Last week, President Obama announced the first steps toward creating a National Network for Manufacturing Innovation with a pilot institute funded jointly by the Defense, Energy, Commerce and NSF. The new pilot institute will established on through a competitive process to demonstrate the feasibility of the new network. According to the budget submission from earlier this year, the National Network for Manufacturing Innovation envisions a set of up to 15 institutions funded at up to $1 billion.
I believe this new networks offers an opportunity to move manufacturing into the knowledge era. The Administration’s announcement was couched in terms of new technologies, such as lightweight materials, additive manufacturing and smart manufacturing using “big data.” As important as these are, I would suggest that the program can go well beyond technology. For example, one of the Institutes could be devoted to the embedding of design thinking in the product development and production process — similar to the work done at the Stanford d-school. Another could focus on the fusion of manufacturing and services from both an operational and a business strategy point of view.
The nature of production has changed and our manufacturing policy should as well. The game is no longer “manufacturing” in old sense of the word, but “production” in the broadest sense. And all forms of production are becoming more knowledge intensive. The National Network for Manufacturing Innovation can be a great step forward in fostering a knowledge-intensive U.S. production base. But only by embracing the larger economic shift and thinking boldly about what it means to produce things in America.
To counter this morning’s good news on February employment comes bad news from the BEA about January’s trade deficit. The trade deficit continued to grow, increasing by $2.2 billion to $52.6 billion in January. Exports were up by $2.6 billion but imports increased by $4.7 billion. Much of the deterioration was due this time to a rising deficit in petroleum goods. The increased in the deficit in non-petroleum goods was only $123 million. On top of the bad January news, the deficit for December was revised upward to from $48.8 billion to $50.4 billion. The January deficit was much higher than the $48.4 billion forecast by economists surveyed by the DowJones Newswire.
In mixed news, our trade surplus in intangibles continued to grow in January, if ever so slightly with an increase of $68 million to $13.726 billion. As was the case in December, the overall increase was due to a growth in the balance of trade in royalties — where exports (incoming payments) grew faster than imports (outgoing payments). The surplus in business services decreased slightly as imports grew faster than exports. This is third straight month that surplus in business services declined.
On a positive note, following December’s trend, our deficit in Advanced Technology Products dropped by roughly $1.2 billion in January. As was the case in December, much of the improvement was due to a drop in information and communications technology imports — more than offsetting a decline in the trade surplus in aerospace. The last monthly surplus in Advanced Technology Products was in June 2002 and the last sustained series of monthly surpluses were in the first half of 2001.
The January data also included the annual revisions for 2011, mostly in the second half of the year. The new data shows lower royalty payments received (exports) and payout (imports) and for private services exports and imports. For royalty payments, the revisions generally balance out. But, in the case of private services imports, the revised data is significantly lower. As a result, the trade surplus in private services is revised upward by $1.5 billion and the overall intangibles trade surplus for 2011 revised upward by $1.6 billion.
Note: we define trade in intangibles as the sum of “royalties and license fees” and “other private services”. The BEA/Census Bureau definitions of those categories are as follows:
Royalties and License Fees – Transactions with foreign residents involving intangible assets and proprietary rights, such as the use of patents, techniques, processes, formulas, designs, know-how, trademarks, copyrights, franchises, and manufacturing rights. The term “royalties” generally refers to payments for the utilization of copyrights or trademarks, and the term “license fees” generally refers to payments for the use of patents or industrial processes.
Other Private Services – Transactions with affiliated foreigners, for which no identification by type is available, and of transactions with unaffiliated foreigners. (The term “affiliated” refers to a direct investment relationship, which exists when a U.S. person has ownership or control, directly or indirectly, of 10 percent or more of a foreign business enterprise’s voting securities or the equivalent, or when a foreign person has a similar interest in a U.S. enterprise.) Transactions with unaffiliated foreigners consist of education services; financial services (includes commissions and other transactions fees associated with the purchase and sale of securities and noninterest income of banks, and excludes investment income); insurance services; telecommunications services (includes transmission services and value-added services); and business, professional, and technical services. Included in the last group are advertising services; computer and data processing services; database and other information services; research, development, and testing services; management, consulting, and public relations services; legal services; construction, engineering, architectural, and mining services; industrial engineering services; installation, maintenance, and repair of equipment; and other services, including medical services and film and tape rentals.
