U.S. chip manufacturing in the age of the iPad

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Behind the fly-off-the-shelf popularity of products like Apple's iPad and iPhone are hundreds of thousands of manufacturing jobs--mostly overseas. Is it possible to create more of those jobs here in the U.S. to combat chronically high levels of unemployment?

Andy Grove's Stanford class examined the state of manufacturing in the U.S.

(Credit: Intel)

Personal computing is moving rapidly beyond the laptop. And there's no better example than Apple, whose most popular products are now the iPhone and the iPad. The surging demand for anything Apple is causing a seismic shift in chip manufacturing to Asia, the hotbed of new silicon ecosystems. Though companies like Hewlett-Packard and Dell also play a role, they are still primarily Intel-centric PC makers, while Apple is morphing into a maker of smartphones and tablets, which is creating the alternative non-Intel silicon manufacturing ecosystems overseas. Thus the focus on Apple.

So, is there anything a U.S. gadget supplier like Apple can--or should--do to help maintain a chip manufacturing base in the U.S.? Seeking an answer to that question I recently sat in on a Stanford University class taught by Andy Grove, the former Intel chief executive, and talked to Vivek Wadhwa, director of research at the Center for Entrepreneurship and Research Commercialization at Duke University's Pratt School of Engineering.

My premise was pretty simple. The tablet and high-end smartphone are pushing chip manufacturing outside of the U.S. and away from PC chip stalwart Intel, which has always maintained a large manufacturing base here. My question: If all things are more or less equal technologically, is it a feasible business decision to source silicon from companies, when possible, that have manufacturing bases--and create jobs--in the U.S.?

One of the most prominent examples is Micron Technology and its flash memory chip joint venture with Intel, IM Flash Technologies. Micron is a scrappy Boise, Idaho-based chip manufacturer that survived Japanese chipmakers' takeover of the lion's share of the DRAM (Dynamic Random Access Memory) business in the 1980s and is still alive and kicking despite Asia's--primarily South Korea's and Japan's--preeminence in the memory chip business now.

Toshiba, in particular, is emerging as a strong presence in flash memory now. Thanks, increasingly, to Apple. In fact, to date, a sizable chunk of the flash that went into the iPhone and iPad was sourced from Toshiba. Most pointedly, Apple announced publicly in 2009 that it had cut a $500 million deal with Toshiba to supply flash.

And flash is now prominent in the new MacBook Air, which is offered with 64GB, 128GB, or 256GB flash drives. In the popular 11.6-inch MacBook Air, for example, an iFixit teardown reveals a 64GB solid-state drive supplied by Toshiba.
Cost breakdowns by firms such as iSuppli show that the flash memory component of iPads and iPhones, as percentage of a total bill of materials, ranks very high and is--depending on whether it's 16GB or 64GB--sometimes the largest single component in terms of cost.

Is this business that Micron and/or Intel--who manufacture flash at facilities in Lehi, Utah, and Manassas, Va.,--could get a bigger piece of? That's a business decision Apple has to make. But my point is that the opportunity to make that choice could vanish if trends continue.

U.S. manufacturing clusters
Grove's Standford University graduate business class focused in part on "industry clusters," which are described as "a geographic concentration of interconnected businesses, suppliers, and associated institutions focused on a particular field (i.e., Silicon Valley)," in the class handout. And one of the questions for open discussion was, "How do we make Silicon Valley an industry cluster for manufacturing technology?"

I didn't hear any good answers to that question. What I did hear were more needling questions such as, "Can you control what you don't produce? We say, no." Or statements about America's lack of focus on maintaining a manufacturing base, such as, "America is not fighting right now, at least not very hard." And, of course, the usual warnings about major disincentives: the stratospherically high U.S. corporate tax rate--a point Intel's current CEO Paul Otellini is not bashful about making--was cited as second only to Japan's at 40 percent.

The corporate tax rate is an important issue because, when it's globally competitive--that is, low--it draws business to the U.S. naturally, in the spirit of Adam Smith's oft-quoted maxim of the Invisible Hand. The U.S. government can't plan a manufacturing base into existence--capitalism doesn't work that way--but a country can do everything possible to make the conditions favorable.

Grove asserts that the U.S. government should be aggressive on all fronts to keep the international playing field as level as possible. "Is China following WTO (World Trade Organization) rules? Should you be worried about being accused of protectionism?"--Grove asked the class. He was posing questions that seemed to imply that the U.S. needs to do more to help itself.

And product giants like Apple can also do their share by turning to existing U.S. sources. "Yes, let's put pressure on Apple. If Apple bought flash from Intel or Micron, that's a great example," said Duke University's Wadhwa.

But not all manufacturing is created equal. "The vast majority of manufacturing is destructive to the environment. Like paint and toy manufacturing. And if you build more manufacturing plants here like Foxconn--which build Apple's iPhone in China--Americans wouldn't want to do those jobs. It's mindless, grunt work," he said.

Wadhwa continued. "Germany (for example) is all very high-level manufacturing. It's very high-level technology products and they pay very high salaries. It's not grunt work. By all means let's get high-end high-tech manufacturing in the U.S. Flash memory is a good example. Manufacturing the most critical ingredients of solar technology is a good example. And clean-tech manufacturing," he said.

Some manufacturing, surprisingly, is coming back to the U.S. The Stanford class cited cases of "re-shoring" of manufacturing by General Electric, Caterpillar, and Ford. In some cases, unforeseen complications make manufacturing abroad simply impractical. And China's cost of living is rising too, which will work against low-cost manufacturing in that country in the future.

Let's hope that the U.S. remains as hospitable as possible to high-quality high-tech manufacturing jobs and that companies like Apple do their share to source from U.S.-based suppliers when possible.

Brooke Crothers
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