Intangibles and economic development: win, lose and tie

When it comes to thinking about the role of intangible assets in economic development, this morning’s Washington Post contains the full range of outcomes.
First, the win is a small town in Virginia where:

Over the past two years, the languid farming town of Culpeper, 70 miles southwest of Washington, has been transformed into an exceptional place to walk and shop for great groceries. The boards have come off the windows on East Davis Street. In the center of the historic district, built between 1880 and 1920, decay and neglect have been replaced by fine restaurants as well as food shops selling hot tamales, fresh geese and good wine.
Culpeper, rich in Civil War history and with a population of 15,000, has never looked better. The weathered brick buildings decorated with heavy cornices and detailing are filled with newly renovated shops selling imported and local foods alongside surviving bakers and hardware purveyors.

Key to Culpeper’s success goes beyond building on its history and location (as a number of small towns around Washington have done, such as nearby Fredericksburg). Culpeper’s revival is anchored in its local assets: Calhoun’s Ham House – a well-known supplier of country hams, including to the White House. Anchored off of the Ham House and using historic preservation tax credits (and other programs), the city was able to turn the downtown area into a food cluster.
This is no easy feat. My old hometown also has two regionally-known food purveyors. But they have not been able to create a food cluster. Part of the reason is location. Culpeper is located between Washington DC and Charlottesville VA – an easy drive from both and from Richmond VA. My hometown is located 200 miles from any major metropolitan area and not on a major travel route. But part is also image. Culpeper has created more than a food processing cluster (which is what AceNet has done in Appalachian Ohio). They have created a destination that blends the food shops with other local amenities, including interacting with other designations in the area, such as the award winning Inn at Little Washington. A smart use of all your local intangible assets.
– – –
The loss is New Orleans’ exodus of musicians, such as the Neville Brothers, to Austin. But Austin isn’t the only destination:

Storm-tossed New Orleans musicians have resettled in music capitals such as Nashville (where Aaron Neville has established his home), Memphis, New York and Los Angeles. But since the hurricane, musicians also have relocated throughout Louisiana and to Atlanta; Houston; Dallas; Birmingham; Orlando; Santa Fe; Montgomery, Ala.; Portland, Ore.; and even Hoboken, N.J. Some have trickled back into the flooded city. Others are in and out, playing in reopened clubs and hoping they, too, can start their lives anew in New Orleans next year.
Cyril Neville and his wife, singer-writer Gaynielle Neville, just bought a house in southwest Austin and have helped resettle 10 members of the extended Neville family and 26 of Gaynielle’s relatives here. Neville said he has no desire to return to a New Orleans that will never be the same.

That does not bode well for the economic rebuilding of the city.
– – –
The tie is Prince George’s Country (directly east of Washington) where a court overturned a law to ban small used-car lots on Route 1. The law was enacted to force the existing auto dealers to move as part of a plan to turn the area into an Arts District. Route 1 had been a major auto deal cluster since World War II. But, now the proliferation of small used car lots is seen as a determent not an asset. The Arts District is struggling, but making progress. However, it has never been clear to me that forcing the used-car lots to close would help spur the growth of the Arts District. More likely it would result in a number of parcels sitting empty. Creative destruction is fueled by the creative – not the destructive. If the Arts District concept takes off, the used-car lots will eventually vacate. Maybe the ruling will force community leaders to concentrate on other tactics.
Oh, and part of the tie in PG County is the strengthening of their historic preservation laws. Done right, historic preservation can be a strong attracter for economic development. It creates a powerful intangible asset – just think of Culpepper.

Patent litigation

Patents are once again headed to the Supreme Court for review. This time it is eBay’s “Buy it Now” option, which a patent-holding company – MercExchange LLC – claims infringes on their patent. The U.S. Court of Appeals for the Federal Circuit issued an injunction last March and, according to the Wall Street Journal, “EBay says the court’s reasoning could result in the more frequent issue of injunctions in patent disputes by lower courts.”
According to the Washington Post, the issue is just that of the injunction.

EBay was found to have violated MercExchange’s patent and was ordered to pay $25 million in damages. The Supreme Court is not taking up that issue, only whether there should be an injunction to prevent eBay from continuing to use the technology.
EBay’s appeal asks to overturn a U.S. appellate court’s ruling that it should be customary to issue a permanent injunction when a company is found to have violated a patent. In an earlier ruling, a district court decided not to issue an injunction against eBay, despite finding it in violation of a MercExchange patent. EBay argues that judges should have leeway to consider hardship on a company before prohibiting the future use of technology through injunctions.

