Archive for June, 2011

House Passes American Invents Act

Tuesday, June 28th, 2011

The House passed H. R. 1249, The Leahy-Smith America Invents Act, on June 23rd by a 304-to-117 vote, a bipartisan tally with more than two-thirds of lawmakers from each party supporting the bill.  The Senate passed similar legislation in March on a 95-to-5 vote.  The bill would change how the U.S. grants patents and award them to the party which is “first to file” an invention instead of the “first to invent” it.  The bill to reform the U.S. patent system for the first time in nearly 60 years would bring the U.S. in line with other countries who adopted first to file patent systems years ago, a move that will simplify the patent process for companies that file applications in multiple countries.

Congress has been trying to reform U.S. patent rules for more than a decade, but previous efforts to reach a compromise on new rules fell apart because of disagreements by various industries, including pharmaceutical and Silicon Valley companies.  However, many of the most divisive issues have been settled by the courts in recent years, leading to the current legislation.

The banking industry scored a victory when lawmakers included a provision in the bill which would make it easier for banks to get re-examination of patents on financial business processes such as check-scanning, in an effort to avoid paying patent-infringement fees.  The U.S. Chamber of Commerce and the National Retail Federation joined the banking industry to push for the provision, which was opposed by some small inventors.  An amendment sponsored by six lawmakers to strip that provision from the bill failed.  The banking industry measure is also in the Senate version of the bill.

Fifteen amendments were introduced, and only seven were accepted.  Among the amendments rejected were Rep. Sensenbrenner’s Amendment 502 to strike Section 3 of the legislation converting the U. S. patent system from a “first to invent” to a “first to file” system and Amendment 492 by Rep. Conyers (D-MI), which would have inserted language to move the United States to a “first to file” system only upon a Presidential finding that other major patent authorities have adopted a similar one year grace period.

Rep. John Conyers (D., Mich.) said the legislation would “benefit large multinationals at the expense of independent inventors and small businesses” and would “harm jobs, harm innovation and harm our nation.”

Even though the legislation enjoyed broad industry support and was relatively uncontroversial, the House bill ended up filled with some thorny provisions that riled a few industry groups.  Some inventors and small businesses complained that switching to a “first to file” system would give large companies an advantage and hurt individual inventors.  Opponents argued there is no reason to change the U.S. system.

The bill’s supporters say it will improve patent quality by creating a new process for reviewing patents after they have been issued and allow third parties to provide information on other parties’ applications.  To address concerns by university researchers, the bill would also give inventors a grace period to file for patents after publicly disclosing their inventions.  It would also stop the ability of inventors to receive patents on tax strategies.

“This bill is designed to help all inventors,” said Rep. Lamar Smith (R – Texas), who chairs the House Judiciary Committee and helped author the legislation.  The current system “seriously disadvantages small inventors and companies” because it can lead to years of costly legal challenges to their patents, he said.

Representative Mike Michaud (D-ME), who voted in favor of the bill, said, “We need to make it easier for companies to innovate and make things here at home, and this bill does that.   Although I was disappointed that the bill did not improve the funding structure for the Patent and Trademark Office, I am pleased that provisions were added to make it better for U.S. manufacturing.  This bill shows how effective Congress can be when both sides of the aisle work together.  I look forward to working in a bipartisan fashion with my colleagues to further advance U.S. manufacturing and see this bill through the conference process with the Senate.”

Rep. Don Manzullo (R-IL) voted against the bill after his two proposed amendments failed.  One would have totally transformed the bill by simplifying it with a plan focused solely on reducing the huge backlog in patent applications, and the other would have eliminated one section of the bill that gives the Patent & Trademark Office the ability to set its own fees.  Rep. Manzullo stated, “This bill would weaken our strong patent system that has protected American entrepreneurs for centuries from overseas companies trying to pirate their inventions.” Manzullo said. “Any patent reform we undertake should focus on reducing the backlog in patent applications, not dramatically altering the system and giving multinational corporations advantages over American innovators.  The last thing we should be doing right now is giving foreign companies an even greater opportunity to take our ideas and our jobs.”

