Why Technology Start-Ups Wont Save Us

Scale. That is the only word you need to remember.

Innovation is cool. Start ups are tantalizing. But scale is what delivers sales, profits and jobs. And scale does not happen in the US or Europe anymore.

We all know where it happens. And there is a vast, multi-tentacled, never-ending debate about why. There are similar debates about how and what needs to happen to make it happen here. There are fierce debates among the elite in China about how to capture even more of the value chain by transferring concept and design to that country. But in the end, scale is what delivers the cash. JL

John Naughton comments in The Guardian:

Tom Friedman is a significant figure because his pulpit on the NYT enables him subliminally to insert ideas into the collective unconscious of America's ruling elite. Which is why something he wrote recently needs to be challenged. "If we want to bring down unemployment in a sustainable way," he wrote, "neither rescuing General Motors nor funding more road construction will do it. We need to create a big bushel of new companies – fast. We've got to get more Americans working again for their own dignity… Good-paying jobs don't come from bailouts. They come from startups."

"Friedman is wrong," says former Intel CEO Andy Grove. "Startups are a wonderful thing, but they cannot by themselves increase tech employment. Equally important is what comes after that mythical moment of creation in the garage, as technology goes from prototype to mass production. This is the phase where companies scale up. They work out design details, figure out how to make things affordably, build factories, and hire people by the thousands. Scaling is hard work but necessary to make innovation matter.
The scaling process is no longer happening in the US. And as long as that's the case, ploughing capital into young companies that build their factories elsewhere will continue to yield a bad return in terms of American jobs."

Thomas L Friedman, the New York Times's foreign affairs columnist, is an engaging master of the pithy half-truth. He once famously observed, for example, that two countries which had significant networks of McDonald's franchises would never go to war again, because an addiction to Big Macs signified the existence of a significant middle class with too much to lose from casual hostilities. In a subsequent book with the provocative title The World Is Flat he updated the thesis to the proposition that two countries with manufacturing industries which were part of the supply chain of giant companies such as Apple, Toyota, Dell and Cisco could no longer afford go to war with each other either.

When Samuel Johnson was asked how he would refute Bishop Berkeley's philosophical proposition about the non-existence of matter, he famously kicked a stone and said: "I refute it thus!" Not having a convenient stone, I pick up the nearest object that lies to hand. It's an iPhone. "Designed by Apple in California", it says on the back. "Assembled in China".

Grove is right. And it applies not only to the US but to every industrialised country whose government fantasises that new high-tech businesses are the key to industrial renewal. Startups do create good jobs in their countries of origin, but only for relatively small numbers of highly qualified people. That's why – as Andy Grove points out – the unemployment rate in Silicon Valley is actually higher than the US national average.

Which is where ideology enters the picture. Evangelists for the twin doctrines of globalisation and maximising shareholder value simply shrug their shoulders at this point. The fact that manufacturing jobs have moved to China, they say, is just a fact of life, an economic version of Newton's first law.

But actually it's not a fact of life: it's an ideologically driven choice. This emerged graphically in a recent TV discussion between CNN's Candy Crowley and Jim Hoffa, boss of the teamsters' union. Hoffa startled his interviewer by launching into an attack on Apple for sitting on its $78bn cash mountain and not spending it in the US. When the interviewer pointed out, mildly, that Apple was allowed to do that, Hoffa responded: "But they are not doing anything with it. And instead of investing here, everything they do is in China or is in Asia somewhere."

"It's cheaper there," explained the interviewer, at which point Hoffa exploded. "But don't they have an obligation to America to build it in America, to put people to work?" he said. "I think the president should challenge the patriotism of these American corporations that are sitting on the sidelines saying, why do we have high unemployment but I am not going to hire anybody? You know, they have an obligation just like the federal government, just like Obama. We have all got to get into the game. And I don't see that happening. So the trillions and billions of dollars that they have on the sidelines, they have money, Pfizer and General Electric, they have trillions of dollars overseas, let's start repatriating that money. Let's start a programme to get America going again."

Now of course Hoffa is a union boss and he would say that, wouldn't he. But the point he raises is nevertheless sobering. Not only is patriotism a completely outmoded concept for major technology companies, but so also is the idea that these corporations have any wider social responsibility to the societies which provide them with the skilled and educated people who make them so innovative and profitable. Welcome to Tom Friedman's flat world.