to foreign countries," Grove said, referring to the process of scaling up a product from design to manufacturing. "Somebody in the government (needs to take) a step that is dangerous enough to invite targeted criticism. Unless they are willing to do that I don't believe that they are serious about it."

And it's certainly not impossible to create and build in the U.S. Brian Krzanich, a senior vice president and general manager for manufacturing and supply chain at Intel, echoes Grove's sentiment. "Each of (Intel's) factories has 1,000 to 2,000 highly trained and highly technical engineers...Getting to the point of taking something from the lab into high-volume manufacturing. There's quite a bit of innovation in that."