Is Bi-partisan Tax Reform Possible?

April 27th, 2016

Tis the season of talk about tax reform. Every presidential election cycle, the candidates all propose some kind of tax reform. However, once the new president is elected, Congress does not do anything because tax reform becomes the “third rail” to special interests who lobby for or against reforms that would affect them. The last comprehensive tax reform that Congress passed was the Tax Reform Act of 1986, more than a generation ago. Thus, we must pose the question: Is it possible for Congress to pass bi-partisan tax reform.

First, let’s separate fact from the rhetoric:

Rhetoric: Corporations play games to keep from paying their fair share of taxes.

Fact: Out of the 34 countries in the Organization for Economic Co-operation and Development (OECD), a group that includes most advanced, industrialized nations, America ranks first with a 39.1 percent corporate tax rate, compared to an OECD average of 24.1 percent. However, the effective rate for 2014 was 27.9 percent, which was second highest behind New Zealand among OECD countries and 15th-highest among the 189 countries measured. Effective tax rate takes into consideration the tax deductions allowed corporations to reduce the pool of taxable profits.

Some corporations aren’t paying their fair share of taxes because multinational corporations that have subsidiaries or divisions in other countries use legal accounting strategies to transfer profits to lower corporate tax rate countries or set up shell corporations in tax haven countries. This means that American corporations whose only facility is in the U. S. bear the brunt of our high taxes, making it more difficult for them to compete in the global marketplace.

One of the strategies used is what is called “Corporate inversion” by Investopedia, which refers to re-incorporating a company overseas in order to reduce the tax burden on income earned abroad. Corporate inversion as a strategy is used by companies that receive a significant portion of their income from foreign sources, since that income is taxed both abroad and in the country of incorporation. Companies undertaking this strategy are likely to select a country that has lower tax rates and less stringent corporate governance requirements.
How can we get these multinational corporations to pay their fair share of taxes in the United States?

Well, we can follow the example of states that have passed bi-partisan tax reform to address the problem of getting corporations to pay a fair share of taxes in their state. The solution was “apportionment” of corporate income taxes that is a share of taxes to be paid by a corporation to a state based on a particular formula. According to a Policy Brief by the Institute on Taxation and Economic Policy, all but the five states that don’t have a corporate income tax (Nevada, South Dakota, Texas, Washington, and Wyoming) have adopted some type of formula for state apportionment of corporate taxes.

  • “First, if a corporation does not conduct at least a minimal amount of business in a particular state, that state is not allowed to tax the corporation at all. Corporations that have sufficient contact in a state to be taxable are said to have “nexus” with that state.
  • Second, each state where a corporation has nexus must devise rules for dividing the corporation’s profits into an in-state portion and an out-of-state portion — a process known as “apportionment.” The state can then only tax the in-state portion.”

About half the states with a corporate income tax adopted the model legislation worked out in the 1950s, called the Uniform Division of Income for Tax Purposes Act (UDITPA). UDITPA recommends the following three factors to determine the share of a corporation’s profits that can be taxed by a state:

  • “The percentage of a corporation’s nationwide property that is located in a state.
  • The percentage of a corporation’s nationwide sales made to residents of a state.
  • The percentage of a corporation’s nationwide payroll paid to residents of a state.”

Only two states use the percentage of property tax since local government jurisdictions already impose a property tax, and state governments don’t want to encourage corporations to relocate to other states by doubling up on property tax. Only eight states still use the unmodified formula, and many have moved to just sales. Most of the rest of the states have increased the weight on sales, and 18 states “double weight” the sales tax percentage.

One of our members of the Coalition for a Prosperous America, Bill Parks, is a passionate advocate of corporate tax reform at the federal level based on the Sales Factor Apportionment Framework. Mr. Parks is a retired finance professor and founder of NRS Inc., an Idaho-based paddle sports accessory maker. He asserts that “Tax reform proposals won’t fix our broken corporate system… [because] they fail to fix the unfairness of domestic companies paying more tax than multinational enterprises in identical circumstances.”

He explains that multinational enterprises (MNEs) can use cost accounting practices to transfer costs and profits within the company to achieve different goals. “Currently MNEs manipulate loopholes in our tax system to avoid paying U. S. taxes… MNEs can legitimately choose a cost that reduces or increases the profits of its subsidiaries in different countries. Because the United States is a relatively high-tax country, MNEs will choose the costs that minimize profits in the United States and maximize them in what are usually lower-tax countries.”

The way his plan would work is that the amount of corporate taxes that a multinational company would pay “would be determined solely on the percent of that company’s world-wide sales made to U. S. customers. Foreign MNEs would also be taxed the same way on their U. S. income leveling the playing field between domestic firms and foreign and domestic MNEs.”

For example, if a MNE’s share of worldwide sales in the United States is 40%, then the company would pay taxes on 40% of its sales. Mr. Parks states that the advantages of his plan are:

  • “Inversions [and transfer pricing] for tax purposes become pointless because the company would pay the same tax no matter what its base.
  • It would encourage exports because all exports are fully excluded from corporate income tax.
  • It simplifies the calculation for federal, state, and local taxes because the profit to be taxed by the U. S. is determined by a simple formula.
  • Reduces or eliminates the tax incentives to locate jobs, factories, and corporate headquarters offshore, boosting employment and U. S. tax revenue.
  • Ends the disguised income taxes which are actually royalty payments.
  • Allow Congress to raise revenue without raising rates because it stops U. S. and foreign multinationals from being able to place their profits offshore to avoid U. S. taxes.”

A couple of additional benefits listed at www.salesfactor.org are:

  • “Removing the incentives for multinational corporations to leave their profits in off-shore tax havens.
  • Maintaining Congress’ ability to lower rates and/or increase revenue.”

Bill concludes that “Sales Factor Apportionment is simpler and more effective than our current system which attempts ? and often fails ? to tax the worldwide business activities or U. S. corporations. Because it is based on sales, not payroll or assets, it is a difficult system to game. Companies can easily move certain business operations and assets out of the U. S., but few, if any, would be willing to give up sales to the world’s largest market.”

Mr. Parks was part of my team visiting the offices of Congressional Representatives in Washington, D. C. the week of April 11th, and several Representatives appeared quite interested in the Sales Factor Apportionment tax proposal he described. Mr. Parks is the author of a much more in-depth article in the April 4, 2016 issue of Tax Notes (available only by subscription), and I am happy that he gave me permission to write about this topic for my audience. For further information, you may email him at Bill@nrs.com. You can also read the results of several studies on SFA at www.salesfactor.org.

CPA’s Balanced Trade Message has Impact on Congress

April 27th, 2016

I just returned last Friday night from the Coalition for a Prosperous America‘s 9th annual Fly-In to Washington, D. C. It was my 4th time to participate with CPA members from across the country to meet with Congressional Representatives and/or their staff. I noticed a big difference in the reception we got during our visits compared to my first trip. The Coalition for a Prosperous America is a nonprofit organization representing the interests of 2.7 million households through our agricultural, manufacturing and labor members, and I’ve been a member since 2011.

In his report, CEO Michael Stumo wrote, “It was an amazing experience to finally have the wind at our backs instead of facing headwinds…CPA is taken very seriously by congressional offices. They trust what we say. One-fourth of our meetings included the congressman/woman themselves, which is significant and a new high for us. Senior staffers attended our meetings rather than junior staffers as was the case only a few years ago.”

However, we have not just been doing an annual visit to D. C. once a year since 2008. Teams of CPA members led by Michael Stumo have made visits to D. C. once or twice a month since January 2015. Here in California, teams of members led by me have visited the offices of 37 of the 53 Representatives from one to six times since 2013. In addition, CPA has co-hosted four manufacturing summits in California starting in 2013 ? two in San Diego, one in Orange County, and our recent one in Sacramento in February. The same kinds of activities have taken place in other states where CPA has a state chapter, such as Ohio, New York, and Pennsylvania.

In all of our visits, either in district or in D. C., we have constantly focused part of our message on simply establishing why our huge trade deficit not only matters, but is core to our national economic malaise. As I have written in past articles, our annual trade deficit over the past 20 years has a relationship to our national debt and is a major cause of the loss of 5.8 million manufacturing jobs and the nearly 95 million people that are no longer part of the workforce.

For years, we have been emphasizing the following:

  1. Trade deficits matter, they kill jobs and growth: This may sound obvious to you and me, but many Representatives and their staffer did not believe trade deficits mattered in the past. They were unwilling to admit the serious consequences in having a huge deficit in goods. So, if trade deficits were not a problem, there was no need to pursue a solution. Michael Stumo wrote, “This past week showed we have largely won that argument. We can only grow jobs and our economy if we focus upon a national strategy to balance trade by identifying the biggest trade cheating problems and aggressively fixing them.”

Our teams distributed a flyer titled, “Balanced Trade: Fighting the New Mercantilism” recommending that Congress establish a national goal to balance trade over a reasonable period of time by means of:

  • Direct trade negotiators to pursue trade deficit reduction as a primary negotiating objective.
  • Review past agreements for compliance with this objective. Renegotiate those that fail the test.
  • Utilize tax, fiscal and monetary policies to achieve the goal.
  • Aggressively and systematically attack and neutralize foreign mercantilism.
  1. Past trade agreements have not improved our trade performance: For years, we have heard this line from the establishment and Congressional Representatives: “Trade agreements establish American leadership, grow exports and create jobs.” The refrain was: “Trade is beneficial. We are increasing exports, and we have a surplus in services.” The only time I heard this refrain this year was by a legislative assistant in Senator Dianne Feinstein’s office.

We were able to trounce this argument this year by distributing a flyer that clearly showed the poor trade performance of our past agreements through visual aids CPA spent a lot of time developing (see below). We clearly showed that modern foreign mercantilism has moved beyond the tariff and non-tariff barrier provisions in trade deals. Indeed, those deals often made our trade problems worse. For example, our trade deficit with Korea has nearly doubled since it went into effect in 2012 (from $14.7 billion to $28.4 billion in 2015.)

