And the manufacturing transformation elsewhere

Just a note to reinforce the importance of transforming manufacturing (see earlier posting), there is this story as well in the New York Times – China Shifts Away From Low-Cost Factories:

Companies here in China’s industrial heartland are toiling to reinvent their businesses, fearing that the low-cost manufacturing that helped propel the nation’s economic ascent is fast becoming obsolete.

These companies are moving into everything from manufacturing related services (e.g. inventory management) to higher-value added product development.
Bottom line: manufacturing is being transformed from low-cost mass production to a higher-valued process. America needs to keep up with that transformation. And we need government policies to help companies and workers make that transformation.

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The coming manufacturing revolution

I have long argued that manufacturing has become a knowledge intensive activity. Part of that transformation is a techniques of 3-D printing. Up until now, much of the technology was used for rapid-prototyping. A company could “print” a three dimensional version of a part or a product — which would speed up the design and development process.
But now, the techniques has moved beyond use in the product development stage to actual production. According to a story in the New York Times, 3-D Printing Is Spurring a Manufacturing Revolution, some companies are using the technique to create finished products. These include exotic furniture, iPhone cases and prosthetic limbs.
As the story notes, however:

Moving the technology beyond manufacturing does pose challenges. Customized products, for example, may be more expensive than mass-produced ones, and take longer to make. And the concept may seem out of place in a world trained to appreciate the merits of mass consumption.

On the other hand, the story notes that “printed” prosthetic limbs can be made for about a tenth of the cost of a customized handmade version. As Scott Summit of Bespoke Innovations noted:

“We want the people to have input and pick out their options,” he added. “It’s about going from the Model T to something like a Mini that has 10 million permutations.”

That is the future of the I-Cubed Economy.

Further update on 3PAR bidding war

Over at M•CAM’s blog Patently Obvious, they have done an analysis of the 3PAR deal from the point of view of the patents – and the finding is enlightening:

In the frenzy of attempting to place the winning bid, neither HP nor Dell fully considered the potential liabilities associated with owning 3PAR’s intellectual property. For $2 billion, HP may have purchased the right to settle over $3 billion of new patent lawsuits.

As the full report goes on to state:

By bringing 3PAR’s intellectual property into HP, the litigation risk to HP has gone through the roof – an observation that is not currently priced into the market.

Once again, it will be interesting to see how they handle the this in the financial statements. I’ve commented before on the question of how they will value the acquired intangible assets. Will they also discuss the litigation risks in the MD&A section?

That iTune business model

Just a short follow up to my earlier posting on business models. I (and others) have often argued that one of the key success of the iPod was its business model — in that it made it easy and legal to download music. Here is confirmation from Nick Bilton piece in New York Times A Technology World That Revolves Around Me:

While I was a student in college, my friends and I stole music all the time. Sure, you could buy some songs online, but the choices were extremely limited, and it’s an understatement to say that the process of actually buying the music was painful. Getting it onto a digital device required a computer engineering degree and a lot of patience.
My music heist came to a screeching halt in 2003 when Apple opened the iTunes music store. With the single click of a button, I could download, transfer, and listen to an entire album or a single song. The entire transaction took seconds. And since the only way to do this with one click was to buy the music, I happily paid.

– – –
BTW – the point of the article:

When people want to know how the media business will deal with the Internet, the best way to begin to understand the sweeping changes is to recognize that the consumer of entertainment and information is now in the center. That center changes everything. It changes your concept of space, time and location. It changes your sense of community. It changes the way you view the information, news and data coming directly to you.
Now you are the starting point. Now the digital world follows you, not the other way around.

The piece is adapted from Bilton’s (one of the NYTimes tech writers) new book: I Live in the Future & Here’s How It Works. Not sure I completely buy this — and not sure I haven’t heard this line of “how everything has changed” before. But, still, interesting.

Importance of new business models

The Economist’s latest Technology Quarterly has it normal set of hot new techie ideas (literally since the lead story is on geothermal energy). It also has this interesting piece — Energy in the developing world: Power to the people. The gist of the piece is that we already have the technology, we now need the innovation:

Providing energy in a bottom-up way instead has a lot to recommend it. There is no need to wait for politicians or utilities to act. The technology in question, from solar panels to low-energy light-emitting diodes (LEDs), is rapidly falling in price. Local, bottom-up systems may be more sustainable and produce fewer carbon emissions than centralised schemes. In the rich world, in fact, the trend is towards a more flexible system of distributed, sustainable power sources. The developing world has an opportunity to leapfrog the centralised model, just as it leapfrogged fixed-line telecoms and went straight to mobile phones.
But just as the spread of mobile phones was helped along by new business models, such as pre-paid airtime cards and village “telephone ladies”, new approaches are now needed. “We need to reinvent how energy is delivered,” says Simon Desjardins, who manages a programme at the Shell Foundation that invests in for-profit ways to deliver energy to the poor. “Companies need to come up with innovative business models and technology.”