Manzullo also believes the bill is unconstitutional (earlier this month, the Supreme Court reaffirmed that patent rights belong to the inventor) and unnecessarily adds a new post-grant review provision that will further delay and add further litigation to the patent approval process.

Biotechnology Industry Organization (BIO) President and CEO Jim Greenwood released the following statement:  “BIO will continue to work with House and Senate leaders to ensure that final patent reform legislation addresses any remaining concerns and is enacted into law this year.”

“Small biotechnology companies rely heavily on their patents to attract investment to fund the lengthy and expensive research and development process necessary to bring breakthrough medical therapies and other products to patients and consumers.  Strong intellectual property protection is critical for these companies.

The Leahy-Smith America Invents Act will bring our patent system into the 21st century.  The improvements made by the bill will benefit all sectors of the national economy by enhancing patent quality and the efficiency, objectivity, predictability and transparency of the U.S. patent system.”

The most important difference between the two bills is funding for the United States Patent and Trademark Office.  The bill passed by the Senate put an end to the practice of fee diversion, which occurs when the Congress appropriates the USPTO less than they collect in fees.  The excess in the fees collected from users of the USPTO then go to the federal government as general revenues and are used for purposes other than the operation of the United States Patent and Trademark Office.

Interest groups are already lining up to continue the fight, and there will probably be many more interest groups that protest the removal of provisions that would end fee diversion once and for all.  The Innovation Alliance, a lobbying group representing some biotech and tech companies including Qualcomm Inc., pulled its support of the legislation prior to passage last week over a disagreement on how patent office operations are funded.

The Innovation Alliance’s Executive Director, Brian Pomper, released the following statement shortly after the America Invents Act passed:  “The Innovation Alliance is disappointed that the House of Representatives has approved legislation that will not end permanently the diversion of user fees from the U.S. Patent and Trademark Office (USPTO).

“Along with many other patent stakeholders across a range of sectors and business models, we believe that the anti-fee diversion provisions approved by an overwhelming vote of 95-5 in the U.S. Senate and a 32-3 vote in the House Judiciary Committee offer the USPTO the reliability and structure it needs to reduce today’s significant backlog of 700,000 patent applications.  Reducing the patent backlog and strengthening the USPTO is essential for driving innovation, job creation, and economic growth. We will continue to work with lawmakers and other stakeholders to ensure that any patent bill that becomes law ends fee diversion permanently.”

Prior to passage in the House, Senator Tom Coburn (R-OK), who was the champion in the Senate of the provisions that would end the practice of fee diversion, issued the following press release:  “For too long tomorrow’s inventions have been stymied by today’s incompetence in government.  It is outrageous for Congress to take fees paid by Americans for a specific service and spend those dollars on other programs.  Since 1992, Congress has pilfered nearly $1 billion in user fees dedicated to the Patent and Trademark Office and spent those dollars elsewhere.  As a result, we have 700,000 patents waiting for a first review that, if approved, could help get our economy moving again,” Dr. Coburn said.

“The Senate voted to end this egregious practice by a margin of 95 to 5 when it passed legislation this March that included an amendment I offered to end fee diversion once and for all.  The House, unfortunately, decided to water down this language and allow the Appropriations Committee to control this account.  Unfortunately, the Appropriations Committee has a poor record of managing such accounts responsibly and honestly in this area and others.  For instance, the Appropriations Committee has stolen billions from the Crime Victims’ Fund and other funds,” Dr. Coburn said.  “There is no reason to believe they won’t continue to do the same with the patent account.”

Now, the fight will go back to the Senate where Senators will be asked to swallow the changes adopted by the House of Representatives, which seems unlikely.  Senator Patrick Leahy (D-VT) and Congressman Lamar Smith (R-TX) will likely want to find compromise language that can pass both the House and the Senate.  A formal Conference on the bill is unlikely, which would mean that the Senate would need to work out language acceptable to the Senate while also being acceptable to the House.

Meanwhile, David Kappos, Under Secretary of Commerce for Intellectual Property and the Director of the United States Patent and Trademark Office, issued the following statement:  “I want to congratulate the House of Representatives for passing the Leahy-Smith America Invents Act today…The effort to reform our nation’s patent laws began a decade ago, and House passage today brings patent reform a significant step closer to becoming law.  This bi-partisan legislation will transform our patent system, enhance our Nation’s competitiveness and promote economic growth and job creation.

