A World without Patents?

“Set Innovation Free” read the cover of the economist last month. You can skip the fluffy leader, and dive straight into the main article, or better still, the working paper by economists at the St. Louis Federal Reserve Bank upon which most of the article is based.  The article posited that we would have more innovation without patents, that patents don’t encourage the behavior they are designed to encourage, and that gradual rollback of patent laws — leading to abolition — would be good policy.

As an intellectual property advisor and a patent applicant, I want strong protection for my ideas and my clients. At the same time, as a former patent examiner, I’ll be the first to admit that our patent system isn’t perfect (one small example — average time between application and the first response from the office for software patents: 21 months). But the case for doing away with the system altogether isn’t often made. To understand the arguments for and against, let’s start by looking at why we have patents in the first place.

What good are patents?

Put simply – patents let an inventor block others from using or selling the invention (granting a monopoly), in exchange for sharing information about the invention. The inventor can, of course, let people use the invention and charge a licensing fee, or give it away for free (like Tesla did for its charging technology).

Patents promote innovation in two ways. First, patents encourage an inventor to invest in a new innovation because it gives exclusive rights to sell that invention. Second, the patent discloses how the invention was made, giving everyone an information advantage and speeding up the next round of invention.

There are three primary arguments in favor of a strong patent system:

1) Open-source invention. Because a patent describes the invention in detail, new inventors can stand on the shoulders of those who came before and move the field along quicker.
2) Incentivize investment in new invention at big companies. Large public companies are answerable to their shareholders. If they can’t reap the financial rewards of an innovation, they will not invest in innovation.
3) Encourage new players to enter a market. If a small startup can’t protect its new invention, an existing well-capitalized business with existing supply chains, manufacturing, distribution, and a strong brand can copy the idea and crush the startup.

There’s a fourth argument that doesn’t come up quite as often, but is just as important:

4) Countries with stronger IP attract more investment. When companies choose where to manufacture, they prefer to keep critical patent-protected inventions in countries that guarantee them their intellectual property rights.

The case against patents

Given the strong case for patents, why would the economist suggest we should get rid of them?

The arguments against our system can be summed up in three points:

1) Patents do not actually lead to more innovation.

2) There are lots of negative side effects.

3) Any patent system will evolve over time to be better for established players and worse for new entrants.

Less innovation with strong patents?

Recall that patents are supposed to increase the incentives to innovate in the first place, and then make subsequent innovations (improvements) easier.

The article raises a few interesting examples of studies indicating that patents don’t always lead to more invention. For example, a study of inventions at international fairs in the 1800s  showed that the rate of invention was no different between countries with and without patent systems. In the 1970s, new rules that expanded the ability to patent crops didn’t lead to more R&D or increases in wheat yields.

After that, the examples get a bit weaker. According to the authors, prior to a new rule allowing German companies to patent new drugs, they invented more new drugs than British companies. Unfortunately, they don’t provide any details about what happened after the rule was changed, nor do they compare Germany to other countries.

The article is weakest when it quotes an article from 1851:

Most of the wonders of the modern age, from mule-spinning to railways, steamships to gas lamps, seemed to have emerged without the help of patents. If the industrial revolution didn’t need them, why have them at all?”

Nevermind that all of these inventions were patented: the spinning mule was patented in the 1700s, and the first automatic mule was patented in 1825, gas lamps were patented in the late 1700s/early 1800s, rail designs were patented, and steam engines were patented in the 1600s. It is easy to say patents “weren’t needed”, but since each of these components of the industrial revolution was patented, the burden of proof is on the authors to show that these would have been invented anyway.

As to whether patents encourage follow-on innovation, the authors of the paper also state that patents are written using confusing legal language, and therefore do not accomplish the goal of spreading knowledge of the invention. More interestingly, the authors state that companies instruct their engineers not to study existing patents, in order to protect them from claims of infringement. (If they didn’t know about the patent, they couldn’t willfully infringe.)

These authors, and the economist article, have provided some evidence that innovation isn’t increased by patents, but a few examples from the 1800s and anecdotal evidence about what happens at a few large companies leaves a great deal of further study to be desired.

