August 2010 Archives

Knowledge intensive agriculture - the case of Brazil

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In a number of postings, I have referenced the transformation of agriculture in the industrial age -- and its continuing transformation in the I-Cubed Economy. A recent story in the Economist -- "The miracle of the cerrado" -- highlights the most recent transformation in the case of Brazil:

In less than 30 years Brazil has turned itself from a food importer into one of the world's great breadbaskets
. . .
And Brazil has done it without deforesting the Amazon (though that has happened for other reasons). The great expansion of farmland has taken place 1,000km from the jungle.
The reason for this success: Embrapa -- Empresa Brasileira de Pesquisa Agropecuária, or the Brazilian Agricultural Research Corporation. The article cites four activities key activities:
although it is true Brazil has a lot of spare farmland, it did not just have it hanging around, waiting to be ploughed. Embrapa had to create the land, in a sense, or make it fit for farming.
. . .
Second, Embrapa went to Africa and brought back a grass called brachiaria. Patient crossbreeding created a variety, called braquiarinha in Brazil, which produced 20-25 tonnes of grass feed per hectare, many times what the native cerrado grass produces and three times the yield in Africa.
. . .
Third, and most important, Embrapa turned soyabeans into a tropical crop.
. . .
Lastly, Embrapa has pioneered and encouraged new operational farm techniques.
But as the article goes on to point out:
Brazil's agricultural miracle did not happen through a simple technological fix. No magic bullet accounts for it--not even the tropical soyabean, which comes closest. Rather, Embrapa's was a "system approach", as its scientists call it: all the interventions worked together. Improving the soil and the new tropical soyabeans were both needed for farming the cerrado; the two together also made possible the changes in farm techniques which have boosted yields further.
In other words, they used information, intangibles and innovation to work a transformation. Not too bad for a sector that is often written off as old fashion and no longer important.

Lost technological capability

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A coda on the early posting on industrial policy from this morning's Wall Street Journal:

The Toledo Museum of Art's $30 million Glass Pavilion is a symbol of America's "Glass City," and reflects the legacy of its local glassmakers.

A smudge on the image: The pavilion glass was imported from China, the new global powerhouse of the glass industry.

No one in the U.S. had the capability to satisfy cutting-edge architectural specifications for the curving pavilion, even though the 2006 job involved techniques advanced decades ago by Toledo inventors: bending and laminating glass. The pavilion features 360 thick glass panels, each up to 13.5 feet tall, eight feet wide and weighing over 1,300 pounds.

For years, the West focused on the threat from China's low-tech exporters like clothing and furniture makers. Glass represents how an even more potent challenge has arrived: sophisticated, capital-intensive businesses that boast high-tech expertise.

But, the issue is not one of competitiveness. As the story outlines, the Chinese company are not winning the business on lower cost. There is no competition as there are no American companies that have the technological capability to compete.

Once lost, that intangible asset of technological capability is hard to regain. In fact it can't be "regained" -- it must be started up anew. And that takes a coherent and sustained policy - something that the US seems to have a problem doing.

Beyond IP (industrial policy, that is)

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Over at the Progressive Fix, Stephen Ezell has a great piece on The Economist's Strange Attack on Industrial Policy -- his riff on a major article in the Economist. One of the more interesting points he makes is the double standard we apply to government sponsored innovation and private sector efforts:

The Economist frets that governments aren't very good at identifying and investing in strategic emerging technologies. In impugning governments' ability to pick winning technologies, the article cites failures such as France's Minitel (a case of a country picking a national champion company) and argues that "Even supposed masters of industrial policy {like Japan's MITI, or Ministry of International Trade and Industry} have made embarrassing mistakes." But this would be tantamount to pointing to the spectacular failure of Apple's Newton and arguing that Apple's no good at innovation. The Economist seems to suggest that if governments failed 80-90% of the time in picking technology winners (and ITIF actually thinks their success rates are much higher), then they must be pretty incompetent at the effort and should stop trying altogether.

But if private corporations followed that advice, then we would have no innovation whatsoever. Indeed, research by Larry Keeley of Doblin, Inc. finds that, in the corporate world, only 4 percent of innovation initiatives meet their internally defined success criteria. More than ninety percent of products fail in the first two years. Other research has found that only 8 percent of innovation projects exceed their expected return on investment, and only 12 percent their cost of capital. Yet companies have to continue to try to innovate, even in the face of these long odds, because research finds that firms that don't replace at least 10 percent of their revenue stream annually are likely to be out of business within five years. The point is that just because innovation is difficult and success rates are low, this does not mean that corporations, or governments, should quit trying--or that their successes, like the Internet, can't be spectacularly successful and have a profound impact on driving economic growth.

In fact, government sponsored investments in R&D have a pretty good return on investment -- as I've written about before.

In fairness to the Economist, they do recognize that government programs can work:

The lessons of the past are clear. First, the more it is in step with a national or local economy's comparative advantage, the more likely industrial policy is to succeed. Drives to spur high-tech entrepreneurship in areas of heavy manufacturing, for instance, face a struggle. According to Mr Lin of the World Bank, following comparative advantage has produced clear successes for some developing countries. Chile, for instance, moved from basic industries such as mining, forestry, fishing and agriculture to aluminium smelting, salmon farming and winemaking thanks to a number of government initiatives.

Second, policy is least prone to failure when it follows rather than tries to lead the market. Curiously, Sheffield Forgemasters might have been an example of the former: Westinghouse, an American company, had suggested to the Yorkshire firm that it should try to break Japan's monopoly on ultra-large nuclear steel forgings.

Third, industrial policy works best when a government is dealing with areas where it has natural interest and competence, such as military technology or energy supply. The worst problems unfold when politicians intervene in purely private domains with short-term goals, bailing out old firms to save jobs or spending lavishly on white elephants. The present round of industrial policy will no doubt produce some modest successes--and a crop of whopping failures.

Echoing Ezell's critique, if some successes balanced with some failures was the outcome, then the effort might be worthwhile. The trick here, as I've mentioned earlier, is to fail quickly and cheaply. The private sector has generally learned that lesson. We need to be able to let the public sector do likewise.

GDP data

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This morning's downward revision of 2nd quarter GDP numbers by the BEA is a shock, but not a surprise. Almost everyone expected such a revision given the recent bad trade numbers. In fact, some expected worse (see stories in the Washington Post, New York Times, Wall Street Journal). If the economy is not doing as well as we had thought due to an increasing trade deficit, this begs two questions:
1) how do we get better data on trade sooner?
2) what do we do about the trade deficit?

