Fareed Zakaria writes for Time Magazine; Tom Friedman writes for the New York Times. The first is a relative newcomer at telling America how to survive the difficult coming age; the second has been at it for a while. The last big effort undertaken by either in this regard came in the form of a two pronged attempt made by Zakaria. It was an audio-visual presentation shown on CNN which was twinned with a written essay published in Time Magazine. Near the end of the television show Zakaria presented his solutions for America which he listed together with what he says were Friedman's solutions. Well, my friends, the time has come to shift gears and do something to pull America from the ditch where the amateurs have pushed her in the first place.
Shows based on similar themes were presented on television previously, and works that were written for print were published in magazines and in book form. Some of these works were good because the authors who created them had expertise in at least one aspect of the subject they discussed. The audience could follow the logic of the presentation because the authors had something to say and they said it with clarity. However, like Zakaria and Friedman there were also writers and filmmakers who dealt with subjects in which they had no expertise but unlike them both, the other authors managed to create something of a different caliber. One example is the work of Hedrick Smith who made for PBS a show titled: Is Walmart good for America? This was an excellent presentation that took one aspect of the problem facing America and discussed it in depth.
Smith succeeded brilliantly because, like a true professional, he relied on outside experts to help him put the show together. And like master builders, he and his team cooperated to erect an edifice that was educational by the wealth of its content and appealing by the interest it was able to generate. It had a solid structure that won the confidence of the viewer and yet, it followed a treatment that was smoothly expressed. When authors approach a project in this way, they see no need to line up CEOs who repeat the old and tired refrain about an America that has what it takes to make a comeback and be number one again. This kind of talk is redundant and boring to the audience, and it fails to tell America how to make a pair of shoes that can compete with shoes made in Asia. Yet, this is precisely what America must master if it wants to survive the coming difficult age. And how to do this is what the viewers want to know rather than be forced to watch a host that is keen at showing off as he or she namedrops a list of CEOs who are themselves keen at making a buck for their shareholders anyway they can, be that in America or in Asia.
Whichever way you start to think about what America and the other industrial nations need at this time, you will always end up with the conclusion that they need the opposite of what got them where they are today. And what got America where it is today was bad advice given by amateurs. It so happened that when the emerging nations began to emerge, the advice given to America was to the effect that “We should leave the labor intensive industries to the emerging nations and concentrate on developing a set of industries that are based on knowledge.” The idea was to sell knowledge to the emerging nations in the form of production machines they will use to make the products they send to America to pay for the machines. Well, there are many reasons why this approach does not work. Those who understand the subject have an idea what these reasons are and they do a good job discussing them. On the other hand, there are those who do not know what they talk about and they do a lousy job discussing these matters. And this is why it is imperative for this latter group to team up with people who can help them put a good show together. Otherwise, they clutter the airwaves and the print space with useless performances such as the interviews they conduct with CEOs who have nothing more useful to say than repeat America has what it takes to be number one again. What a waste! What a pity!
The following are two of the many reasons why selling knowledge to emerging nations in exchange for industrial products will not help the industrial nations get out of the rut.
First reason. Say, you buy a plastic machine for a million dollars. Did you ever stop to think how long it will take this machine to pump out products worth a million dollars? Well, depending on the products you make, the time can be one year or much less, yet the machine will last 20 years or much more. But don't get too excited because you will not keep all this money. In fact, if you are in America running a manufacturing business, the following is more or less how you will spend the money you collect from sales. One third of the money will go to pay your employees. One third will go to pay for raw materials, rent, utilities and the like. And one third will go to pay for the loan you took out to buy the machine, for taxes and for profit. Under this regime, which is one that is common to most industrial countries, it usually takes the businesses 10 years to pay off the machines they buy on credit.
Now imagine you are a businessman in China and you buy the same machine from America. You will pay your employees not one third but one tenth of your sales receipts. This alone tells you that you will be in a position to pay off the machine in 3 years or less, not 10 years. Furthermore, almost every other expense you make -- ranging from raw materials to taxes – will stay in China. And guess what the money will be used for. It will be used to educate the children of China who will -- a generation or so from now -- create the knowledge that will help them make the plastic machines of the future. Thus, after a relatively short period of time, these people will no longer need to buy knowledge from America in such quantities as to give the American people the purchasing power to buy the manufactured goods that they need without asking for and obtaining credit from the Chinese. From then on, the Chinese will be producing both the machines that make the products and the products that are made by the machines. This is known as the vertically integrated approach to doing business. And if you are curious, the businesses that have adopted this approach have become the most successful in history. Just look at the integrated oil companies and marvel at their size and their strength.