We are encouraged by the statements of so many Members of Congress calling for the USPTO to have full access to all of its fee collections.  We are particularly thankful to Chairman Rogers for his commitment to ensure that the USPTO has full access to its fees when fee collections exceed Congress’ annual appropriation for USPTO. Full funding of the USPTO is necessary for the USPTO to successfully implement this legislation and to more effectively perform its core mission.  We are hopeful that this critical legislation can move expeditiously toward final passage and enactment.”

Many are not at all thankful for the role of Congressman Hal Rogers (R-KY) because it was Rogers who protested the end to fee diversion and inserted the language that does not guarantee the USPTO will be able to access 100 percent of the user fees it receives.  Under a compromise, House lawmakers did agree to let the agency keep patent fees but would put any funds excess of its annual budget into a reserve account overseen by Congress.  The provision conflicts with the Senate’s patent bill and the White House expressed concerns about the proposal Tuesday, saying the patent office “must be able to use all the fees it collects to serve the users who pay those fees.”

The House and Senate must now negotiate a final bill before patent reform can be sent to President Obama to be signed into law.  It seems unlikely that the Senate would accept the removal of provisions that will end fee diversion and the across-the-board-prior-user rights also in the House version.  Although the House and Senate bills must now be reconciled, the White House has already signaled its support for the legislation to be signed into law.

Once again, our elected representatives have sold out to the interests of multinational corporations at the expense of inventors and small businesses.

ITIF Makes a Strong Case for National Manufacturing Strategy

Tuesday, June 14th, 2011

The Information Technology& Innovation Foundation (ITIF) released a report, “The Case for a National Manufacturing Strategy,” in April 2011 that makes a strong case for such a strategy.  Authors Stephen Ezell and Robert Atkinson focus on three key questions where there has been no consensus to date:

  1. Does the Untied States need a healthy manufacturing sector?
  2. How healthy is U. S. manufacturing at the moment and for the foreseeable future?
  3. Does the United States need a national manufacturing strategy?

They present information on five key reasons why manufacturing is important to the U.S. economy:

  1. It will be extremely difficult for the United States to balance its trade account without a healthy manufacturing sector.
  2. Manufacturing is a key driver of overall job growth and an important source of middle-class jobs for individuals at many skill levels.
  3. Manufacturing is vital to U.S. national security.
  4. Manufacturing is the principal source of R&D and innovation activity.
  5. The manufacturing and services sectors are inseparable and complementary.

The authors argue that balancing U. S. trade through a revitalized manufacturing sector is crucial because:

  • The trade deficit represents a tax on future generations that compromise their economic well-being.
  • The United States is running substantial trade deficits across many categories of manufactured products.
  • Services and non-manufactured goods won’t be enough to close the U.S. trade deficit.
  • The trade deficit represents a tax on future generations.

They wrote, “The massive bill we run up every year by buying more imports than selling exports will have to be paid eventually when foreign nations demand payment in real goods and services, not in Treasury Bills.  In fact, the average annual U.S. trade deficit for each year of the previous decade was $458 billion, or about $20,000 per household over the course of the decade.”

According to data from the U. S. Census Bureau on foreign trade, the United States accumulated a $5.5 trillion trade deficit in goods and services with the rest of the world during the prior decade.  The U.S. trade deficit in manufactured products tallied nearly $4.5 trillion from 2000 to 2010, and in seven of those ten years, the U.S. manufactured products trade deficit was greater than $400 billion.

Their data regarding the U.S. share of world exports was even more alarming than I had encountered previously.  In contrast to the decline from 25 percent down to 17 percent, they said the U.S. share of world exports has declined from 17 percent to 11 percent since 2000, even as the European Union’s share held steady at 17 percent.

In addition, “from 2005 to 2010, the U.S. share of global high-tech exports dropped from 21 percent to 14 percent, while China’s share grew from 7 percent to 20 percent, as China replaced the United States as the world’s number one high-technology exporter.”

They conclude “without a robust manufacturing sector, it’s simply impossible for almost any nation, unless it’s endowed with oil or other natural resources, to balance its trade—and the United States is no exception.”