On the first question, the fact that trade data is a month behind means that our first look at the GDP will always be subject to potentially major revisions - especially in a time of volatility. As I've state before, we still have a lot of work to do to improve the numbers (see earlier posting). In the meantime, we should remember that the data always contains an element of uncertain and should be treated accordingly.

On the trade deficit itself, that will take more work. Part of our problem is that we have gotten ourselves into a structural problem. As we put in place policies to increase consumer spending, much of that spending is on things that we don't make in the US any more. Hence more consumer spending in the US drives greater imports. On the flipside, as other nations put in place policies to increase consumer spending, the production to meet that demand no longer necessarily takes place within the US. So increased consumer demand abroad does not translated into greater exports. A quote in a recent Washington Post story on trade illustrates the latter point:

Officials at Cummins Inc., an Indiana-based maker of engines and power systems, say that business is booming in such places as China and India but that new orders for its equipment are being met largely at its factories abroad.

"Almost everything we sell in China is made in China, and those factories are at capacity right now," spokesman Mark Land said. "The strength in those markets helps us overall, but our manufacturing capacity creates a limited need to export."

Globalization has already occurred. We cannot assume that simply stimulating demand either domestically or globally will stimulate US production. Increasing our exports as well as decreasing our imports will take a coherent strategy -- a manufacturing strategy.

As my many postings on the intangible trade data shows, trade in intangibles is only a small part of our trade. We cannot just relying on exports of intangible (a flawed strategy that some advocate). We need to utilize our intangible assets to transform and revigorate all parts of our economy -- including manufacturing. Only when we understand the power of intangibles for increasing innovation and productivity -- and apply that power to our own economy -- will we be able to reach sustainable economic growth.

Entrepreneurs are not who you think they are

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An interesting story from Newsweek -- Innovation Grows Among Older Workers:

As it turns out, the average founder of a high-tech startup isn't a whiz-kid graduate, but a mature 40-year-old engineer or business type with a spouse and kids who simply got tired of working for others, says Duke University scholar Vivek Wadhwa, who studied 549 successful technology ventures. What's more, older entrepreneurs have higher success rates when they start companies. That's because they have accumulated expertise in their technological fields, have deep knowledge of their customers' needs, and have years of developing a network of supporters (often including financial backers). "Older entrepreneurs are just able to build companies that are more advanced in their technology and more sophisticated in the way they deal with customers," Wadhwa says.

And the age at which entrepreneurs are more innovative and willing to take risks seems to be going up. According to data from the Kauffman Foundation, the highest rate of entrepreneurship in America has shifted to the 55-64 age group, with people over 55 almost twice as likely to found successful companies than those between 20 and 34. And while the entrepreneurship rate has gone up since 1996 in most other age brackets as well, it has actually declined among Americans under 35. That's good news for one very simple reason: baby boomers are now in their prime, startup-founding years, which will unleash what Kauffman researcher Dane Stangler expects to be an entrepreneurship boom. Since new companies create the vast majority of jobs, the positive impact on a post-recession economy could be great.

So how do we give that 55 year old entrepreneur the tools they need to succeed? That is the public policy question.

On the manufacturing and R&D link

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FYI -- from Jack Buffington, Director of Plant Logistics, MillerCoors Brewing Company -- What Do We Mean When We Assert That Our Economic Salvation Is 'Innovation?':

It is misguided for anyone to believe that America can position itself as the world's expert and specialist in R&D for the global economy; there is no historical evidence to justify this viewpoint for any nation. Instead, America's industrial domination was built upon a model that tightly linked R&D and production, in the public and private sectors.

Late last week, the Department of Health and Human Services released its report on responding to health emergencies -- a process known as "medical countermeasures" or "MCMs" (see press release, fact sheet, and full report. The report, with the official title of The Public Health Emergency Medical Countermeasure Enterprise Review: Transforming the Enterprise to Meet Long Range National Needs, grew out of the concerns over the response to the H1N1 (swine flu) pandemic. According to the report:

Our Nation must have the nimble, flexible capacity to produce MCMs rapidly in the face of any attack or threat, known or unknown, including a novel, previously unrecognized, naturally occurring emerging infectious disease.

. . .

Findings in several key areas led to the development of the new strategy, including: (1) enhancing regulatory innovation, science, and capacity; (2) improving domestic manufacturing capacity; (3) providing core advanced development and manufacturing services to development partners; (4) creating novel ways for the enterprise to work with partners; (5) developing financial incentives, (6) addressing roadblocks from concept development to advanced development; and (7) improving management and administration within the enterprise.

The review recommends new infrastructure initiatives as well as enhancements to the current system. The new initiatives include: (1) enabling innovative regulatory science and oversight, (2) fostering flexible manufacturing and advanced development core services partnerships that focus on new platforms for novel product development and manufacturing, (3) expanding the product pipeline by exploiting new concepts emerging from the science base and addressing multiuse potential for these products, and (4) consideration of the development of an independent strategic investment firm for innovation in MCMs.

This is a great example of a strategy for the I-Cubed Economy -- quick response, flexibility and innovation. There is a lot here, including product development and domestic production capability. One immediate outcome of the report, according to the press release, will be draft solicitation for one or more Centers of Innovation for Advanced Development and Manufacturing:

The center(s) will focus on new manufacturing platforms that can produce a variety of countermeasures. The equipment and methods could provide a way to meet a surge in demand using facilities in the U.S. rather than relying on foreign manufacturing.

The review found that some of the most promising research and development on countermeasures is done by small, emerging biotech companies with little experience in large-scale manufacturing. Therefore, the Centers of Innovation for Advanced Development and Manufacturing will also serve as resources for young companies, helping them bring products to market and helping the U.S. government increase the number of new countermeasures available in an emergency.

A key point on the manufacturing process. The review highlighted the need for facilities that can process multiple medications or vaccines and produce them quickly. Setting up a dedicated manufacturing process once a specific threat has been identified simply takes too long. The manufacturing needs to be in place before hand and ready to deal with whatever product is needed. This nimble manufacturing is a key part of the I-Cubed Economy. These new Centers, therefore, should be able to provide groundbreaking work on the movement toward more nimble medical manufacturing in general, not just for emergencies.

Likewise, the Centers working with small biotech companies on product development should result in new processes that would be applicable to a wide range of bio-medical products. As a result, such Centers will not only help meet the need for rapid response to health emergencies but may help transform the industry.