The TPP will likely make America worse off: CPA read and digested the pro-TPP studies by Petri and Plummer, Peterson Institute for International Economics, Working Paper 16-2, Jan 2016 and the “Global Economic Prospects: Potential Macroeconomic Implications of the Trans-Pacific Partnership,” by the World Bank, Jan 2016. These reports tried to hide the problems and exaggerate gains. Our CPA teams distributed a flyer that “displayed the results through insightful infographics showing that any projected gains were embarrassingly meager and fundamentally implausible”[because] “The studies assume, without analysis, (a) no currency misalignment, (b) no foreign border taxes that replace tariffs, (c) no industrial subsidies and state-influenced enterprises, and (d) no mercantilism.” As Michael Stumo wrote, “These assumptions are untrue. Therefore, we cannot achieve the meager growth projected. We showed how those studies were built upon a series of demonstrably false assumptions to produce those meager gains. Then we showed why losses to American workers, industry and the economy were nearly certain when you eliminated the false assumptions.”


This year we also proposed tax reform that can fix some major foreign trade cheating on a large scale. As Michael Stumo, wrote, “Tax reform is a challenge because K Street lobbyists rig the game for special interests and no connection is made with our success in producing here and winning the international trade competition. However, we made significant gains in showing how we can fight foreign consumption taxes that act as tariffs by smartly adding a US consumption tax and funding the reduction of other regressive taxes and costs to fix the problem. We also showed how we can fix the corporate income tax system with sales factor apportionment to halt tax haven abuse by transnationals, incentivize US domestic production, and make foreign companies pay their fair share of income tax when selling into the lucrative American market.”

The good news is that everyone we saw seemed to agree that the TPP does not have the votes to pass before the election. The danger will be in the “Lame Duck” session. We seem to be in a far better position to prevent future passage than we were last year at this time with regard to passage of the “Fast Track” Trade Promotion Authority. Michael Stumo, wrote, “We almost beat Fast Track last June. Indeed we won the first votes in regulation time but lost in overtime when the Empire Struck Back. Now, it seems that the anti-Fast Track block is holding strong and quite a lot of pro-Fast Track congressional members have either declared opposition to TPP or are leaning against it.”

Michael added, “GOP House leadership pushed Fast Track through last year but they seem to view TPP as toxic now. The GOP rank and file are letting House leadership know they do not want to vote on TPP at any time in the foreseeable future. The Senate side is less solid and has always posed the bigger challenge. Senate majority leadership wants changes to TPP but still wants get to ‘yes.’ However, the changes being demanded are difficult (but perhaps not impossible) to deliver.”

We are being helped by the stand against trade agreements by two of the major presidential candidates, Trump and Sanders, who bring up our broken trade policy in almost every speech. “Trade has become one of the few, rare ‘voting issues’… an issue that actually moves voters to support or oppose a candidate.”

While this has been a several year battle, we haven’t won yet and still have a lot to do. The establishment will continue say that the voters simply don’t understand the “greater good.” Pundits will continue to write many “reasoned” articles about why the voters should support trade agreements such as the TPP. But the success of Trump and Sanders shows that the establishment has not only lost its clout, it is actively disbelieved by many now.

Help us to grow this movement and increase our effectiveness. Encourage your friends and colleagues to participate. Let’s keep up the good fight!

How Could the Trans Pacific Partnership Affect you or your Business

April 19th, 2016

On February 4, 2016, President Obama signed the Trans Pacific Partnership Agreement on behalf of the United States. The TPP agreement has been in negotiation behind closed doors since 2010 between the United States and 11 other countries around the Pacific Rim: Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, and Vietnam. The TPP is a “docking agreement” so other countries could be added without the approval of Congress. India, China, and Korea have expressed interest in joining the TPP.

Our elected representatives in Congress had no involvement in writing the TPP – it was written by the staff of the U. S. Trade Representative office, with over 600 corporate advisors (think corporate lawyers) helping them write it. It contains more than 5,500 pages, and no member of Congress could view it as it was being negotiated until late 2014. Even then, they could not take any staff with them and were not allowed to take pen, pencil, paper, or a camera when they went to view it at the U. S. T. R.’s office.

The full text of the TPP was finally released to the public to review in November 2015, and it now awaits Congressional approval. According to the rules established by the Trade Promotion Authority (TPA) that passed Congress narrowly in June 2015, Congress will only be allowed 45 days for committee analysis after the bill is introduced, only 15 days after that is completed to bring it up for a floor vote, and only 20 hours of debate in the House and Senate. The TPA does not allow any amendments, filibuster, or cloture. Notice that the TPP is called an “Agreement,” as was NAFTA, CAFTA, KORUS, and every other trade deal in the past 22 years. The purpose for this is to get around the requirement of the two-thirds vote of the Senate to approve a Treaty that is required under Article 1, Section 8 of the Treaty clause in the U. S. Constitution. The TPP requires only a simple majority vote (50% + one.)

Supporters of the TPP say that it represents 40% of the world’s economic activity (GDP), but they fail to mention that the U. S. and its current trading partners represent 80% of that 40%. The other five countries represent the other 20%, with Japan alone being 17.7% of that total.

The current goal of trade agreements as given by Congress to the U.S.T.R is to “remove trade barriers,” such as tariffs, quotas, etc. and increase U. S. exports. The U. S. cut tariffs and opened our markets by means of these trade agreements. However, our trading partners didn’t really open their markets to us. They played another game ? mercantilism, featuring rampant global currency devaluation, consumption taxes called Value Added Taxes (VATs) that are tariffs by another name, massive subsidies to their industries, and industrial policies that favor their domestic supply chains.

In brief, the effect to the United States of this unbalanced trade has been:

  • Loss of >600,000 mfg. jobs from NAFTA
  • Loss of 3.2 million mfg. jobs between 2000 – 2010 from China’s entry into WTO
  • Loss of >60,000 mfg. jobs since Korea-US Agreement went into effect in 2012
  • Loss of an estimated 3.4 million U. S. service & call center jobs since 2000
  • Loss of an estimated 700,000 public sector jobs (2008-2013)
  • Racked up cumulative trade deficit of $12 trillion in goods (average $500 billion each year) since 1994

As a result, we now have the worst trade deficit in U. S. history, and we are off to even a higher deficit this year based on the trade figures released for January ($45.9 billion) and February ($47.1 billion). As a recent example of the effect of trade agreements on our total trade deficit, our trade deficit with Korea has nearly doubled in less than four years, increasing from $14.7 billion in 2012 to $28.4 billion in 2015. Proponents of KORUS promised that it would create 70,000 jobs and $10 billion in exports.

As mentioned in a previous article, proponents of the TPP aren’t even giving such rosy predictions. The Peterson Institute’s analysis of the TPP states: “…GDP is projected to fall slightly (-0.54 percent), employment to decline by 448,000 jobs…”

What are some of the ways the TPP could affect you or your business?

Buy American Act would essentially be made Null and Void: The worst effect would be to those businesses who sell to the government, whether it be local, state, or federal because under the TPP procurement chapter, the U.S. would have to agree to waive Buy America procurement policies for all companies operating in TPP countries. This means that all companies operating in any country signing the agreement would be provided access equal to domestic firms to bid on government procurement contracts at the local, state, and federal level. There are many companies that survived the recession and continue in business today because of the Buy American provisions for government procurement, especially defense and military. The TPP could be a deathblow for companies that rely on defense and military contracts. However, it would also affect procurement for infrastructure projects, such as bridges and freeways, as well as construction of local, state, or federal facilities.

Of course, this means that U. S. companies could bid on government procurement projects in TPP countries, but the trading benefit is miniscule. The U. S. government procurement market is 7X the size of current TPP partner countries (+550 billion vs. $55 -70 billion.) It is also highly unlikely that U. S. companies would be the low bidder against domestic companies in these TPP countries because of the vast difference in wages in countries such as Vietnam, where the average wage is 55 cents/hour. Past trade agreements has resulted in an average annual wage loss of 5.5% for full-time workers without college degrees, and U. S. wages have been stagnant for decades, growing by only about 2% per year since 2008. The result has been increased wage inequality from low to high wage earners.

Product Labeling could be Made Illegal: If you like to know if your food is safe, then you won’t like the fact thatCountry of Origin,” “Non-GMO,” or “Organic” labeling could be viewed as a “barrier to trade” and thus be deemed illegal. According to Food & Water Watch, around 90% of the shrimp and catfish that Americans eat are imported. They warn, “The TPP will increase imports of potentially unsafe and minimally inspected fish and seafood products, exposing consumers to more and more dangerous seafood.” Many TPP countries are farm-raising seafood in polluted water using chemicals and antibiotics prohibited in the U. S. Farmed seafood from Malaysia, Vietnam, and China is being raised in water quality equivalent to U. S. sewers. Today, the FDA only inspects 2% of seafood, fruits and vegetables, and the USDA only inspects 4-5% of meat & poultry. Increased imports of food from TPP trading partners could swamp FDA and USDA inspections, so that even less is inspected.

TPP would Increase Immigration: If you are concerned about jobs for yourself or family members, then you won’t like the fact that the TPP increases “the number of L1 visas and the number of tourist visas, which can be used for business purposes.” Any service provider (phone service, security, engineers, lawyers, architects or any company providing a service) can enter into a TPP partner country and provide that service. Companies don’t have to hire Americans or pay American wages – they can bring in own workers and pay less than the American minimum wage.

TPP would Increase Job Losses in Key Industries: If you work in the automotive or textile industries, you may lose your job. The Center for Automotive Research projects a loss of 91,500 U. S. auto jobs to Japan with the reduction of 225,000 automobiles produced in the U. S. Also, the National Council of Textile Industries projects a loss of 522,000 jobs in the U. S. textile and related sectors to Vietnam.

TPP would Reduce Reshoring: Because TPP will reduce tariffs in trading partner countries, such as Vietnam, it will make the Total Cost of Ownership analysis to return manufacturing to America more difficult to justify. The high U. S. dollar has already diminished reshoring in the past year, so Harry Moser, Founder and President of the Reshoring Initiative, recently told me that “The combination of the high USD and TPP will reduce the rate of reshoring by an estimated 20 – 50%.”

Remember that the TPP is missing any provisions to address the mercantilist policies practiced by our trading partners: currency manipulation, Value Added Taxes that are both a hidden tariff and a hidden export subsidy, government subsidies/state owned enterprises, and “product dumping.”

