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      by Tony Wikrent North Carolina Democratic Party Progressive Caucus Strategic Political Economy Economist Mariana Mazzucato has demonstrated that the real driver of innovation isn’t lone geniuses but state investment. [Wired, via The Big Picture 10-19-19] ….Mazzucato, an Italian-American economist who had spent decades researching the economics of innovation […]
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Gasp!

OMG, outsourcing to China has risks!

Found on Susie Madrak’s site, is a story about the risks associated with doing business in a country that is not the US, which she links to with the blurb “For outsourcing CEO’s” (which sounds like a really good idea).  Here is an  example of what can happen to companies that are not careful with their intellectual property when they outsource to China:

“For over three years, this engagement resulted in a very productive relationship, with Shinri manufacturing and shipping our goods to Fellowes’ locations throughout the world,” says James Fellowes, a third-generation chairman and CEO of Fellowes Inc. “Shinri enjoyed a 100 percent-plus return on investment for each of the years and this return on investment was always paid on time.”

But in 2009 everything changed when the leadership of the Chinese company shifted to another Zhou brother. Over the next year, the Chinese company “gradually attempted to usurp control [of our operations] in direct violation of the joint venture agreement,” Fellowes told a recent hearing of the House Foreign Affairs subcommittee on Asia and the Pacific. “Shinri methodically imposed unreasonable requirements on Fellowes in an effort to extort more profit and ultimately control the global shredder business in direct violation of our contract.”

Shinri insisted that Fellowes assign its 100 percent-owned tools to the joint venture. It required that Fellowes assign 100 percent of its engineering capability and its 100-percent owned Chinese sales division to the joint venture. It told Fellowes it must increase its prices immediately by 40 percent. It told Fellowes that it had to unilaterally contribute over $10 million to the joint venture and if it didn’t “then Shinri would close down our operation as the legal representative of the joint venture,” says James Fellowes. “When Fellowes refused these illegal demands Shinri proceeded to destroy our business.”

Starting on August 7, 2010, Shinri started to obstruct shipments of shredders from the factory, forcing the joint venture to stop production. “It placed security guards and trucks at the gates to prevent the entrance of our people, the shipment of our goods and the transfer of our wholly owned assets,” says Fellowes. “They expelled Fellowes’ appointed management personnel at the facility and they illegally detained Fellowes’ injection molded tools. This ultimately led to the bankruptcy of the joint venture.”

James Fellowes immediately flew to Changzhou to meet with Chinese government officials. “They sympathized with our plight but they were either unable or unwilling to force our Chinese partners to open our factory or facilitate a purchase of the joint venture by Fellowes. The cumulative impact of these actions is an economic loss totaling over $100 million to Fellowes.”

Fellowes has recently learned that Shinri is planning to compete directly against it in the shredder business using Fellowes’ custom molding tools “that represent the embodiment of Fellowes’ engineering investment and intellectual property,” says the company

CEO.

The court in China has gotten involved: It has initiated proceedings to liquidate the joint venture and auction the assets “to satisfy the debts of the joint venture” — suppliers who are demanding that unpaid invoices be paid, according to Fellowes. “The sale of Fellowes’ tooling and our finished goods inventory to anyone other than Fellowes would be a direct violation of our intellectual property rights. The immediate release of our tools is of great concern for us today. We have been restricted from these tools for eight months and that has greatly hampered our ability to recover.”

Fellowes wants to bring these tools back to the United States so that it can re-establish a manufacturing operation in Illinois. It is “working around the clock to retool our products and bring up new factories,” says Fellowes. “We hope the U.S. government will act to protect the rights of American companies like ours.”

{{snort!}}  Funny, he doesn’t mention how he hopes the US government will act to protect the rights of American workers.  It’s probably just an oversight.

