Home BUSINESS Shareholder Primacy: Failing Supply Chains And Failing Businesses Threaten Our National Security

Shareholder Primacy: Failing Supply Chains And Failing Businesses Threaten Our National Security

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One thing we learned from the pandemic: in a global emergency, America’s supply chain can quickly collapse. We have become utterly dependent on the rest of the world for our ability to make what we need. Early on, the problems of getting ventilators to hospitals made it clear how countless parts for these machines were manufactured in other countries. In this case, our decades-long rush to outsource manufacturing took away much of our control over the speed of production for therapeutic and protective equipment. Yet we have faced this bottleneck—and this quietly deadly weakness—across all major industries.

The Covid-19 crisis sounded an alarm about how weak and dependent we’ve intentionally become in the manufacturing sector. We aren’t just losing our manufacturing infrastructure—the tooling and plants required to make things—we’re lagging in our knowledge of cutting-edge processes required to make competitive products. It isn’t just that we don’t have the physical capacity to make a certain machine or part. We don’t know how to do it anymore.

This is a sickening development. And it’s so disheartening because we’ve chosen to go down this path. In our readiness to outsource manufacturing overseas, to save on labor costs, we’ve also outsourced some of the ability to develop new processes, new breakthroughs and new ideas for the parts and products we need. This is already crippling us, not only as an economic super-power, but as a society. We need to recognize the dire consequences of our willingness to squander our ability to innovate and build what our companies and consumers need.

The CBS weekly news magazine, 60 Minutes, recently did an in-depth report on the silicon chip shortage we face as a consequence of mismanagement at Intel INTC Corporation, once the world’s leading chip maker. In the end, this story lays bare the grave dangers of shareholder primacy. These risks aren’t simply economic. They are geo-political. The segment on Intel portrayed this foundational and legendary Silicon Valley giant as a mere follower now, not a leader. It is struggling now to catch up with TSMC, the world’s leading chip maker in Taiwan.

Intel’s new CEO, Pat Gelsinger, told Leslie Stahl: “Twenty-five years ago the U.S. produced 37 percent of the world’s semi-conductors in the U.S. Now that number has declined to just 12 percent.” Even that startling decline doesn’t convey the real disaster. He told her there is no U.S. company, including Intel, that actually knows how to make the newest chips properly. Once, twenty-five companies, located around the world, could make high-end chips. Now there are only three. And Intel isn’t the leader.

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The electronics sector—products as diverse as iPhones, personal computers, cars, appliances, and the supercomputer that controls our nuclear arsenal—require silicon chips. Because of the Covid shut-down, the supply of chips shrank. For example, auto and truck sales dropped early in the pandemic and then shot up unexpectedly toward the end of last year. That spike in demand revealed a widespread shortage of the computer chips that now come standard with vehicles. So Intel and the world’s other two chip-makers are scrambling. Here’s the twist: Intel actually can’t manufacture the newest, best chips, because it didn’t develop them. It doesn’t know how they are made. It had to ask its biggest competitor, TSMC, in Taiwan, for help.

This is mortifying. As someone who lived through America’s prime, the post-war era when we were the industrial powerhouse of the world, this feels like the onset of economic defeat. Intel has appealed to the U.S. government for subsidies and tax breaks to ramp up a campaign to regain its leadership. President Biden has looked favorably on this proposal, which is fine. Knowing how much this means to America’s ability to get back to full-speed economically as we open up, Intel may actually regain its competitive edge.

But there’s a bigger story here than 60 Minutes addressed. Stahl nailed it, but then moved on:  

“You have spent much more in stock buybacks than you have in research and development. A lot more” said Stahl.

  “We will not be anywhere near as focused on buybacks as we have in the past. That’s been reviewed as part of my coming into the company and agreed upon by the board of directors,” Gelsinger said.

  Stahl said, “Gelsinger is making big bets, breaking ground on two new giant fabrication plants in Arizona costing $20 billion, Intel’s largest investment ever.”

This is exactly what Intel needs to do: redirect money away from stock buybacks into research, development and new production. It’s actually what all companies need to do. Intel’s story exemplifies what has happened to American business as a whole over the past forty years. We have steadily emphasized short-term shareholder value at the expense of growth in a company’s ability to create new value in products and services. The greed of financial investors has overshadowed and suppressed our ability to innovate and grow in the creation of new, actual value measured by increases in revenue from customers.

It’s astonishing to hear about how Intel has suffered from one huge mistake two decades ago. Intel doesn’t have the ability to make the most advanced chips that Apple AAPL and others need. “The whole company (has) stumbled. In the early 2000s, Steve Jobs needed new chips for a new idea, the iPhone. Intel wasn’t interested,” Geslinger told Stahl.

Apple went to Taiwan for its chips and now Taiwan makes chips 30 percent faster and more powerful than Intel’s.

Under Geslinger’s leadership, it sounds as if Intel has a chance not just to catch up but to regain its leadership in the industry. But the Taiwanese competition will be relentless.

Everyone in business can take Intel’s plight to heart and take courage, as well, from Geslinger’s brilliant choices to back away from financial engineering to the real-world engineering of new electronic breakthroughs. Shareholder primacy is giving way to one huge pillar, one foundational principle, of stakeholder capitalism: investment in people and processes to make new breakthroughs and higher productivity possible. What has been for too many years a corporation whose mission was simply to jack up its stock price may regain its original status as the top brand in its field. Computers once bore a prominent little nameplate that said, “Intel inside.” Back then, it meant you were getting the best performance possible. In a few years, we may be seeing that little boast make a big comeback. Meanwhile, the rest of us should be studying Intel’s moves and following its example.

Above and beyond the drama of this shift in computing power from West to East, a much larger threat looms. A spokesman for Taiwan’s industry told Leslie Stahl that he fears China might at some point invade Taiwan and take control of its chip manufacturing, along with everything else. This could give China an enormous lever to influence the world through the control of its chip supply. China could also take control of Taiwan without aggression. For us the results would be equally threatening. Our greed thus leaves us vulnerable not just to shortages of products, but to the necessity for war. Shareholder primacy has left us in a looming economic crisis but also a geopolitical one. Embracing stakeholder primacy, as Intel is now doing, represents a move toward greater national security and world peace. What more does our private sector need to embrace stakeholder primacy? How about doing it now!

Source: Forbes

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