The hollowing out of the U.S. industrial base has severely impaired its ability to scale innovations from laboratory breakthroughs to mass production, especially in hardware-intensive sectors like advanced batteries, semiconductors, power electronics, and clean energy. The key failure lies not in invention, but in industrial translation—the critical mid-stage that connects research to scalable, market-ready manufacturing.
Erosion of Tacit Knowledge and “Know-How”
Tacit knowledge refers to the uncodified, experience-based expertise that resides within skilled workers, engineers, and supply chain partners. It is the hands-on, intuitive understanding—what the World Economic Forum has called “fingerspitzengefühl”, or “fingertip feel”—that enables practitioners to sense how materials behave under certain conditions, how machines must be finely calibrated, and how subtle process adjustments can enhance yield or performance. This form of knowledge cannot be easily documented or transferred through manuals; it is accumulated through years of practice, observation, and problem-solving on the production floor.
As manufacturing has increasingly moved offshore, much of this tacit knowledge has been lost in the United States. The hollowing out of domestic production has meant that generations of engineers and technicians who once possessed the embodied know-how to bridge the gap between laboratory discovery and large-scale manufacturing have disappeared. When new innovations now emerge from American research labs, there is often no longer a domestic ecosystem capable of transforming those ideas into robust, efficient, high-volume production. The result is longer development cycles, higher costs, and a greater likelihood of failure during the commercialization stage.
This loss of tacit knowledge has also eroded the crucial process of “learning by doing,” through which manufacturing continuously generates innovation. Many of the most important advances in materials science, process engineering, and product design originate not from research centers but from the factory floor, where engineers and technicians iteratively refine production methods. Without a strong manufacturing base, the United States forfeits this iterative feedback loop that drives practical innovation. In contrast, China’s electric vehicle and battery industries have scaled rapidly precisely because engineers, technicians, and supply chain partners collaborate in real time to identify and solve production problems. This dynamic interaction between design and manufacturing—between conceptual innovation and physical realization—remains one of China’s greatest industrial advantages and one of the key weaknesses of the contemporary U.S. innovation ecosystem.
Breakdown of the Design-Manufacturing Feedback Loop
In a healthy and integrated industrial ecosystem, designers and engineers work in close collaboration with manufacturing teams. Prototypes are rapidly fabricated and tested on the production line, while feedback on manufacturability, cost, and performance is immediately incorporated into subsequent design iterations. This continuous, hands-on interaction between design and production enables the swift refinement of ideas, allowing innovation to emerge not just from laboratories but through real-world experimentation and optimization. The result is a dynamic cycle of improvement in which creative design and practical manufacturing reinforce each other.
When manufacturing is moved offshore, however, this vital feedback loop is weakened or even broken. Communication between designers and production teams becomes slower, more mediated, and often stripped of the subtle, experience-based nuance that drives effective problem-solving. Designers working in isolation from the factory floor may produce technically impressive concepts that prove difficult, costly, or impossible to manufacture at scale. Equally important, they lose exposure to the process-driven insights that often spark incremental but crucial innovations. The physical and organizational separation between design and production thus not only raises costs and delays development but also undermines the very mechanism through which industrial learning and innovation thrive.
Diminished Process Innovation Capabilities
Over the past several decades, the United States has suffered a marked erosion of its process innovation capabilities—a decline rooted not only in the offshoring of manufacturing but also in a deep structural disconnect between research and production policy. U.S. industrial and innovation policy has long emphasized basic research through agencies such as the National Science Foundation (NSF) and the Defense Advanced Research Projects Agency (DARPA), yet it has consistently failed to bridge the critical gap between laboratory discoveries and industrial-scale production. The absence of a coherent national strategy to fund pilot plants, scale up production equipment, and train specialized workers has left a void between research breakthroughs and their commercial realization.
This disjunction contrasts sharply with the coordinated approaches of countries such as China and South Korea, where ministries like China’s Ministry of Industry and Information Technology (MIIT) and Korea’s Ministry of Trade, Industry and Energy (MOTIE) systematically align R&D priorities with industrial needs, factory construction, and supply chain integration. In these systems, research and production reinforce one another in a continuous feedback loop, accelerating the translation of innovation into manufacturing capability.
In hardware-intensive sectors such as advanced batteries and semiconductors, this coordination is especially decisive. Innovation in these fields depends not only on the design of new products—such as chip architectures or battery chemistries—but also on mastery of the production process itself. Developing new fabrication methods, improving yields, and reducing energy consumption are as critical to competitiveness as the underlying scientific breakthroughs. As the United States shed much of its manufacturing base, it also lost the tacit expertise, institutional knowledge, and infrastructure needed to develop and scale these complex processes. Meanwhile, countries that invested in process innovation have emerged as global leaders in advanced manufacturing, gaining a durable strategic advantage in both technological capability and industrial resilience.