As is usually the case for Supreme Court review, the issue involves differing interpretations of the law. The New York Times explains:

But Judge Jerome B. Friedman of Federal District Court [where the case began], noting that MercExchange “exists solely to license its patents or sue to enforce its patents, and not to develop or commercialize them,” refused to issue an injunction that would have barred eBay from continuing to use the patented methods in its Web operations.
. . .
The United States Court of Appeals for the Federal Circuit, a specialized court here that hears all appeals in patent cases, overturned the district court’s decision this year and ruled that MercExchange was entitled to the injunction it sought.
The appeals court said that injunctions were the “general rule” in patent infringement cases, and should be withheld only in such “rare instances” as “the need to use an invention to protect public health.”
. . .
The Supreme Court, in its order granting the case, said it would reconsider a precedent from 1908, which suggested that injunctions were always an appropriate remedy for patent infringement.

All of this is going on as patent reform legislation stalls in the Congress. As I understand it, the bill is hung up in a disagreement between the biotech/pharma industry (which wants the law changed one way) and the software industry (which wants it changed another way). There is also a fight over whether or not injunctive relief should be weakened. Given that the role of injunctions is the issue before the Court, maybe the actions of the activist justices of the Supreme Court might spur lawmakers (and lobbyists) to find a compromise.

Retail Federation writes off US manufacturing

The National Retail Federation is writing off US manufactures. This is the gist of a recent press release. In this specific case, they are complaining about a provision in the tax reform proposal that would remove the tax incentive for offshore manufacturing by switching to a destination-based tax system (rather than an origin-based system). According to the Federation’s press release, this would amount to an “import tax” on American consumers. This is because:

Relatively few consumer goods are manufactured at competitive prices or in commercial quantities in the United States, so retailers can’t easily shift to domestic products to avoid the tax.

In other words, American manufacturing can’t compete. And changing the tax code won’t help bring manufacturing back.
This may be a hard statement of fact of today’s situation. But, it is unclear whether it is a viable strategy for the future.
I wonder who the retailer’s representatives think will eventually be buying those products in their stores. Maybe they have succumbed to the post-industrial myth that manufacturing doesn’t matter. They also seem stuck in the industrial mentality that consumer goods must come from cheap mass production factories employing low cost labor. That may be true today for the low end goods – but not necessarily for all consumer goods, especially at the higher value end.
Let me repeat what I have said numerous times before. Manufacturing plays an important role in the I-Cubed Economy. But it is not the same manufacturing in the height of the industrial era. If the Retail Federation represents anyone besides Wal-Mart, they need to understand that the evolution of manufacturing will affect their business. They need to start working with other sectors to help create a balanced economy – and restore some sanity to our international current-account deficit. Otherwise, all those cheap imported goods won’t be cheap (due to the drop in the dollar) or will be left on the shelf with no one able to buy them.

Innovation in hosiery

This from the Wall Street Journal: “Weird Science Stockings

From a laboratory in North Carolina to a research center in Wilmington, Del., teams of scientists are hunkered down trying to solve one of fashion’s greatest mysteries: how to get women to wear pantyhose again.
In their latest bid to revive the sagging hosiery business, makers are turning to science and trotting out nylons and tights that seem more likely to show up at science fairs than on the runways of Paris or Milan. Capezio says its “microcapsules” filled with aloe — scented with a hint of lavender — burst as you move, to combat dry skin and chafing. Calvin Klein is using a high-tech fiber with tiny channels dug into the yarn that the company says drains away sweat from your legs. Meanwhile, No Nonsense is borrowing technology from surgical socks; its new “Smart Support” hose are engineered with a tighter weave at the bottom to keep veins constricted and the blood flowing.

While it sounds cutesy, this is part of a serious program of research to maintain a domestic textile and apparel industry through innovation. Other areas of research included next-generation fire-fighting protection and chemical/biological protection garments, surgical textiles including surgical masks, filtration materials and state-of-the-art manufacturing machinery. For all you hear about textiles and apparel as a “low-tech” industry, they are trying hard to innovate their way to economic competitiveness.
Now, if they could just make men’s socks that would stay up without cutting of the circulation in my legs . . .