Side effects

Both the article and the St. Louis paper make the case that the many negative side-effects of our current patent system are enough to warrant some major changes.

The article suggests that a patent system:

  • restrains free trade
  • restrains competition
  • encourages fraud
  • encourages rent-seeking
  • creates arguments among inventors
  • creates lawsuits
  • allows patent trolls to stop inventions (block competition)
  • enables patent trolls to “appropriate the fruits of the inventions of others”
  • does not give security to “really good inventors”

There is ample evidence for each of these points, which leads many to agree that the system simply needs to be reformed to prevent these side effects. That brings us to the final point:

Evolution of the system

The article maintains that any patent system will devolve to encourage rent-seeking behavior as large, established players seek to protect their market share. These companies, they say, will use their leverage to lobby for rule changes that favor them, and that they can spend their substantial wealth to buy defensive patents and bring legal action (or the threat of legal action) to block smaller entrant firms.

The economist’s patent-free paradise

So what would the world look like without patents? The authors acknowledge that in some fields, like drug discovery, a patent system does encourage R&D spending. A better model, they suggest, would be a prize competition where firms who develop a new drug receive significant funding from the government. The drugs could then be manufactured by anyone, reducing the sale price of the drug, thereby reducing Medicare and Medicaid payments. Those welfare savings would more than pay for the prizes. While this sounds like a reasonable approach, I’m afraid it would fail in the details. While the government could announce a list of highly sought-after life-saving cures (say: malaria, HIV, specific cancers), how many prizes would the government set aside for drugs that improve the quality of life, like those that slow the progression of dementia, or treatments that aren’t covered by Medicare and Medicaid.

Closing Thought: Are patents different from copyrights?

Many of the same arguments for and against a patent system can be made for copyright protection as well. If the Economist is serious, maybe the newspaper should give up copyright protection on its content?

What happened to US Solar? Part 1: OptiSolar

Today the headlines are filled with great stories about successful solar companies: vivint, SolarCity, SunEdison. But what about all the news stories about all the US solar companies that went belly-up over the last decade?

Some have cited bets on the wrong technologies: CIGS, ink-based cells, thin film cells. Some have said that it was a short-sighted gamble on an ever-increasing price of bulk polycrystalline silicon, while some blame Chinese manufacturing — cheap capital, easy permitting, and established supply chains helped vastly oversupplying the market — and some further suggest that China was dumping panels (that is, selling them for less than they really cost in order to corner the market and push out other suppliers.) Still others have put the blame on venture capital: that the VC model wasn’t right for energy, or that the investors put in too much money in too many companies, or that there wasn’t enough venture capital to get companies through to an exit. Now that we’re a few years out of the big “cleantech bubble,” I’ll be diving in to a few of those companies on a case-by-case basis.

This is part one of a set of case studies where I dive in to what happened to a few of the colossal failures. The blog post is informed by a number of great news articles and press releases, which you can find at the bottom of the page.

Part 1: OptiSolar

All we need is scale

In 2004, two engineers at Hewlett-Packard predicted that the future of solar was “super-large-scale manufacturing”. The idea was simple, set up “solar cities,” where every piece of the supply-chain is co-located, own every piece of that supply chain (even the solar farms themselves), and, most importantly, doing it at incredibly large scales. That was the key — the cost of solar could only be price competitive at a massive scale. Marvin Keshner and Rajiv Arya, the two engineers, floated the idea to their bosses at HP, but management wasn’t interested.

Instead, in 2005, they took over the patents and founded OptiSolar. They believed that costs could come down “without the need for any significant new innovation. It [low cost] comes entirely from the design of a very large, dedicated and optimized factory, the design of manufacturing equipment for a very large factory and the cost savings resulting from operating at such a large manufacturing scale.”

OptiSolar suprised the world of renewable energy in April 2007 announcing that they would install North America’s largest solar farm, 40MW, in Sarnia, Canada, using panels produced in Silicon Valley.