Missing Specialized Suppliers and “Industrial Commons”
The strength of a modern manufacturing sector depends not only on individual companies but also on the dense, interconnected network of specialized suppliers, research institutions, and a skilled labor force—a system often referred to as the “industrial commons.” This ecosystem includes providers of chemicals, precision components, tooling, machinery, and production equipment, as well as research organizations focused on applied manufacturing science. Together, these elements enable rapid iteration, problem-solving, and the practical translation of laboratory innovations into scalable, high-quality production. When this industrial commons is intact, startups and established firms alike can access the materials, expertise, and infrastructure needed to bring advanced technologies from concept to commercialization.
In the United States, however, this ecosystem has eroded over the past several decades. As domestic suppliers of critical components, precision machinery, and specialized production equipment have dwindled, and as mid-skilled manufacturing engineers—technicians, machinists, and line engineers—have become scarce, the capacity for domestic manufacturing has weakened. As a result, even highly innovative U.S. startups often struggle to move beyond the laboratory. For example, a company developing a novel battery chemistry may find it nearly impossible to source anode or cathode materials, custom machine tools, or pilot-scale production expertise domestically, forcing it to turn to foreign supply chains in China, Korea, or elsewhere. This hollowing out of the industrial commons creates a structural barrier to technological leadership, making it difficult for American firms to fully capture the value of their innovations and sustain a competitive manufacturing base.
Lack of Scaling Infrastructure and Capital
The United States faces a significant challenge in translating laboratory-scale innovations into commercially viable hardware products, a difficulty often referred to as the “valley of death.” This gap arises because moving from early-stage research to mass production demands substantial capital investment, specialized equipment, and highly skilled personnel to build and operate production facilities. Unlike software or service ventures, which are less capital-intensive and often attract venture funding more readily, hardware startups encounter formidable obstacles in securing the resources necessary to scale their innovations. As a result, many promising technologies remain confined to the laboratory, unable to progress toward commercialization.
A critical factor underlying this challenge is the erosion of domestic scaling infrastructure and the broader manufacturing ecosystem. Laboratory discoveries frequently require custom tools, pilot production lines, precision engineering, and specialized material inputs that are readily available only within dense, well-integrated industrial hubs. In regions such as China, Korea, Taiwan, or Japan, startups and research labs benefit from tightly interconnected networks of suppliers, manufacturers, and technical expertise, allowing rapid prototyping, iterative development, and efficient scaling. In contrast, the U.S. lacks this level of support. With fewer mid-scale pilot plants, limited experience in high-complexity manufacturing, and a dispersed supply base, American innovators struggle to bridge the transition from prototype to mass production, further reinforcing the valley of death and limiting the commercial impact of domestic hardware research.
Workforce and Skills Deficiencies
The decline of manufacturing in the United States has had profound implications for the country’s workforce and industrial capabilities. As factories closed or shifted operations overseas, vocational training programs dwindled, leading to a shrinking pool of skilled technicians, engineers, and production line workers with hands-on experience in hardware manufacturing. This erosion of expertise has weakened the foundation of knowledge and practical skills that once supported rapid industrial innovation.
Consequently, even if a company were able to establish a new factory, it would encounter significant difficulties in recruiting and training a workforce capable of operating it efficiently. The loss of accumulated experience in complex manufacturing processes not only limits productivity but also hampers the iterative innovation that arises when engineers and operators collaborate closely. In effect, the shortage of skilled labor represents a structural bottleneck, constraining the United States’ ability to rebuild a robust and technologically advanced industrial base.
Capital Markets and Investor Short-Termism
Milton Friedman’s shareholder theory, often called the Friedman doctrine, established a normative framework for business ethics that has deeply influenced corporate behavior. According to Friedman, the primary social responsibility of a business is to increase its profits, with shareholders regarded as the central economic engine to which the firm is accountable. This perspective positioned shareholder value as the ultimate guiding principle, often subordinating other stakeholders such as employees, communities, and society at large.
Jack Welch, CEO of General Electric from 1981 to 2001, epitomized this approach and, in doing so, transformed corporate America. Under Welch’s leadership, GE aggressively pursued strategies that prioritized short-term shareholder returns over long-term value creation. Massive layoffs and the systematic treatment of employees as costs rather than assets became normalized. Mergers and acquisitions were used not merely to strengthen core capabilities but also to enhance financial metrics, sometimes leading to diversification into unrelated businesses. The company’s increasing reliance on financial operations, including stock buybacks and leveraged earnings management through GE Capital, marked a broader shift from industrial production to financialization. Gelles and other observers argue that these practices reshaped American capitalism, contributing to the erosion of communities in the heartland, the suppression of innovation, and rising societal inequality.