GM and product design – and the state of manufacturing

GM is in trouble. Yesterday’s announcement of layoffs, plant closings and cut back merely confirmed that fact. While everyone now understands the seriousness of the situation, the discussion continues as to why. Some are stunned at the layoffs. Just like Delphi, which got in trouble despite the fact that it won innovation awards, GM plants are being closed despite their best efforts. As the head of the local UAW at one of the to-be-closed plants said: “We’re one of the best, most efficient press plants in the country. We won many J.D. Power awards. It don’t make sense.”
He is right, from an industrial age perspective. But the efficiency is no longer the deciding factor.
There are many culprits in this story, all probably playing a part. The over reliance on the SUV, especially at a time of rising gasoline prices is the newest villain of the piece. Already on stage are the perennial problems of the so-called legacy costs: health care and pensions. But, one of the major problems – the 800 pound gorilla sitting in the corner that now one really wants to talk about – is the products themselves. As The Economist reports:

Indeed, after the company’s annual meeting, [GM CEO Rick] Wagoner conceded: “If we had a chance to rerun the last five years, we probably would have done a little more thinking about making sure that each product was distinctive and had a chance to be successful.”

“Distinctive and had a chance to be successful” — what a novel concept.
The late Peter Drucker has been quoted saying that his study of GM (The Concept of the Corporation, “had an immediate impact on American business, on public service institutions, on government agencies–and none on General Motors.”
Apparently, that is still true today. GM appears to have forgotten Drucker’s famous dictum that the purpose of a business is to create customers.
And unless the company as a whole creates customers, the efficiency efforts of the front-line production workers will be for naught.
We need to go beyond the earlier definitions of “high-performance work organizations” to involve the creative skills of the front line workers not only in improving the production process but also in improving the product itself. Our earlier concerns focused on bringing the front-line workforce into the process improvement activities through self-managed work teams, job rotation, quality circles and total quality management. [For more on high-performance work organizations, see Paul Osterman, Securing Prosperity: The American Labor Market: How It Has Changed and What to Do about It.]
In the I-Cubed Economy, with its relentless focus on innovation, the workforce needs to be engaged in all parts of a seamless design and innovation process.
As Richard Florida has said, our next task is ensuring that all workers are creative workers. That includes my old high-school buddies who are finishing up their 30 years on the GM assembly lines — and more importantly, their kids who are facing layoffs.
The industrial age paradigm is rapidly disappearing. We need to prepare for the new.

Peter Drucker

After Peter Drucker died earlier this month, a number of articles explored his legacy and his influence on modern business. Most have concentrated on his writings on corporate management, especially his seminal book, The Concept of the Corporation. Few of these, however, really captured the social thinker – the author of The End of Economic Man and The Future of Industrial Man — his first two books. Most importantly, many of these articles either skipped over or downplayed what is, for me, the most important of Drucker’s ideas – the rise of the knowledge worker. The review by the Economist “Peter Drucker: Trusting the teacher in the grey-flannel suit” got it right:

The two most interesting arguments in “The Concept of the Corporation” actually had little to do with the decentralisation fad. They were to dominate his work.
The first had to do with “empowering” workers. Mr. Drucker believed in treating workers as resources rather than just as costs. He was a harsh critic of the assembly-line system of production that then dominated the manufacturing sector–partly because assembly lines moved at the speed of the slowest and partly because they failed to engage the creativity of individual workers. He was equally scathing of managers who simply regarded companies as a way of generating short-term profits. In the late 1990s he turned into one of America’s leading critics of soaring executive pay, warning that “in the next economic downturn, there will be an outbreak of bitterness and contempt for the super-corporate chieftains who pay themselves millions.”
The second argument had to do with the rise of knowledge workers. Mr. Drucker argued that the world is moving from an “economy of goods” to an economy of “knowledge”–and from a society dominated by an industrial proletariat to one dominated by brain workers. He insisted that this had profound implications for both managers and politicians. Managers had to stop treating workers like cogs in a huge inhuman machine–the idea at the heart of Frederick Taylor’s stopwatch management–and start treating them as brain workers. In turn, politicians had to realise that knowledge, and hence education, was the single most important resource for any advanced society.

Too bad that American business really hasn’t absorbed these two lessons. They think they have – but workers are still treated as liabilities, not assets. And their knowledge is treated as something that can be turned off and on like a machine.
Drucker himself gave a great example of this problem in an interview published on Jan 1, 2000 (which the Wall Street Journal has reposted online :

I just spent 10 days in the hospital. This is our local hospital, and I know the administrator. Nine of those 10 days I was in good shape, but I had to lie flat and motionless because I had an IV in each arm. So all the nurses came and chatted with me. They came to me in the hope that I would get across to the administrator something that irked them. I won’t tell you the details. It involved a change in policy imposed on the hospital by the HMOs that altered their professional status. They were being told what to do instead of being asked what should be done. They are used to that from physicians — but not from administrators.

