- By Jim Pinto
- January 01, 0001
Products are becoming commodities in the fast-moving new global business environment. To succeed, businesses need a competitive differentiator – a proprietary edge which can only be developed through innovation, knowledge and experience.
Automation businesses sell just one core benefit – productivity. In today’s global markets, end-users recognize full well that whoever produces cheaper, faster and better wins.
In this new global century, nations and regions are engaged in a fight – albeit peaceful – that will impact many generations to come. It’s a war of ideas and innovation, of agility and tenacity. It will take new thinking to stay ahead.
For several decades now, the assumption has always been that the U.S. and other industrialized nations will keep leading in knowledge-intensive industries while under-developed and developing countries focus on lower skills and lower labor costs. That's now changed. Many countries around the world now compete both with low wages and high tech, plus significant government subsidies and incentives.
There’s another key human factor – “asymmetric motivation”. In North America and Europe, salaries are high and the motivation to work long hours is limited to those few who have natural drive. By contrast, in developing countries like India and China, the drive for upward mobility is far more. In China, manufacturing people work diligently for comparatively low wages and government-provided housing; working fixed hours in a clean factory beats pulling rice from mud. This asymmetric motivation results in huge productivity differences.
In the global environment, there’s yet more asymmetry that’s causing financial investment shifts. Today’s world has three business/technology models:
- U.S. businesses develop products with 60-70% gross-profit margins, and target revenue growth of $100 million to $1 billion. U.S. investment is simply not available for products with smaller margins and markets. Because of this, products developed in the U.S. are more complex and are targeted for large markets that can justify high investment and subsequent high overhead.
- Other developing countries are growing rapidly through products that have intermediate complexity with smaller revenue growth and medium (40-50%) gross-profit margins. In India, there are exciting technology companies growing to $5-10 million within three to five years with medium complexity products, quickly developed. This level of success attracts high levels of investment.
- China is unique in that it is government controlled, with target gross-margins of only 5-10% (margins that are considered too small anywhere else). Their primary objectives are local employment and market share. As a result, China has become the undisputed world leader in low-cost manufacturing of high-volume products. Also, China mandates disclosure of all intellectual property, demonstrating their long-term perspectives. By contrast, American and other outsourcers are giving away intellectual property and knowledge for short-term financial gain.
In the automation world, Honeywell, Rockwell, GE, Emerson and most of the majors are going offshore, both for manufacturing as well as development and systems engineering. Honeywell and IBM just recently announced that they will be doubling their employment in India. A decade ago, Hewlett Packard and Microsoft outsourced approximately 30% of their software to places like India, Malaysia, Hong Kong and Russia. Today, this number is closer to 50%.
One wonders what will happen to manufacturing knowledge and experience in advanced economies. The remedies require significant attitude changes. Our society must recognize that manufacturing and job creation are not the manipulations of evil corporations – that these are beneficial to society.
Automation is the result (not the cause) of job flight. The idea that manufacturing jobs are somehow "bad" has caused us to replace US jobs with automation. When people insist that there should be an embargo on job export, automation guru Dick Morley asks the question is, "OK, so you want some of your children to work in an assembly plant?" The usual response is, "Gosh, no!" “Well then,” asks Morley, “Whose children do you want working on the automobile assembly line?
Dick Morley insists that US jobs are not leaving – they are being driven out. No community in the US wants a new automobile assembly plant, a printed circuit board plant or a semiconductor manufacturing plant in the area. If manufacturing companies try to locate almost anywhere in the US, they are fined with high taxes, strict compliance regulations an infinite bureaucracy. These are NIMBY rules - "not in my backyard". In the meantime, the environmentalists are happy to see more trees, more green and non-polluting boutiques and shopping malls everywhere.
Says Dick Morley, “One of the other things we can do is make the factories look good – small, efficient and a glorious place to work. As an example, have a beer facility (Budweiser) in an adjoining town. Everyone likes to work there: it's clean and quiet, enclosed. The refinery, much like a coal mine, appears to be an intruder rather than a citizen of the society within which it exists; making the refinery, the pipeline, the factory and the process plant good citizens, rather than the adversaries, will help a lot.”
America needs to recognize that the manufacturing-based middle class is the nation’s backbone. It’s important to keep investing in jobs to upgrading factories, to be competitive in a global market. This doesn’t mean replacement of the old-style, labor-intensive manufacturing jobs; those have disappeared in the last century – like farming (which used to be some 30% of the population at the start of the last century, and is now less than 2%).