Rising silicon prices

OptiSolar had something big going for it: the price of silicon was skyrocketing. The silicon used for solar panels had historically come cheap — the unwanted byproducts of the computer chip industry. As the demand for solar panels grew, so did the price. Between 2005 and 2007 that price had more than tripled. Contenders in the solar arena were busy inventing new solar cells based on other materials or ways to use considerably less silicon.

OptiSolar reduced costs by using a very thin film of amorphous silicon. Press releases touted their ability to recycle silane gas, the raw material source of the silicon in their process. Even though thin-film technologies were known to have lower efficiencies compared to other technologies, the founders were confident that their vertically integrated business model would mean they could stay competitive, once they could manufacture at scale.

The Sarnia project

When they announced the contract to develop the Sarnia solar farm, their manufacturing plant was still under construction in Hayward, California. Canada was an obvious first choice because OptiSolar could take advantage of generous feed-in-tariffs, essentially subsidies for renewable power generation. The Ontario Power Authority agreed to a 20-year deal to buy the power for C$0.42/kWh, (about US$0.46 /kWh at the time, and has hovered between US$0.40 and US$0.50 since). At the time, average retail prices for electricity in the US were US$0.09/kWh. The project was planned in four 10MW phases, and OptiSolar said at the time that a standard 10 MW installation at the time would cost $C 70-80 million. At that rate, the full project would cost around $320 million. A separate estimate pegged the cost of manufacturing the panels at $300 million — not counting the installation. Sources said that by the end of the year, the company had raised between $35 and $65 million. There were questions about whether the technology could perform as promised — at that point, OptiSolar had yet to demonstrate a solar module or solar panel that used their thin film technology.

More projects, more money, and a shiny factory

Yet to deliver on the promises of the Sarnia plant, in early 2008 the agreement for the Canadian project was nevertheless upgraded from 40 to 50 MW, and at the end of January, the firm raised over $38 million. This was followed in April by a flurry of new announcements: the planned Canada project had grown to 60 MW, another 140 MW of deals elsewhere in Canada had been signed, and another $132 million of new funds had been raised. In July they raised another $77.8 million, bringing the total funding to over $300 million, all of which was equity investment, according to Alan Bernheimer, the Vice President for corporate communications.

This may have been the most prescient thing OptiSolar did. The founders realized earlier than most others that the “high capital requirements would exceed the capabilities and sensibilities of Sand Hill Road.”[1] Instead of raising funds from typical venture capital, the investors were oil and gas private equity firms, mostly based in Canada. The private equity investors presumably had the patience for energy investments that VCs did not.

In conjunction with announcing the latest fundraising, OptiSolar announced that a new 550 MW solar farm was in the works in San Luis Obispo County, California. In August, the company revealed that they had won a competitive contract from Pacific Gas & Electric to purchase the power from this field. The project, dubbed the Topaz Solar Farm had an estimated cost of $1 billion.

Construction of Topaz wasn’t slated to begin until 2010, but because construction in Canada had yet to begin and the company had still not presented a product, some questioned how an unproven startup with an untested technology could land such large deals. Bernheimer attributed their success in securing the contracts to their competitive advantages in automated manufacturing and vertical integration — neither of which were up and running. By October of 2008, OptiSolar stated that the company wasn’t worried about the credit crunch, claimed that the first 10 MW phase of generation at the solar farm in Sarnia would be up and running by the end of 2008, and vice president Peter Carrie expected the rest of the project to be completed in 2009.

Around the same time, the company announced a new million-square-foot factory in Sacramento, able to produce 600 MW worth of panels per year. To lure OptiSolar to the former site of McClellan Air Force Base, the county had offered $20 million in tax rebates. In November, Governor Schwarzenegger and TV crews from 60 minutes visited the factory and used it as a backdrop to sign a new executive order supporting the renewable energy industry.

The downturn

Three days after the Governor’s visit, the company suspended work on the factory until the following year. Asked why, Bernheimer explained that in “tough economic times, you husband your resources.” The company — that hadn’t been worried about the recession a few months before — said it needed another $200 million to continue expanding the new factory, but the current crop of investors either weren’t willing or weren’t able to pile on more cash.

