In Depth September 10, 2009, 5:00PM EST

Can the Future Be Built in America?

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In the U.S., Bridgelux's sales are on pace to double this year, to $24 million, and the global LED market is expected to reach $12 billion in three years. "The challenge we face now is trying to get a factory in place in time to service this exploding market," says CEO Swoboda. The company wants to start with a small U.S. plant and has been scouring California for old chip facilities it could convert—but the cleanrooms are in such a state of disrepair that even this goal may not be reachable without heavy investment. "We were shocked that we found nothing," Swoboda says. "All of the cleanroom space was torn out and property owners converted these fabs to offices."

The harder task is figuring out where to build the large-scale facilities. To be near Bridgelux's scientists and protect intellectual property, Swoboda wants to stay in the U.S., but investors are balking at the high costs. The company is now applying for an Energy Dept. loan, but it's also getting great offers from Singapore, China, and Malaysia. Examples like this worry Robert Street, a senior research fellow at Palo Alto Research Center (PARC) who specializes in a related field known as flexible electronics. "We could just be a big funnel of R&D to Asia," he says.

One area where the U.S. is backing up R&D with manufacturing aid is rechargeable lithium-ion batteries for cars. With the auto world moving toward electric vehicles, having domestic battery producers is seen as vital to retaining a U.S.-based car industry. In August the Energy Dept. lent $2.4 billion to A123 Systems, EnerDel (HEV), Johnson Controls, and other companies to build factories in the Midwest.

Yet already, General Motors has awarded its contract to supply batteries for the Volt, due on the roads in 2010, to South Korea's LG Chemical, which will assemble battery packs in Detroit from cells made in its home country. U.S. upstarts also will compete with better-funded Asian giants such as Panasonic (PC) and China's BYD Auto, which dominate mass production of lithium-ion batteries for consumer electronics. The biggest markets, moreover, are likely to be in Asia, where carmakers are ahead in developing electric vehicles and governments keep gasoline prices high. "This industry will not be inside the U.S.," predicts VantagePoint's Salzman.

What can Washington do to boost manufacturing competitiveness? It could bridge the disconnect between R&D and commercialization, as it has done in biotech. If the U.S. believes flexible displays, fuel cells, or solid-state lighting warrant billions in R&D, it should follow through with enough aid for product development and manufacturing.

To critics of government intervention, such measures smack of picking winners, but it's not as if that's something new to Washington. Agriculture and oil drilling remain heavily subsidized. The federal government was crucial to launching the aerospace, telecom, and Internet industries. Now it owns General Motors. "We do have an industrial policy," says Craig A. Giffi, vice-chairman of Deloitte Consulting. "What we don't have is a coherent industrial policy. We don't know what industries we want and where we are going."

Even short of an overarching strategy, there is a lot the U.S. can consider. Perhaps it's politically impossible to grant corporations 10-year tax holidays for building a factory, says ITII's Atkinson. But Washington could allow companies investing $100 million, say, in a new high-tech plant to write the entire sum off in the first year, rather than depreciate it over time. To create enough demand for large-scale domestic production of renewable energy equipment, the U.S. could impose European-style feed-in tariffs on all utilities.

And rather than dispense limited funds to a chosen few, Washington could offer low-cost loans for all new U.S. factories that can show they have a market and meet certain criteria. Or it could create an institution similar to the U.S. Export-Import Bank, which lends to companies so they can fill export orders.

The U.S. could even explore strategies used in certain emerging markets. Hau L. Lee, a professor at Stanford Graduate School of Business, thinks America needs large industrial zones devoted to specific industries—similar to zones in Taiwan, Singapore, Malaysia, and much of China. Such areas offer tax breaks, cheap or free land, workforce training, plenty of water and power, and agencies that serve as one-stop shops for all of the necessary permits and regulatory approvals. The idea isn't too far-fetched. The Interior Dept. hopes to set aside thousands of acres of federal land in the West for 13 solar power generation zones, with a special office in Nevada to approve projects quickly. Such zones also could include solar manufacturing plants.

Thinking like a developing nation may be a comedown for the world's greatest economic superpower. But that is the level to which America's manufacturing might has eroded. Unless it changes course, the U.S. not only won't be able to recapture industries it has lost—it may not be able to launch the new industries it invents.

Engardio is an international senior writer for BusinessWeek .