Update on German patent funds

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Update from Joff Wild at IAM blog on the status of the Deutsche Bank IP funds (see earlier posting):

Although IP Bewertung (IPB) has filed for bankruptcy, I understand that the patent funds it managed on behalf of Deutsche Bank are still operating and are now under the control of a Munich-based boutique called Clou Partners. This has been around for 10 years and specialises in intangibles. I am told that it was Clou that first came up with the idea for the funds and it received just over 5% of the €200 million that they raised. It is now Clou's job to turn that investment into profit - something that IPB clearly found very tricky.

A broad view of innovation and economic development

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Here some interesting bits from Rich Bendis on innovation. The specific topic in on economic development in Iowa, but the comments speak very well to anyone who thinks innovation and the intangible economy doesn't include all sectors:

Basing our economic development efforts on innovation will benefit both agricultural and manufacturing industries.
. . .
The benefit of an innovation economy is not limited to larger metro areas and tech centers. One example of this is from two Iowa agricultural companies, Pioneer and Monsanto. As they increase yield in corn per acre, it has increased a substantial return on investment for those companies and farmers; in addition, it has also increased the wealth in communities, and has increased the overall wealth and economic stability of the state.
Does anyone really want to argue that Pioneer is not a knowledge-intensive company -- and therefore we can just write off agriculture as part of the Intangible Economy? Yet some have -- implicitly by consigning agriculture and manufacturing to the past.

They are wrong. The only thing that should be consigned to the past is the outmoded notion that economic development means moving up the value chain and abandoning agriculture and manufacturing.

Economic development really means transforming agriculture and manufacturing into knowledge intensive activities. That transformation has already occurred in many ways in agriculture -- in part due to active government policies to establish land-grant colleges, agricultural research institutes and an agricultural extension service.
Remember -- all of these institutions were specifically designed to increase the production and dissemination of knowledge.

We are now in the same level of transformation in manufacturing -- from mass produced low-price commodities to higher value added goods and services. We need to make sure we have a similarly appropriate set of policies in place to aid with this transformation.

Expanding business assistance to intangibles - UK example

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In yesterday's posting, I continued my rant about how we don't have an innovation policy that reflects the real nature of innovation. Our policy - and that of most governments - general follows the linear model of innovation which runs from scientific research to final product. While that is one path, it is only one of many. And probably not even the most common. More common is an entrepreneur identifies an opportunity and mixes and matches the tools to exploit that opportunity.

We do have some policy tools to help in this opportunity-pull process. One of those is by directly helping businesses who acting entrepreneurially regardless of their size (start-ups, rapidly growing companies and established firms). That assistance takes many forms and is usually labeled as something other than innovation policy -- such as small business policy or clean energy or manufacturing. It includes financial assistance (including tax credits, loans, grants), business contacts (including research partnerships and government procurement) and technical assistance (such as SBA technical assistance and the MEP centers).

One of the emerging and more important parts of technical assistance is helping companies develop and manage their intangible assets. In an earlier posting I describe what some other countries are doing in this regard, including that Scottish Intellectual Assets Centre.

Here is another example -- the UK Intellectual Property Office's Intangible Assets Network:

This website aims to:
* Help you learn about intangible assets;
* Help you manage intangible assets and create value from them;
* Highlight the risks to your organisation if you don't manage IA effectively.
It is directed particularly at finance officers, information officers and project managers as they are likely to hold some level of responsibility for the management of IA.

Interestingly, the site is also meant to help in public sectors. One section includes information on IA Policy which:

is intended to serve as a tool to assist Government organisations who do not currently have a structured policy on Intellectual Property (IP) and Intellectual Property Rights (IPR) and who wish to establish one.

My one concern about the site is that it is IP-centric (understandable given it is the IP Office). The list of "intangibles" are really a list of intellectual property categories (some of which such as databases and design the US does not include under IPR). It does include "knowhow." But the description is what would be covered in the US under trade secrets.

Most troubling, it lumps all the other areas of what we would consider intangibles into "goodwill":

While the majority of goodwill may lay in brand, goodwill is broader than "brand" as it can accommodate value attributable to other intangibles such as staff expertise etc.

So two steps forward and one step back. There is hope, however. The Intellectual Assets Centre is a partner in the endeavor. They may be able, over time, to set this on a path that understands the breath of intangible assets and the need to manage across that breath.

Employees Hold the Key to Innovation

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Here is a tidbit from two management experts writing in yesterday's Wall Street Journal - Employees Hold the Key to Innovation:

Most great ideas for enhancing corporate growth and profits aren't discovered in the lab late at night, or in the isolation of the executive suite. They come from the people who daily fight the company's battles, who serve the customers, explore new markets and fend off the competition.

So why is our "innovation" policy still focused on the folks in the labs -- ie R&D money and talent in; innovation (read: patents since we in the US don't have any other way of measuring innovation) out?

That valuation question

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You may have heard that HP and Dell are in a bidding war for a company called 3PAR. Here is the latest update from the Wall Street Journal:

H-P's $24-a-share bid is one-third higher than the $18-a-share that Dell agreed to pay for 3PAR last week. Both companies are offering a big premium for the maker of data-storage equipment. Before the Dell agreement was made public Aug. 16, 3PAR last traded at $9.65.
For those of us interested in the valuation of intangible assets, this begs the question: why the high premium?
Did Dell see almost twice as much value in 3PAR (presumably in the form of intangible assets) that the financial markets did a week ago?
And is the market really that blind to the value intangible assets?
Does HP see even more intangible value -- that Dell overlooked?
Or is it that the intangibles are more valuable to HP (for strategic or operational reasons) than to Dell?
Or is it all just froth and ego bidding up the price?

All possible answers -- none of which will be easy to sort out. But, sorted out they will be if either HP or Dell wins -- since the GAAP rules require the accounting of intangibles acquired from outside. The theory on the rule (and not counting internally generate assets) is that such assets having been purchased through an "arms-length" transaction reflect true market prices. In other words, the intangibles are worth whatever someone on the open market is willing to pay for them.

We will see once the accountants get a hold of the deal, however, how much they are willing to value the intangible at -- and how much goes into that amorphous category of "goodwill" (often simply a catch all for froth).

German patent funds in trouble?

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In our report last year Maximizing Intellectual Property and Intangible Assets: Case Studies in Intangible Asset Finance, we mentioned the patent fund partnership between Deutsche Bank (DB) and IP Bewertungs AG which manages three funds totaling more than 150 million euros. The funds buy patents and then works to further incubate the technologies with the goal of commercialization.

Now comes word that IP Bewertungs has filed for bankruptcy -- see IP finance: IP Bewertung - RIP. Joff Wild at IAM Blog also has comments at Pioneering German patent fund business files for bankruptcy.

