The Demographic Tea Leaves and American Manufacturing

The winds are set to blow more manufacturing back to the US over the next 20 years.  One reason is demographic.  Another reason is the nature of manufacturing innovation.

This post looks at demography, while future posts will look at what is happening with manufacturing innovation.

The demography changes that matter for America are those in China.  China rode the demography wave on the way up, drawing its large workforce from the country into urban factories, providing historical capacity to make shoes, toys, iPads, and what have you for the world.  Because its one-child policy is catching up to it, its rapidly aging population is not being replaced by enough younger workers, either to support the costs of caring for the old or to replace the former pools of cheap labor. From now to 2050, the share of the Chinese population that is of working age will fall drastically, while the number of elderly dependents is rising, creating a potentially economically destructive imbalance.

This will have profound internal societal, as well as global economic effects.  In terms of the latter, the Chinese workforce that builds and assembles for the rest of the world will not be as flexible, whether in terms of price, skill, or availability, as it is today.  (Think of recent coverage about the ability of the Chinese workforce to expand to prepare for a new Apple product launch.)

Here is where the contrast with American culture comes in, showing America’s special flexibility to support innovation.  The Economist writes this week:

The shift spells the end of China as the world’s factory. The apparently endless stream of cheap labour is starting to run dry. Despite pools of underemployed country-dwellers, China already faces shortages of manual workers. As the workforce starts to shrink after 2013, these problems will worsen. Sarah Harper of the Oxford Institute of Population Ageing points out that China has mapped out the age structure of its jobs, and knows for each occupation when the skills shortage will hit. It is likely to try to offset the impact by looking for workers abroad. Manpower, a business-recruitment firm, says that by 2030 China will be importing workers from outside, rather than exporting them.

Large-scale immigration poses problems of its own. America is one of the rare examples of a country that has managed to use mass immigration to build a skilled labour force. But America is an open, multi-ethnic society with a long history of immigration and strong legal and political institutions. China has none of these features.

Taking Your Ball, Going Home, And Inventing A Different Game

I am going to blog next week about Peter Thiel’s class at Stanford. In the meanwhile, David Brooks will have to do. This excerpt from his column this week reminds that creativity comes from doing what the masses at HBS or elsewhere are not, whether you visualize this as finding the blank spots on the map, wandering the wilderness, or playing your own invented game:

Think about the traits that creative people possess. Creative people don’t follow the crowds; they seek out the blank spots on the map. Creative people wander through faraway and forgotten traditions and then integrate marginal perspectives back to the mainstream. Instead of being fastest around the tracks everybody knows, creative people move adaptively through wildernesses nobody knows.

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But business, politics, intellectual life and most other realms are not like that. In most realms, if somebody hits three home runs against you in one inning, you have the option of picking up your equipment and inventing a different game. You don’t have to compete; you can invent.

Google Drive: On the Right Road?

Google launches its Drive cloud-based storage service  today, and enters the ring with Dropbox, iCloud, and others.  Two initial questions that Google needs to answer to determine whether this service is heading down the right path.

First, is it going to invest the necessary resources to make the suite of services in the service formerly known as Google Docs usable?  (See post here on Google Docs.)

Second, documents that we create — like our email — have some of our most confidential information in them, whether business or personal.  Google mines our email to deliver personalized advertising to us; it needs to be clear about whether it is going to do the same with our documents from the start, i.e., now before users start uploading their files and pictures.  It’s not good enough to say that everything put onto Drive is voluntarily put on, so all is fair game.  (See post here on privacy concerns.)

Public Data, Private Business

I’ve noted that one of the primary things the government can do for innovation is creating and releasing data sets:

Data sets do two things.  One, they lend themselves to the creation of apps or other innovations to manipulate and present the data, which in themselves can be very valuable.  Two, and tied to the issue/trend spotting point, they help both entrepreneurs and investors find potential market opportunities and/or test hypotheses.

Spend government money making usable data sets from information that the PEOPLE own.  For example, think of court cases, and how one must pay an arm and leg to private vendors to access case information.  Imagine the power of releasing clever teams of folks on that data.  The result would be providing cheaper disruptive ways for consumers to access that information, and disrupting expensive business models and customer deadweight loss along the way.

There is also a justice principle at play — consumers should be paying for innovation value-add to public information, not for access to data the PEOPLE should already own.