The bad news piled on quickly. In January of 2009, OptiSolar announced that it would lay off half its employees, 105 at the plant in Sacramento, and 185 in Hayward. Construction of the million-foot plant in Sacramento would be delayed until at least the second half of the year. The company claimed to be continuing production of modules in Hayward for the Canada project, but had pushed the target delivery date by a full year. At this point, Bernheimer claimed that the first 10 MW phase would be complete by the end of 2009. The company announced that it would apply for a loan guarantee from the Loan Programs Office at the Department of Energy.

If there was a bright spot for the company, it was the first announcement of product delivery: 1MW of panels had been installed in Sarnia. This is compared to the 2,000 MW OptiSolar had commited to across North America. Another glimmer of hope came in February, when the PG&E deal was formally approved by the utility commission in California, and the company filed the paperwork to request a $300 million loan guarantee.

Refocus on manufacturing or a return to R&D?

In early March, OptiSolar’s rival First Solar announced that it would take over OptiSolar’s project pipeline – all of the agreements to install and operate solar farms. This amounted to approximately 2 GW of capacity — including the Sarnia and 550 MW Topaz projects. In exchange, OptiSolar would receive $400 million worth of shares in First Solar. At the time, there was speculation that this was an effort to refocus the company’s efforts on manufacturing, but later interviews with one of the executives indicated that the private equity investors pressured the sale in order to recoup their $322 million investment.

Whatever the reason, OptiSolar was now only a manufacturing company. Technology analysts, though, weren’t convinced that the company’s numbers added up. Doubts were raised about efficiencies, outputs, and production capacity. Silicon raw-material prices had peaked in 2008 at $450/kg, 6 times higher than they were in 2005. By 2009, the price had crashed to $100/kg. The cost-savings of the thin-film technology wasn’t as meaningful anymore. As for the modules, the efficiency was estimated at 5 percent to 5.5 percent by GTM Research, while at the time the industry standard was 6.5 percent. The company’s claim all along was that even though the thin-film technology would be less efficient, the lower costs of manufacturing at scale would make up the difference. Outside estimates indicated that, even with these scaling effects, efficiencies in the 9 – 10 percent range would be needed to stay price-competitive.

The projects that survived

Later that same month, OptiSolar announced that it would stop manufacturing and lay off most of the remainder of its staff. The planned facility in Sacramento would lose 58 staff, and 142 at the original factory in Hayward would lose their jobs. Bernheimer said at the time that production was ready to start. But a buyer would need “resources, cash flow, and the ability to invest in research and development” in order to get the factory up and running. His words may have revealed the actual maturity of the technology. Meanwhile, analysts predicted that any company relying on the manufacture-at-scale model would “burn through its cash before it can start to ship in volume for a decent revenue stream, fail to find more backing, and be forced to pull the plug.”[2]

The Sarnia project, at least, was mostly spared. After a few regulatory hurdles, First Solar, now the developer of all of OptiSolar’s projects, was in the process of removing the 2.5 MW of installed OptiSolar technology and installing up to 80 MW of First Solar’s cadmium telluride technology.

Two years later, in 2011, construction began on Topaz, the biggest First Solar project acquired from OptiSolar. First Solar applied for a loan guarantee for the project, but was unable to secure financing. They were saved by Warren Buffet — a month later after construction began, the project was bought by Berkshire Hathaway’s MidAmerican Energy Holdings. Construction was planned to be complete by 2015, though the total projected costs had doubled to $2 billion.

Pulling the plug, and OptiSolar’s legacy

In July of 2009, the Canadian company EPOD Solar came forward to buy OptiSolar’s intellectual property and manufacturing capacity for $260 million in stock. EPOD Solar was really Allora Minerals, a Canadian mining company that had bought the assets, and name, of EPOD Solar. The OptiSolar assets up for sale included the Hayward facility, which was revealed to have only 15 MW of production capacity. OptiSolar had invested about $310 million in the manufacturing capacity. The million-square-foot factory that Schwarzenegger had visited was also included in the purchase, and promptly listed for sale on a real estate website.