 America is at a crossroads. We can either continue down the path of increasing trade deficits and increasing national debt by allowing anything mined, manufactured, grown, or serviced to be outsourced to countries with predatory trade policies. Or, we can forge a new path by developing and implementing a national strategy to win the international competition for good jobs, sustained economic growth and strong domestic supply chains. If you support the latter path, then add your voice to mine and millions of others in urging Congress not to approve the TPP in either the regular session before the Presidential election or the “lame duck” session after the election.

What is the Heart and Soul of Manufacturing?

March 15th, 2016

Once in awhile you read a book that has such kernels of truth that they touch your soul. One such book is The Heart & Soul of Manufacturing by Bill Waddell that I just finished reading. The subtitle reveals the focus of his book: “How Lean Management aligns with the better angels of our nature to create extraordinary business results.”

I met Bill in 2014 when we were both speakers at the Lean Accounting Summit in Savannah, Georgia and reconnected with him at the summit in Jacksonville, Florida last year. I knew that we connected at a higher level because of his presentations and the topics we cover in our blogs, but reading his latest book confirmed it.

Bill has been a lean guru for more than 30 years, and in his Introduction, he writes this about his journey, “During the time I have grown in my own thinking from seeing lean as an exciting new set of tools to use on the factory floor and in the supply chain, to an all-encompassing business and economic model, to what it truly is: All of the above driven by and centered on a powerful and rare organizational culture.”

My own lean journey has been much shorter ? only 10 years since I attended my first workshop about lean in 2006, but it was preceded by getting my certificate in Total Quality Management in 1993. By the end of the 1990s, I had discerned that TQM failed because it started from the bottom up with “Quality circles” and was not adopted as a philosophy or incorporated into the corporate culture by C-level management.

I began my lean journey with the viewpoint that the adoption and implementation of lean tools and principles would help American companies be more competitive in the global marketplace and play a role in “saving” American manufacturing as expressed in my book published in 2009.

When I read Bill’s book, I resonated with his statement, “The cut throat world of business, and especially manufacturing over the last thirty years, has become centered on the negative: laying off good people in pursuit of lower headcounts, closing plants and moving the work to China, decimating entire small towns across America, and bankrupting small suppliers by abruptly terminating long relationships and replacing them with cheaper foreign sources.” These facts are what motivated me to write my book, Can American Manufacturing be Saved? Why we should and how we can.

The understanding of the importance of the total transformation of the culture of a company was revealed to me when I took classes in 2014 from Luis Socconini of the Lean Six Sigma Institute to acquire my Yellow Belt in Lean Six Sigma and thereafter read his book, Lean Company.

After years of applying the Toyota Production System tools and principles in his consulting, Bill dug deeper into the precepts behind them to understand what enables “Toyota with its nearly perfect track record of providing lifetime employment to its workers ? and making a lot of money at the same time.” One of the five precepts that more Americans need to emulate is “Be contributive to the development and welfare of the country by working together, regardless of position, in faithfully fulfilling our duties.”

Bill realized that there are other people like him “who want to do their jobs well, but also want to treat people well…they want to have a positive impact on the world around them and especially on the people around them.” The purpose of his “book is to send the message to those people that it is possible to do both…it provides a path for good people to combine the crafts of their trade with their moral code, to be good manufacturers because they are good people, rather than feeling they must either be good manufacturers or good people.”

Bill’s book features in depth consideration of companies that are every bit Toyota’s equal in their people-centered culture: ATC Trailers, Barry-Wehmiller, and West Paw Design.

Bill states that a lean culture is more than a “feel good culture;” it must be “a driver for a completely different way of running the business.” It must be based on “servant leadership,” wherein “the servant leader is always asking, ‘How can I help?’ Leadership and management exist to enable the folks on the front lines to better serve customers.”

Bill writes, “Eliminating waste and empowering people intersect beautifully.” But, in the goal to eliminate waste, “The resources that are the most important to eliminate wasting are people’s time and talents.” He adds, “Traditional management sees human beings as little more than unique tools, while lean thinkers see people as the very heart and soul of the organization’s reason for existence.” And, “In a lean company letting a thinking, feeling, growing person go ? laying them off ? is a shameful waste of a resource that is both precious and has enormous economic value.”

Those familiar with lean will understand his emphasis in a subsequent chapter on organizing a company by value streams, which engenders the feeling that “we’re all in this together” in the “shared commitment to the common good.” In a company with a lean culture, “success is defined by how the team performs along the entire end-to-end value stream…Rather than pit people against each other for individual recognition, lean incentivizes people to help each other, and to do whatever they can to make the other folks on the team more capable, to enable them to bring more of their talents to bear on the job.”

In chapter 5, “It’s all about Growth,” he writes, “There is a widespread misconception that lean is a strategy for reducing costs by eliminating waste. Quite to the contrary, lean is an engine for growth. The purpose of waste reduction and ideally elimination is to free up capacity.” When you free up capacity, you can grow, produce more, and make more profits. As Bill writes, “no company has ever cut its way to success…Success can only come from more, and you can’t cut your way to more.”

In chapter 6, “Hard Core Culture,” Bill discusses what is meant by a lean culture in contrast to “the traditional culture of blame, and its companion – arrogance…that causes most companies to fail from the inside out.” While a lean culture eliminates blame to utilize the Deming Cycle of Plan, Do, Check, Act (PDCA), Bill states, “The core concept of respect for people is not just theoretical or philosophical respect based on the belief that we are all children of God and equal in His eyes. It is professional respect, as well…based on the knowledge that no one knows everything about a process or an operation, but everyone involved knows something.”

Chapter 7, “Accounting,” contains Bill’s easy to understand explanation of “the important aspects of lean accounting, and how they support the decisions a principled, faith driven manager…” Lean accounting measures costs “based on cross functional value streams, rather than in each functional silo. It is based on “real money…it largely does away with the various types of cost types typically assigned to them…Standard costs are done away with in lean.”

I became a big proponent of lean accounting after a four-hour module in my Yellow Belt class that was reinforced when I attended sessions at the Lean Accounting summits of 2014 and 2015.

In chapter 8, Bill recounts the horrific story of the Triangle Shirtwaist factory fire that I recounted in my own book, wherein 145 women workers died in a fire because the doors were locked so the women couldn’t get out via the stairs, three of the four elevators weren’t working, and the owners had not installed a sprinkler system. It was the worst industrial incident in American history. It shocked the country and “it set off a series of laws and changes in industrial safety that eventually put an end to sweatshops in the United States.”

Bill then recounts the stories of two equally or more horrific tragedies that occurred in 2012 and 2013 offshore: Tazreen Fashions factory fire in Bangladesh where 117 women died in a fire because of locked doors and no fire prevention system and the Rana Plaza factory building collapse killing more than 1,200 people. He comments, “Since NAFTA was enacted some twenty or more years ago there has been a flurry of global trade agreements that typically pay little more than lip service to moral and ethical issues…These same trade agreements have had the effect of causing American environmental regulations to be something of a sham…great swaths of American manufacturing has moved to places such as China and Vietnam where there has been little or no environmental concern.”

We have actually been outsourcing our pollution to primarily China or Mexico. There is no sky-high fence to keep the air from crossing our border with Mexico, so we are breathing the polluted air being generated by companies in Mexico. In addition, the horrifically polluted air from China is actually coming to the U. S. on the trade winds.

The rest of the chapter 8 is a rather lengthy discussion of the differences between a privately owned vs. a publicly owned company with regard to practicing moral principles in the conduct of business.

Chapter 9 focuses on people, as “lean is a completely people centered business theory… lean management assumes the best and is based on empowerment and trust.” A culture of lean eliminates the conflict between management and labor. He presents examples of the “talent development” aspect of lean and now some companies evaluate people on the basis on their skills and knowledge in a four-square quadrant for both compensation and leadership. He concludes, “The companies with the best people working together on the best teams are the winners, and putting the best people into the best teams is done by principled leaders, not on the basis of accounting parameters.”

Chapter 10 considers “A Few Specifics,” and one of them that flies in the face of modern technology is the elimination of ERP systems as lean companies “see big IT systems as creators of significant levels of non-value adding waste. ERP systems create the need for planners, production schedulers, cost accountants and buyers. They require data collection and entry, as well as supervisors to oversee all of this, along with the costs of the software and hardware itself.” He provides examples of how ATC and West Paw Design use much simpler systems based on kanban (“a Japanese term mean something like ‘display card'”) He explains “Lean companies operate on a demand pull basis, rather than sophisticated forecasting models. Under this approach, they set a minimal inventory level in place and their purchasing and producing simply replenish that which has been used to meet actual customer demand…”

He concludes, “Perhaps the biggest reason lean companies avoid systems such as ERP is their cultural aversion to complexity. Complexity is the enemy of short cycle time, and it is the enemy of continuous improvement.”

The final two chapters contain a plea to take action and start leaning. He states, “You can’t change the basic trajectory of the business unless you change how you manage it…The gut wrenching, radical transformation in the business is not on the shop floor ? it is in the management office.” He states that successful lean leaders don’t come to this enlightened approach to management through logic, “they come to it through their principles…a principled leader is not content with the basic shop floor tools…they delve deeper and deeper into lean to find the zone of the management structures and philosophies need to allow them to manage by their principles and they dive even deeper into the core of lean culture until they fully understand and support the cultural rules need to turn the whole company into one driven by the leader’s strongly held beliefs.” He encourages companies to “learn why a strong culture is the linchpin of Lean success.”

The kernels of truth I briefly highlighted herein are why I recommend this book to everyone who wants to live and work by his higher principles while achieving greater success. If more American companies had the type of lean culture that Bill envisions, we truly could rebuild our manufacturing industry to make America great again and create jobs for millions of out of work Americans.

CPA Criticizes Peterson Report on Trans Pacific Partnership Agreement

March 13th, 2016

On January 25, 2016, the Peterson Institute for International Economics (PIIE) released a report  on the Trans-Pacific Partnership trade agreement. The Coalition for a Prosperous America (CPA) promptly released their commentary on the Peterson Institute report the same day, which was based on oral and written testimony CEO Michael Stumo had given to the U. S. International Trade Commission on January   15, 2016.

The Peterson Institute used the “”computable general equilibrium (CGE) model.” I’m not an economist. I live and work in the real world of manufacturing. Thus, I am not familiar with some of the terms economists use for economic models, and had not heard of this term previously. I try to find explanations that make sense, but even the Wikipedia definition was complex; “A CGE model consists of (a) equations describing model variables and (b) a database (usually very detailed) consistent with the model equations… CGE models are useful whenever we wish to estimate the effect of changes in one part of the economy upon the rest. For example, a tax on flour might affect bread prices, the CPI, and hence perhaps wages and employment. They have been used widely to analyse trade policy.”