Along these lines, I noted the very impressive effort by Harvard University to release libary data, as covered on the New York Times website today (h/t to John Palfrey):

Harvard’s library is making public the information on more than 12 million books, videos, audio recordings, images, manuscripts, maps, and more things inside Harvard’s 73 libraries.

Harvard can’t put the actual content of much of this material online, owing to intellectual property laws, but this so-called metadata of things like titles, publication or recording dates, book sizes, or descriptions of what is in the video is also considered highly valuable material. Frequently descriptors of things like audio recordings are more valuable for search engines than the material itself. Search engines frequently rely on metadata over content, particularly when it can’t easily be scanned and understood.

Harvard is hoping other libraries allow access to the metadata on their volumes, which could be the start of a large and unique repository of intellectual information.

“This is Big Data for books,” said David Weinberger, co-director of Harvard’s Library Lab. “There might be 100 different attributes for a single object.” At a one-day test run with 15 hackers working with information on 600,000 items, he said, people at created things like visual timelines of when ideas became broadly published, maps showing locations of different items, and a “virtual stack” of related volumes garnered from various locations.

This is leadership by a private institution filling the void of the lack of public vision.  Hopefully, the Library of Congress and other government institutions get it soon.

The High Cost of Breaking Up

Antitrust reverse termination fees (fee paid by the buyer to seller if the deal falls apart because of antitrust objections) are meant, in part, to compensate for the risk to the seller from an antitrust investigation, in addition to providing extra incentive to the buyer to get the deal done.  These fees–in antitrust-sensitive deals–typically range about 3-4% of the purchase price.

In the internet industry, 20% may be the new 4%, reflecting the government’s keen interest/unpredictability in these acquisitions.  Google’s Motorola Mobility acquisition has a $2.5 billion breakup fee, 20% of the $12.5 billion purchase price.  Today, Facebook revealed that the Instagram acquisition has a $200 million breakup fee, again 20% of the $1 billion purchase price.

Human Itches Are Forever; Ways To Scratch Them are Fickle

Steve Blanks says:

The quickest way to create a billion dollar company is to take basic human social needs and figure out how to mediate them on-line.

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Friendship, dating, sex, art, entertainment, communication, confession, networking, gambling, religion – would our hearts still beat and would our lungs still breathe without them?  Of course.  But these are things that make us human. They are hard-wired into our psyche. We’ve been doing them for ten’s of thousands of years.

The thing with basic human needs is that they are all massive if you figure out something that truly resonates with an individual’s humanity.  Perfecting an individual experience could mean perfecting every individual’s experience.  Blanks’ post is worth reading as a model to think about such ideas.

The other thing about such applications, flowing from being so deeply linked to each and every person’s humanity, is that there is always someone figuring out a way to make them even better, particularly as underlying technology platforms change, e.g. computer to smart phone.  That means that possessing the killer solution can be transitory.  Fred Wilson had an interesting thought about that this week where he describes the “round trip from nothing to everything to nothing again” as “network effects are possible in both directions.”

Information is Free, Information is Valuable: The Paradox at the Heart of the Internet

I am spending time recently thinking about the following paradox about information from Stewart Brand, as printed in the Whole Earth Review:

On the one hand information wants to be expensive, because it’s so valuable. The right information in the right place just changes your life. On the other hand, information wants to be free, because the cost of getting it out is getting lower and lower all the time. So you have these two fighting against each other.

He also said later:

Information wants to be free (because of the new ease of copying and reshaping and casual distribution), AND information wants to be expensive (it’s the prime economic event in an information age)… and technology is constantly making the tension worse. If you cling blindly to the expensive part of the paradox, you miss all the action going on in the free part. The pressure of the paradox forces information to explore incessantly. Smart marketers and inventors quietly follow-and I might add, so do smart computer security people.

The tension between information both being the most valuable thing we have in humanity, but also that it wants to spread and can spread so much more easily when digital resonates with much in the very concept of information networks.