OptiSolar’s projects were in good hands with First Solar, and OptiSolar’s investors were at least reasonably happy that the $400 million in First Solar stock pay back the investors (who had contributed $322 million). EPOD Solar, the buyer of OptiSolar’s equipment and IP had changed hands and was now NovaSolar, a subsidiary of a Hong Kong company.

NovaSolar, the new upstart, had a clear vision of “utility-scale power plants that will essentially undercut any other vendor on the planet” and solar modules based on existing technology, once they reach high-volume production.

One of the founders of the company was Marvin Keshner. If that name sounds familiar, it should. Keshner was the original author of the HP report, and a founder of OptiSolar. The other founders were also former OptiSolar alums.

NovaSolar secured investment from Asia, leased 65,000 square feet of research and development space in Fremont, California, and started building a 500,000 square-foot factory in China capable of producing 250 MW of panels per year. According to COO Darien Spencer, the business model remained the same as before: the “end product is building power plants and selling the power to utilities and utilizing your own product [the solar panels].” Apparently, the hype was the same as before, too, “it’s a great opportunity because as you reach grid parity, you have unlimited market potential.” The technology was also the same, with a few years of R&D improvement. The company claimed that efficiencies were now in the 8-9 percent range, making it better than when OptiSolar failed two years earlier, but not enough to keep up with improvements in competing technologies. The difference this time? Access to cheap finance in Asia. “Money is easier to borrow and factories easier to build.”

Apparently, cheap financing and easy construction permitting weren’t enough to fix the problems. By February of 2012, the San Francisco Business Journal reported that NovaSolar had furloughed 52 of 60 employees, and that the remaining eight had been unpaid for months. Construction in Fremont and China had been tabled, with contractors claiming $1 million in unpaid work so far.

In June of 2012, NovaSolar filed for bankruptcy.

So what really happened?

OptiSolar, and NovaSolar after it, failed because it underestimated the difficulty of taking an unproven technology to massive scale, and the speed at which innovation would occur in other companies. Other factors certainly played a role, too. OptiSolar was not helped by the decline in bulk silicon prices, but even if silicon prices had remained high, other non-silicon competitors (like First Solar) would have won the day. Even if the company had found investors or lenders and finished the 600MW factory, the panels would likely not have been cost competitive and the company would have trouble winning new development contracts.

Unfortunatley, OptiSolar wasn’t the first or last company to try to prematurely scale a new technology, but I’ll leave that for future posts.

The good news? Topaz, the world’s largest solar farm, came online in late 2014 and was joined by another 550 MW First Solar plant in early 2015.

[1] http://www.greentechmedia.com/articles/read/inside-optisolars-grand-ambitions-6029

[2]http://www.pv-tech.org/chip_shots_blog/its_official_thin-film_pv_firm_optisolar_to_shut_down_operations_lay_off_ma

References:

http://venturebeat.com/2007/04/27/secretive-silicon-valley-company-optisolar-builds-largest-solar-farm/

http://guntherportfolio.com/2007/04/optisolar-to-solar-electrify-sarnia-ontario-canada/

http://webcache.googleusercontent.com/search?q=cache:RPT0OJmjKVsJ:www.maryanncolihan.com/%3Fp%3D19&hl=en&gl=us&strip=1 (Jan 2008)

https://gigaom.com/2008/04/11/add-another-zero-to-optisolars-funding/

http://www.thestar.com/business/2008/04/21/sun_rises_on_ontario_solar_farm_industry.html

http://venturebeat.com/2008/04/25/we-should-be-talking-more-about-optisolar-a-solar-startup-with-big-plans/

http://www.greentechmedia.com/articles/read/can-optisolar-make-thin-film-dreams-real-850 (4/29/2008)

http://www.jetsongreen.com/2008/05/optisolar-plann.html

https://www.pehub.com/2008/07/optisolar-raises-778m/

https://gigaom.com/2008/07/22/optisolar-quietly-piling-on-cash/

http://www.nytimes.com/2008/08/15/business/15solar.html?_r=0

http://www.sfgate.com/business/article/PG-E-plans-big-investment-in-solar-power-3199510.php#photo-2339487 (8/15/2008)

