on August 4th, 2010

Dear Colleagues

As you know, with the recent release of the various Apple iPhones and iPads; innovation tuned into the market is highly prized and rewarded. Rupert Murdoch, the news media magnate, predicts that tens of millions of iPads will be sold over the next few years. He remarked about the Apple CEO, Jobs: ‘He's got such incredible focus. He's got such power inspiring the people around him who work for him. And, you know, it's -- it's a highly, highly disciplined company... and it makes beautiful products.’ In essence, I believe, it’s all about leadership and innovation strongly focussed on the marketplace.

Certainly, a rock bottom price doesn’t play a huge part in the success of these products, and Jobs will have the horde of lower cost imitators pouring in shortly. He will have to keep ahead of the pack. And sure, he has had some problems with the antennas. But this is the stuff of business. He has persevered and succeeded (today).

Innovation is not the great saviour

All the so-called experts in western countries keep on banging on about innovation being the saviour for the western world against the competition from the low cost Asian wages countries. Innovation is critical to long term success, but only when backed with manufacturing. But therein lies the dilemma.

Many say that as we can’t compete in any other way with low cost countries, we have to simply focus on selling our innovation and R & D. Typically it is said that America, Canada, Europe, Australia and NZ, will do the R & D and the rest of the world (typically China and India) will do the dull work of simply making things. Cheap labour is supposedly the main reason why manufacturing will continue to move to the China, Vietnam and India.

But as Ralph Gomory (of the IEEE) points out, cheap labour doesn’t quite explain why Japan and Germany have such vibrant car manufacturing industries. Or why semiconductors, which require such an incredible amount of R & D and are so highly automated, are mainly made in Asia. The theory that manufacturing in the western world is doomed and will go to low wage countries is a flawed one.

A few awkward truths

We have an additional awkward truth to confront. If we don’t make something or sell a service in sufficient quantities we have to import and pay for it out of borrowings. As we all know, these loans have to be eventually paid back. No free lunch here. Thus providing only innovation and R&D is simply just not enough to pay the bills.

Countries such as China are definitely not only interested in pursuing low cost wages and products or services. They are slowly moving up the food chain into producing higher quality and far more innovative based goods and services. So believe me – competition is not only going to be in traditional manufacturing but also in innovation and R & D.

I also see a considerable amount of money wasted on R & D on projects which are simply not commercially oriented or simply a bureaucratic waste of time creating “jobs for the boys and girls.”

Wage costs going up

There are interesting signs of wage costs going up strongly in China. On an anecdotal front, one of my more entrepreneurial buddies (who peddles camera accessories) found to his horror that his Chinese manufacturer had been making them at a loss for the past two years and had to raise prices by a few hundred percent to stay in business. The wage plunge is not only downwards. Eventually, workers are going to want to be paid reasonable wages and things will thus be more competitive. This will happen in the distant future, but it is happening.

What must we do?

• Keep innovating and doing R & D as intensively as possible to give your products and services that incredible edge.
• Look at ways to produce and manufacture innovatively and cost effectively.
• Form partnerships with other firms around the world to sell products and services.
• Show outstanding leadership to your people and colleagues in creating outstanding innovative products which fulfil a real customer need.
• Keep firmly focussed on the bottom line in terms of profitable products and services.

Lee Iacocca remarked about the need for persistence and the difficulty of achieving success particularly in the manufacturing areas:

There ain't no free lunches in this country. And don't go spending your whole life commiserating that you got raw deals. You've got to say, 'I think that if I keep working at this and want it bad enough I can have it.'

Thanks to Ralph Gomory of the IEEE for his very interesting note on the subject.

Yours in engineering learning


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