As both postings point out, it is the technical advisor to the fund, IP Bewertungs, that has filed -- not the funds themselves. So the business model of buy and incubate may still be in place. But the bankruptcy does point out how difficult that strategy is.

More on manufacturing

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FYI -- from Bill Strauss, Economic Advisor and Senior Economist with the Chicago Fed -
Midwest Economy: Is U.S. Manufacturing Disappearing? -- its all about productivity. And manufacturing is doing quite well in that category, thank you very much:

Using recent history is a guide, we can look forward to an industry that will continue to produce more, contributing to a stronger U.S. economy, with manufacturing employment representing a smaller share of the overall U.S. labor market.

The manufacturing sector remains vibrant and innovative. Manufacturing output has been rising at a solid pace over time. Most of this growth, especially over the past 30 years, has been achieved by improving productivity. Of course, for some workers and towns, this increase in productivity has been a double-edged sword, since highly productive operations can achieve their output goals using fewer workers. Nonetheless, higher productivity has fostered a globally competitive U.S. manufacturing sector with the ability to produce more goods with relatively lower price increases, which has benefited U.S. households and the overall economy.

For my own take on the question of whether manufacturing is disappearing, see my earlier posting.

The changing music business

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Here is an interesting aside in a recent Wall Street Journal story on the latest problems of the music company EMI:

Sales of recorded music have tumbled over the last decade, as digital downloads opened a floodgate to Internet piracy. Digital downloads also make it easier to buy single songs instead of albums, further curbing legitimate sales. But the music publishing business has continued to be strong, due in part to the revenue generated when music is licensed from publishers for use in commercials, films and video games.
So the music business is adapting to the new realities - finding new markets for its IP as the traditional markets change.

GM's intangibles

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Yesterday, General Motors filed for an IPO . As the Wall Street Journal notes, "The 734-page document is the most detailed portrait yet of GM post-bankruptcy." (See also stories in the New York Times and the Financial Times.) For those interested in how company's report their intangible assets, GM's Form S-1 filing with the SEC makes interesting reading. Summary:

At December 31, 2009 Intangible assets, net were $14.5 billion. In connection with our application of fresh-start reporting, we recorded Intangible assets at their fair value of $16.1 billion at July 10, 2009. Newly recorded identifiable intangible assets include brand names, our dealer network, customer relationships, developed technologies, favorable contracts and other intangible assets.
. . .
At June 30, 2010 Intangible assets, net of $12.8 billion decreased by $1.7 billion (or 11.9%), primarily due to amortization of $1.4 billion and foreign currency translation of $0.3 billion.
Here are the details:
Intangible assets

We recorded Intangible assets of $16.1 billion at their fair values. The following is a summary of the approaches used to determine the fair value of our significant intangible assets:

• We recorded $7.9 billion for the fair value of technology. The relief from royalty method was used to calculate the $7.7 billion fair value of developed technology. The significant assumptions used included:
      • Forecasted revenue for each technology category by Old GM's former segments;
      • Royalty rates based on licensing arrangements for similar technologies and obsolescence factors by technology category;
      • Discount rates ranging from 24.0% to 26.0% based on our WACC and adjusted for perceived business risks related to these developed technologies; and
      • Estimated economic lives, which ranged from 7 to twenty years.

• The excess earnings method was used to determine the fair value of in-process research and development of $175 million. The significant assumptions used in this approach included:
      • Forecasted revenue for certain technologies not yet proven to be commercially feasible;
      • The probability and cost of obtaining commercial feasibility;
      • Discount rates ranging from 4.2% (when the probability of obtaining commercial feasibility was considered elsewhere in the model) to 36.0%; and
      • Estimated economic lives ranging from approximately 10 to 20 years.

• The relief from royalty method was also used to calculate the fair value of brand names of $5.5 billion. The significant assumptions used in this method included:
      • Forecasted revenue for each brand name by Old GM's former segments;
      • Royalty rates based on licensing arrangements for the use of brands and trademarks in the automotive industry and related industries;
      • Discount rates ranging from 22.8% to 27.0% based on our WACC and adjusted for perceived business risks related to these intangible assets; and
      • Indefinite economic lives for our ongoing brands.

• Our most significant brands included Buick, Cadillac, Chevrolet, GMC, Opel/Vauxhall and OnStar. We also recorded defensive intangible assets associated with brands we eliminated, which included Pontiac, Saturn and Oldsmobile.

• A cost approach was used to calculate the fair value of our dealer networks and customer relationships of $2.1 billion. The estimated fair value of our dealer networks of $1.6 billion was determined by multiplying our estimated costs to recreate our dealer networks by our estimate of an optimal number of dealers. An income approach was used to calculate the fair value of our customer relationships of $508 million. The significant assumptions used in this approach included:
      • Forecasted revenue;
      • Customer retention rates;
      • Profit margins; and
      • A discount rate of 20.8% based on an appropriate WACC and adjusted for perceived business risks related to these customer relationships.

• We recorded other intangible assets of $560 million primarily related to existing contracts, including leasehold improvements, that were favorable relative to available market terms.

So, the bottom line for GM's intangible value:

Technology and related intellectual property: $7.889 billion (5 year amortization)
Brands: $5.476 billion (38 year amortization)
Dealer network and customer relationships: $2.149 billion (21 year amortization)
Favorable contracts: $543 million (28 year amortization)
Other intangible assets: $17 million (3 year amortization)

Total intangible assets $16.074 billion

Beyond the numbers, the MD&A section includes information on operating strategy and utilization of intangibles. For example, it specifically talks about brand rationalization. It also goes into some detail on their R&D activities - including the OnStar communications technology. One interesting note -- the "old GM" spent about $8 billion on R&D in 2008; the "new GM" will spend about $6.5 billion.

However, one glaring point is the absence of any discussion of human capital.

So -- an interesting case study in how companies report their intangibles today. But clearly not complete. As such it may serve as pointer to how they should report their intellectual capital and intangible assets in the future.

UPDATE: The NY Times DealBook column has an interesting take on another set of intangibles that are covered in GM's SEC filing: risks. Included in that -- the risks due to the change in G.M.'s management.

Jointly developing green

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Here is an perfect example of the new innovation ecosystem of the I-Cubed Economy -- from the Wall Street Journal "GM Plans High-Tech Engines With China Partner":

General Motors Co. will team up with its Chinese partner to develop powertrain technologies geared at making cars more fuel-efficient, as the global race to prepare for tougher fuel-economy requirements heats up.
. . .
GM and SAIC Motor Corp. Wednesday signed an agreement in Shanghai to jointly develop a family of several high-tech small engines and advanced automatic transmissions.

