Editor’s Note: In Part 1 of this 3 part series (In Compliance January 2013), author Gregg Kervill explores trends and patterns throughout history that, in his opinion, have led us to the present day landscape of our economy, technology and the future of engineering. Here in Part 2, we look at the importance of rebalancing our economy to move toward innovation and advancement. We begin where we left off.
In comparison with countries like France, which has not balanced1 a single budget since 1981 and whose public debt has risen to 22% of GDP, the US has not done so badly. But being contented by not being at the bottom of the class will not impress the electorate, in much the same way that a poor report card did not impress our parents. Being content and safe at the bottom of the class is not a strategy for improvement, nor does it present a pulpit from which we can lead the world.
GOING FORWARD AND THE NATIONAL DEBT
To resort to family economics again, what do we do when our outgoings exceed our income? We cut back – we look for a better paying job – we get a second job.
So, how does the US get a better paying job? Simply put, it can’t – but it can switch from producing products with low ROI to high tech goods that usually have a higher price tag and much higher margins. This is the path that US companies must take. However before this can happen, the US technical workforce must either grow, or use its existing workforce more efficiently, or rely on overseas workers by increasing the number of Visas. Outsourcing product design is not an option as it would be counterproductive to advancing our own economy, education and expertise.
A very important question to consider here is – can the education sector respond fast enough to meet our needs? The answer is, most probably, no. It will most likely take between 5 and 20 years to retask our education system with new priorities. The good news is that some projects have already begun. One such program, Liberal Education and America’s Promise (LEAP)2 was launched in 2005 by The Association of American Colleges and Universities. LEAP was established to introduce science and engineering students to a more liberal education program, creating a forum for economic creativity.
Point of interest: earning a typical Honors Science Degree in Europe takes only 3 years, significantly less than the cost of a degree program in the U.S. education system.
We know that we have a problem. The last US balanced budget was in 19983, followed by surpluses in 1999, 2000 and in 2001. Since that time, several things have taken place leading us to our current financial situation.
- We have fought two unfunded wars, paying for them using our National “Credit Card”.
- A lack of financial regulation allowed refinancing and borrowing against over-valued houses, paid out billions of dollars in commission to the finance industry and brought our economy to the brink of collapse.
- The use of this credit to fuel equally massive spending on foreign goods
- Massive outsourcing – A 2011 analysis by John Lounsbury, Correlating US Demographics Trade Deficits and Employment4, reviews the downward spiral preceding the financial collapse..This analysis is essential to our understanding that it is we, the public, that are responsible for the massive offshoring of manufacturing jobs between about 1996 and 2006.
- The rate at which we spent our new found credit was so high that it exceeded our national capability to manufacture. It was our massive, uncontrolled spending that forced companies to offshore jobs because it was the only way they could keep pace with our demand.
- The collapse of the financial markets and subsequent bail-out with more borrowed money.
These are some of the major causes of our huge debt – so let’s not do that again. We also know that that solution(s) is(are) outside of politics; because, if it took more than 12 years to get into this mess of debt and it is going to take much longer to get out of it. The solution is unlikely to come from our political leaders because it will take more than 25 years, or seven Presidential elections, during which there must be a consistent financial policy.
So we have discovered that many of the problems (including the financial collapse and offshoring) are the result of our actions. What can we do about it? Or better put, what shall we do about it?
Turn back to our history5 from Part 1 of this article, “Some groups will survive better – the Resourced (those with money, wealth or power) the Resourceful, the Leaders, and the Lucky” It’s best we not rely on the Resourced and the Lucky to control our future. The solution must come from Entrepreneurs and business owners –
the Leaders; and Engineers – the Resourceful. We are the solution and we are the best placed to pull the country out of its present financial mess.
There is perhaps one alternative. But, it has been tried in many civilizations before ours – to take from the defenseless, the old, the poor and the crippled. We can cut the social safety nets and let the devil take the hindmost. Please don’t think this is what I am advocating. It is a viable policy and we must consider all viable options. It has been tried and has worked – for a limited time, but be careful to contrast this with the 4 year timespan needed for political expediency. For what happens when we ourselves become old; lose our job; or become sick? To give Isaac Asimov the last word on this subject – “Any dogma, primarily based on faith and emotionalism, is a dangerous weapon to use on others, since it is almost impossible to guarantee that the weapon will never be turned on the user.” So perhaps we truly must be our own salvation.
The Spread of New Inventions and Products
New products cannot be brought into existence without the appropriate knowledge: and because that knowledge can only be passed between people, the one factor that limits its speed is the rate at which we can communicate.