Drucker went on to discuss how he passed the message on to the hospital administrator, who changed the process.
Slowly – oh, so slowly – we are leaning the wisdom of what Peter Drucker said long ago about the true value of workers’ knowledge. As the hospital story shows, people get it – but they have to have it pointed out to them by astute observers, such as Drucker. It is sad that he won’t be around anymore to remind us and chide us to further progress.

Losing the brand and intangibles wars – in China

No — this is not about Chinese counterfeiting American brands. It is about what brands Chinese consumers want:
New York Times – “Made in U.S., Shunned in China”

Abby Chan, a 23-year-old advertising copywriter, took a break from shopping for Levi’s jeans at a mall here on Wednesday evening and relaxed at a table in a Starbucks restaurant.
Aside from coffee and denim, there were not many American brand products that interested her. She covets Chanel clothing and Louis Vuitton bags, dreams of owning a BMW or Mercedes-Benz someday, and struggles to think of an American brand that appeals to her.
“There are more choices for European brands, more styles, so they are more interesting,” she said.
. . .
China’s economy is galloping along just as a long series of America’s weaknesses are combining to hurt American exports. With many of America’s name brands made in China these days, from clothing to cars, the Chinese are beginning to wonder what a “Made in U.S.A.” label really has to offer.
“The only U.S.-produced items that I can think of that exist in large quantities in China are dollar bills,” said Matthew Crabbe, the managing director of Access Asia Ltd., a market research firm
But the handful of products that Americans make well, and which sell like hotcakes, do not have labels on the sleeves – Boeing’s aircraft and General Electric’s power plant equipment, railway locomotive parts and aircraft engines. Beyond those, American exports to China consistently grow more slowly than imports, and this year, they have slowed even more.
. . .
At the consumer level, tastes in China are also changing to the detriment of American companies. As China becomes increasingly cosmopolitan, an early admiration for all things American is fading. The generation of students who raised a copy of the Statue of Liberty during the Tiananmen Square protests in 1989 has gone on to acquire tastes as international as any in the world.
American car brands like Ford, marketed in the United States with a lot of waving flags, are promoted here as quality vehicles that show their owner’s taste and sophistication.
“Putting explicit American symbols in advertising will be alienating, not because of anti-Americanism but because of Chinese nationalism,” said Tom Doctoroff, the chief executive for greater China at the JWT Advertising Agency.
Shopping at a store selling Coca-Cola merchandise in the same Tee Mall where Ms. Chan shopped, Estella Chong, an English teacher who has never lived outside China, said that attitudes had changed. “Maybe some people thought American brands were better than Chinese brands or had better after-sales service,” she said. “Now they don’t think so.”
. . .
The biggest strength of the United States in many markets has been its innovation. At a conference in Beijing on Tuesday, Gov. Arnold Schwarzenegger of California held up a new solar cell that had been designed in Silicon Valley, though it was actually manufactured in China.
But China’s rampant copying of everything from movies to auto part designs makes it hard for American companies to profit even by licensing their ideas. The Chinese government is determined to move into higher- technology industries, moreover, and is hiring top scientists to be researchers.
China wants new products to be “not just ‘made in China’ but ‘designed in China,’ ” said Gov. Huang Huahua of Guangdong Province at a news conference here on Thursday evening.

Message to all those folks who keep telling us that if we just have more IP enforcement in China we will be fine: you are a decade too late. Yes, we need to do more to protect legitimate IP (as opposes to the bogus patents and the thousand-year copyrights). But we aren’t going to prosper in this new globalized I-Cubed Economy on yesterday’s ideas.
As the economy has evolved, we have exchanged one treadmill for another. The industrial era was a relentless pursuit for lower cost and greater productivity – mostly through economies of scale and the substitution of capital for labor. The I-Cubed economy is about relentless innovation — fueled by information and intangibles. Shorter product lifecycles, faster change, more design intensive are the norms. Time to market is trumping thousand-year IP protection.
The Chinese understand this (see my earlier posting on Chinese design), as do American companies. Missing in action is the US government – which can’t even seem to understand that R&D funding is important, let alone the other areas of intangibles and innovation.