Policarpio, Jerome S.

20058568 MSEM

GSECOMAN 08/11/2018

Digression2: Shifting industrial boundaries (Special case: the convergence between

Silicon Valley and Detroit)

In the past, the economies of Detroit and Silicon Valley couldn’t look more different: the
Motor City has long been known as a hub for manufacturing and the auto industry, while
innovations in technology have dominated Silicon Valley. Despite their differences, these cities
are actually more similar than most think.

Increasingly, manufacturing has gone high-tech in Detroit, while the Silicon Valley/San
Jose region has seen an uptick in manufacturing. This isn’t what we might expect, but to
understand this convergence, it helps to look at a recent Brookings report, which lists a group of
50 advanced industries, ranging from automobile manufacturing to software development.
Together, they contain our nation’s most competitive and innovative firms. Nationally, these
industries have an outsized impact on the economy—just 9% of the workforce, they produce
17% of gross domestic product and, since the end of the recession, advanced industries have
created 65% of new jobs.

It is not a surprise no one that San Jose and Silicon Valley have the highest
concentration of advanced industries workers in the country, with 30% of all jobs in the metro
area in one of these R&D and STEM-intensive industries. While some might think Facebook FB
0.57% and Twitter TWTR dominate the Valley, manufacturing actually employs nearly half
(46.1%) of workers. These 134,000 workers produce everything from semiconductors to
computer equipment to aerospace parts and pharmaceuticals.

The reverse dynamic is at play in Detroit. While the automotive industry accounts for
over one-third of all advanced industry employment, services still employ almost half. Over
32,000 professionals in the Detroit metro area are employed in the computer systems design
sector alone—many of which feed into the larger automotive supply chain.

Still, even this data obscures just how much the business of innovation is changing —
and how firms are responding. General Motors GM -1.94% remains one of the largest
employers in Detroit, mostly within automotive manufacturing. But increasingly, the automaker
has also been getting into the software space, according to patenting data, which shows that
GM filed 592 software patents over the past five years, accounting for over 15% of their
patenting activity.

Similarly, Google GOOG 0.92% , a software company, is rapidly moving into

manufacturing. Thirty-nine percent of its patents from 2007-2012 have been in hardware —
computer hardware, yes, but also power and energy devices, as well as mechanical hardware—
many originating from their ambitious autonomous car project. The very fact that the world’s
leading software giant is moving into the automotive sphere (and that one of Detroit’s Big Three
automakers invests so much in software R&D) shows just how integrated these two industries
have become.

This dynamic is not unique to the automotive sector. In 2011, venture capitalist Marc
Andreessen famously declared that “software is eating the world.” His prediction was that
software companies would take over large swaths of the economy — everything from
automotive manufacturing to financial services to healthcare. This is playing out on the
production side, where robotics and digital design are increasingly common. On the product
side, virtually every new consumer good (phones, watches, even refrigerators) is linked to an
internet-connected computer.

For the United States the trend is welcomed. The United States remains the dominant
player in the global software industry, a significant competitive advantage as the landscape of
manufacturing changes. Helmuth Ludwig and Eric Spiegel of Siemens identified several
advantages: lower costs of production due to increased efficiency; thanks to digital prototyping,
products go to market quicker; and finally, greater flexibility and customization offered by digital
design and automated production.