The story notes the reasons for this agreement:

To meet fuel-economy regulations that are expected to become tougher in markets around the world, "we need to continue to advance technology levels of engines and transmissions not just in China but around the world," Daniel Hancock, GM's vice president of global strategic product alliances said in a telephone interview with The Wall Street Journal Wednesday.
. . .
The joint development is "significant" because it marks the first time when GM and SAIC - partners for more than a decade already - are going to develop "base" propulsion technology, going a step further than simply integrating existing engine and gearbox technologies into automobiles.
Mr. Hancock said the new technologies are necessary for the U.S. auto maker to meet more stringent fuel-economy requirements around the world. Those anticipated requirements are "definitely going to drive us toward coming up with more efficient propulsion systems and more efficient vehicles in the future," he said.

As the OECD Innovation Strategy (see previous posting) notes, these global innovation networks are becoming the norm. And, as the OECD also notes:

The challenge for governments is to tap into and exploit these global networks to access new knowledge and markets while generating value locally.
The GM-SAIC deal sounds like a case study in meeting the challenge. And so what is the US strategy?

Another attack on manufacturing strategy

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There they go again -- another gratuitous attack on manufacturing strategy. Once again, the argument by some economists seems to be base on the fact that manufacturing as a percent of GDP has steadily declined over the years. Therefore, manufacturing in not important.

I can almost guarantee that the percentage of income of these economists devoted to food has declined since their graduate school days. By their logic of economic shifts, food is no longer important to their survival and therefore it would be fine if the just stopped eating. As much as I disagree with them, I wouldn't recommend that they act on this logic.

As I've noted before, manufacturing is a part of the Intangible Economy. But lets take a closer look at the supposed decline of manufacturing. Here is the data.

Yes we buy more intangibles and services that we used to. But, we haven't stopped buying and using things (at least until that drop in the Great Recession).

Personal consumption.gif

What we can't see from that graph is how much of that consumption is intangibles. Both services and goods embody a greater and greater amount of intangibles. Just because more of company and national value is made up of intangible assets does not mean that production of goods is less important. It does mean that intangibles are more important in the entire production process.

The other part of the argument of manufacturing doesn't matter concerns employment. As the ratio of goods to services in final output changed, supposedly this meant that employment had to decrease. Wrong. This is a classic case of confusing relative to absolute. Relative manufacturing output decreased; absolute it increased. The governing factor here is the rate of output growth versus the rate of productivity growth. As long as output is increasing faster than productivity, employment grow -- that was one of the miracles of the industrial revolution. If productivity and output are basically match, employment stays constant.

That is roughly what happened in the 1980's and 1990's. As the amount of goods consumption and productivity (brought about by increased investments in intangibles such as worker skills and better organizational methods) both increased, employment remained relatively stable. Until about 2001, that is, when manufacturing employment started a major decline.

Manufacturing employment 1980-2010.gif

The fact is that at the turn of the century, we stopped making things. It was not a many decades long decline. It was like some on turned off the switch.

We can argue as to what happened in 2001. But it is clear a shift in manufacturing took place that had little if anything to do to do with the increased output of intangibles. Output (as measured by our consumption) of goods continued to grow -- we just didn't make them here anymore.

The Hulu IPO and intangibles

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Over at Smarter Companies, Mary Adams makes an incredibly important point about the upcoming Hulu IPO:

The internet television video company Hulu is reportedly considering an IPO. But, reports the NY Times, the company "evidently makes little in profit."
I am not privy to their numbers but I can tell you from experience that their income statement is probably full of "expenses" that are actually investments in their intangible productive capacity (also called intangible capital). These include investments in some investments in processes, training, networks, and other forms of organizational knowledge.
As she points out, treating these investments as expenses lowers the company's profitability and distorts the analysis of its financial situation:
I worry about this a lot. Not just because it hurts IPO chances of companies like Hulu (funds get allocated instead to companies that fit the model better). But because our understanding of corporate productive capacity is being distorted by industrial-era accounting. The only way to get our economy back on track is to improve our collective use of knowledge. And we cannot even see it.
Amen to that!

Finding intangible assets in resource-based companies

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People don't normally think of resource aka mining) companies as having valuable intangible assets. After all, their strength is in the natural resources they control, right? Wrong! From Rick Mills at Resource Investor, here is a great case study on how intangibles increase the value of a mining joint venture:

Company XYZ - with few or no recognizable intangibles assets - has 5 billion pounds of copper and gets bought out at .04 per pound - the company would be worth $200,000,000.00.

On the flip side, the assets of a company such as operational experience, speed to production advantage and in place financial partners for production are the "intangibles" that ultimately create the most shareholder value.

Assume XYZ's project could support a 250M pound per year copper producer netting $1.50 per pound in cash flow and has the intangibles assets of management that can and will take it all the way down the development path to a mine - their operational experience and deep pocketed financial partners giving them a speed to production advantage over their peers.

A project with 250M lbs X $1.50 per lb = $375M in cash flow. Most analysts would suggest a five times cash flow multiple implying a $1.875B company. This could create a producing company potentially valued many times more than a deposit sitting there waiting to be purchased.

That is a lot on intangible asset value!

Tip of the hat to Mary Adams for point this out.

Bad M&A, bad M&A

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Here is an interesting story from Bloomberg News -- M&A Losers in $10 Trillion Deal Binge :

More than half of the 100 biggest takeovers made during the last mergers-and-acquisitions boom have something in common: By one measure, they never should have happened.

The stocks of 53 companies that made the biggest purchases from 2005 to 2008 lagged behind industry peers two years later, according to data compiled by Bloomberg's ranking group.
. . .
Companies struck $10 trillion of deals during the last merger binge, even after more than a decade of research showing deals often don't pay off for the buyers. The average stock price of all the top acquirers trailed benchmark indexes by an average of about 3 percentage points.

Maybe if they had done a better job of analyzing the intangible assets -- and more importantly coming up with a strategy for managing them post-M&A -- those bad deals might not have happened or turned out as badly.

Then again, maybe this is a story about how the market doesn't understand or value intangibles correctly. Maybe the stock prices went down because the analysts could only see the expenses without seeing the assets.

More research is clearly called for.