Some examples:

• Think about the music industry’s early struggles and missteps with how to handle privacy, i.e. the legitimate desire to protect artists and the business overriding any notion of giving the customer what she wanted which was something more maneuverable than the physical CD.  We’re getting a lot better, but still struggling with this, i.e., where content needs to be monetized for effective creation, but spreads easily due to technology and cultural norms.
• The current patent battles and the state of the patent system are arguably about a system being abused to overprivilege the “expensive” aspect of information over the natural process of information spreading.  This inhibits the opportunity for others to build on ideas in the process of innovation.
• It’s also true that some of the most valuable internet ideas — Facebook, Twitter, Instagram, Foursquare, Pinterest — have been the networks that have enabled the creation or organization of content for free and made the sharing and spread of that information frictionless.  We’ve talked a lot about that on this blog.  See for example this post.  These types of ideas are particularly lucrative because while the information is valuable, creators are not concerned about being compensated.

Another potential idea is where you accelerate commerce, perhaps in some expensive service, by somehow tying it into an information activity to take advantage of the frictionless roll of information to spread it and gain the value out of sharing it with others.  Here, like in the first example above and unlike the third example, one wants to somehow solve the paradox in both respecting the information/idea as both something valuable that needs to be monetized, but something that also needs to be shared in the natural order of things.  This is a difficult problem but lucrative if solvable.  I need to think about this and will post more in the future.

Taking Innovation Back: Twitter’s Innovator’s Patent Agreement

Often the biggest leaps in creativity come from relatively small tweaks to status quo mechanisms.  These small tweaks can have a big impact, when they enable bigger latent forces to operate and move the status quo, like a sail can catch the wind and move an otherwise stationary boat to a new location.

It remains to be fully seen, but Twitter’s announced model for the IP assignment agreement, the Innovator’s Patent Agreement is the small tweak that has the potential to over time dramatically disrupt the dangerous and toxic world of patents and patent litigation which is constraining innovation today.

The background is that companies usually require its inventor employees to assign ownership of his or her patents to the company.  Because patents are property, years later another entity can gain possession of the patent and use it offensively to sue others.  It also turns out that many inventors find it offensive that their innovation is being used to squelch innovation in a later life.

The innovator’s disgust with becoming tools of anti-innovation objectives is the strong “wind” that Twitter realized was not being reflected in current patent policy.  The question then becomes: what is the “sail” that might move patent policy from the destructive location that it is anchored in.

Twitter’s tweak is to give a veto right to the inventor in the assignment agreement if the patents are to be used offensively, regardless of who later owns the patent.  It empowers inventors to say no to their patents later becoming tools of innovation disruption.  By unilaterally adopting the policy and evangelizing it to other companies and venture capitalists, it has the potential to become the new norm, and potentially a prerequisite for attracting the most creative minds to come invent under your roof.

If it does become the norm, and there is a long way to go, this will be one of the most revolutionary developments in the tech industry — on par with many important enabling technology and process innovations of recent times that have resulted in the low barriers to entry startup culture that we have.  This is something to be very grateful to Twitter for taking the lead on.

“Apples and Oranges” Creativity

One of the things that I learned about the process of creativity long ago and has fascinated me ever since is playing around with connecting random unrelated things – hip-hop and econometrics, the quarterback position and Buddhism, North Korea and foursquare (or North Korea and virtually anything else!).

It’s illustrative of some beliefs I have. One, due to some common humanity and potential we all have, there are always connections between things. Two, figuring out these connection often leads our minds to land on interesting insights. Three, we often compartmentalize ourselves into more and more specialized fields, but it’s counterproductive for deep creativity and also leads us to forget we are capable of contributing to multiple areas in life, often completely different. Fourth, this all leads to a more interesting life.

On this score, I read today in the FT of a new book on creativity by a young wonder kid named Jonah Lehrer, “Imagine: How Creativity Works.” It seems worth picking up. I liked these particular excerpts from the FT piece:

Get Lehrer talking about the book, and it’s clear he loves his material. At one moment he will be explaining how jazz pianists inhibit certain parts of their rational brains in order to improvise. Moments later, he will relate an anecdote about how Proctor & Gamble researchers came up with a new kind of mop . Throughout, he is creating bridges that connect academia and the mundane. “The funnest part for me is finding a connection between the two,” he says. “The liminal space between the lab and the real world, that’s what I’m drawn to.”

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In part, it is this more democratic understanding of creativity that makes Imagine so appealing. Lehrer doesn’t suggest we can all be brilliant artists, but he does lay out a set of conditions – relaxation, curiosity, divergent interests and determination – that make creativity more likely.

Interest In Pinterest

After the Instagram acquisition, Pinterest gets bought by Google, Microsoft, or Facebook (in that order of likelihood) for $3-$5 billion in the next several months.