US technological leadership is fragile

In our highly competitive technological world, it can take only one big product error to displace corporate leaders. This just happened to two global technology leaders: Intel in semiconductor chips and Boeing in large commercial aircraft.

Intel no longer leads the world in chip-production technology and Boeing is now behind  Airbus in plane production. Intel lost out to TSMC, a big contract chip-production company  in Taiwan.

It is fashionable to blame corporate grief on “unfair” international competition. But nothing unfair victimized Intel and Boeing. Their setbacks in both cases were caused by poor management decisions on technology, apparently driven by short-term financial considerations. History has shown that this is a recipe for failure in dynamic technology industries.

The Boeing problem related to the 737 MAX project, where a major mechanical redesign   decision was made to avoid a lengthier, more costly redesign by adding an optional flight control software solution to the aircraft for automated instability correction in flight.

In the hands of experienced and appropriately trained pilots, the aircraft was apparently fine. However, the new software was only installed at the option of the carrier customer. To save on cost, some customers avoided doing so, and their pilots did not receive special training.

After two crashes occurred, the plane was declared unsafe, and deliveries were canceled, leaving room for competitors to fill the void. The harm to the company’s reputation was very severe.

The Intel problem occurred in tooling for production of chips with devices in the sub-10-nanometer feature size. The company had developed the device geometry and was the first to produce multi-nanometer device chips. However, when it came time to shrink the devices further, management made a decision to use a complex process to maximize their density on the wafers and increase revenues per wafer.

But the technical risks in this approach were very high, and these were apparently not well understood by senior management, who supported this decision because of the higher revenue potential compared with a lesser-density approach. The result was that production yields were unacceptable and product delivery commitments could not be met. It can take a long time  to retool such factories.

On the other hand, TSMC (Taiwan Semiconductor Manufacturing Company), using a similar technology, chose a more conservative, lower-device-density process and was able to go into production while Intel continued to struggle. The result is that Intel has decided to outsource its highest-performance sub-10-nanometer chips to TSMC.

The Intel and Boeing situations appear similar in that major engineering decisions affecting the future of the businesses were made with financial considerations overriding prudent risk assessment. One can only speculate on how such big engineering decisions were made.

Both in Boeing and Intel the orientation of the senior management had changed over time  from being engineering-driven to being much more financially driven. Clearly, prudent  technological risk assessment was lacking.

Both companies’ chief executive officers have been replaced. Intel now has a CEO with strong technology credentials.

Great technology companies are led by CEOs passionate about technology and products. While aware of the imperatives of strong financial management, their talent is calibrating risks and opportunities with innovation, with long-term technological and market leadership uppermost.

A great example of a highly successful manufacturing company is Corning, which continues to lead the world in sophisticated glass technology. Steve Jobs came to Corning when he needed novel high-strength thin glass for the Apple phones, and Corning became the exclusive supplier. Verizon came to Corning when it needed special optical glass communications fiber for its Fios program.

I visited the company’s research and development center in Corning, New York, where it spends US$1 billion annually. New products and proprietary manufacturing technologies are developed there and transferred to production sites around the world.

Intellectual property is carefully guarded because the company develops everything needed for mass production internally. For example, despite intense competition, Corning has remained a world leader in optical-fiber communications cables, with products spanning every kind of application.

The company’s research and product plans span years, and it has been willing to reduce profitability when investment requirements were deemed to be essential.

As I think of business leaders with a passion for technology that drives major commercial  innovations, I am reminded of RCA, which was managed with the vision of the company’s  long-term CEO David Sarnoff. Sarnoff took a personal interest in research, particularly consumer electronics.

The company had pioneered black-and-white television, and Sarnoff was convinced that color television was the future. This was an enormous technical challenge, but the RCA Laboratories scientists came up with a solution and demonstrated it to Sarnoff in the form of an image screen that was thumb-sized.

He looked at it through a microscope, and it was a full-color image. He stood up and looked up at the lab director and said: “I want it. Just give me a product development plan and it will be funded.”

And so color television was born after many millions of dollars of investment sponsored by Sarnoff, who ignored many skeptics. The return on this investment was huge, because RCA held patents on the fundamental technology and became a leading global manufacturer.

Henry Kressel is a technologist, inventor and long-term Warburg Pincus private equity investor. Among his technological achievements is the pioneering of the modern semiconductor laser device that enables modern communications systems. His most recent book (with Norman Winarsky) is If You Really Want to Change the World: A Guide to Creating and Sustaining Breakthrough Ventures (Harvard Business Review Press, 2015).