Case study on trade secrets

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The other day as I was sitting at breakfast eating my English Muffin, I came across a fascinating story on trade secrets featuring -- my English Muffin. The NY Times article -- A Man With Muffin Secrets, but No Way to Cash Them In -- outlines the case of an executive accused of taking the secrets of the nooks and crannies of Thomas' English Muffins to a competitor. The executive signed a confidentiality agreement, but not a non-compete agreement. (As noted in yesterday's posting, noncompete agreements do not offer as much protect as many may think.) The case, therefore, is a classic trade secrets action. As trade secrets lawyers will tell you, one of the key to proving a violation is to show that the owner took steps to keep the secret a secret. Looks like that is the case here:

According to Bimbo's filings [Bimbo Bakeries USA, the parent company], the secret of the nooks and crannies was split into several pieces to make it more secure, and to protect the approximately $500 million in yearly muffin sales. They included the basic recipe, the moisture level of the muffin mixture, the equipment used and the way the product was baked. While many Bimbo employees may have known one or more pieces of the puzzle, only seven knew every step.
"Most employees possess information only directly relevant to their assigned task," Daniel P. Babin, a Bimbo senior vice president, said in a written court declaration, "and very few employees, such as Botticella, possess all of the knowledge necessary to produce a finished product."
So for an example of how trade secrets work in practice, this is a good read. And you might want to learn more about trade secrets. As Mark Halligan argues in his recent paper Trade Secrets v. Patents: The New Calculus, trade secrets may be the best way to protect valuable information:
Contrast patent-eligible subject matter to trade secrets. There are no subject matter constraints imposed on trade secret protection so long as the information provides a competitive advantage derived from the secrecy of the information.
The trick -- as the English Muffin case illustrates -- is keeping the secrets secret. That is not always an easy thing to do.

Absorbing technology

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David Wessel's column today was about how "The Demographics Driving Nations' Wealth". But he includes this great throwaway line: "Belgium is rich not because it is big or has invented a lot, but because it has the wherewithal to employ technology invented by others, notes Michael Kremer of Harvard University." That observation is also essentially a throwaway line in Kremer's 1993 paper (on the link between early population growth and technology development).

But the idea of technology absorption is an important one -- with a long history of scholarship behind it. The "fast follower" strategy has lots of supporters - including me (see earlier postings).

Let me suggest that Wessel's next column should be a follow up -- on why Belgium is rich and what are the lessons for the US. I think there is much we can learn.

Update on protecting your assets via noncompete agreements

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In a posting a couple of months ago, I noted that IBM was suing a former employee -- Joanne Olsen -- for violated a one year noncompetition agreement when she took a senior position with Oracle. Today there is a story in the Wall Street Journal that notes that IBM dropped the suit in early July. Oracle had filed their own suit alleging unfair competition and seeking to move the case from New York to California. As I noted in my earlier posting, noncompete agreements are considered illegal in California under Business and Professions Code Section 16600.

The action by both companies raises an interesting question: are noncompete agreements dead? Are there better ways of protecting valuable information?

And what information is it that you are really trying to protect? As Alfred Marshall famously noted over 100 years ago:

When an industry has chosen a locality for itself, it is likely to stay there long; so great are the advantages which people following the same skilled trade get from near neighborhood to one another. The mysteries of the trade become no mysteries; but are as it were in the air, and children learn many of them unconsciously. Good work is appreciated, inventions and improvements in machinery, in processes and the general organization of the business have their merits promptly discussed; if one man starts a new idea, it is taken up by other and combined with suggestions of their own; and thus it becomes the source of further new ideas.

FYI - His earlier statement was this:

Where large masses of people are working at the same kind of trade, they educate one another. The skill and the taste required for their work are in the air, and children breathe them as they grow up. This is seen particularly in such manufactures as those of glass and pottery.
Again, each man profits by the ideas of his neighbors: he is stimulated by contact with those who are interested in his own pursuit to make new experiments; and each successful invention, whether it be a new machine, a new process, or a new way of organizing business, is likely when once started to spread and to be improved upon.

I would note the statement in the second version -- "each man profits by the ideas of his neighbors."

So the question still needs to be asked: what information are you protecting and what information should be protected -- both for company profit and general economic growth?

Not transformative

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I have long argued that the economic stimulus spending need to be more than a short term boost -- it needs to be transformative. Education is a transformative investment. Thus I support additional funding to state and local governments for education. Another transformative program is the innovative DOE loan programs for clean energy facilities. However, raiding one to pay for the other is not transformative. Yet that is apparently what happened in the Education Jobs and Medicaid Assistance Act signed by the President yesterday. As a piece in WSJ (Renewable Energy Backers Wince As Congress Raids DOE Coffers) notes, this is not the first time Congress has used funds from the energy loan program to extend other programs. Last time, it was to fund the "Cash for Clunkers" program.

At least this time it was for another transformative program - education. As much as I liked the Cash for Clunkers idea, it was a short term stimulus not a long term transformative action.

The Congress' action is all too understandable. Short term hits are always easier than long term investments. But we need to start getting seriously about national long term investments. In a few years, our GDP numbers will reflect that R&D spending is an investment. We need to back up that thinking with a better view of the government's investment strategy.

Right now there is an analysis of the government's long term investments hidden in a chapter in the technical appendix of the budget documents. That analysis need to be front and center in both the documentation and in our thinking. And the analysis need to be expanded to include all forms of longer term investments, including the creation of intangible assets.

I can't say that this type of information will stop the short term focus of the political system. That would be naive. But at least it will help bring to better light the fact that our long term investments are often neglected and short changed. That would be a step forward.

June trade in intangibles

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June's trade data released this morning was not good news -- unless you really like the huge trade deficits of old days of the last decade. In fact, the news is horrible. The trade deficit jumped to $49.9 billion from $42.0 billion in
May. Exports dropped by $2.0 billion and imports jumped by $5.9 billion. And once again, oil was not the culprit. Our trade deficit in petroleum products was roughly steady while our trade deficit in non-petroleum goods dramatically worsened (see chart below).

The jump in the deficit was also unexpected. According to the Wall Street Journal, economists had expected the deficit to be $42.7 billion in June.

Our intangibles trade surplus resisted the import onslaught, however, to stay relatively stable (declining by a mere $55 million). Exports rose slightly in both royalties (payments received) and private services while private services imports dropped and royalty payments paid-out (imports) grew slightly. A stable intangibles surplus is little comfort, however, in the face of such large and growing goods deficits.

Our deficit in Advanced Technology Products also jumped in June to over $8.4 billion -- up from a deficit of $5.8 billion in May. This is the worst monthly deficit since the government started publishing data specifically on Advanced Technology Products. The June number was mainly due to a surge in imports of information and communications technologies. As I noted above, that may be taken by some as a good sign of increased consumer spending but it is a bad sign for a sustainable and balanced economic recovery. The last monthly surplus in Advanced Technology Products was in June 2002 and the last sustained series of monthly surpluses were in the first half of 2001.

