Why Not Here?

A recent article in the Wall Street Journal by James R. Hagerty—“U.S. Loses High-Tech Jobs as R&D Shifts Toward Asia”—seemed like just another dose of bad offshoring news. But buried within was this statement: “Companies aim to tap a broader pool of scientific talent, tailor products to overseas markets and curry favor with foreign governments by doing more research abroad.” Understanding this statement could help us understand globalization better, and for that matter, how we should respond to offshoring.

I see two driving forces in globalization: geography and cost. Concerning geography, if you intend to be a global company, you must locate assets globally—sales, service, technology, and manufacturing. Strategic asset allocation is actually even more imperative than tailoring products or currying favor.

In some countries, experimental data—particularly data that might be used for drug approval—cannot be imported. It has to be generated locally. Add to that the “indigenous innovation” policy, wherein the government preferentially buys things invented locally regardless of the nationality of the company. Many governments are organized to be full partners with their private sector in the name of growth, in which case you are competing with Country Inc.

If geography is the driving force for the decision to locate a facility, there’s really nothing to be done short of making that country the 51st state. But once a company’s global diversification is complete, the story can change.

That’s because the other driver is cost. Most people think of cost only from the perspective of labor cost: Hire the cheapest people you can find who can do the job. That strategy works for some things—we’re now seeing apparel manufacture moving out of China to Cambodia because China’s too expensive. But it doesn’t work for others, and I argue that the chemical industry and particularly technology development are good examples of where it doesn’t work because of the size, value, and permanence of investment. In this case the consideration has to be “total cost of ownership.”

Think of things other than wages that translate to costs. Infrastructure: roads, electricity, finance, education, talent, Internet, global shipping, and energy. Policy: stable governance, intellectual property protection, visitation and immigration, taxes, and government investment. Get even some of those elements wrong and your cheap labor advantage evaporates. The state of these variables is largely derived from government policy. And this is the part we—as Americans and as the American Chemical Society—can do something about.

I’ve written previously in this space about the ACS Business Climate position statement (C&EN, Sept. 6, 2010, page 71). My summary question is this: The next time a company wants to build a laboratory and it could be anywhere, why not here? This is where we—as the U.S.—have to sharpen our game and make this the best place on Earth to locate a laboratory or a factory or a business on a total cost basis. This is not an unknown strategy.

There is a reason why there is a Nissan plant in Tennessee and a Mercedes-Benz plant in Alabama. The plants—even after the decision to locate in the U.S.—could have been anywhere, but those two states assembled packages to attract the facilities. I’m suggesting that as a country we can do as much. In fact, if we want to attract investment on any basis other than happenstance, we must—even though we have a lot of things going for us without doing so.

Five years ago, your colleagues would have laughed you out of the lunchroom if you suggested that a new ethylene cracker would be built in the U.S. And if you suggested it would be anywhere but Houston, they’d throw a net over you. Now, because of the new paradigm of abundant shale gas, crackers are planned for—wait for it—Pennsylvania. Natural-gas-based chemistry today has a huge competitive cost advantage over oil-based chemistry on the world market.

For that reason, gas-based ethylene derivatives have had boom years recently because of exports. There is the chance that, if we get the regulatory aspects right (both for environmental protection and cost), we could take the hot hand in chemicals back from the Middle East. The game can, and has, changed.

Energy is a part, but not all, of our road back. Look at the infrastructure components mentioned above and ask whether we are globally competitive. China gets the idea of the total package. That’s what the research parks and the academic funding and the other incentives are about. Even high-wage-rate Germany seems to be able to make it work. The kinetics of where business goes to locate a facility is very complex, and yes, it’s about world-class talent available at attractive rates, but it’s also about much more.

So when I hear about a plant or a lab or a technology center locating somewhere in the developing world to be close to a market, I’m disappointed, but I understand. When it goes to a developed country or when it could have gone anywhere, and it doesn’t come here, I’m ashamed because sometimes it seems we made the conscious decision not to compete.

We don’t have to pick technology winners; everyone can play here if we think about why people don’t. Infrastructure. Policy. We can do better.