Up until a few hundred years ago geography and communications were great limiters to the transfer of ideas, and our social and economic development. For example:
- The first reference to gunpowder in China occurs in the mid-9th century, but the first time gunpowder was used in the west was 1262.
- Rice was found in China 3000 BC, it did not reach Africa until between 1500 and 800 BC, Europe in the 15th century and America in the 17th century.
Explorers and traders journeyed into far distant lands; high speed travel had a pace of 50 miles a day – assuming you could keep your horse well fed and well shod. Progress was slow and everyone lived off the land. There was no technology; there were no factories; there were no public schools. Information traveled, not at the speed of light (as today), but at the speed of foot.
Figure 1: This illustration (Wikipedia) shows the gradual spread of technologies necessary to reduce ore and forge metals.
Gradually, farming communities formed and agriculture became more efficient. Some groups and tribes ceased a nomadic existence and gradually the first great thinkers like Thales, Plato, Panini, Pythagoras, Aristotle and Archimedes were freed from the daily drudge of physical labor and began to develop technology and scientific tools. The keystones of engineering were established and spread slowly to northern climes.
The point to note from this is that scientific thinkers were funded either by their local community or by a local benefactor – the parallel is Wikipedia, funded by individuals that value its worth. They were not paid when they had a new idea. They were, generally, insulated from the needs experienced by the common man – free to think without day-to-day clutter, or telephone calls.
Teaching was by internship and apprenticeship. There were no courses, no universities, no examinations and no need for teaching certificates as our forebears established the first education systems. It was not until the late 700s that the first European teacher, Saint Alcuin, formed what was to become a mode; of our schools and universities.
Today, communications are now so fast that ideas are limited only by our ability to output, uptake and process data. What does this mean? Distance is no longer something that shapes or influences new ideas, concepts and products.
A New Scope for Innovation?
Study, research and teaching were considered an ‘overhead’ and part of a society’s fixed-cost. In much the way that a town considers a mayor a necessary post. Having a ‘thinker’ on a retainer or as a member of staff and taking legal ownership of her inventions is a relatively new concept. It also has modern parallels; many companies pay retainers to specialists and consultants so that they can obtain an ‘instant’ response without the delay of a purchase order.
Perhaps there is scope for other ways of encouraging innovation and new ideas. From the perspective of this paper the ownership of an idea is immaterial –
our criterion is to make maximum capital from each new idea so that the resultant wealth can be spread to the community.
The Six ‘X’ Factors for New Ideas and Products
The evolution of a new idea or product relies on several ‘X’ factors: these include
Take ‘iron’ for example: it cannot be smelted without resources (wood, clay and cheap labor), culture (coordinated team working) and is dependent on soil rich in iron ore (geography); and knowledge to make charcoal, reduce iron ore to iron, make a kiln. History does not tell us the pressing need that drove iron manufacture and trade – it would be nice to believe that it was to furnish a stronger plough and not stronger weapons.
Rice was essential to feed growing populations and required cheap labor; coordination and a stable government (it takes years to develop a rice paddy); the right terrain and soil; knowledge; and a warm wet climate,
REMEMBER THE PAST, DIRECT THE FUTURE – TAKING CONTROL
In the 80s I worked on a product that was exported to South Korea. At the start of the project we did not know that a special manufacturing plant had been built and staffed with graduate engineers. We did not know that every one of the assembly line and other workers had recently graduated and spoke good English – there had been a colossal investment in buildings, equipment (including the latest CNC machinery) people, and education.
Our contract included supply of finished parts and instruction to install, align and commission the equipment. We delivered drawings and kits of parts for assembly in Korea. It was only during the contract that we realized we were training Korean design engineers to develop the next generation of products, to understand our quality systems, design concepts and drawing standards.
The equipment needed extremely high accuracy. We used the best gears we could afford, ‘over-meshed’ them and ground them into position with grinding paste. Our ‘students’ did not take long to see the reliability problem we had created. They also had the solution – the CNC Machines they had sitting in a room next door. Their strategy was to learn what we knew, then to improve our design and to compete with us.
In short, the product we delivered was immaterial, the purpose of the contract, we realized later, was to transfer technology and knowledge and to train a new generation of design engineers that was to become our competition.
In the previously referenced 2011 analysis we see that South Korea is ranked in the top position by two methods of analysis and fourth in the third method. I believe their position is no accident – but is the result of a carefully planned, well financed and brilliantly executed policy with unswerving commitment.