The World Bank states, “Computable General Equilibrium (CGE) models offer a comprehensive way of modeling the overall impact of policy changes on the economy… However, CGEs are significantly affected by the assumptions that they are based on which, depending on their definition, can impact on the results.”

CPA criticized the PIIE for using “the controversial computable general equilibrium (CGE) model to analyze the TPP rather than models that produce less optimistic results.” Stumo stated that the CGE model is increasingly recognized as unreliable because:

Untrue Facts Assumed ? “full employment always exists, trade is in balance, that wages and productivity stay in alignment rather than diverge, and that all countries have perfectly free markets with rational economic behavior.” These assumptions are false ? “full employment rarely exists; trade is almost never in balance; wages have diverged downward from productivity for the past several decades; and many TPP countries have state-directed capitalism or strong industrial policies to influence and alter market outcomes.”

Untrue Past Results ? The CGE model was used to analyze China’s being granted Permanent Normalized Trade Relations with China (China PNTR) in 2000 and the Korea-U. S. trade (KORUS) agreement in 2012. A reduction in the trade deficits were predicted for both countries, but the reality is that U. S. trade deficit with China increased from $68.7 billion in 1999 to $337 billion in 2015, and the Korea trade “deficit worsened by $12 billion annually between 2012 (date of KORUS implementation) to 2015.” (US Census Bureau)

Untrue Assumption of No Net Job Losses? “The CGE model wrongly assumes that there are no job losses to produce its results. The International Trade Administration assumes that for every billion dollars of U.S. exports supported 5,796 jobs, down from 7,117 jobs per billion dollars of U.S. exports in 2009. Conversely, every billion dollars of imports has the opposite result. Thus, where trade agreements result in worsening trade deficits, as is the case for the NAFTA, Korea and China PNTR deals, the job losses are drastic.”

Additionally, Stumo criticized the Peterson report because it ignores the fact the Trans Pacific Partnership Agreement does not address problems with currency misalignment, border taxes (VATs), and industrial policies, such as state-owned enterprises and government subsidies.

Stumo stated, “The PIIE model incorrectly assumes that currency valuations will be set by the perfectly free market and will not be manipulated. It does not take into account rising foreign value added taxes – which replace tariffs – charged to imports from the US.  It also ignores the industrial policy and state-directed strategies that Japan, Vietnam and others use to give an advantage to state-influenced or national champion domestic industries.”

Stumo criticized the fact that PIIE admits the TPP will create no new jobs and little growth even if the CGE model’s conclusions are true.

Job Creation Will Not Occur ? “…while the TPP is not likely to affect overall employment in the United States, it will involve adjustment costs as US workers and capital move from less to more productive firms and industries. Section 4 estimates that 53,700 US jobs will be affected—i.e., that number is both eliminated in less productive import-competing firms and added in exporting and other expanding firms—in each year during implementation of the TPP. This kind of movement between jobs and industries is what economists refer to as “churn,” and most kinds of productivity growth cannot occur without it taking place. For perspective, 55.5 million American workers changed jobs in this way in 2014—so the transition effects of the TPP would represent only less than 0.1 percent increase in labor market churn in a typical year. Most workers who lose jobs do find alternative employment, but workers in specific locations, industries, or with skill shortages may experience serious transition costs including lasting wage cuts.”

The Peterson report even admits job loss from past trade agreements, stating “The largest loser is the United States, whose trade and current account deficits have been $200 billion to $500 billion per year larger as a result. The United States has thus suffered 1 million to 5 million job losses.

The reality is that we lost 6.2 million manufacturing million jobs in the past 20 years as a result of NAFTA, China’s being granted PNTR in 1999, and the subsequent trade agreements with Central America, Korea, and other countries. Since manufacturing jobs create three to four other supporting or related jobs, we really lost 18 – 20 million jobs, which partly explains why 94,610,000 Americans are no longer in the labor force, which is the lowest participation rate in 38 years.

What do the report’s authors mean by “import-competing firms”? It appears to me that this means American manufacturing firms whose domestically-made products compete with imports for market share in the U. S. In addition, the Made in USA products are also competing as exports to other countries against the exports of China, Korea, our other trading and non-trading partners. So what guarantee do we have that the people losing jobs at import-competing firms will find jobs at exporting companies? None!

In addition, the CPA commentary highlighted the following:

Income gains are Negligible ? “The study projects that, by 2020, US incomes will rise a mere 0.1% of GDP. (Table 2).  This means that 99.9% of growth will happen without regard to the TPP.  The number 0.1% is equivalent to, or less than, a rounding error. It can only come true if all untrue assumptions in the CGE model are true. It will take another 10 years for the optimistic projection to deliver a meager 0.5% income gain by 2030.”

Middle Class Will Not Benefit ?  “Assuming (which we do not) the small income gains are realized, the study is silent on who benefits from them. The Economic Policy Institute reported that trade agreements account for 90% of wage inequality. If there are any income gains, the middle class will be a net loser.”

Other countries will “benefit” more than the US ? “The Peterson Study projects that Japan, Malaysia and Vietnam will gain far more than the United States.  The US Trade Representative, by pushing the TPP, is helping open markets for competitors in Japan and other countries. Japan is estimated to gain five times more income (in relation to GDP) than the US, Vietnam 16 times more, and Malaysia 15 times more. (Report, Table 2).”

Finally, the CPA commentary points out that other economic models show losses to the U.S. and other TPP countries. The commentary cites the fact that scholars at the Global Development And Environment Institute of Tufts University released a working paper in January 2016 that used the United Nations Global Policy Model (GPM). The Executive Summary of this paper states, “This GDAE Working Paper employs a more realistic model that incorporates effects on employment excluded from prior TPP modeling. We find that any benefits to economic growth are more limited, and even negative in some countries such as the United States. More importantly, we find that TPP would lead to losses in employment and increases in inequality. This is particularly true for the United States, where GDP is projected to fall slightly (-0.54 percent), employment to decline by 448,000 jobs, and inequality to increase as labor’s share of income falls by 1.31 percent.”

The paper states that the job loss would not be limited to the U. S, stating, The TPP would lead to employment losses in all countries, totaling 771,000 lost jobs…Participating developing economies would also suffer employment losses, as greater competitive pressures force them to limit labor incomes and increase production for export.”

In fact, it also states that job losses would not be limited to TPP trading partners: “The TPP would lead to losses in GDP and employment in non-TPP countries. In large part, the loss in GDP (-3.77 percent) and employment (879,000) among non-TPP developed countries would be due to losses in Europe, while developing country losses in GDP (-5.24%) and employment (-4.45 million) would reflect possible losses in China and India.”

The CPA commentary concludes that “the PIIE report as revealing the lack of any economic benefit from the TPP under the most optimistic, albeit implausible, circumstances. It is more likely that job destruction and industry shrinkage will continue being the net result.”

I will be even more emphatic in my predictions if the TPP is approved by Congress. The TPP will result in millions of job losses since past predictions were always exceeded. It will be another nail in the coffin of American manufacturing. The TPP is so overreaching in its scope that it would change many aspects of American life. I’ve written several previous articles posted on the blog section of my website under “trade” on the dangers of the TPP and why we must stop it from being approved by Congress. Do your own research and don’t be fooled by the rhetoric of its supporters. You can read the full text of the agreement for yourself here.

What Could be done about China’s Theft of Intellectual Property

March 13th, 2016

Hardly a week goes by without a report of Chinese “hacking” or Intellectual Property Theft, so it was no surprise that a published analysis by CrowdStrike, a California-based cyber security company, revealed that China violated its cyber agreement with the United States the very next day after CNBC reported that President Obama and China’s President Xi Jinping agreed to not conduct cyber theft of intellectual property on Friday, September 25, 2015. President Obama said. “The United States government does not engage in cyber economic espionage for commercial gain, and today I can announce that our two countries have reached a common understanding on a way forward.” However, the U.S.-China agreement “does not prohibit cyber spying for national security purposes.”

It is interesting to note that the day before the announcement, September 24, 2015, Chet Nagle, a former CIA agent and current Vice President of M-CAM, penned an article in the Daily Caller, stating, “At FBI headquarters in July, the head of FBI counterintelligence, Randall Coleman, said there has been a 53 percent increase in the theft of American trade secrets, thefts that have cost hundreds of billions of dollars in the past year. In an FBI survey of 165 private companies, half of them said they were victims of economic espionage or theft of trade secrets — 95 percent of those cases involved individuals associated with the Chinese government.”

He blamed the corruption of Chinese government officials for the problem and stated that “President Xi Jinping has instituted a strict anti-corruption campaign. Regrettably, the campaign has focused on “tigers” — senior government officials — at the expense of eliminating the rampant corruption by the “flies” — officials at the provincial and local level. In any event, putting a dollar value on direct corruption does not address the totality of the costs. Business confidence and foreign direct investment in China are already falling because of the absence of the rule of law.”

He concluded, “China’s disregard of the rule of law should be the underlying driver for all discussions of commercial topics during the coming visit of China’s president. Lack of the rule of law is the most difficult challenge American enterprises face in China.”

In researching this topic, I found out that three years earlier, May 22, 2013, the bipartisan Commission on the Theft of American Intellectual Property of the U.S. International Trade Commission released a report. Dennis C. Blair, former Director of National Intelligence and Commander in Chief of the U.S. Pacific Command, and Jon M. Huntsman, Jr., former Ambassador to China, Governor of the state of Utah, and Deputy U.S. Trade Representative, were the Co-chairs of the Commission.

The day after the release, Forbes published an article about the report, stating that “China accounts for at least half – and maybe as much as 80 percent – of U.S. intellectual property theft.” The article briefly discussed the problem of China’s Intellectual Property theft and included quotes from the co-chairs, but did not go into any detail about the recommendations of the Commission.

