More China Manufacturing

I linked to this already, but it’s too good not to copy this para

In a sense, I feel like the shanzhai are brethren of the classic western notion of hacker-entrepreneurs, but with a distinctly Chinese twist to them. My personal favorite shanzhai story is of the chap who owns a house that I’m extraordinarily envious of. His house has three floors: on the top, is his bedroom; on the middle floor is a complete SMT manufacturing line; on the bottom floor is a retail outlet, selling the products produced a floor above and designed two floors above. How cool would it be to have your very own SMT line right in your home! It would certainly be a disruptive change to the way I innovate to own infrastructure like that — not only would I save on production costs, reduce my prototyping time, and turn inventory aggressively (thereby reducing inventory capital requirements), I would be able to cut out the 20-50% minimum retail margin typically required by US retailers, assuming my retail store is in a high-traffic urban location.



This is a brilliant idea.

Most innovation, well, isn’t: it is “unnovation,” or innovation that fails to create authentic, meaningful value. The biggest stumbling block to innovation is unnovation: most companies are too busy unnovating to ever learn how to truly innovate.

In the race to innovate, most organizations forget a simple but fundamental economic truth. A new process, product, service, business design, or strategy can only be described as an innovation if it results in (or is the result of) authentic, durable economic gains.

Unfortunately, much of what our economy produces today isn’t innovative — it’s unnovative. The evidence is hard to dispute: we merely need to note how deep the global decline is, how consistently 20th Century business fails to do stuff that matters — or just how many industries are caught simultaneously in deep crisis.

Here are some examples of unnovation.

The Hummer was a product unnovation, which destroyed value for both society and Detroit.

CDOs were a financial unnovation, that crippled the financial system, and have cost everyone hundreds of billions.

Integrating into auto finance was a business design unnovation for Detroit — one which diluted and sapped the incentives to make authentically innovative cars.

In our field, innovation requires investment and time. But “unnovation”! That’s a different story.

Department of hell freezing over

I have also learned something about my country. I run a global company, but I am a citizen of the U.S. I believe that a popular, thirty-year notion that the U.S. can evolve from being a technology and manufacturing leader to a service leader is just wrong. In the end, this philosophy transformed the financial services industry from one that supported commerce to a complex trading market that operated outside the economy. Real engineering was traded for financial engineering. In the end, our businesses, our government, and many local leaders lost sight of what makes a nation great: a passion for innovation.

To this end, we need an educational system that inspires hard work, discipline, and creative thinking. The ability to innovate must be valued again. We must discover new technologies and develop a productive manufacturing base. Our trade deficit is a sign of real weakness and we must reduce our debt to the world. GE will always invest to win globally, but this should include a preeminent position in a strong U.S.

Jeff Immelt

The idea of  the CEO of GE writing such a thing 2 years ago would have been unthinkable.

The train to the terminal station

Digital Equipment Corporation
Silicon Graphics Corporation
Sun Microsystems

One might get the impression that the boards of directors of technology companies have as much ability to intervene to stop suicidal business strategies as the boards of directors of Bear Stearns did.

But business is simple: you always have to look at the business model of the company and of the company management and other employees. In the case of Sun, there has been zero incentive for Sun management to bring in people who would challenge their decisions or the lax process and culture at the company. They get paid, feted, and admired by flunkies without being forced to actually justify their poor results. In the case of the banks, if your management staff and other high executives have the chance to make hundreds of millions of dollars personally by taking crazy risks with other people’s money, what would you expect? One of the things that I find most ludicrous about economics is the implicit theory that corporate employees identify their interests with the interests of the company: only engineers are stupid enough to do that. Once you realize there is a difference between the business model of the company and the business model of the people who run or invest in the company, the underlying logic of all sorts of wacky strategies that leave upper management well rewarded become clear. I used to be puzzled by well financed startups and public companies that motored along, getting new investment or other financing, being cheered on the street, and so on without having any remote chance of ever making any money. But there are plenty of opportunities for the people who manage, advise, and lend and invest other people’s money to all personally do well from such a business.

Venture capital, short term, and India

From Wladawsky-Berger’s blog entry on Carlota Perez’s analysis in 2005:

She mentions three particular structural tensions that we need still to work out in order to move on: investments continue to be focused on short-term gain, not on long-term production and growth; the social system continues to foster an unstable environment in which the rich get richer and the poor get poorer; and there is too much idle money chasing and inflating assets like housing and not going into expanding the demand needed to soak up all the excess supply being produced.”

And from the Wall Street Journal in April 2009:

The Mushahar in Bihar are part of a political and economic shift that is building across the Indian countryside. The transformation, largely driven by development spending by national and state policy makers, will be put to a test starting next week. The world’s largest democracy kicks off a month of polling April 16 in which many of the leaders behind these experiments are seeking re-election.

Growth has slowed in the new India of technology outsourcing, property development and securities trade. But old India — the rural sector that is home to 700 million of the country’s billion-plus people — shows signs it can pick up the slack. The rural awakening helps explain why India continues to grow even as the U.S. recession drags on the world economy.

The very idea of the “elevator pitch” encodes a complex economic theory in which investment ideas are supposed to be reducible to 1minute sound bites that professional money managers have the judgment and expertise to screen.  To me, one of the problems in the US economic system is that too much power is concentrated in the hands of professional money managers – from bankers to venture capitalists to investment advisors.  For 30 years or more, we in the US have been force fed a theory that the government doesn’t have the expertise to pick winners and losers compared to the nimble and efficient market. And certainly, it is clear that the government can blow lots of money on nonsense. But compare the Internet, developed by a government monopoly and by DARPA and then NSF, to or, worse,  Countrywide, and ask which was a better considered, smarter investment.

Venture Capital falls off the cliff

Through all the bumps and strains in the broader economy, venture outlays kept up an almost eerily steady pace over the previous 21 months, ranging between $7.3 billion and $8 billion each quarter, from the start of 2007 to the third quarter of last year, according to the MoneyTree survey, which tracks venture-capital investments.

But in the fourth quarter, investments plunged to $5.4 billion, a drop of 26.4 percent from the prior quarter and 33.2 percent from the fourth quarter a year earlier, the MoneyTree report showed. The survey is produced by the accounting firm PricewaterhouseCoopers and the National Venture Capital Association, using Thomson Reuters research data. (Boston Globe)

I’m ready to argue is that there is a basic problem in returns demands.  Insistence on earning very high returns fast pushes investors into “elevator pitch” companies with technology that is easy to undertand for non-experts. Imagine trying to explain Visi-calcs product when it was in development stage. Or Adobe’s. Or Oracle’s product. All of these are complex, relatively new, pieces of technology that required long term investment of engineering efforts.

The coming bust in venture cap

According to Forbes (thanks to Trevor Loy for the link)

The venture capital industry is staring at the most vicious shakeout in its history. Returns are pathetic for most funds, the public offering pipeline on which venture depends for its exit strategy is clamped shut, and with the shares of many big publicly traded tech companies swooning, those firms are less likely to buy up promising upstarts.

Rate of return versus risk (probability of success) is a tough ratio to try to fudge.