Our UK Company formed a vital part in that strategy to create a center of excellence and we unwittingly, destroyed the future export market for ourselves, our European and US competitors. This was an example of a first-class top level strategy and commitment to creating a center of expertise. The more widely known example was the creation of IT professionals and investment in high technology pockets with good access to the Internet backbone. Within 10 years India had become a source of cheap software, call handling and out-sourcing.
Rewind – and Replay
During the 1850s UK Industrial Revolution companies began to export machines used in cotton processing to the US, because it was cheaper to refine the cotton before it was shipped. Soon after, hundreds of workers lost their jobs in the UK and European Cotton trade. Next, weaving machines were exported; using ‘cheap’ US labor, this led to the loss of more European manufacturing jobs. Finally UK companies exported the machine tools used to make spinning, weaving and other machines for the cotton industry. For every lathe sold orders for dozens of machines were lost. There is no record of the number of engineering jobs lost. Lack of a clear technical strategy, export policy and short-termism had destroyed a major European industry and hundreds of workers were unemployed.
Short-Termism – The lesson we may never learn?
During the last 20 years the universities of industrialized countries have educated foreign students, grateful for the additional revenue. Is it any surprise that we have competition from the countries whose students we have educated? This is not to suggest that we should place an embargo on teaching overseas students – just ask former USSR Officials how isolationism worked out for them!
All things have finite value
Our history shows that successive governments and businesses have failed to grasp (or have ignored) the ramifications of supplying knowledge and developing competitors who will later compete with us. (Suggestions – a taxation paid by the overseas government that would offset future unemployment and fund research that would create new opportunities for those displaced). One way to mitigate this competition and to gain new engineers would be to grant overseas “a” students a visa. We will, most likely, grant the visa anyway, so why not a few more to help our own economy?
Even on our local shores short-termism has created too many problems6, take for example the Oil ‘spill’ in the Gulf; contamination of drinking water by pollution and hydraulic fracturing7. And for our future:-”…role of…investers..they are: “primarily financial engineers interested in the largest possible profit in the shortest period of time,” who usually maintain “laser-beam focus on quarter-to-quarter earnings” – and they accordingly favour a short-term spike in the share price over long-term wealth creation. Indeed,” [i]n most cases, the[se] investors have nointerest at all in the long-term economic success of the enterprise.”8 To this statement we must be cautious – for there are some who have no interest in the long-term economic success of either the enterprise or of this country.
One of the many principles that Bill Gates has instilled in us is the value and necessity of the “Undo” button. We should not implement a technology unless we have a proven way to reverse its effects.
THE RISE OF THE NICHE
How many times did our parents tell us: “You can’t be good at everything!” So does this also apply to countries? India carved out a niche in software design, African countries have carved out a niche in mobile phone applications, and the list goes on.
Necessity – the Mother of Invention
Ideas and products still depend on climate, geography, knowledge, the environment. The communication infrastructure of Africa is focused more on mobile phones than on internet. We could expect such a skew in resources to create a deficiency but the driving need for financial, technical, medical and social application specific to Africa more than offset that initial disadvantage and has created a driving strength and ability to “do it without outside help”. Africa has become a center of expertise in creating phone applications,9 proving that things are not always structured and deliberate: and that serendipity also has its part to play.
World Trade and the Niche10 – What is Value
Taken from “The Concise Encyclopedia of Economics International Trade” – by Arnold Kling, David Ricardo developed and published one of the first theories of international trade in 1817.
“England,” he wrote, “may be so circumstanced, that to produce the cloth may require the labour of 100 men for one year; and if she attempted to make the wine, it might require the labour of 120 men for the same time….
“To produce the wine in Portugal, might require only the labour of 80 men for one year, and to produce the cloth in the same country, might require the labour of 90 men for the same time. It would therefore be advantageous for her to export wine in exchange for cloth. This exchange might even take place, notwithstanding that the commodity imported by Portugal could be produced there with less labour than in England.
“If a painter takes twenty hours to paint a house, and a surgeon could do the job in fifteen hours, it still makes sense for the surgeon to hire the painter. The surgeon can earn enough money in a few hours of surgery to pay for the entire house-painting job. We say that the surgeon’s comparative advantage is in doing surgery, while the painter’s comparative advantage is in painting houses. Ricardo’s theory of comparative advantage explains why a surgeon will hire a house painter and why a lawyer will hire a secretary.”
This model relies on man hours as the factor for determining ‘cost’ but how do we determine what someone may be willing to pay for a product or service? – how do we assess ‘value’?