Intangibles trade-Jun10.gif

Intangibles and goods-Jun10.gif

Oil good intangibles-Jun10.gif

Note: we define trade in intangibles as the sum of "royalties and license fees" and "other private services". The BEA/Census Bureau definitions of those categories are as follows:

Royalties and License Fees - Transactions with foreign residents involving intangible assets and proprietary rights, such as the use of patents, techniques, processes, formulas, designs, know-how, trademarks, copyrights, franchises, and manufacturing rights. The term "royalties" generally refers to payments for the utilization of copyrights or trademarks, and the term "license fees" generally refers to payments for the use of patents or industrial processes.

Other Private Services - Transactions with affiliated foreigners, for which no identification by type is available, and of transactions with unaffiliated foreigners. (The term "affiliated" refers to a direct investment relationship, which exists when a U.S. person has ownership or control, directly or indirectly, of 10 percent or more of a foreign business enterprise's voting securities or the equivalent, or when a foreign person has a similar interest in a U.S. enterprise.) Transactions with unaffiliated foreigners consist of education services; financial services (includes commissions and other transactions fees associated with the purchase and sale of securities and noninterest income of banks, and excludes investment income); insurance services; telecommunications services (includes transmission services and value-added services); and business, professional, and technical services. Included in the last group are advertising services; computer and data processing services; database and other information services; research, development, and testing services; management, consulting, and public relations services; legal services; construction, engineering, architectural, and mining services; industrial engineering services; installation, maintenance, and repair of equipment; and other services, including medical services and film and tape rentals.

Attack on manufacturing policy

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Today's Financial Times has an amusing attack on manufacturing policy from Jagdish Bhagwati. Why I find it amusing is that Bhagwati falls into the same that he accuses other of: unwarranted presumptions. He perpetuates the simplistic myth that it is either manufacturing or services. In fact, as I've noted earlier, boosting manufacturing also means boosting services, both direct manufacturing-related services and indirect services. I am also surprised that an economist who has made his name in trade theory is mouthing the notion that the US economy can thrive with only non-tradeable services.

The economy is a complex mix of manufacturing and services -- almost to the point that the terms are becoming meaningless. As "services" and "manufacturing" continue to fuse, we need a policy that transforms manufacturing and increases productivity in services. After years of neglect, attention is finally being paid to the manufacturing side of the equation. Bhagwati's gratuitous attack on that attention is distracting and wrongheaded.

That such a defender of economic orthodoxy as Bhagwati feels it necessary to attack manufacturing policy is an interesting sign in and of itself. That means that manufacturing policy is finally being taken seriously. Good!

Parts of a new economic strategy

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Over the weekend, there were a couple of stories on ways to revive the economy. In an op-ed in the New York Times, "The Economy Needs a Bit of Ingenuity", Noble Laureate Edward Phelps talked about the need to renew what he call the "dynamism" of the economy. First, he noted that the economic issues facing the US are structural, not just a cyclical downturn (something I obviously agree with and have been writing about in this blog). Then he outlined some of his ideas:

One reform would be to create a First National Bank of Innovation -- a state-sponsored network of merchant banks that invest in and lend to innovative projects. Another would be to improve corporate governance by tying executives' compensation to long-term performance rather than one-year profits, and by linking fund managers' pay to skill in picking stocks, not in marketing their funds. Exempting start-ups from corporate income tax for a time would also help.

We also need a program of tax credits for companies for employing low-wage workers. That may seem counterintuitive at a time when the Obama administration is pressing education and high-paying jobs, but we need to create jobs at all levels. Early last year, Singapore began giving such credits -- worth several billion dollars -- and staved off a recession. Unemployment there is around 3 percent.
Some of these ideas have been around for some time. I especially like the twist on the innovation bank, however, in that Phelps calls for a network of merchant banks to fund innovation -- not one centralized institution.

Another piece of the strategy was raised in this story -- "Wind Farm Deal Assures Bigger U.S. Role" -- about a deal cut between the Steelworkers Union and Chinese companies providing equipment to US wind farms:
Without releasing full details, the union said that the steel for the wind towers, enclosures for working parts atop the towers and reinforcing bars for the bases would be sourced in the United States. So will the blades, which are not made of steel but are often made by steelworkers, the union and the two companies said.

The agreement was brokered with the Shenyang Power Group, known as SPG, and a subsidiary that it partly owns, A-Power Energy Generation Systems, which have entered a joint venture with the American investment firm U.S. Renewable Energy Group to build the wind farm in West Texas.

United Steelworkers officials did not say what fraction of the machines' value would be from domestic manufactured parts. The Chinese companies will also work to develop a domestic American supply chain for wind machine manufacture beyond the Texas project, the union said. [emphasis added]
In a previous posting, I talked about a similar deal with high-speed rail. As I said back then, however, the conditions set down in the deal are important: technology transfer to US companies; use of US labor; and use of US suppliers. They need to be looked at very carefully before the deal is signed. Are they really structured in a way to promote the growth of an American-based industry in this field? Or are they structured in a way that simply give the US the low value-added part of the project - with no future benefit?

Clearly we have a way to go in our quest for a new economic strategy. But the idea are out there - and we need to listen carefully.

July employment

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This morning BLS data on employment indicate a sideways movement in the labor markets -- Federal government employment fell, but private-sector payroll employment went up slightly by 71,000. As the chart below shows, the number of involuntary underemployed (part-time for economic reasons) was basically unchanged in July -- a slight declined in those underemployed because of slack work but a slight rise in those who could only find part time work.


How to create more junk patents

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Today's New York Times has an op-ed by former patent judge and a high-tech executive recommending that a tax credit be given for each patent received. That is an incredibly bad -- and counterproductive -- idea. On the surface this may sounds like a great idea to incentivize invention. But the result is more likely to be a flood of dubious patent applications into an already overwhelmed patent office. As the authors point out, there is already a backlog of 1.2 million applications. How many more applications will be filed in hopes of gaining the tax credit? And how many of the dubious ones will simply clog a system that is already working hard to improve patent quality?

The authors of the piece rightly argue for more resources for the patent office. But creating a tax incentive to file more patents would undo any good that comes from allocating more resources.

Better to use the funds to make the R&D tax credit -- a proven method of spurring innovation -- permanent. Better yet, use the funds to expand the R&D tax credit into a knowledge credit tax credit.