They concur with my premise that manufacturing remains a critical source of middle-class jobs and note “U.S. manufacturing jobs increasingly require individuals possessing higher skill levels.”   They pointed out that “from 1973 to 2001, the share of production workers with some post-secondary education rose from 8 percent to over 30 percent.  Moreover, according to a recent survey of leading manufacturers, 51 percent of the workforce demand in manufacturing is currently for skilled production workers, 46 percent for scientists and engineers, and only 7 percent for unskilled production workers.”

In substantiation of my recent articles on the importance of co-location of manufacturing and R&D, they wrote,  “manufacturing, R&D, and innovation go hand-in-hand.”  They quote Susan Houseman of the Institute for Employment Research, who said, “The big debate is whether we can continue to be competitive in R&D when we are not making the stuff that we innovate. I think not; the two cannot be separated.”

They concur with my argument that “the process of innovation and industrial loss becomes additive. Once one technological life cycle is lost to foreign competitors, subsequent technology life cycles are likely to be lost as well.”  They cite the example of the United States losing leadership in rechargeable battery manufacturing technology years ago, largely because increasing demands in consumer electronics for more and more power in smaller packages drove most innovation in batteries.   As a result, GM has had to source the advanced battery for its Chevy Volt from a Korean supplier.

According to Ezell and Atkinson, “there is a deeply symbiotic, interdependent relationship between the health of a nation’s manufacturing and services sectors: the health of one sector greatly shapes the health of the other. In particular, the technology-based services sector depends heavily on manufactured goods.”

They conclude, “the U.S. economy’s ability to remain competitive in services sectors, particularly high-technology ones, requires close interactions with the creators and suppliers of technologically advanced hardware and software.  The message is clear: manufacturing and services are not separable—they are joined at the hip.   The United States must discard the notion that it can give up its manufacturing industries but retain a robust set of services sectors capable of propelling the economy forward by themselves.”

The authors echo my strong belief that manufacturing is critical to our national security and note, “If we lose our preeminence in manufacturing technology, then we lose our national security. This is because:

1.      As the U.S. industrial base moves offshore, so does the defense industrial base.

2.      Reliance on foreign manufacturers increases vulnerability to counterfeit goods. “

They quote Joel Yudken, who explained in Manufacturing Insecurity, “Continued migration of manufacturing offshore is both undercutting U.S. technology leadership while enabling foreign countries to catch-up, if not leap-frog, U.S. capabilities in critical technologies important to national security.”

The report shows that the “United States has diminishing or no capability in lithium-ion (Li-ion) battery production, yttrium barium copper oxide high-temperature superconductors, and photovoltaic solar cell encapsulants, among others…. Additional examples of defense-critical technologies where domestic sourcing is endangered include propellant chemicals, space-qualified electronics, power sources for space and military applications (especially batteries and photovoltaics), specialty metals, hard disk drives, and flat panel displays (LCDs).”

Reliance on foreign manufacturers increases U.S. vulnerability to receiving counterfeit goods.  According to a study conducted by the Bureau of Industry and Security (BIS), in 2008 there were 9,356 incidents of counterfeit foreign products making their way into the Department of Defense supply line, a 142 percent increase over 2005.

The section of the report, “U. S. Manufacturing in Transition and Relative Decline,” shows that manufacturing has lagged and is no longer keeping up with overall U.S. economic growth.  From 2000 to 2009, total manufacturing realized a 5 percent increase in real-value-added, even as overall U.S. GDP increased 15 percent, which means that manufacturing is not keeping up with the growth in the rest of the economy.

The report shows that most manufacturing sectors actually shrank in terms of real value-added from 2000 to 2009. In fact, from 2000 to 2009, fifteen of nineteen U.S. manufacturing sectors saw absolute declines in output; they were producing less in 2009 than they were at the start of the decade (categories were listed in the report).

The reality is that U.S. manufacturing declined noticeably over the last decade, not just in the number of jobs.  Their data from the Bureau of Economic Analysis shows that from January 2000 to January 2010, manufacturing jobs fell by 6.17 million, or 34 percent.  And, from 2000 to 2009, fifteen of the nineteen aggregate-level U.S. manufacturing sectors shrank in terms of change in real value-added.  They present convincing evidence that the government’s official calculation that manufacturing accounts for a 11.2 percent share of U.S. GDP is too high because it vastly overstates output from the computer and electronics industry.