Everything starts with education. Consider training in the U.S: There are excellent engineering classes, supported by local and state schools, colleges and universities. However, after graduating engineers don’t get more respect; there are no immediate high-paying jobs, no new exciting openings that develop than were available before their training.
It’s evident that ISA’s “Certified Automation Engineer” does not mean any additional status or pay. Till that is corrected, the problem remains. One of the initiatives Dick Morley is working on is linking automation training with the education at MIT, Cal Tech and other well-known education centers, to derive additional status. This would have the advantage of being “brand connected”, and will eventually bring more status, and correspondingly higher compensation.
The lack of interest is that there's no money at the end of the engineering rainbow, as perceived by the student; there are no adequate teachers as perceived by the university; there's just no fun, no money and no reward for either the instructors or the students.
Talent & Innovation
Just two things are left in the U.S. – talent and innovation. These should be encouraged, stimulated and rewarded. The solution is to encourage entrepreneurship and talent to thrive in the manufacturing sector. Today, innovation only costs money and has no reward. The recent law suits on intellectual property, and the perceived ideas of openness, have certainly dimmed the inventiveness of many of the innovative people.
It is significant that science and engineering professionals are dangerously absent from all levels of policy and decision-making in the U.S. Somehow, we have allowed lawyers and professional politicos to take over everything by default. As a result, government is manipulated by lobbying interests and the business climate becomes a political football. Among other ills, this has become a direct threat to our jobs and innovation tendencies.
The short-term financial mind-set must change. Business needs to realize that continual quarter-to-quarter increases in revenue and profits cannot be sustained with manipulation of work that is done elsewhere. Wall Street must stop manipulating company value by demanding short-term, quarterly financial performance. The media covers high paying jobs, seldom paying attention to society contributions.
I remember visiting a Chinese steel plant several years ago. It seemed comparable to most steel plants – operators were bustling around, loading and stacking the raw materials, with the roar of the blast furnaces in the background. I thought to myself, this could be anywhere in the world today – Sheffield, England; Sao Paolo, Brazil; Pittsburgh, USA.
Up past the proverbial catwalk was the instrumentation room, filled with old but serviceable displays, meters, recorders, switches and controls. I asked my host, an instrument engineer, where their process and controls information came from and he showed me; it was an old textbook, like one you might find at any swap meet in America. And then I looked at his library – there was Bela Liptak’s Instrument Engineers’ Handbook, first edition, midst other similar tomes and the usual collection of supplier catalogs.
I asked him, "Do you follow these textbooks closely, or do you develop your own variations?"
He smiled wisely, "Ah, we also have our own secrets..."
This was when I realized that most of the basic knowledge related to the industrial revolution – how to make steel, cement, plastics, or just about anything else – has already been widely disseminated. Anyone who wants to do it does it.
Losing the knowledge base
Clearly, the knowledge base that was once the advantage in the U.S. and Europe is being lost. In many, large end-user companies many long-term process experts and instrumentation engineers, with deep and intimate knowledge of key equipment and processes, have been eliminated and have become “independent contractors”, available to competitors in the U.S. and worldwide. The proprietary edge is frittered away, a casualty of short-term financial thinking.
At this stage, recognizing the need for engineering expertise to keep equipment and processes up to date, some end-user companies have partnered with major automation suppliers to take complete responsibility for all automation systems. It seems like a mutually beneficial arrangement.
But, this raises many questions: How do you choose the primary automation vendor/partner? Simply select one of the major automation suppliers (from a handful of global contenders) and exclude bright, up-and-coming companies? Abandon the multitude of systems integrators and other significant suppliers of materials, instruments and equipment, to rely solely on one source? Will the relationship be profit based, or on a cost-plus basis? After settling on a primary supplier, internal engineering talent soon becomes non-existent; so, who will negotiate upgrades and contract changes? If the selected automation supplier flounders financially, how will the situation be corrected?
Think on this: quality, price and availability are all becoming commodities in the fast-moving new global business environment. To succeed, you need a competitive differentiator – the proprietary edge. And this cannot come through short-term "consultants". It can only be developed by consistent, long-term investments in people and leadership. It requires sustained development budgets for automated processes and plant equipment – which requires strong and committed in-house engineering talent.
Like that Chinese engineer, you need to say, "Ah, we have our secrets...!"
- The pursuit of Innovation:
- Automation plus Innovation Wins:
- Business Week - Outsourcing Innovation:
- Cheaper, Faster, Better - The Productivity Race
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