The article did provide the link to the 100-page report, which I have since read. In view of the continuing problem, it is time to reconsider the key findings of the report, titled, “The Impact of International IP Theft on the American Economy”:

  • ”Hundreds of billions of dollars per year. The annual losses are likely to be comparable to the current annual level of U.S. exports to Asia—over $300 billion…”
  • Millions of jobs. If IP were to receive the same protection overseas that it does here, the American economy would add millions of jobs.
  • A drag on U.S. GDP growth. Better protection of IP would encourage significantly more R&D investment and economic growth.
  • The incentive to innovate drives productivity growth and the advancements that improve the quality of life. The threat of IP theft diminishes that incentive.

The report stated, “A core component of China’s successful growth strategy is acquiring science and technology. It does this in part by legal means—imports, foreign domestic investment, licensing, and joint ventures—but also by means that are illegal. National industrial policy goals in China encourage IP theft, and an extraordinary number of Chinese in business and government entities are engaged in this practice.”

The report stated that existing remedies are not keeping up with the problem because of:

  • Short product life cycles – “the slow pace of legal remedies for IP infringement does not meet the needs of companies whose products have rapid product life and profit cycles.”
  • Inadequate institutional capacity ? a shortage of trained judges in developing countries
  • China’s approach to IPR is evolving too slowly – “improvements over the years have not produced meaningful protection for American IP.”
  • Limitations in trade agreements? there are also significant problems in the WTO process that have made it impossible to obtain effective resolutions. “Bilateral and regional free trade agreements are not a panacea either.”
  • Steps undertaken by Congress and the administration are inadequate.

The Commission recommended short-term, medium-term, and long-term remedies. The short-term measures are immediate actions that are largely regulatory or made effective via executive order and include the following:

  • Designate the national security advisor as the principal policy coordinator for all actions on the protection of American IP.
  • Provide statutory responsibility and authority to the secretary of commerce to serve as the principal official to manage all aspects of IP protection.
  • Strengthen the International Trade Commission’s 337 process to sequester goods containing stolen IP.
  • Empower the secretary of the treasury, on the recommendation of the secretary of commerce, to deny the use of the American banking system to foreign companies that repeatedly use or benefit from the theft of American IP.
  • Increase Department of Justice and Federal Bureau of Investigation resources to investigate and prosecute cases of trade-secret theft, especially those enabled by cyber means.
  • Consider the degree of protection afforded to American companies’ IP a criterion for approving major foreign investments in the United States under the Committee on Foreign Investment in the U.S. (CFIUS) process.
  • Enforce strict supply-chain accountability for the U.S. government.
  • Require the Securities and Exchange Commission to judge whether companies’ use of stolen IP is a material condition that ought to be publicly reported.
  • Enforce strict supply-chain accountability for acquisitions by U.S. government departments and agencies by June 1, 2014, and work to enhance corporate accountability for the IP integrity of the supply chain.

The Commission made the following medium term recommendations to build a more sustainable legal framework to protect American IP that Congress and the administration should take:

  • Amend the Economic Espionage Act (EEA) to provide a federal private right of action for trade-secret theft. If companies or individuals can sue for damages due to the theft of IP, especially trade secrets, this will both punish bad behavior and deter future theft.
  • Make the Court of Appeals for the Federal Circuit (CAFC) the appellate court for all actions under the EEA. The CAFC is the appellate court for all International Trade Commission cases and has accumulated the most expertise of any appellate court on IP issues. It is thus in the best position to serve as the appellate court for all matters under the EEA.
  • Instruct the Federal Trade Commission (FTC) to obtain meaningful sanctions against foreign companies using stolen IP. Having demonstrated that foreign companies have stolen IP, the FTC can take sanctions against those companies.
  • Strengthen American diplomatic priorities in the protection of American IP. American ambassadors ought to be assessed on protecting intellectual property, as they are now assessed on promoting trade and exports. Raising the rank of IP attachés in countries in which theft is the most serious enhances their ability to protect American IP.

The more idealistic long-term recommendations are:

  • Build institutions in priority countries that contribute toward a “rule of law” environment in ways that protect IP.
  • Develop a program that encourages technological innovation to improve the ability to detect counterfeit goods.
  • Ensure that top U.S. officials from all agencies push to move China, in particular, beyond a policy of indigenous innovation toward becoming a self-innovating economy.
  • Develop IP “centers of excellence” on a regional basis within China and other priority countries.
  • Establish in the private, nonprofit sector an assessment or rating system of levels of IP legal protection, beginning in China but extending to other countries as well.

Of particular interest is the mention in the report that an annual survey in late 2012 of member companies of the American Chamber of Commerce in the People’s Republic of China “over 40% of respondents reported that the risk of data breach to their operations in China is increasing, and those who indicated that IP infringement has resulted in “material damage” to China operations or global operations increased from 18% in 2010 to 48% in 2012,” and that “The longer the supply line, the more vulnerable it is to IP theft.”

The risk of Intellectual Property is one of the major reasons many companies are returning manufacturing to America through reshoring. This is also why I urge the inventors that are part of the San Diego Inventors Forum to avoid going to China if at all possible, and if they have to go to China to meet their target Bill of Material cost, they should never source all of the parts of their product with one vendor. Otherwise, they are at risk of being victimized by their Chinese vendor stealing their IP and getting a counterfeit version of their product on the market first.

In conclusion, “The Commission considered three additional ideas for protecting the intellectual property of American companies that it does not recommend at this time.” The following one of the three is particularly interesting to me because of the enormous trade deficits we have with China:

“Recommend that Congress and the administration impose a tariff on all Chinese-origin imports, designed to raise 150% of all U.S. losses from Chinese IP theft in the previous year, as estimated by the secretary of commerce. This tariff would be subject to modification by the president on national security grounds.”

“The Commission is not prepared to make such a recommendation now because of the difficulty of estimating the value of stolen IP, the difficulty of identifying the appropriate imports, and the many legal questions raised by such an action under the United States’ WTO obligations. If major IP theft continues or increases, however, the proposal should be further refined and considered.”

What is outrageous to me is that it is obvious to me that none of the short-term, medium-term or long-term recommendations have been implemented or we would not still have the serious problem of cyber espionage and Intellectual Property Theft three years later.

Supporters of developments in China “essentially argue that when China begins producing its own intellectual property in significant quantities, the country’s own entrepreneurs and inventors will put pressure on political and Communist Party leaders to change the laws and improve IP protections.” Since China has the stated goal of becoming the superpower of the 21st Century and is Intellectual Property Theft is one of their tools to achieve this goal, I do not feel that this will ever happen.

To me, the most important conclusion of the report is “If the United States continues on its current path, with the incentives eroding, innovation will decline and our economy will stagnate. In this fundamental sense, IP theft is now a national security issue.” It will be interesting to see if the next president and the next Congress we elect will have the courage to play hardball with China by implementing some of the recommendations of the Commission.

Mixed Messages at San Diego’s Economic Outlook Events

February 9th, 2016

Economists and industry experts presented conflicting outlooks at the three of the Economic Outlook events held in San Diego this month. I attended two of the three ? the 32nd Annual San Diego County Economic Roundtable and the San Diego 2016 Economic Outlook by the National University Institute for Policy Research ? and read about the third, the San Diego Business Journal (SDBJ) Economic Trends event.

The SDBJ event focused on the areas of expertise of industry panelists in banking, health care, insurance, commercial real estate, tax, and employment, which is why I did not attend this event. If you are involved in these industries, then you were happy to hear that these experts forecast a healthy year for San Diego with the U. S. economy growing about 2.5%. Home prices have increased, consumer spending is growing, wages are increasing, and commercial real estate vacancy rates are below the 10-year average.

The other two events paid more attention to the manufacturing sector in which I am involved. Marney Cox, Chief Economist for the San Diego Association of Governments (SANDAG) participated in both events, and he and Kelly Cunningham, Chief Economist at the National University Institute of Policy Research (NUPR) were more cautious, forecasting a more modest 1.9% growth in the region, 2.1% in California as a whole and only 1.8% growth in the U. S.

Kelly Cunningham stated that it took us 74 months after the last recession to get back to the job level we had in 2007, which was two to three times as long as the recessions of 1980-81, 1990-91, and 2000-2001. The average GDP growth after these three previous recessions was 4-5% annual growth, but the U. S. GDP has grown an average of only 2% since the Great Recession. At the SDWP event, Marney Cox opined that the regional GDP growth should be >3%.

San Diego is adding jobs faster than the rest of California, and he forecast that the San Diego unemployment rate would remain at the low of 4.8% reached in December 2015 compared to 5.8% for California. He emphasized that this is the commonly used U3 rate of employment, not the U6 rate that includes part-time and discouraged workers. The U6 rate is about double the U3 rate, and was 9.8% in December 2015. However, the U3 rate doesn’t include people who have dropped out of the labor force. At the SDWP event, Marney Cox stated that 698,000 people had dropped out of the labor force in San Diego since 2005.

What concerns me is that manufacturing is only 9.5% of the regional GDP (based on 2014 data), up from the low of 7.6% of GDP in 2008. This is still considerably down from the high of 30.1% in 1980. It had slipped to 24.8% by the end of 1999, but that is less than a 6% loss in 19 years, whereas we have now dropped another 15.3% in 15 years. Also, San Diego’s GDP dropped from 7th in 1999 to 17th in ranking of the top 35 metropolitan areas in the U. S.

According to NUPR report, San Diego has “added 7,000 manufacturing jobs back as 2015 ended. Half of the new manufacturing jobs are in non-durable goods, one-quarter in aerospace, and the rest among other durable goods production, including shipbuilding and recreational goods…” However, this is about 5% or 6,000 fewer jobs than we had in 2007 (102,400) and more than 26,000 fewer jobs in manufacturing than we had in 1999 (128,300).

Since you have to make it, grow it, or mine it to generate tangible wealth, it is questionable whether or not San Diego can even maintain its level of prosperity in the future. Agriculture did not even show up on the pie chart of GDP for San Diego, and natural resources only represented .5% of the GDP. Thus, it is critical that San Diego maintain a strong manufacturing base. Manufacturing jobs create 3-4 other support jobs, while service jobs only create 1-2 other jobs.

Construction dropped from 3.8% of the region GDP in 2008 to only 3.3% at the end of 2014, but there has been very little recovery in the number of construction jobs as the number of jobs is still down by 12% from what the number was in December 2007. The NUPR report stated, “In 2016 we do not foresee a significant increase of this part of the economy, in part because of the

relatively small number of housing permits approved in the County. Absent a fundamental change of that figure, this part of the economy will continue to struggle.”