In the section “Why the United States Needs a Manufacturing Strategy,” the authors present three primary reasons:

  1. Other countries have strategies to support their manufacturers and by lacking similar strategies we are therefore forcing our manufacturers to compete at a disadvantage.
  2. Systemic market failures mean that absent manufacturing policies, U.S. manufacturing will underperform in terms of innovation, productivity, job growth, and trade performance.
  3. If a country loses complex, high-value-added manufacturing sectors, it’s unlikely to get them back, even if the dollar were to decline dramatically.

They state that “a number of countries—including Brazil, Canada, China, Germany, India, Singapore, South Africa, Russia, and the United Kingdom, among others—have articulated national manufacturing strategies, and the United States needs one as well it if wants to stay competitive with these countries.  Among other elements, countries’ manufacturing strategies include measures such as:

  • offering competitive tax environments including generous R&D tax credits;
  • providing incentive packages, including tax breaks and credits, to attract internationally mobile capital investment;
  • increasing government R&D funding;
  • supporting programs designed to enhance the productive and innovative capabilities of their small to medium enterprise (SME) and large manufacturers;
  • facilitating technology transfer between university and industry;
  • producing a highly educated, highly skilled workforce, including by investing directly in workforce manufacturing skills; and
  • investing in physical and digital infrastructure such as wired and wireless broadband networks, smart electric grids, and intelligent transportation systems.”

While acknowledging that these types of policies and incentives all represent tough, fair, legitimate competition between nations to win advantage in key manufacturing industries, they note, however, that U.S. manufacturers aren’t just competing against foreign manufacturers; they are increasingly competing against foreign manufacturers backed by the technology, economic, and political systems of their nations.  American manufacturing firms operating as independent entities will increasingly find themselves at a disadvantage in international markets against firms from countries backed by effective public-private partnerships.

The authors opine that a number of countries are supporting their manufacturers through unfair, mercantilist strategies that manipulate or violate the mutually established rules of international trade.  In contrast to the fair practices described above, these countries’ goals are not to increase the global supply of jobs and innovative activity, but rather to induce their shift from one nation to another. These countries accomplish this goal by using a broad range of unfair mercantilist practices, including:

  • Currency manipulation;
  • Standards manipulation;
  • Intellectual property theft;
  • Illegal mandates including the forced transfer of intellectual property or location of manufacturing production as a condition of receiving market access;
  • Government procurement practices that exclude foreign competitors; and
  • Abuse of regulatory, anti-trust, or competition policies to the disadvantage of foreign competitors.

The authors make it clear that “the loss in U.S. manufacturing jobs has not just been a story of higher productivity leading to fewer jobs—as was the case with the transformation of the U.S. agricultural sector over the last century.  It’s been more a story of decline in output due to a loss of international competitiveness,” so it merits a serious policy response.

In the “What Would a National Manufacturing Strategy Do?” section of the report, they state their “goal for a national manufacturing strategy would be to create the most competitive environment for U. S. manufacturing firms, of all sizes, to flourish.”  Their call is not to wish for the re-creation of all the lost jobs from factories employing low-skill workers and producing commodity products.  It’s “a call to restore U.S. manufacturing to a competitive position in the global economy, even though the industries and jobs will look very different than they did a generation ago.”

They don’t mean “a de facto, heavy-handed industrial policy that ‘picks winners and losers.’”  They “mean a process of designing our nation’s tax, regulatory, and innovation policy environments to make the United States the world’s most attractive location for advanced manufacturing (including both domestic and foreign direct investment

They recognize that “most U.S. manufacturers, small or large, cannot thrive solely on their own; they need to operate in an environment grounded in smart economic and innovation-supporting policies with regard to taxes, talent, trade, technological development, and physical and digital infrastructures.”