Who could have predicted?   The Chinese are notorious piraters of entertainment industry copyright protected content. They have a record of hacking Google and the Defense department.  But that hasn’t stopped lots of CEOs from signing up with China for cheap labor covering just about every industry.  In the drug industry, for example, lots of medicinal chemistry jobs have gone to China.  Presumably, the executives are counting on the contracts they signed to keep the Chinese synthetic chemists from becoming too interested in their work.  I wonder if it ever occurs to the outsourcers that the last bunch of analogs they ordered could be held hostage or that the Chinese wouldn’t hesitate to tap the intranets of the intellectual property geniuses in the US to see what those analogs are good for.  Imitation is the highest form of flattery but theft takes less time.  And who could blame them?  Those potential blockbusters are being made in THEIR country by their chemists.  Wouldn’t it be weird if they *didn’t* want a piece of the action?

But it’s even worse than that.  It looks like Shinri got tired of being used as the slave labor by a modern equivalent of the British East India Company and asked to have a bigger share of the engineering aspect of the business.  Say what you will about their motives but Shinri asked for a measley $10M ransom payment.  It’s modest by today’s Dr. Evil standards.  But Fellowes turned them down and has consequently lost $100M in the interim.  How dare a Chinese company get all uppity and start issuing demands.

That’ll learn’em short term thinking MBAs.  ehh, who are we fooling.  These braintrusts probably got raises last year for reducing US labor costs.

Well, now we know such things can happen.  There’s a reason why the business environment in the US was so productive and innovative compared to the rest of the word.  Rules and regulations are intended to keep stuff like this from happening.

Let this be a lesson to the outsourcing CEOs.  Play fair or risk it all.

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American business is flying into a mountain

Do you remember the 70’s PBS series Connections?  Each week, James Burke showed how politics, obscure history, necessity, science and opportunity lead to the technological advances we now take for granted.  You never know where you’ll find connections.  So, I’m intrigued when I think I spot one.  See if you agree.

In one of his recent books, Outliers, the Story of Success, Malcolm Gladwell relates the story of the crash of Korean Air Lines Flight 801 into a mountain in Guam.  There were a number of factors that contributed to the crash, including that the glide path signal was taken out of service for a 2 month overhaul, the landing beacon that was supposed to be located a the end of the runway was relocated 5 kilometers from it and that the low altitude warning system was reconfigured to prevent the air traffic controllers from being annoyed by false positive alarms.

But the air crash investigators found another problem on the black boxes and cockpit voice recorders.  The pilot was exhausted and the co-pilot was reluctant to override him until the crash seemed imminent.  The problem seems to be a function of the culture where those people in charge are not questioned.  Malcolm cites research that shows that countries where questioning authority is forbidden or discouraged have bigger barriers to cross when introducing new ideas and preventing catastrophes.  The more hierarchical the structure of the society, the less likely innovation is to be nurtured.

Flash forward to 2010.  Derek Lowe at In The Pipeline posted this letter from a pharmabot in a corporate setting regarding the perils of outsourcing.  Here’s the money quotes:

in a recent edition (25th Oct 2010 “The Grand Experiment”) you state that Merck &Co targets 25% external R&D and that AstraZeneca is striving for 40%. I recently talked to all the project managers which oversee our current collaborations. The stories of naivety, incompetence and missed deadlines by the outsource companies were legion. The managers I talked to mostly used in-house resource and expertise to paper over the cracks. Why?When asked whether they had reported these problems up the chain of command, the answer was always no. The reasons?

1 “If we have four collaborations and mine is the only one reporting problems, which three project managers do you think will get a bonus?”

2 “They won’t believe me, they will just think I am trying to protect jobs here”.

3. “You can’t swim against the tide”.

4 “When it goes bad here, I might be able to get a job with the collaborator”.

5 “My next job will be outside chemistry as a project manager. The last thing I need is any negative vibes around this collaboration”.

6. “I want to be the out-sourcing manager when that is all that there is left here. Do you think I want any trouble to become visible”

So, as far as senior management know, it is all going very well.

Unfortunately I can’t attach my name and organization. I need a job too and telling the truth is not always that popular, as many out-sourcing managers will have experienced. . .