Since manufacturing and construction represent good paying jobs for the middle class, this explains why middle wage jobs are decreasing. The NUPR report released at their event defines “middle wage jobs as those paying between $35,000 and $77,000 per year in 2014 dollars” and states that “in 2001 middle wage jobs accounted for 56.6 percent of all payroll wage jobs…the ratio continued to shrink, standing at 49.5 percent as of 2014.”

Essentially in San Diego, we are creating six times more low paying jobs than high paying jobs and double the number of low paying jobs than middle wage jobs. Higher wage jobs “increased from 21.2 percent in 2001 to 26.2 percent by 2014,” and lower wage jobs “increased from 22.3 percent in 2001 to 24.3 percent as of 2014.”

This trend is nothing new. I remember Marney Cox expressing concern over the shrinking number of middle wage jobs at economic roundtables I attended in the mid 1990s.

Another trend Marney Cox mentioned is that the percentage of workers age 55+ has increased from 25% of the workforce to 35.1%, and there has not been a recovery in employment for those ages 25-54. Since these years are supposed to be the “golden years” of making money in a career, this does not bode well for the future for this age bracket. My own son and daughter are in this age bracket, and my son has had to work as an independent contractor since early 2010 without being able to find a permanent, full-time job in an occupation related to construction. Neither of my children has been able to afford to buy a house because with rents as high as they are, they can never save enough money for a down payment. Their dad and I were able to buy our first house in our mid 20s when houses cost about 3-4 times a median annual salary, but now they cost 9-10 times an annual median salary.

As I have mentioned in past articles, San Diego has been an innovation hub of advanced technology for the past 30 years, and we now have many startup companies at various stages of development in the more than 45 different accelerator/incubator programs in the region. This is why I was very concerned when Marney Cox stated that venture funding being invested in San Diego companies has greatly diminished. Last year, venture fund investment was <$One Billion and represented only 2% of national investment compared to 4-5% previously.

If this trend continues, it would have far-reaching effects. San Diego’s diverse industry clusters derived from technology-focused R & D have always helped the region perform slightly better than the rest of the country. However, if early stage companies cannot get venture funding beyond the Angel investor stage, it will be more difficult for them to ramp up into the full production stage where the majority of job expansion occurs. As a mentor for startup technology-based companies for the San Diego Inventors Forum and the CONNECT Springboard program, I am witnessing the increasing difficulty entrepreneurs are experiencing in getting investment funds. Crowdfunding is helping more companies get off the ground, but they will not be able to succeed in the long run and scale up to full production without significant Angel and venture funding.

San Diego’s economy cannot depend on military/defense spending and tourism for growth in regional GDP. Tightening defense/military budgets because of sequestration have been a drag on the San Diego regional GDP growth for the past three years, and the slight increase in defense spending in the current fiscal year budget will not make much of a difference.

These considerations are why I think that the conclusion reached in the NUPR report is valid: “World and national headwinds suggest battening down the hatches with a prognosis for tightening economic conditions…San Diego will be fortunate to achieve a seventh year of continuous positive economic momentum in 2016. These indicators of economic activity, however, do not portend an acceleration, but rather uneasy movement going forward.”

Based on the economic indicators I am seeing for the national manufacturing industry, I would say that these words of caution should also be applied nationally.

Is Reshoring Increasing or Declining?

January 21st, 2016

In December, two conflicting reports were released, one by A.T. Kearney and one by the Boston Consulting Group. The A. T. Kearney report states that reshoring may be “over before it began”, and the Boston Consulting Group report states that it is increasing. Why the difference in opinion and who is right?

This was the second report by A. T. Kearney, in which their “U.S. Reshoring Index shows that, for the fourth consecutive year, reshoring of manufacturing activities to the United States has once again failed to keep up with offshoring. This time the index has dropped to –115, down from –30 in 2014, and it represents the largest year-over-year decrease in the past 10 years.”

In fact they conclude that “the rate of reshoring actually lagged that of offshoring between 2009 and 2013, as the growth of overall domestic U.S. manufacturing activity failed to keep pace with the import of offshore manufactured goods over the five-year period. The one exception was 2011.”

The authors of the A. T. Kearney report identify the two main factors contributing to the drop in the reshoring index to be “lackluster domestic manufacturing growth and the resilience of the offshore manufacturing sector.”

With regard to the lackluster domestic manufacturing, the report states that data from the U. S. Bureau of Economic Analysis predicted that U. S. manufacturing gross output would shrink by 3.6% through the end of 2015 based on data through November [December data not available.]

On the other hand, the Boston Consulting Group survey results showed that “Thirty-one percent of respondents to BCG’s fourth annual survey of senior U.S.-based manufacturing executives at companies with at least $1 billion in annual revenues said that their companies are most likely to add production capacity in the U.S. within five years for goods sold in the U.S., while 20% said they are most likely to add capacity in China…The share of executives saying that their companies are actively reshoring production increased by 9% since 2014 and by about 250% since 2012. This suggests that companies that were considering reshoring in the past three years are now taking action. By a two-to-one margin, executives said they believe that reshoring will help create U.S. jobs at their companies rather than lead to a net loss of jobs.”

The difference of opinion is based on different data. A. T. Kearney notes that “The manufacturing import ratio is calculated by dividing manufactured goods imports from 14 Asian markets [list of countries] by U. S. domestic gross output of manufactured goods. The U. S. reshoring index is the year-over-year change in the manufacturing ratio.”

In contrast, the Boston Consulting Group data is based on “an annual online survey of senior-level, U.S.-based manufacturing executives. This year’s survey elicited 263 responses. The responses were limited to one per company…Respondents are decision makers in companies with more than $1 billion in annual revenues, across a wide range of industries.”

“These findings underscore how significantly U.S. attitudes toward manufacturing in America seem to have swung in just a few years,” said Harold L. Sirkin, a BCG senior partner and a coauthor of the research, which is part of BCG’s ongoing series on the shifting economics of global manufacturing, launched in 2011. “The results offer the latest evidence that a revival of American manufacturing is underway.”

The BCG survey identified such factors “as logistics, inventory costs, ease of doing business, and the risks of operating extended supply chains” are driving decisions to bring manufacturing back to the U.S. The primary reason for 76% of respondents reshoring production of goods to be sold in the U.S. was to “shorten our supply chain…while 70% cited reduced shipping costs and 64% said “to be closer to customers.”

The reasons cited by the BCG survey are consistent with the case studies that the Reshoring Initiative has captured, but the reshoring trend over the last few years has also been driven by a range of factors including rising offshore labor rates, especially in China, as well as the increased use of Total Cost of Ownership analysis to quantify the hidden costs of doing business offshore. The threat of Intellectual Property theft, cost of inventory (space to store and cost to buy larger size lots to get the “China price,) and quality/warranty/rework are also cited frequently. Longer delivery, cost and time of travel to visit offshore vendors, transportation costs, and communication problems also influence the decision to reshore.

About 60% of companies ignore these hidden costs and only look at wage rate, quoted piece price or at best, landed cost. Because of inaccurate data, many companies make the decision to offshore on the basis of faulty assumptions. The reality is that many companies are saving less than they expected, and in some cases, the hidden costs exceed the anticipated cost savings.

As an authorized speaker for Harry Moser’s Reshoring Initiative for the past five years, I have been conducting my own informal surveys of manufacturers that I meet at trade shows and conferences. Most of these companies are Tier 2 or 3 suppliers of assemblies, sub-assemblies and component parts. Each year, more and more companies have told me that they are benefitting from reshoring.

At the trade shows I attended last year and conducted my informal survey, I didn’t meet a single company that hadn’t gotten new business or recaptured an old customer because of reshoring. I believe that there is a great deal more reshoring going on than A. T. Kearney or even the Boston Consulting Group can quantify because it isn’t a whole product. It is an assembly, subassembly, or component part, such as metal stamped part, machined parts, sheet metal fabricated parts and assemblies, plastic and rubber molded parts, printed circuit boards, etc.

I now have slides for 300 case studies of companies that have reshored in the last six years provided to me by the Reshoring Initiative to use in my presentations. I can tailor my presentation to include slides for particular industries or geographical location. For example, when I spoke at the Lean Accounting Summit in Jacksonville, Florida in October, I shared case studies of companies that had reshored to the Southeast and when I spoke at the Design2Part show in Pasadena later that month, I shared case studies for companies that had reshored to California.

The Reshoring Initiative estimates that “if all companies used Total Cost of Ownership (TCO) analysis, 25% of the offshoring would come back.” Their data reveals that about 100,000 manufacturing jobs have already been reshored in the last six years. Harry Moser states, “Excess offshoring represents an economic inefficiency that can be corrected at low cost. It is less expensive to educate companies than to incentivize them.”

During a recent conversation with Harry Moser, he said, “The economic bleeding due to increasing offshoring has stopped. The rate of new reshoring is now equal to the rate of new offshoring. The challenge is now to reshore the 3 to 4 million manufacturing jobs that are still offshored.” He provided me with the following chart to use in the presentations I gave last fall:

  Manufacturing Jobs / Year
  2003 2013 % Change Feasible 2016
New offshoring * ~150,000* 30-50,000* – 70% 20,000
New reshoring    2,000* 30-40,000** + 1,500 % 70,000
Net reshoring -148,000 ~0 -100% +50,000

*Estimated / ** Calculated

In the past, corporate cultures, supply chain reward systems, and investment have been heavily focused on offshoring. Many companies followed each other offshore in what Harry and I call “herd behavior.” We are endeavoring to change the mindset from offshoring is cheaper to sourcing domestically may be the better choice.

Another way would be to change the way buyers/purchasing agents in supply chain groups are being evaluated and rewarded on the basis of their success in achieving purchase price variance; i.e., selecting sources on the basis of the cheapest price. Chief Financial Officers need to allow their company’s supply chain department to utilize expenses in the other accounting categories that need to be taken into consideration in doing a Total Cost of Ownership analysis, such as transportation costs, travel and communication costs related to the supply chain, and the cost of quality problems related to rejected parts and reworking of salvageable parts.

Transforming to the value stream method of Lean Accounting would also facilitate being able to do a Total Cost of Ownership analysis more than Standard Cost Accounting because all of the costs related to that value stream are put into the category of Conversion costs and not put in the separate accounting categories of standard cost accounting.