Mostly continued good news in this morning’s employment data from the BLS. Employment rose by 227,000 with jobs being created in professional and businesses services, health care and social assistance, leisure and hospitality, manufacturing, and mining. This was slightly better than the 213,000 forecast by the DowJones Newswire’s survey of economists. The unemployment rate remained at 8.3%
As Erza Klein in the Washington Post and Annie Lowrey in the New York Times have noted, a key indicator of the recovery is growth in the civilian labor force, which would indicated that people are looking for jobs. The civilian labor force increased in Feb.
One possible spot of concern is the slight increase in slack work (individuals working part time because of slack work or unfavorable business conditions). This may be a reflection of slowing demand. However, the number of workers who could only find part time work declined. Thus, the total number of involuntary underemployed declined very slightly. It is still nowhere near the levels of before the Great Recession.
According to a story in the Atlantic Wire, a major shareholder is going after AOL for not being more aggressive in monetizing its patent portfolio. Starboard Value LP has sent a letter to the AOL Board late December and then again in late February criticizing the Board’s actions. Starboard’s February letter highlight the patent monetization issue:
As one specific example, in addition to the valuable assets highlighted in our December Letter, AOL owns a robust portfolio of extremely valuable and foundational intellectual property that has gone unrecognized and underutilized. This portfolio of more than 800 patents broadly covers internet technologies with focus in areas such as secure data transit and e-commerce, travel navigation and turn-by-turn directions, search-related online advertising, real-time shopping, and shopping wish list, among many others.
Since our initial public involvement in AOL, we have been approached by multiple parties specializing in intellectual property valuation and monetization, some of whom believe that (i) a significant number of large internet-related technology companies may be infringing on these patents, and (ii) AOL’s patent portfolio could produce in excess of $1 billion of licensing income if appropriately harvested and monetized. Unfortunately, several of these parties have expressed severe frustration that AOL has been entirely unresponsive to their proposals regarding ways to take advantage of this underutilized asset. The Company’s inaction is alarming given our understanding that many of the key patents have looming expiration dates over the next several years which could render them worthless if not immediately utilized.
AOL’s response – we’re working on it:
We have a valuable patent portfolio and several months ago, prior to Starboard’s first letter, the AOL Board of Directors authorized the start of a process, and hired advisors, to realize the value of these non-‐strategic assets.
I don’t know if this will result in a possible AOL auction or other sale of their patent portfolio. But since Starboard Value has also nominated its own slate of Directors for the AOL Board, this could result in a major proxy fight. Regardless of the outcome of that fight, the mere fact of its occurrence would send a shot across a lot of corporate bows. How you handle your IP assets has become a Board of Directors issue. Will the broader question of managing intangible assets follow?
Here is a posting in the Wall Street Journal Real Time Economics blog – Vital Signs: Slowing Services Hiring. According to the posting, “U.S. services businesses slowed their pace of hiring in February from January. The Institute for Supply Management’s seasonally adjusted Services Employment Index was 55.7 in February, down 1.7 points from the previous month.”
What does that tell us? That the economy is slowing? Maybe, maybe not. The release from Institute for Supply Management said “Economic activity in the non-manufacturing sector grew in February for the 26th consecutive month.” And with respect to employment, “The industries reporting an increase in employment in February — listed in order — are: Mining; Other Services; Wholesale Trade; Educational Services; Professional, Scientific & Technical Services; Utilities; Transportation & Warehousing; Information; and Finance & Insurance. The industries reporting a reduction in employment in February — listed in order — are: Retail Trade; Public Administration; Health Care & Social Assistance; Accommodation & Food Services; Arts, Entertainment & Recreation; and Construction.”