Ezell and Atkinson recommend adoption of the following actions as part of the national strategy:

  • Increase public investment in R&D in general and industrially relevant in particular
  • Support public-private partnerships that facilitate the transition of emerging technologies from universities and federal laboratories into commercial products
  • Coordinate state, local, and federal programs in technology-based economic development to maximize their combined impact
  • Provide export assistance to build upon the National Export Initiative, which seeks to double U. S. exports by 2015.
  • Increase export support for U. S. manufacturers through the Export-Import Bank loans

The authors acknowledge that “this will require a new understanding of the importance of U. S. manufacturing on the part of economists and policymakers alike and a deeper understanding of the forces affecting U. S. manufacturing industries.”

In conclusion, they state that “The American public gets it; it’s time that economists and policymakers do so as well.”  They recommend, “Congress craft, pass and fully fund and the President sign and implement a comprehensive national manufacturing renewal strategy for the United States.”


Does it Matter Where R&D is Done by Manufacturers?

Tuesday, June 7th, 2011

There are some who say it doesn’t matter where R&D is conducted, and in fact, it’s better to have the R&D department or facility located away from where manufacturing is conducted.  This perspective often originates from people in design. There are others who say that it is best situated in manufacturing facilities, and this perspective originates from people in manufacturing

One of my blog readers worked for Baxter for many years and touts the Baxter model as the best solution to this question.  Baxter has nearly all of its engineering R&D located in Round Lake, IL and biological R&D in Morton Grove, IL.  Baxter’s manufacturing plants are all over the world.  He listed three of the reasons Baxter set up this model as follows:

  1. The personnel who are good at R&D work do not fit well in manufacturing.  And conversely, personnel who function well in manufacturing are not good fits in R&D.  The two disciplines are quite different.  In R&D, you want to take the most tolerable risk and have a flexible environment to make the greatest advances.  In manufacturing, you want to minimize risk and have a highly structured system.  People who fit well in manufacturing are typically risk averse.  People who are successful in R&D are bored with stability and thrive on risk.  Great R&D people are a real pain in a manufacturing facility.  Separation of manufacturing and R&D allows both to hire personnel that are best suited for each environment.
  2. R&D runs into many schedule and plan changes due to the nature of working in the unknown.  Throwing these into a manufacturing facility disrupts the manufacturing efficiency and raises manufacturing costs.
  3. Location of R&D is best near technology sources such as universities and technology suppliers.  Manufacturing is best located at low cost labor sites that are usually in remote areas and far away from technology sources.

His solution to the question is to have America sell R&D services to nations like Mexico and China and have countries like Mexico and China sell manufacturing goods to the USA in return.

This was an economic strategy first proposed by John Naisbitt in Megatrends, in which the United States would become the center of innovation and all the dirty, grubby manufacturing would be done in other countries.

Thus far, Mexico has remained a location for outsourcing of manufacturing and not a producer of proprietary end products so they aren’t interested in doing R&D for their products; much less buying the R&D services from American companies.  However, China wasn’t’ satisfied with being the world’s factory floor – they want to do it all.  China is transitioning from an outsourcing location to a producer of proprietary end products, and their companies are either doing reverse engineering of American products to market copies or counterfeits or stealing American intellectual property to produce their own brands of products.   China is graduating 500,000 engineers per year while the Untied States only graduates about 50,000 per year, many of which are foreigners, who return to their own countries when they graduate.

There is an abundance of articles by myself and others discussing the consequences of having China sell manufactured goods to the USA — high trade deficits, the loss of thousands of manufacturers, the loss of millions of manufacturing jobs, and the loss of whole tiers in the supply chain of goods.

There is no question that it is advantageous to have R&D conducted near universities or government and private research centers, which is why San Diego is a hotbed of companies starting up with innovative new products, as a result of the research being conducted at the University of California, San Diego, Scripps Research Institute, Department of Defense facilities such as SPAWAR, and other institutions.

My argument is that American companies need to be conducting their own R&D in the United States and not hiring it to be done by companies in China and India.   It doesn’t matter whether or not R&D is done in the same facility or done in separate facilities of a company.  What does matter is losing the knowledge of how to make a product to be able to innovate the next generation of product or innovate a totally new product.