These corporate strategies reflected and reinforced a wider structural transformation of the U.S. economy. The relentless pursuit of capital efficiency incentivized offshoring, deindustrialization, and a pivot toward intangible and financial assets such as design, software, and finance, rather than traditional manufacturing. In parallel, U.S. venture capital increasingly favored software-driven enterprises over hardware-intensive industries, drawn by faster returns, lower capital expenditures, and reduced operational complexity. In contrast, countries like China and South Korea filled this gap with patient capital, state-backed industrial policies, and long-term subsidies, supporting sectors that require sustained investment and slower scaling. Collectively, these dynamics highlight how the dominance of shareholder primacy and short-term financial thinking reshaped not only corporate strategy but also the broader industrial landscape.
Concrete Examples (Advanced Batteries, Consumer Drones)
The United States has long excelled in advanced battery research, particularly in university and national laboratory settings, pioneering innovations in lithium-ion and solid-state chemistries. Yet, translating these laboratory breakthroughs into large-scale, cost-competitive production remains a formidable challenge. The U.S. lacks a mature domestic battery manufacturing ecosystem, including supply chains for raw materials and the technical know-how for gigafactory-scale operations. In contrast, China has invested heavily over decades to build a vertically integrated battery industry that spans raw material processing, cell production, and large-scale manufacturing. This comprehensive infrastructure gives Chinese firms a decisive advantage in scaling new battery technologies for electric vehicles. Even promising U.S. startups, such as QuantumScape, struggle to overcome these scaling barriers, highlighting the strategic importance of an end-to-end industrial ecosystem beyond mere R&D capability.
A similar dynamic can be observed in the consumer drone and action camera market, where GoPro’s decline relative to Shenzhen-based firms DJI and Insta360 illustrates the limits of first-mover advantage and hardware-focused innovation. DJI and Insta360 employ a rapid, iterative development model in which hardware and software co-evolve in tight feedback loops. Their deep vertical integration allows fast design iterations, close coordination with component suppliers, and agile scaling, whereas GoPro’s outsourced production and slower iteration cycles hinder responsiveness to user needs. Beyond production, Shenzhen companies leverage “system innovation,” integrating cameras, drones, gimbals, AI-assisted features, and mobile apps into cohesive ecosystems, while GoPro has largely remained focused on incremental hardware improvements. Real-time feedback from a massive and diverse domestic user base further accelerates innovation in Shenzhen, enabling rapid adaptation to emerging trends, whereas GoPro relies on slower, Western-centric feedback loops. The case of GoPro demonstrates that hardware excellence alone is insufficient; the true competitive moat lies in software integration, ecosystem synergy, AI-assisted creation, and rapid global manufacturing capabilities, which together can outweigh brand legacy and single-product performance.
In both advanced batteries and consumer electronics, these examples underscore a broader strategic lesson: innovation cannot thrive in isolation. Laboratory breakthroughs or superior hardware designs must be supported by comprehensive manufacturing ecosystems, iterative development cycles, and system-level integration to achieve market dominance and global scalability. The United States retains technological creativity, but without corresponding infrastructure, supply chain depth, and agile ecosystem execution, it risks losing out to nations that have aligned these capabilities into cohesive, rapidly adaptive industrial strategies.
Conclusion
The U.S. belief that it could maintain its innovation edge while shedding its manufacturing capacity was founded on a flawed premise. By allowing its industrial base to hollow out, the United States severed the vital links between design and production, disrupting the feedback loops that turn laboratory breakthroughs into competitive, mass-produced hardware. This separation has resulted in a loss of critical tacit knowledge, practical capabilities, and the interconnected ecosystems necessary to support complex manufacturing. As a consequence, the country now faces significant challenges in translating cutting-edge research into commercially viable technologies, particularly in hardware-intensive sectors such as advanced batteries and certain semiconductors. The assumption that design and manufacturing could exist in isolation underestimated the importance of the iterative, hands-on process that underpins technological leadership.
In contrast, China has pursued a different path, deliberately integrating design and manufacturing within the same organizational and industrial frameworks. Firms such as Huawei, CATL, and BYD exemplify this approach, combining research, engineering, and large-scale production under one roof. Beyond individual companies, the Chinese government has invested in industrial-scale infrastructure, anticipating future commercial returns while actively cultivating entire ecosystems encompassing specialized tools, raw materials, workforce training, and technical standards. This holistic strategy has enabled China to scale innovations efficiently, maintain close coordination between R&D and production, and secure a competitive advantage in critical 21st-century technologies—an advantage the U.S. has found increasingly difficult to replicate given the fragmentation of its domestic industrial base.