Voice of the Modern Manufacturing Economy Since 2013

Do you know where your IP is? Guarding knowledge critical to overseas outsourcing

Article by G. Ravishankar October 5, 2016, 03:08 pm MDT

Intellectual property within a company often isn't where people think it is. Over the years patents have been the touchstone to determine how much intellectual capital a company had. But is that really where it is?

For a few decades the massive shift of manufacturing from countries like the U.S., towards lower-cost manufacturing locations such as China, India, Taiwan, and the Philippines has taken a huge toll on employment in the manufacturing ranks. Amidst a lot of hand-wringing, governments are starting to realize that manufacturing is the lifeblood of most economies. The much touted "service economy" hasn't materialized, at least not at a scale to compensate for the job losses occurring in the manufacturing sector. Moreover, the labor cost advantage that once existed is rapidly disappearing as productivity rises.

The notion that we are going to transform into a nation of knowledge workers also only goes so far. Most knowledge is easily transferable or accessible around the globe. Calculus is the same around the world, as are the laws of physics and chemistry. In fact, the data would suggest that students around the world are better at those fundamentals that their U.S. counterparts.

So what is the differentiating factor? It is in the expertise gained in the application of that "book knowledge," where the rubber meets the road. Until recently, U.S. and European workers had a distinct advantage applying that knowledge.

Every employee within an organization learns skills, regardless of whether it is technical or not. It transfers with them when they move on. This learned knowledge is often where the intellectual capital lies. It might also lie in the process and manufacturing technologies that goes into making of the products, which again is learned by the employees who work in those facilities and on those processes.
This knowledge is rarely protected under patents. In nascent technologies and fields like renewable energy, nanotechnology and biosciences a significant portion of the intellectual property often lies in scaling the technology in a manufacturing environment with a relatively low-skill worker with a high-school diploma, not a Ph.D. Very often it is not patentable and has to be kept as trade secrets. It's the "secret" in Grandma's secret sauce.

If "employees are the greatest asset," as a lot of organizations like to state on their corporate values statement, what are they doing to protect it? Where do the loyalties of the employees lie? In the nation where they live, or with a corporate entity with headquarters 20,000 miles away?

The governments in China and India are clamoring for manufacturing facilities to be set up in their country, and leaders have insisted that their countries be part of trade agreements, because they recognize that is how they can transform their "book-smart" populations into "business-smart" workers who can compete in the world market. As companies continue to invest in manufacturing facilities around the world they are effectively training those workers in the very processes, tools, and techniques that might enable them to compete against them in the future. This is the risk that companies assume as they look outside to establish a manufacturing presence to gain entry into markets.

Intel Corporation would not be the juggernaut of the microprocessor industry were it not for its commitment to not only designing chips, but making them as well. Making them gives them insight into how to design them. To this day, Intel has maintained its core manufacturing in the U.S., giving it an insurmountable lead in technology that even massive foundries as Taiwan Semiconductor cannot match.

It goes beyond just losing to competitors. It is critical to maintaining integrity of the supply chain. Another Fortune 100 company moved its zinc castings facility used to make their valves to a contractor with facilities in Mexico. All was well for the first couple of years as they also continued to maintain a small facility in the U.S. Eventually the process migrated to aluminum castings, and they opted to shut down the U.S. facility rather investing in local manufacturing. However, aluminum is less forgiving in the casting process than zinc. Not that long ago, the company's entire production line was shut down because of casting issues at the Mexican plant, a mad scramble ensued to try and understand the problem.

One of the recommendations of the internal task force that solved the problem was that it might be wise to have at least a secondary facility in the U.S. Easier said than done. Where do you go for the staff for such a facility? There are few, if any, colleges that teach metallurgy as a formal discipline. All the engineers and technicians who worked at the old facility were laid off and have since moved on. The deep knowledge that existed within the company about the process and its particular nuances as it applied to their products is long gone. The contractor does not have the same vested interest in technology improvement since it is a small fraction of their business. Moreover, what they learn about aluminum casting is also being used to supply castings to the company's competitors!

As a technical advisor on the U.S. solar trade mission to India, I noted that the attendees from India significantly outnumbered the U.S. participants. Most of the Indian company participants were interested in technology transfer, even if it was older technologies. The primary reason for this is technologies in emerging fields serve as tremendous learning platforms. The transferring source often isn't as wary about sharing details about older technologies.

However, companies often fail to realize is that the latest and greatest often evolved from those older technologies. Companies in China and India have the ability to throw a significantly larger number of very technically savvy resources to understand the engineering, physics, chemistry, or mathematics that drive the technology. Combining this with funding and financial subsidies by the governments to "target industries" can often allow these companies to leapfrog ahead.

This fact was illustrated in a July 2010 article published in the Financial Times that describes the debacle faced by Kawasaki Heavy Industries of Japan as they teamed up with China's CSR Qingdao Sifang to ostensibly supply China with high-speed bullet trains. Sifang essentially digested all the information provided to manufacture the trains and redesigned them under their own brand. A Japanese executive familiar with the 2004 deal said the KHI team recognized that this might "give China a start into the industry, but they could not imagine the catch-up would be so fast."

Does this mean companies should avoid doing business in India and China? Certainly not. However, it does require companies understand what knowledge they are transferring and what risks are associated with doing so.

Lastly, it is crucial to continue to maintain an internal competency in those critical processes. This is particularly critical for small and mid-sized companies where creating a low-cost competitor could be fatal to their business.

Mr. Ravishankar is a business advisor and consultant on lean operations, innovation and product development. He can be reached at g.ravishankar@alum.mit.edu.

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