Second reason. This is an example I actually lived through myself. Sometime in the Nineteen Seventies I received a phone call from a headhunter I dealt with previously. He had work for me that paid more than I was making at the time, and the job description fit my background perfectly well. The company was CBS Records in Don Mills, Ontario where they made vinyl (plastic) records in the 45 and 33 RPM formats. The production machines they had were using IBM relays but these electromagnetic devices were becoming outdated, and the logic systems (something less than a computer) that were built around them were being upgraded to run on solid state (transistor) technology. The Company needed a few people with my background to help do the upgrading; to debug and maintain the systems until such time other people were trained to take over. Thus, while the operators ran the 30 machines in the plant 24 hours a day, we stopped one machine at a time to do the upgrade which took 2 or 3 days to complete. We then handed the machine to an operator to run while we stood nearby and watched it go through several cycles. We moved on to the next machine, leaving it up to the operator and possibly a technician to take meticulous notes of any recurring or intermittent problem that may arise after that. If and when this happened -- which it always did -- we modified the design where necessary to fix the problem, and we tried to do the work while causing the minimum of downtime.
Don Mills was not the only plant that CBS Records had; there were something like a dozen of them scattered around the world. Like every new system, ours had its bugs and every time we resolved one bug, we were liable to create a new one or a few more. But we had to keep resolving these bugs until we had a system that worked perfectly well, something that took two years to accomplish. And because there were a dozen other plants around the world doing the same thing, we communicated to them the changes we made so that they may duplicate them. Of course, we also duplicated the changes that were made elsewhere and were communicated to us. And all the traffic in information that we and the others generated was passed through and distributed from the offices of the company that designed and built the solid state logic system. Having a CBS Records plant nearby, they made each modification themselves in that plant to study the effect. When done, they told us if we should maintain the modification or scrap it.
New technologies called the cassette and then the disc were invented after that, and the vinyl record disappeared. However, plastic did not disappear and there will be plastic machines for a long time to come, making one product or another including slippers and shoes that many Americans believe is beneath them to make. Now think about this: a generation from now plastic machines will be made in America and in China. The Chinese will be producing the slippers and the shoes but not the Americans who will only be making and selling the machines to perhaps some African countries. And while the machines will require engineers and technicians to keep upgrading them and keep ironing out the bugs, the Chinese engineers and technicians will have the plants and the machines near them as they do the modifications and assess the results. As for the Americans, they will be sitting in offices behind a desk in America reading an email from Africa about a problem that is bugging the machines out there. And these Americans will try to communicate to someone in Africa a possible modification that may or may not work, or may create a few more bugs to worsen the situation. Either this or the Americans will be sending a team of engineers and technicians to every country where their machines will be sold. And these teams will stay in those countries for as long as two years until the machines are completely debugged. The cost of doing business will rise for the Americans and will be added to the price of the machines. Under these circumstances, my friend, who do you believe will have the greatest economic advantage as a nation, America or China?
What this says is that the successful economies of the future will make the machines and use them to produce the goods in a vertically integrated sort of operation. These economies will have to undertake both activities simultaneously for the reasons cited above. To be sure, a million dollar machine will produce well over 20 million dollars worth of products during its lifetime. If you and your neighbors are willing to live on a million dollars, do so by all means. But your competitors and their neighbors will live on 20 million dollars for every million of yours and this will make their standard of living 20 times as high as yours. Think about that.
The principle is that you cannot design, build and improve on a machine based solely on knowledge you have accumulated in the past without continually doing the necessary research and development or without seeing the effects of your effort on the machine as it works under normal conditions -- operated not by you but by an average run-of-the-mill operator. It is just that lab work alone will not do it; you need to field test the thing.
The lesson to take from this is that if you only want to live on a knowledge economy, the knowledge that will inevitably hit you in the face after a while is that your client -- the manufacturer -- will have accumulated enough money to buy you out lock, stock and barrel, and will have begun to transfer your accumulated knowledge to his country under your nose leaving you with very little or with nothing.
Just ask Hedrick Smith who knows what he is talking about because he has not wasted his time chasing after CEOs to tell him that America has what it takes to make a comeback and be number one again. Smith got to the bottom of the matter and came out with useful knowledge which he shared with the audience.
May those who are in a position to design an industrial policy for the nations of the “West” be smart enough to differentiate between the useless noise of the amateurs and the useful insights of the professionals. If they can do this, the construction of the policy will be a cakewalk because it will dictate itself.