The ‘value’ of a product (as perceived by the customer) is the key to profit. Value, always hard to define is a rare combination of Need, Rarity and Desirability. Of these three factors Need will always be the dominant driver in poor economies while Rarity and Desirability are key drivers in rich economies.
Selling to poor economies can provide a secure income stream but, by definition, there is little disposable wealth so profit margins will be small. Selling to rich economies is a different animal. An object may be highly prized because it is scarce like gold and diamonds. (Note that diamonds exist in huge quantities but their abundance has been stifled by cartels for more than 200 years, which makes diamonds a synthetic market.)
The lessons we may take from this are: There is a place in the world for a Niche, where a product or service is so special or unique that it can only be produced by low labor costs, special skills, specialist equipment or unique environmental conditions. Current examples include aluminum (needs cheap – hydroelectric – power; cell phones (where labor is currently the driving cost). Future specialist products will, conceivably, rely on low gravity (space), high pressure (deep sea). Profit margin is usually greater when selling to ‘desirability’ but narrow markets can be volatile and subject to fads. Desirability does not always equate to high value
Mexico – ‘the new China’
An Economic feature11 points out that Mexico economy grew faster than Brazil’s in 2011 and is about to exceed that growth. This may be because China’s niche (low labor cost) is being transformed by its internal wages quadrupling in the last 10 years. This has made manufacture in Mexico (lower transport costs – better control, etc.) a very attractive alternative. In the last few years we have been aware that ‘approved’ manufacturing sites of many established products have been extended to locations in Mexico and also in the US, within walking distance of the border.
The Rise of the Machines
Due to their high capital cost and lack of flexibility the use of Robots was initially limited to high volume applications, like the auto industry and the assembly of small electronic parts and products. The future of robots will be interesting to observe. To the U.S. they will mean potential unemployment of skilled/semi-skilled: but for countries that have falling populations they could be the salvation.
“The numbers speak for themselves. Currently, China has approximately 137 million people aged 65 or above. In 12 short years, this will balloon by another 100 million. The ratio of retirees to income earners will jump from 49 percent currently to 69 percent in 2030, assuming that the retirement age remains the same. By 2035, the median age in China will have increased from 35 to 45 years — equal to Japan’s median age currently.
“But China is not alone. South Korea’s working-age population will also begin to shrink in 2015. Taiwan has already seen a sharp rise in the ratio of retirees to income earners, while the country’s median age is projected to climb from 37 currently to 56 in 2050, which will make it the oldest population in Asia. Hong Kong and Singapore face similarly daunting demographics — although, in both cases, immigration could yet help mitigate the problem. Even Thailand is past its demographic prime, with the labor force expected to start contracting within the next 10 years.”12
What Makes America Unique?
Enter that question into Google and we are informed:
- Land of Opportunity
- Policeman of the World
What will be America’s Niche?
PC Software? Defence Products? Infrastructure? Areas like RTP (Research Triangle Park, North Carolina – USA) provide world class facilities for IBM, CISCO, GSK, RTI and many other companies. The value of start-up and soft start programs is accepted universally.
Perhaps this is a way for our future…
- In Compliance, January 2013, Engineering Our Future, Section: Some Groups Will Survive Better
please see images
- Focusing On Corporate Short-Termism
- Top 10 Mobile Phone Apps in Africa
- The Concise Encyclopedia of Economics International Trade, Arnold Kling
- “The Rise of Mexico,” The Economist, November 24, 2012
Kervill started out as a physicist but has spent all of his career in electronics because, as he puts it, it was more fun. Gregg career as an electronics design engineer began in the industrial controls, consumer electronics, space and military markets. He completed a Diploma in Industrial Management (the forerunner of the MBA) in the 1980s with a thesis on the application of Kan Ban and JIT to highly variable product lines. Also in the 1980s, he became involved with product safety for military products, and became a CSA design verification engineer for Digital Corporation. In 1993, he formed GK Consultants Ltd, with whom he has maintained a web presence.
A registered consultant to the European Union (advising on Slovenia’s entry to the EU), Gregg has contracted to NIST and the US-Consumer Electronics Association, and has advised the UK, Northern Ireland, Slovenia and Hong Kong governments. He has also provided pro bono support to Virginia Governor Mark Warner’s VALET export program, as well as the planning and strategy committee of the City of Austin, Texas. Since 1995, he has lectured and consulted on three continents, published three engineering books, and created the first multi-media training software for electrical product safety. Currently he is developing web-based training material from world-class subject matter experts (SMEs) for the Phoenix Technical Group, an internet-based company with a presence in the US, UK, and Brazil.