Let’s parse this a little. First, this is a survey of non-manufacturing, NOT “services”. It includes mining, utilities and construction. Second, there are “services” and there are “services.” What is happening in “Retail Trade” sends a very different message about the economy compared to what is happening in “Professional, Scientific & Technical Services”, “Management of Companies & Support Services” and/or “Information.” The fact that hiring in “Accommodation & Food Services”, and “Arts, Entertainment & Recreation” is declining tells us something different from the fact that hiring in “Finance & Insurance” is increasing — and even different from the fact that “Public Administration” and “Health Care & Social Assistance” are also declining.
My point is simple: our continued framework of “services” as a aggregate measure is increasingly meaningless. Just as our dividing the economy into “manufacturing” & “services” is outmoded. We need better statistics. And to get to better statistics, we need better concepts of what constitutes our economic structure.
Now there is a research project!
Last month, the Hong Kong stock exchange issued new guidance to listed companies on disclosure of information on the companies’ intellectual property rights (IPR). The purpose of the guidance is to promote “more meaningful disclosure on such rights to the investors.” The exchange’s regulations already require listed companies to include information on IPR “which are material in relation to the group’s business and, where such factors are of fundamental importance to the group’s business or profitability, a statement regarding the extent to which the group is dependent on such factors.” The new guidance requires this disclosure to be part of the description of the business, not just a separate list of IP.
In the US, such disclosures are government mainly by the SEC regulations. Some years ago, the SEC expanded its guidance on what should be included in the Management’s Discussion and Analysis (MD&A) statement required as part of annual corporate filings. Specifically, SEC called for greater disclosure of non-financial information that are “material” to investors.
However, as the new Hong Kong guidance notes:
3.3 Disclosure of IP Rights by issuers in other jurisdictions is far less extensive than in Hong Kong listing documents:
(i) In the US, issuers are required to take into account both quantitative and qualitative factors such as the significance of the matter to the issuers, the pervasiveness of the matter and the impact of the matter in determining what information is material and should be disclosed. As a result, disclosure of IP Rights are far less extensive than in HK prospectuses (if any), and, if they appear, would form part of the narrative disclosure of all material information relating to the issuer’s business.
The question here seems to be whether U.S. companies consider their IPR to be material enough to warrant disclosure. Given this concern, it may be time for the SEC to once again review its MD&A guidance. I would suggest that they go even further than the Hong Kong exchange. IP is one important piece of information for investors. But, as we pointed out in our earlier study, Reporting Intangibles: A Hard Look at Improving Business Information in the US, more needs to be done to disclose intangibles in general.
Hong Kong may be leading the way on IPR disclosure. But the US can take the lead in providing more information on intangibles in general. Increased disclosure on intangibles would have a two-fold positive impact. It would give investors the information they need to make informed decisions. It would also force business executives to pay more attention to how manage their intangibles. Both markets and management benefit — as would the economy as whole.
Thanks to the folks over at the IAM Magazine blog for highlighting this.
As regular readers of this blog will know, I am excited about the possibilities of additive manufacturing (aka 3D printing). Thus, I was interested in a new article in Slate on “3-D printing hype: Will every living room have one?” The article by Will Oremus argues that the popular conception of home production is probably wrong. Additive manufacturing will not completely replace mass production – nor is it necessarily capable of making products out of a range of materials (rubber, wood, etc). But that doesn’t mean that the technique isn’t revolutionary and won’t have profound impacts.
Yesterday, the New America Foundation held an event that talked about some of the issues and opportunities around the “markers movement” or DIY (do it yourself): Tinkering With Tomorrow: Will the DIY Movement Craft the Future?. The comments by Banning Garrett were especially interesting. He pointed out that additive manufacturing changes things on the industrial scale. As I’ve noted before, the power of additive manufacturing is that it allows you to make things you simply couldn’t make before.
Remember, the mass production economy did not begin with the development of idea interchangeable parts. It began with the ability to produce those parts to a tolerance so that they were truly interchangeable. Additive manufacturing will allow us to make things in a whole new way — which will allow us to make whole new things.