Manufacturing and services link

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Here is an interesting new paper from three economists at the International Trade Commission on the question "Can the US raise employment with more exports?" The answer is very surprising: a revival of manufacturing exports will create jobs, but not necessarily jobs in manufacturing. The jobs will be created in manufacturing related services.

According to the authors, "Both upstream and downstream services are embodied in the value of final manufactured goods . . . In 2007, services amounted to 23% of the costs for each dollar of US manufacturing output." They also note that "the direct and indirect services employment embodied in US goods exports make up nearly 39% of the total employment supported by goods exports."

Kind of puts an end to the manufacturing versus service argument, doesn't it. The answer to the argument is "yes" -- i.e. manufacturing and services are not an either/or but a both/and.

The Intangible Economy includes manufacturing

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Yesterday's posting talked about the renewed interest in manufacturing. This has been building for some time. At the end of last year, the Obama Administration released a "manufacturing framework" (see earlier posting). As I noted in my Policy Brief--Intellectual Capital and Revitalizing Manufacturing, the framework included intellectual capital but needed to be expanded.

Unfortunately, not everyone gets its. There is still a misunderstanding on this point. For example, one witness testified at the House Energy and Commerce Committee (the hearing I mentioned yesterday) that we didn't need manufacturing because value of intangible assets was greater than the value of tangible assets.

This is such a misreading of the economic transformation as to be breathtaking.

As I have noted many time before, moving up the value chain does not mean abandoning manufacturing. It means transforming manufacturing from mass produced low-price commodities to higher value added goods and services.

As Aneesh Chopra, the Obama Administration's CTO, said in his prepared testimony at that same hearing:

The manufacturing sector is undergoing transformative change. We can help foster and facilitate this change and ensure that workers and communities thrive in the midst of this change if we take certain critical actions. Past manufacturing strategies have largely failed. Two different views have dominated these past approaches. One view was that manufacturing industries needed to be protected and insulated. Not only was this approach ineffective but it was also counterproductive. An alternative view was laissezfaire, cutting critical research and support programs and hoping the market will take care of problems. This approach has contributed to the steep job losses over the last decade but more importantly threatens to rob us of the potential for greater innovation over future decades. An alternative to these two poles is a strategy that recognizes that change is inherent in the economy and necessary for productivity growth. Evidence-based policy can help foster and channel this change and ensure that workers and communities can thrive in the midst of it.

As a report from the MEP advisory committee Innovation and Product Development in the 21st Century notes:

So how does U.S. manufacturing remain competitive? An important factor will be to more clearly define a central constraint on the growth of the manufacturing sector - the ability to translate innovation into commercial products. Federal policy can help renew manufacturing in America by improving the process of transition from research and development to domestic product design, manufacturing, and product deployment. Unfortunately, many of today's manufacturers suffer from a lack of access to new technologies, new processes, new markets, and a skilled workforce to make this transition. Many firms have knowledge about what needs to be done but need help in taking appropriate action. Other firms must be educated toward new opportunities. Current public policies can do more to assist U.S. firms at the scale needed to compete.

In other words, companies need to build on their intangible assets -- and government policy is needed to help them do that.

Reviving manufacturing

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After years of neglect, manufacturing has become a hot topic in policy making circles. Today's Washington Post notes how the jobs debate has attention (New Democratic strategy for creating jobs focuses on a boost in manufacturing). As the story notes, last week the House passed a couple of bills aimed at raising the level of debate. One of those bills was H.R.4692 - the National Manufacturing Strategy Act of 2010. (For testimony on the strategy act see the House Energy and Commerce Committee hearing.)

The bill calls for the creation of a manufacturing strategy to "promote growth, sustainability, and competitiveness; create well-paying, decent jobs; enable innovation and investment; and support national security." While that is a good set of goals, the manufacturing strategy needs to go beyond that simple statement. We need to embrace the fact that manufacturing is being transformed.

In that regard, the bill falls short. For example, the bill mandates a Quadrennial Study by the National Academy of Sciences. That study is almost exclusively past and present oriented. It is more an evaluation study than a look ahead. Yes, it does call for the study to conduct "(a)n assessment of the trends and short- and long-term forecasts of
manufacturing." But a forecast is not a vision. And the assessment is really part of the evaluation process, since the next paragraph calls for a "review of the trends and short- and long-term forecasts of manufacturing relied upon in previous National Manufacturing Strategies as compared with actual events and trends."

Reviving manufacturing will take more than a return to the ex-ante status quo of a decade ago. It will take a clear strategy of transformation. The National Manufacturing Strategy is a good first step. But the idea of transformation needs to be baked-in to the process from the very beginning. Only that will ensure we get a road map for the future rather than a nostalgic look back.

Protection of government logos

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In previous presentations and postings, I've mentioned the fact that governments invest in the creation of intangible assets -- including brands and logos (trademarks). But government logos are a special case of trademarks which are given a higher level of protection. Chapter 33 of Title 18 of the US Code protects government emblems, insignia and names. This runs from use of "Federal Deposit Insurance Corporation" to the FBI to Smokey the Bear.

The purpose of these laws is to prevent abuse and deceptive practices. No one wants the public to think a private bank with the words "Federal Reserve" in the name is really one of the Fed banks. Likewise, the use of the Presidential seal such be reserved for the use of the President (something candidate Obama found out quickly when his campaign once used a look-alike Presidential seal during a speech).

The laws, however, also allow the agencies to control commercial use of the logos and license them out. For example, various White House and Secret Service logos are licensed to the United States Secret Service Uniformed Division Benefits Fund. Licensed products are sold in the official (or licensed) gift shops. Similarly, the FBI Recreation Association sells official FBI items at gift stores in Washington and at field offices.

Every once and awhile, government agencies feel the need to warn someone about the use of the logo. The latest occurred last week when the FBI sent a letter to Wikipedia stating that the use of the FBI logo in the Wikipedia article on the agency violated the law. Wikipedia responded in a letter stating that the Bureau had overstated the case -- claiming that Wikipedia's use of the seal did not constitute assertion of authority or intent to deceive. Nor does the posting violate commercial use. (See also New York Times story).

The Wikipedia letter noted that they are willing to fight out the issue in court. No word yet as to whether the FBI is willing to pursue the matter. In either case, the exchange is may be important step in clarifying the protection granted to government logos. It may also force the government to take a closer look at how it manages its brands -- and other intangible assets.

As I've noted many time before, the US government invests significant funds in the creation of intangible assets -- both those used by the general public (education; R&D) and those held by the government (brands). We need to better understand those investments (with a better budget analysis) and management them.

    Note: the views expressed here are solely those of the author and do not necessarily represent those of Athena Alliance.

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