This isn’t really surprising and isn’t exclusive to R&D industries.  But the whole R&D apparatus in particular is scared sh&*less by layoffs and outsourcing.  No one wants to be the one to break the bad news to upper management that some outsourcing collaborations or periodic business management rearranging of the deck chairs restructuring is making our jobs harder and less productive.  As Derek sums up:
Just as with internal efforts, Something Upper Management Wants can too easily turn into Something Upper Management Is Going To Do No Matter What. And with outsourcing, the problems can be both harder to detect and potentially more severe. Because what you don’t want is Something Upper Management Will Be Told Is Going Great, if it’s really not.
But how do you break the news to the guys in charge without getting fired?
And then I read this article recommended in the comments section of today’s news post about the fading fortunes of America’s middle class.  In Class Dismissed: Why middle income jobs are not coming back, this paragraph caught my attention:
From 1979-2009, there was a nearly 12% drop in the four “middle-skill” occupations: sales, office/administrative workers, production workers, operators. Meanwhile, people in the top 20% of the economy earning $100,000 or more a year, says Peter Francese, demographer at Ogilvy & Mather, “have barely been touched by this recession.” They average an unemployment rate between 3% and 4%, the lowest in the nation. The US Bureau of Labor Statistics projects a 14% increase in low-education service jobs between 2008-2018. “The only major occupational category with greater projected growth,” Autor writes, “is professional occupations, which are predicted to add 5.2 million jobs, or 17%.” These sectors include medicine, law and middle- and upper-management.
Yes, that’s right.  Middle and upper management is now considered a “profession” right along side doctors and lawyers.  Hold that thought for a moment.
A couple of years ago, I ran into one of my daughter’s friend’s parents in a movie theater lobby.  Here’s how her side of the conversation went:
Oh, hi, what’s up?  Oh, I didn’t know you work for yadayadaco?   No, I work for blahco.  Yes, my job is very exciting.  I graduated from Wharton.  Which school did you go to?  Oh, really?  Well, my last project was very ambitious.  Yeah, we just corrected the labeling on the bottle of *insert famous over the counter medication here*.  And you do what?  What does that mean, I mean, I don’t know what that is.  Oh, it must be very interesting.  Well, gotta go.  Bye!
Readers, she’s bringing in the big money in her family.  Her husband’s career is more like a hobby.  They live very well, very well indeed.  Nice big house.  Expensive cars.  Lavish vacations.
And she changes the labels on over the counter drugs.  Now, I’m not saying this is not a very important thing to do but do you really need an MBA for that?  I mean, wouldn’t any one with sufficiently well developed communication and planning skills be able to read the documentation provided by the FDA and make the appropriate changes?  Sure, you have to coordinate with other departments but this is something the labrats do on a daily basis in addition to solving science problems.  Yeah, we have to read contracts, negotiate with vendors, make spreadsheets, call meetings, coordinate with other departments, prepare budgets and do every thing else that the Wharton MBA does.  But we do it for much, much less in salary and other benefits.  Moving from the lab to the corporate building always comes with a generous increase in salary regardless of company.
They think very well of themselves, those MBAs.  I doubt that any of them have a clue what we do and I don’t expect that any of them want to find out.  I’ve seen well respected PhDs in biology dressed down in a training session by some snooty woman from purchasing in her business suit because he had the temerity to ask about the application they were forcing on us.  It’s typical.  The condescension is palpable any time a labrat has to deal with the administrative side of the business.  You get the impression they think of us as dirty nuisances, an unpleasant and expensive necessity and we are stupid idiots for not immediately understanding their obscure bureaucratic procedures for getting even the simplest things accomplished in a time sensitive manner.  Yes, they waste our time and they aren’t nice about it.
But the fear we face is that the MBAs don’t want to hear this even if it is in the best interests of the shareholders.  We fear that they don’t want to hear that  they are sometimes wrong and that they will kill the messenger.  So, we just try to adapt and keep doing our best even when the alarms are all flashing danger.  No one wants to be the first one to raise their voices and get cut down by the higher ups.  We’ll keep our heads down and brace for the impact into that mountain.