The reality is that companies will only bring back the majority of offshored work if the economics of producing in the U.S. improve. The actions needed for more reshoring are the same as needed for manufacturing in general. These include developing a national manufacturing strategy that encompasses skilled workforce training, corporate tax reform, regulatory reform, and Border Adjustable Taxes (aka VATs) while addressing the predatory mercantilist practices of other countries with regard to currency manipulation, product dumping, and government subsidies.

Let’s return to the question of the status of the reshoring trend. The government keeps no related data. ATK tries to measure reshoring indirectly by measuring imports. It would be better to measure the actual phenomenon. BCG uses surveys of reshoring plans, but companies’ actions often differ from plans. The Reshoring Initiative counts the actual reshoring cases and jobs reported in the media and privately by companies. Readers can help resolve the dispute by reporting their cases of successful or failed reshoring to Harry Moser or to me, so I can write about them in future articles.

Louisville Knocks Manufacturing out of the Park

December 31st, 2015

In mid-November, I had the pleasure of touring manufacturing plants in the Louisville, Kentucky region as the guest of the marketing consortium of the Greater Louisville Inc. Initiative. Well-known as the home of the Louisville Slugger baseball bat and the start of the “Bourbon Road” tours of bourbon and rye whiskey distilleries, Louisville has a much more diverse manufacturing base than I expected. My hostesses for the plant visits were Eileen Pickett and Ceci Conway, members of the marketing consortium.

Our first visit was FirstBuild, which is a partnership between GE Appliances and Local Motors. We met with Director Venkat (Natarajan Venkatatakrishman) and Randy Reeves of Operations. Venkat said that they are creating “a new model for the appliance industry, engaging a community of industrial designers, scientists, engineers, makers and early adopters to address some of the toughest engineering challenges and innovations.” He explained that “Firstbuild’s mission is to invent a new world of home appliances by creating a socially engaged community of home enthusiasts, designers, engineers, and makers who will share ideas, try them out, and build real products to improve your life.”

The Microfactory is divided into four sections: an interactive space for brainstorming, focus groups and product demonstration, a lab for prototyping, a fabrication shop, and assembly area. In the interactive space, there were some current projects on display: a smart chillhub refrigerator with two integrated USB hubs, an easy-load double oven with a sliding drawer, a wall-mounted pizza oven for home use, and a micro kitchen. Randy Reeves gave us a tour of the fab shop, and besides the expected 3D printers, they have a CMC mill and lathe, a small turret press, a press brake, a small stamping press, and a laser-cutting machine. The shop is capable of producing up to 2,000 units per year of a new product.

Venkat said, “We test the market for a new product using innovative techniques including Indigogo for crowd funding and preordering of the products. If there is sufficient interest in a new product, we can then manufacture those designs in our Microfactory for rapid product introduction and iteration. We are pioneering the future of work with a new model for inventing, building, and bringing the next generation of major appliances to the market. Since we opened on July 23rd, 2014, we have launched 10 products, and one has been scaled up to mass production.”

After lunch, we visited D. D. Williamson (DDW), the world leader in caramel color and a leading provider of natural colors for major food and beverage companies. DDW’s natural colorings are used in everything from beer, malt ale, soft drinks, sauces, baked goods, cheese, ice cream, and confectionery products.

I was frankly astonished when Chairman and CEO Ted Nixon told me that the company had been founded in 1865 by Dutch immigrant Douw Ditmars Williamson in New York to manufacture burnt sugars for the brewing industry. He said that the company was well positioned to provide caramel color when the cola soft drink industry started and then expanded into colors for other products in the latter part of the 1900s. The company set up a plant in Louisville in 1948, and then moved its headquarters to Louisville in 1970.

Nixon said, “We set up our first plant outside of the U. S. in Ireland in 1978 to produce caramel for the European cola industry. Then, we set up a plant in Shanghai to manufacture caramel color for customers in Asia. In 1999, we began producing in Swaziland to supply customers in Africa, the Middle East and South Asia. In 2001, we opened a plant in Manaus, Brazil to service the South American market and acquired a company in Manchester, England in UK in 2004. Now we have nine plants on five continents.”

He added, “About ten years ago, we launched the first certified organic caramel colors in North America and added annatto extract, turmeric, paprika, and red beet to our natural color portfolio. Our lab is continually working on new natural flavors to keep us as the leading producer of natural colors.”

Our last visit of the day was to Peerless Distillery in downtown Louisville. Chairman Corky Taylor gave us a brief history of the company. He said, “The company was originally founded in 1881 by Elijah Worsham and Capt. J. B. Johnston as Worsham Distillery Company in Henderson, Kentucky. My great grandfather, Henry Kramer, purchased the company in 1889 after Mr. Worsham died and reincorporated as Kentucky Peerless Distilling Company in 1907. My great grandfather invested in new equipment and built the company up from 300 barrels of bourbon a year to a peak of 23,000 barrels in 1917. He stopped production when America entered WWI that year to aid in the conservation of corn for the war. Production did not resume after the war because prohibition went into effect. The 63,000 barrels in the warehouse were sold for medicinal use during prohibition. My great grandfather invested in and became president of First National Bank of Henderson. My dad went to military school and went in an army. During WWII, he was one of the aides to General Patton.”

I asked him what his prior career had been and why he chose to recreate Peerless, and he said, “I owned successful financial services that focused on designing pension systems for government agencies. About five years ago, I sold my business and retired to Sarasota, Florida. Walking the beach one day, I realized that being retired and boring was depressing and boring, so I moved back to Louisville to resurrect my great grandfather’s business and leave a legacy. I needed something to make life worth living.”

Corky’s son Carson was a building contractor and they hired an associate of his, Michael Vaughn, to rehab the building they selected in the historic downtown area being redeveloped. It took over a year to rehab the building, and they began production last February. Michael Vaughn stayed on as Operations Mgr. and is working to become a Master Distiller. Michael gave us the tour of the distillery and told us that it takes four years to age bourbon and two years to age rye whiskey, so they are producing moonshine in the meantime. They have developed unique flavors, and we were each allowed to have a half ounce of two flavors. As a virtual non-drinker, I liked the Green Apple and Chocolate the best. The moonshine is only 44 proof, about the same as wine, and it was a nice way to end our busy day.

The next day, we visited Amatrol, located across the river from Louisville in a 120,000 sq ft. headquarters plant in Jeffersonville, Indiana. President Paul Perkins said that his parents, Don and Roberta Perkins, founded the original parent company, Dynafluid, Inc. in 1964. He said the company started as a manufacturer of industrial automation systems for many Fortune 500 companies including Coca Cola, General Electric, Alcoa, Ford, Chrysler, and others.

Perkins said, “Many of our customers wanted help in training their employees to use and maintain the automation systems and other equipment we built, so Amatrol was created as the educational division of Dynafluid in 1978 and was formally incorporated as a separate company in 1981.” Amatrol, short for Automated Machine Controls, first provided training equipment to industrial and educational clients for new technologies like those being implemented in Dynafluid’s systems.”

Perkins said, “Amatrol was in a unique position to effectively develop training programs for these technologies because its engineers and technicians were thoroughly familiar with the design, application and maintenance of them. Since that time, Amatrol has grown significantly, becoming the leading company in our primary market segments.”

Over the years, Amatrol focused its business model by providing training equipment and highly engaging interactive multimedia online training software in the following areas for high schools, colleges, and private industry: Advanced Manufacturing, Biotech, Certified Production Technician, CNC Machine Operator, Construction Technology, Engineering Technology, Green Energy Technology, HVAC, Industrial Maintenance, Iron and Steel, Mechanical Maintenance, Mechatronics, Mining, Oil and Gas, Packaging, Power and Energy, Solar Technology, and Wind turbine technology.

Perkins said, “A key factor to our success is that we have a group of people who have developed a very close connection and understanding of the needs of our customers and a realization that satisfying the needs of our customers to make them successful makes our company successful.”

Our next visit was to Rev-A-Shelf, back in Louisville. Rev-A-Shelf was originally a division of Ajax Hardware in California. In 1978, it was established as a division of Jones Plastics and Engineering, a family owned injection molder of appliances parts, and other custom polymer components that now has five manufacturing facilities in Kentucky, Tennessee, and Monterrey, Mexico.

General Manager David Noe said, “We began making metal and polymer Lazy Susan components for some of the largest U.S. cabinet manufacturers. We are a family owned business with a national scope and a passion for innovation. We have grown our product line from Lazy Susans to Kitchen Drawer Organizers, Base Cabinet and Pantry Pull-Outs, functional Waste Containers, LED lighting systems and Childproof Locking System to become a market-leading innovator of quality, functional residential cabinet storage and organizational products. We have factories, warehouses and satellite offices strategically located to serve our expanding customer base of kitchen dealers, architects, furniture manufactures, cabinet industry distributors and retail home centers worldwide.”

We toured the assembly plant and didn’t visit their plastic injection molding facility down the street. The two buildings total 315,000 sq. ft. of space, and the company has about 250 employees. When I asked about Lean, Noe said, “We are currently implementing a comprehensive “Lean Manufacturing” initiative throughout the company. Our goals are to add value to our customers with quality, service, and innovation in everything we do. We are committed to a more functional and organized life for our consumers. Our Marketing Slogan is “We Are Going to Change the Way You Think about Cabinet Organization!”

The last company I visited on my trip was Dant Clayton that manufacturers bleachers and stadium grandstand structures. Founded in 1979 by Bruce Merrick, the company started out making bleachers for Little League ball fields and has grown to providing everything needed for up to 60,000 seat stadiums.

We toured the two production plants built next to the corporate headquarters of the Dant Clayton campus, consisting of 350,000 sq. ft. of production space, spanning 25 acres. The company has a full range of material finish capabilities in-house, including powder coating of steel and aluminum and blasted slip-resistant deck. It was astonishing to see 3 ft. X 12 ft. steel beams attached to hooks moving down the 600 ft. robotic powder coating line before entering the oven to cure. I have never seen such a large supply of aluminum extrusions anywhere. I am sure that having these capabilities and equipment internally allows for greater quality control and continuous improvement.

