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:
- 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.
- 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.
- 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 www.connectory.com 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.