Baxter’s model as a multinational global company is one that can only be replicated by another multinational global company.  It is not a model that any small to medium sized company would have the financial and technical assets or personnel to utilize.  In fact, in San Diego, very few manufacturing companies are large enough to have a fully staffed engineering department, which includes design engineers, component engineers, mechanical engineers, and manufacturing engineers.  There are only a dozen or so manufacturing companies of over 500 employees, and more than 90% of all manufacturing companies are under 50 people.  Many companies are only able to have one or two of the above categories of engineers, and some don’t have any engineers on staff as full-time employees.

My blog reader is right when he said that most cutting edge or break-through technologies are not generated by established, larger companies.  They come from the creative innovations of entrepreneurs starting up companies.  However, most of these entrepreneurs don’t startup their companies in a vacuum; they are most often started by people who have gained knowledge and experience at existing companies in a technology/product field and leave the company to develop their own innovative new product in that same field.

From my experience working with startup companies for nearly 30 years, the model in San Diego is for a company to start up with a concept for an innovative new product.  The founders of the company may have a concept of the new product they wish to develop and market but don’t have the technical expertise to do the design and development themselves. More often than not, they hire outside consultants to design and develop the product or they may subcontract the design, development, and prototyping to a company specializing in providing these services. There are more than a dozen product development companies and more than a hundred engineering consultants listed in San Diego’s Yellow Pages, and most with which we have dealt are not even listed.

At the extreme end, these companies subcontract everything from start to finish, including engineering design, procurement of the parts and materials, assembly, test, inspection, and shipping of the product to the end customer.  They may handle marketing and customer service, but sometimes they even subcontract out these functions to marketing and customer service firms.

Many of these startup companies never become manufacturers in the traditional meaning because they never set up any manufacturing capability within their own facility.   They are what I call “virtual manufacturers” because they outsource all of their manufacturing and assembly.  The difference between the past and present is that these companies used to outsource various processes of manufacturing to other American companies or have their product assembled at maquiladoras in Baja California, Mexico, and now many of them outsource much or all of their product to Chinese companies.

“Virtual manufacturers” became common for consumer products that had a limited life span sold to a mass market or for entrepreneurs that just wanted to make a quick fortune and were not interested in building a company to last with follow-on products.  Some examples of fad products with a limited manufacturing life are:  the Hula Hoop, Cabbage Patch Kids, and PokeMon.   If a product was designed for ease and simplicity of manufacturing, the location of the vendors who produced the parts and sub-assemblies didn’t matter as much.  However, today such factors as ease of communication, costs of transportation for shipping parts, and quality of the products are playing a more important role in determining where a product is manufactured.

As I’ve mentioned previously, two local organizations recognize the importance and advantages of co-location of R&D and manufacturing by American companies within our country and even within our local region.  One is the San Diego Inventor’s Forum, which meets the second Thursday of the month.  As a member of the steering committee, we help inventors and entrepreneurs do their product development and prototyping locally and help them source their manufacturing within the United States as much as possible.

The other is San Diego’s CONNECT organization, which has recognized the value of the current trend of bringing operations closer to home to reduce costs and become more flexible, responsive and adaptable in the constantly changing marketplace.  CONNECT calls it “nearsourcing” in contrast to “nearshoring,” which Californians understand to mean sourcing in Mexico.  CONNECT launched a new industry cluster in December 2010 for technology manufacturers to help them connect with local and regional sources for products and services.  CONNECT is collaborating with the San Diego East County Economic Development Council to utilize the EDC’s well-established database of manufacturers to facilitate the connections.  CONNECT put on a program May 3, 2011 on “Nearsourcing vs. Offshore:  What it is and what are the Initial Considerations for Technology Companies.”   A case study on nearsourcing, “How Do we make ‘Made in San Diego’ a Winning Business Model?” will be presented at the CONNECT-sponsored MIT Enterprise Forum on Wednesday, June 15, 2011.

In conclusion, it doesn’t matter whether American companies do their R&D within their own facility or hire it to be done by outside American consultants or product development firms, but it does matter whether the R&D is done within America.  We need to keep innovation within our country if we want to remain at the cutting edge of technology and maintain the critical mass of our manufacturing industry.  Outsourcing R&D to China is like a mayor giving the key to his city to a would be conqueror.   We need to protect the key to our future security as a nation and keep R&D and manufacturing within the United States.