Merrick said, “For the first few years, we experienced 20% growth before flattening for awhile. Thereafter, we would experience growth spurts for two or three years, and during the growth spurts, we doubled the seating capacity of our bleachers from 500 to 1,000, to 2,000, to 5,000, to 10,000, to 25,000 and then 50,000.” Merrick explained that they “are the most competitive when they get involved at the design stage and provide engineering, construction management, and installation services.”

When I asked what are the key factors are that have led to his company’s success, he said, “A culture of continuous improvement that goes beyond lean manufacturing to include product development, R&D efforts, and discovering latent customer needs, as well as rigorous hiring practices, and a culture of personal development and accountability by all employees.”

The examples of commitment to excellence and continuous improvement displayed by the companies I visited in Louisville are what make America great. And, yes I did get to visit the home of the Louisville slugger between appointments. The company was wooed back from Indiana to set up their manufacturing plant right on the main street of downtown Louisville, and you can watch the bats being made through windows on two sides of the building and visit the museum that houses the model bats for all of the famous baseball sluggers.

 

CONNECT’s Most Innovative New Product Awards Feature Cutting Edge Technology

December 31st, 2015

On December 1, 2015, CONNECT presented its Most Innovative New Product awards to winners in eight categories at its 28th annual event at the Hyatt Regency Aventine. CONNECT is a premier innovation company accelerator in San Diego that helps startup entrepreneurial teams become great companies in the technology and life sciences sectors by providing access to the people capital, and technology resources they need to succeed. CONNECT has assisted in the formation and development of more than 3,000 companies since 1985. Lead sponsors for the event were Ardea Biosciences, Cubic Corporation, and JP Morgan Chase & Company.

Under the new leadership of CEO, Greg McKee, CONNECT has refocused its vision for the future. In his opening comments, McKee said, “We enable and empower scientists and entrepreneurs to transform their ideas into products and services that change lives. We create and activate a powerful network of the world’s leading researchers, entrepreneurs and investors that have an innate drive to be purposeful in making the world a better place. The CONNECT experience elevates the value of this network to make San Diego the center of extraordinary and highly convergent technology. The people of CONNECT are dedicated, authentic, and passionately committed to making a difference in our region and the world. CONNECT’s community ignites San Diego’s position as a leader in the global innovation economy.”
He announced a new big goal to “build the next ten ONE BILLION DOLLAR COMPANIES” by 2025 to help grow the San Diego 200 billion dollar ecosystem to 300 billion dollars.” While admitting the goal is ambitious, he said it is important “Because companies of this size are the life blood of our community – they bring jobs, tax revenues, international recognition, sophistication, and most importantly, they are a magnet to the next generation of leaders. The more successful companies we can create, the stronger the gravitational pull to San Diego becomes.”

Continuing, he said, “But, San Diego’s entrepreneurs are no strangers to creating billion dollar companies. Just off the top of my head, there’s Illumina, Dexcom, Cubic, Care Fusion, Amylin, Idec, Life Technologies, Nuvasive, Callaway, Auspex, Viasat, Resmed, Cymer, Ardea, and I almost forgot that little startup  Qualcomm, just to name a few.” He concluded by saying, “This is the next generation of CONNECT, and if you are with me, if you believe that San Diego’s future depends on being a leader in the global innovation economy, then JOIN US!”

Over 100 companies applied for the Most Innovative Product Award this year. To be eligible, a company must have developed the product in the San Diego or Baja California region, introduced the product and generated revenue from sales between March 2014 and August 2015, and not have been nominated previously. A more than 60 member selection committee pre-screened the applicants and narrowed them down to 24 finalists, three in each of the following eight categories.

Aerospace, Security and Cyber Technologies

Ocean Aero won for its Submaran, which is a wind and solar-powered surface and subsurface vessel, designed for extended autonomous ocean observation and data collection. This unmanned vessel is changing how we observe our oceans because of its survivable and undetected ability to perform long-term data-gathering missions without the need to refuel or recharge.

CEO and President, Eric Patten said, “Ocean Aero is incredibly honored to receive this award, especially considering the competitive field of finalists.” He added, “This award validates the massive potential of the Submaran for the Ocean Aero team.”

The other finalists were Cubic Global Defense for its Javelin missile simulator and Tortuga Logic for its security software suite.

Cleantech

Q Factory 33 won for its B3 Bypass Device that facilitates 625% increases in energy potential of solar, wind, stationary battery backup systems and electrical generators and enables 30% increases in conductivity, five?fold reductions in soft costs and elimination of expensive electrical upgrades.

President and CEO Randy Hughes said, “CONNECT’s recognition of the potential of the B3 Bypass to overcome one of the solar industry’s most perplexing challenges — the bus bar limitations imposed on energy backfeed potential of solar, storage and wind systems across the board — lends another valuable validation to the relevance of our work to drive widespread adoption of clean tech solutions.”

The other finalists were Flux Power for its lithium-ion battery pack and Yulex for its plant-based, natural rubber wetsuit.

Communications and IT

Mushroom Networks won for its VOIP Armor, which if a “Voice over IP” gateway device that automatically heals and works around any network problems that otherwise negatively impact phone calls. You set and forget it for crystal clean phone calls with unbreakable reliability for your business.

“MIP Awards are the Oscar’s of the IT industry and is very important for our company as it confirms our innovative approach to bringing solutions to the market”, said Cahit Akin, Mushroom Networks CEO.

The other finalists were Field Logix for its innovative dispatching solution and the Lytx DriveCamTMVideo-based safety solution for commercial fleets.

Life Science Diagnostics and Research Tools

CureMetrix won for its CureMetrix image analysis platform that quantifies the qualities of anomalies in images. As a first target, CureMetrix is focused on doing early and accurate detection of breast cancer in mammograms along with reducing unnecessary biopsies.

CEO Kevin Harris said, “Winning the CONNECT Most Innovative Product Award in Life Sciences was no small feat since the companies in this category all have amazing teams and products. For us, this is one more bit of validation and recognition that were are working on something that is incredibly important and has the opportunity to change lives.”

The other two finalists were DermTech for its non-invasive adhesive skin biopsy kit and Gattaco for its CENTREPON Centrifuge Replacement Tool.

Mobile Apps

Chalk Digital won for its Instant Mobile Ad Platform that is a Do-it-Yourself advertising solution (portal and app) that builds locally target, affordable campaigns with mobile optimized landing pages within minutes. It offers businesses and consumers the ability to build, target, and launch their own personal advertisement in minutes that is displayed in thousands of mobile apps based on your location.

The other two finalists were Boost Academy for its one-on-one math tutoring and Cubic Transportation Systems’ mobile payment app for trains and buses.

Pharmaceutical Drugs and Medical Devices

PureWick won for its PureWick device that empowers women with safe and simple incontinence management in hospitals, nursing facilities and at home. A non-invasive, disposable wick comfortably moves urine away from the body providing a new standard of care without the need for catheters or specialized nurses.

PureWick President, Camille Newton, M.D. thanked the judges for “recognizing the disruptive elegance in something so simple and intuitive.” She also said that she hoped that the “award will help them get their product to market faster to help women to be dry, comfortable, and safe.”

The other two finalists were RxSafe’s robotic production of strip packaged medications and Tandem Diabetes Care for its t-flex® Insulin Pump.

Software and Digital Media

Comhear‘s MyBeam won for its MyBeam single, portable, wireless 12-18″ sound bar device that produces spatialized, localized, and binaural virtual surround sound. MyBeam delivers a fully immersive audio experience through a portable personal device that replaces headphones. The device commercializes a patent-pending algorithm that sends sound directly to your ears precisely the way your body was designed to receive it.

CEO Perry Teevens said, “CONNECT is an excellent organization and a great platform for innovative companies to gain recognition for their products. We are looking forward continuing our relationship with SD CONNECT and associated members of the organization. Making it to the finals and eventually winning this category has been a thrilling experience. I’m grateful to our employees and partners who made winning this award possible.”

The other two finalists were AristaMD’s Referral intelligence Platform and the SOCI for scoring the social web.

Sport and Active Lifestyle Technologies

Hush won for its Hush Smart Earplugs, which are the world’s first smart earplugs that help people sleep better in noisy environments. Combining a sound machine, earplug, and Smartphone connectivity, Hush allows you to drown out noises that keep you up at night, while simultaneously allowing you to hear the alerts and notifications you need.

Co-founder/CEO, Daniel Lee said, “Winning the MIP award has been a pretty incredible milestone for Hush. As we gear up to finally launch and ship out our long-awaited Hush product, winning such a prestigious award couldn’t have been more timely. As each week passes by, we become less of the college students with lofty dreams and more of a legitimate company with a legitimate product. The MIP award was a landmark milestone defining this maturation.”

The other finalists were the FORECAST new film system by Ride100% and the hookit scoring engine for athletes.

The final award of the evening was the William W. Otterson Award, CONNECT’s highest honor given to technology or a product that has demonstrated a significant impact on society and our quality of life. This year the award was given to the RQ-4 Global Hawk, developed by Northrop Grumman. “The RQ-4 Global Hawk is a high-altitude, long-endurance (HALE) unmanned aircraft system (UAS) designed to provide military field commanders with comprehensive, near-real-time intelligence, surveillance, and reconnaissance (ISR), plus detection of moving targets over a large geographical area for battle management, targeting, and situation awareness of enemy actions. The superior performance of the Global Hawk’s system significantly enhances the U. S. military’s ability to prevail in all types of operations from sensitive peacekeeping missions to full-scale combat.”

The event concluded after “Brennon Crist, Managing Director at JP Morgan Chase & Company, presented a $230,000 check to CEO Greg McKee to support CONNECT in the development of small business clusters in San Diego…Crist stated, We understand that many entrepreneurs are tackling some of the world’s biggest problems, which is why we support start-up accelerators like CONNECT who are making a dramatic difference in the way small businesses work and how they succeed.”

CONNECT is the oldest of the over 40 different accelerators or incubators in the San Diego region, which is one reason why San Diego ranks #2 in the world for the most patents issued. After 30 years leading San Diego’s innovation economy, CONNECT has a built an unbeatable roster of over 500 highly-qualified individuals to serve as Springboard Entrepreneurs-In-Residence and Mentors who volunteer their time as mentors to help entrepreneurs develop successful companies. I am honored to be a new member of the Mentor group after working with inventors for the last six years as part of the San Diego Inventors Forum, which is a “feeder” organization for CONNECT’s Springboard program for entrepreneurs.