China: Going for a Knockout on Manufacturing

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tdp2664 InvestorPlace About a year ago, President Barack Obama toured Solyndra, a top manufacturer of solar photovoltaic (PV) systems. It was a centerpiece of cleantech — and how it would reinvigorate jobs. As a sign of importance of the company, the Department of Energy provided a $535 million loan guarantee. Unfortunately, it has turned out to be a disaster. This month, Solyndra filed for bankruptcy, shut down its manufacturing facility and terminated about 1,100 employees. The problem? Well, it looks like China has been even more aggressive with its alternative energy investments. The result has been a substantial drop in solar cell prices. Besides Solyndra, two other major U.S. solar firms have imploded during the past month, which include Evergreen Solar (PINK: ESLRQ ) and Intel- backed ( NASDAQ : INTC ) SpectraWatt. In a way, China's government is playing a game the U.S. perfected years ago. After all, federal subsidies have been crucial for industries like aerospace, semiconductors and even the Internet. Of course, these are markets we still dominate — at least for now. Already, Congress has launched an investigation of Solyndra and the FBI has raided the offices. No doubt, many Republicans see this as an example of the perils of federal involvement in new industries. Even some high-ranking Democrats are concerned about the situation. So in light of the acrimonious budget battles, the Solyndra debacle is likely to be a political lightning rod to push back hard on federal activism. In fact, venture capitalists also have been getting antsy about cleantech deals (keep in mind that Solyndra received more than $1 billion in private funding). Just look at Kleiner Perkins Caufield & Byers. Once a leader in cleantech, the firm seems to be more interested in social networking companies like Twitter and Zynga. Keep in mind that the headwinds will not only come from the U.S. Europe also is cutting back on cleantech. With the sovereign debt crisis and slowing growth, it is hard to justify these types of long-term investments. OK, it's true that the U.S. still has cutting-edge businesses. Facebook and Google ( NASDAQ : GOOG ) certainly are shining examples of innovation. Yet if there is to be real growth for the whole economy, manufacturing is necessary. Actually, this is the contention of Andrew Liveris, CEO of Dow Chemical (NYSE: DOW ). He recently wrote a book about this called Make It In America: The Case for Re-Inventing the Economy . In it, he says that services jobs are simply not enough. Instead, the U.S. needs to focus on advanced engineering, which will help propel growth in categories like materials, construction and energy. Consider that one manufacturing job leads to five new jobs , according to a recent piece in The New York Times . But somehow, Americans basically have an out-dated impression of manufacturing. It's often associated with smokestacks and dirty factories. Who really wants this stuff? But if you visit a state-of-the-art manufacturing facility, you will see a very clean operation, skilled workers and sophisticated equipment and robotics. Often, there will be research facilities nearby, where engineers are busy innovating. But for the most part, you'll see most of this in places like China. Then again, the country has spent two decades pursuing an aggressive policy to promote manufacturing. This has been through tax incentives, cheap land, training assistance, education support and subsidies. So is it any wonder that U.S. multinationals, such as Dow and General Electric (NYSE: GE ), have moved operations offshore? Consider this: Based on data from Bureau of Economic Analysis, China's manufacturing as a portion of gross domestic product is more than 25%. As for the U.S., its share is a meager 11.7%, which compares to 28% back in the 1950s. What can be done? According to Liveris, the U.S. government needs a comprehensive policy. This means getting serious about education, tax policy, R&D credits and loan guarantees. He believes it's the only true way to get things back on track. It's a smart approach, but there are some big hurdles. First of all, Liveris' strategy will take at least a decade to get traction. What's more, U.S. multinationals probably will not bring back manufacturing operations from other countries. Why? They realize the importance of having manufacturing in Asia and its growing consumer markets. So all in all, the calls from Liveris and other American CEOs are not likely to get much attention. Rather, policymakers want to find any way to cut back on spending to reduce the deficit. And in the end, it likely will mean the U.S. will see further long-term deterioration in manufacturing — putting even more pressure on job creation. Tom Taulli is the author of "All About Short Selling" and "All About Commodities." You can also find him at Twitter account @ttaulli . He does not own a position in any of the stocks named here.