I was really struck by this article on Amazon’s Kindle from the New Republic website based upon an article on the HBR Blog ‘Is the US Killing its Innovation Machine?’ by Professor Willy C Shih, titled ‘The U.S. Can’t Manufacture the Kindle and That’s a Problem’. It highlights the opposite of what every globalisation guru asserts: namely, that far from innovation being an open playing field, innovation remains intimately tied to the nation-state and the national ecosystems they nurture.
The author details why Amazon’s Kindle cannot be manufactured in the US, despite the fact that it was designed in California and its key innovation — its electronic ink (the tiny microcapsule beads used in its electrophoretic display) — was invented and is being made in the USA by E Ink, a company based in Cambridge, Massachusetts. He reveals that Asian manufacturers are capturing the vast majority of the value added by manufacturing the e-reader itself. Even more worrisome for him, he sees this growing capacity in Asia almost certainly resulting in the loss of control by the US of e-paper display technologies and the future innovations that spring from them.
VALUE ADDED MANUFACTURING
The majority of the value added in manufacturing the Kindle is being captured in Asia. Why? Simply because the key components that make up the Kindle cannot be made in the USA:
- E Ink had to have the glass made in Asia because the companies there are the only ones that can deposit patterned silicon on sheets of glass. That capability left U.S. shores when American companies failed to keep up in the LCD flat-panel-display industry;
- The next most valuable component, the wireless broadband data module, supplied by San Diego-based Novatel Wireless, is made in Korea. Its value of $39.50, includes a $13 Qualcomm CDMA chip, also manufactured in Asia. Though chips like this are still designed in the U.S., the vast majority of them are manufactured in chip foundries in Taiwan, Singapore, and China, and then packaged somewhere in the region;
- The Kindle contains a microprocessor chip supplied by Austin, Texas-based Freescale Semiconductor but it is not clear where there is manufactured (according to the author). But all the other electronic components, including the lithium-polymer battery, were designed and are being manufactured in Asia, where the capabilities reside thanks to its strong consumer-electronics industry.
Professor Shih concludes that of the total cost of $185, perhaps $40 to $50 is captured in the US and asks if this is a problem. He notes that Amazon is well positioned to capture most of the value of the Kindle and a healthy portion of the profits generated by sales of e-books to Kindle owners including Kindle’s wireless data service, which uses Sprint’s US-based data network.
So why the concern?
Besides the impact this has on the US’s trade deficit the more substantive cause for concern is that ‘when innovations can’t be manufactured in the U.S., the locus of innovation in that area frequently shifts to the countries that can manufacture them’. Even though the electrophoretic beads were the central innovation in the Kindle, E Ink could not control the low temperature polysilicon and the fabrication of the display. It thus could not perform the system integration required for it to capture the majority of the value add. That capability has shifted to Asia. And this is the key development.
VALUE-ADD AND INNOVATION CAPACITY
The issue highlighted by the Kindle example, is the fact that the shift of value-add in manufacturing to Asia has created a newfound innovation capacity there that those without this exploitation platform, will find increasingly difficult to match. Professor Shih remarks that by ‘not manufacturing the electrophoretic display, the U.S. will miss out on the future industries that spring from it — things like large flexible displays, future generations of electronic signage, and plastic electronics’. And these in all likelihood will spawn other innovations and new industries.
“The lesson: Sometimes when you let your capabilities get away, you give up not only one industry but all its progeny.”
Professor Shih notes how years ago the U.S. lost the vast majority of its infrastructure, or “commons,” in precision optics to Japan. Again it was not simply value add that was problematic: ‘The Japanese used those capabilities to grab the lead in producing lithography tools for semiconductor manufacturing, which, in turn, drove most American semiconductor manufacturers out of the DRAM business. The Japanese also employed those capabilities to expand into lithographic tools needed to manufacture flat panel displays’.This same story has played out in high-tech industry after high-tech industry.
This example reveals that innovation capacity is not something that can be turned on and off at will but develops over time across an ecosystem that fosters exploration, engagement and exploitation. This is a symbiotic relationship which encompasses a set of critical relationships from the education system to government industrial policies; from the regulatory environment to longer term investment commitments to R&D etc.
Above all else, the Kindle example is only one of the latest that demonstrate that innovation capacity is rooted in the nation-state. We now begin to see the consequences of the financialisation of Western economies and where the short-term, risk-averse instrumentalism underpinning Western business culture is leading: the shift in manufacturing from West to East, what some define as globalisation, has given rise to a similar shift in the capacity to innovate. Innovation capacity remains firmly rooted in the nation-state and until such time that a sense of ambitions is revisited upon Western economies, this is a trend that will only intensify in the 21st Century.
This is what BIG POTATOES: The London Manifesto for Innovation is attempting to address.