For those who don’t remember, the village telephone ladies were women who formed companies or coops to buy a cell phone and then rent it out by the call to other villagers. It was (is) a critical step in the adoption of the technology – as the cost was generally out of reach of any one single villager. The telephone ladies is one of the shining examples of the success of micro-financing. Thus, there were two business model innovation powering the spread of mobile phones in these villages: the service delivery model and the financing model.
I whole heartedly agree with the Economist that new business models are a key to the energy issue. Later in the piece they provide a number of examples, such as these two:

One idea is to use locally available biomass as a feedstock to generate power for a village-level “micro-grid”. Husk Power Systems, an Indian firm, uses second-world-war-era diesel generators fitted with biomass gasifiers that can use rice husks, which are otherwise left to rot, as a feedstock. Wires are strung on cheap, easy-to-repair bamboo poles to provide power to around 600 families for each generator. Co-founded three years ago by a local electrical engineer, Gyanesh Pandey, Husk has established five mini-grids in Bihar, India’s poorest state, where rice is a staple crop. It hopes to extend its coverage to 50 mini-grids during 2010. Consumers pay door-to-door collectors upfront for power, and Husk collects a 30% government subsidy for construction costs. Its pilot plants were profitable within six months, so its model is sustainable. [emphasis added]
Emergence BioEnergy takes this approach a step farther. Its aim is to provide many entrepreneurial opportunities around energy production, says Iqbal Quadir, the firm’s founder, who is also director of the Legatum Centre for Development & Entrepreneurship at the Massachusetts Institute of Technology (MIT). A cattle farmer in a small village in Bangladesh might, for example, operate a one-kilowatt generator in his hut, powered by methane from cow manure stored in his basement. He can then sell surplus electricity to his neighbours and use the waste heat from the generator to run a refrigerator to chill milk. This preserves milk that otherwise might be spoilt, offers new sources of income to the farmer (selling power and other services, such as charging mobile phones or running an internet kiosk) and provides power to others in his village.

But I would go even further. The issue is not simply one of new business models to spread adoption of existing technology. Nor is it just in developing nations. Changes in business models are needed in “developed” nations and go well beyond technology diffusion. Zipcar is still one of my favorite examples. Bikesharing is another.
So where are the policies to help foster and development new business models? One would be an expansion business incubator and start-up assistance services. The EDA reauthorization bill includes some of these programs (see earlier posting). We will see if Congress acts on this legislation — and, more importantly, appropriates the money to actually fund the programs.
But incubators are just one example of the types of new policies we need. Putting together an innovation strategy that understands the role of organizational innovation and new business models would be the first step.

The long struggle to revive manufacturing

Daniel Gros on reviving manufacturing in the US — The Skills Deficit:

The key point is not that manufacturing jobs are somehow better, but rather that we must consider the asymmetry in the structural-adjustment process. It is relatively easy to manage a structural shift out of manufacturing during a real-estate boom, but it is much more difficult to re-establish a competitive manufacturing sector once it has been lost.
Post-bubble economies thus face a fundamental mismatch between the skills available in the existing work force and the requirements of a modern export-oriented manufacturing sector. Unfortunately, there is very little that economic policy can do to create a strong exporting sector in the short run, except alleviate the social pain. Labor-market flexibility is always touted as a panacea, but even the highest degree of it cannot transform unemployed realtors or construction workers into skilled manufacturing specialists. Experience has also shown that retraining programs have only limited success.
Ironically, Germany might provide the most useful template for the problems facing US policymakers. Germany experienced a consumption and construction boom after unification, with full employment and a current-account deficit. After the boom peaked in 1995, one million construction workers were laid off and could not find jobs elsewhere. The German economy faced a decade of high unemployment and slow growth.
Exports initially did not constitute a path to recovery because the deutsche mark was overvalued, and some manufacturing capacity had been lost during the unification boom. “International competitiveness” became the mantra of German economic policymaking. But it still took more than ten years for Germany to become the export powerhouse of today. [emphasis added]

And this is exactly why we need a new competitiveness strategy that embraces manufacturing as part of the intangible economy!
Here is Steven Pearlstein’s take on the same topic:

At this point, there is only one clear path out of the unemployment box we have created for ourselves.
Right now, the United States is running a trade deficit that is likely to reach $450 billion this year. That’s down considerably from the $750 billion at the height of the economic bubble, but still more than a wealthy advanced economy should have. Bringing it down – either by producing more of what we consume (fewer imports) or more of what other countries consume (more exports) – represents the path toward sustainable, long-term job creation.
The problem with that strategy is that for the past two decades we have allowed our industrial and technological base to deteriorate as talent and capital were grossly misallocated toward other sectors of the economy, even as other countries were able to attract the investment, the technology and the know-how to serve the U.S. and global markets.
For a time, none of this seemed to matter because we were consuming so much that we were able to support job creation at home as well as overseas. But now that the debt-fueled consumption binge is over, we find that we don’t have the companies, the workers or the competitive products to replace the stuff we now import or expand our share of export markets. Even when we do, our companies are disadvantaged by an overvalued currency or unfair trading practices.
As Daniel Gros, director of the Centre for European Policy Studies, wrote this month for Project Syndicate, a wonderful new economics Web site: “It is relatively easy to manage a structural shift out of manufacturing during a real-estate boom, but it is much more difficult to re-establish a competitive manufacturing sector once it has been lost.”
A structural shift toward exports and import substitution,” Gros warns, “will be difficult and time consuming.” He might have added that it will also be expensive, requiring sustained investment by government and industry, and internationally disruptive, requiring a much tougher line with trading partners that consistently tilt the playing field in their favor.
In this election season, the politicians who are really serious about creating jobs and bringing down unemployment won’t be the ones screaming about tax cuts, or stimulus or some imagined government takeover of the economy. They’ll be the ones talking about how to make the American economy competitive again.

I hope Pearlstein is right. But unfortunately, I don’t hear a lot of voices talking about what it will really take to make the US economy competitive.

Other economic news

Besides the trade data (see previous posting), there was other economic news coming out today.
This morning, the OECD released its latest economic assessment. They project 2.0% GDP growth in 3Q 2010 and then only 1.2% in 4Q. OECD Chief Economist Pier Carlo Padoan explains:


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The Fed’s beige book of economic conditions was released yesterday and painted a mixed picture:

Consumer spending appeared to increase on balance despite continued consumer caution that limited nonessential purchases, while activity in the travel and tourism sector picked up relative to seasonal norms. Activity was largely stable or up slightly for professional and other nonfinancial services. Reports on manufacturing activity pointed to further expansion, although the pace of growth eased according to several Districts. Agricultural producers and extractors of natural resources reported continued gains in demand and sales. Home sales slowed further following an initial drop after the expiration of the homebuyer tax credit at the end of June, prompting a slowdown in construction activity as well. Demand for commercial real estate remained quite weak but showed signs of stabilization in some areas. Reports from financial institutions pointed to generally stable or slightly lower loan demand and noted some modest improvements in credit quality.

As the Wall Street Journal notes:

The economic recovery is advancing unevenly across the U.S., as regions reliant on such industries as manufacturing and farming show progress while those more dependent on housing continue to struggle.
. . .
The decline in housing has pushed some states back into recession after a brief upturn, said Mark Zandi, chief economist for research and consulting firm Moody’s Analytics, based on an index that takes into account income, employment, retail sales and industrial production.
. . .
Areas that rely more on manufacturing, meanwhile, have benefited from increasing demand, including a surge of export orders for farm and construction equipment churned out by Midwest factories. “We’re having a little bounce from a deep bottom,” said William Testa, an economist with the Chicago Fed, referring to the upturn in manufacturing in his district. “Longer term, it just depends on the strength of the U.S. and the world economies.”

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The long term strength of the US (and other) economy was the subject o another report out yesterday. The World Economic Forum new Global Competitiveness Report 2010-2011 (see also stories in the Washington Post and the Wall Street Journal). That report shows the US dropping from second to fourth place due to a number of factors:

In addition to the macroeconomic imbalances that have been building up over time, there has been a weakening of the United States’ public and private institutions, as well as lingering concerns about the state of its financial markets.

It is interesting to note that these factors of institutions and the state of the financial markets are based on business leaders perceptions and opinions. The drop in the rating may reflect more the political climate in the US rather than the economic climate. Having said that, however, I would note that the inability of the governmental and political system to address economic issues is a major drag on a nation’s competitiveness. If we end up in a situation of political stalemate, our competitiveness will be affected.