http://inhabitat.com/pge-announces-800mw-of-solar-energy-for-california/ (8/18/2008)

https://gigaom.com/2008/10/17/optisolar-has-started-construction-doesnt-fear-credit-crunch/?utm_medium=contentutm_campaign=syndicationutm_source=yfinanceutm_content=a-special-report-the-rise-of-a-mega-solar-panel-farm-why-its-important_904582

http://www.bizjournals.com/sacramento/stories/2008/11/17/daily52.html?ana=from_rss

https://web.archive.org/web/20090122060639/http://www.pv-tech.org/chip_shots/_a/thin-film_solar_pv_enigma_optisolar_peeks_out_from_behind_the_curtain/ (12/05/2008)

http://www.bizjournals.com/sacramento/stories/2009/01/05/daily64.html

http://www.cleanbreak.ca/2009/01/11/despite-massive-cuts-optisolars-sarnia-project-spared-pain/

https://gigaom.com/2009/01/13/get-ready-for-the-solar-layoffs/

http://guntherportfolio.com/2009/01/whither-optisolar/ (1/18/2009)

https://gigaom.com/2009/03/02/optisolar-hawks-its-crown-jewels-to-first-solar/

http://www.pv-tech.org/chip_shots_blog/its_official_thin-film_pv_firm_optisolar_to_shut_down_operations_lay_off_ma (03/19/2009)

https://gigaom.com/2009/03/20/optisolar-crashes-lessons-for-greentech/

http://www.sfgate.com/business/article/OptiSolar-halts-manufacturing-will-lay-off-200-3167637.php (3/20/2009)

http://www.forbes.com/2009/03/20/firstsolar-optisolar-energy-leadership-clayton-christensen-business-model.html

http://www.greentechmedia.com/articles/read/inside-optisolars-grand-ambitions-6029 (4/13/2009)

http://www.saultstar.com/2009/05/09/sarnia-solar-farm-grinds-to-a-halt

http://satellite.tmcnet.com/news/2009/07/21/4282270.htm

http://www.greentechmedia.com/green-light/post/optisolar-sold-rd-manufacturing-assets-for-260m (7/21/2009)

http://www.renewableenergyworld.com/rea/news/article/2009/07/allora-minerals-signs-loi-to-purchase-optisolar-manufacturing-facilities (7/22/2009)

http://www.pv-tech.org/news/allora_becomes_epod_solar_buys_optisolar_rd_and_production_assets_scores_ge (7/22/2009)

http://www.wind-works.org/cms/index.php?id=38&tx_ttnews%5Btt_news%5D=207&cHash=cb25efe688da1177e3884ffa6b4b0eee (Nov 2009)

http://investing.businessweek.com/research/stocks/private/snapshot.asp?privcapId=42891668

http://www.bizjournals.com/sanfrancisco/print-edition/2011/08/19/novasolar-rises-up-from-optisolars.html?page=all

http://www.forbes.com/sites/michaelkanellos/2011/10/18/remember-the-optisolar-debacle-theyre-back-as-novasolar/

https://gigaom.com/2011/12/07/warren-buffetts-midamerican-buys-massive-topaz-solar-farm/

http://www.greentechmedia.com/articles/read/NovaSolar-the-former-OptiSolar-Leaving-Smoking-Crater-in-Fremont (2/24/2012)

https://gigaom.com/2012/06/19/thin-film-solar-startup-novasolar-goes-out-of-business/

 

 

 

Brief thoughts on today’s silicon globalization talk at ITIF

Today I had the pleasure of attending a seminar on the globalization of the semiconductor industry hosted by the technology policy think tank, the Information Technology and Innovation Foundation (ITIF). Professor Doug Fuller of Zhejiang University compared the industrial policy of China and India as it related to integrated circuits — the computer chips that make possible essentially all of our modern devices. This was followed by comments from the panel: David Isaacs, a representative for the semiconductor industry, and two policy analysts Jimmy Goodrich (ITIC) and Rob Atkinson (ITIF).

The IC industry was invented in the U.S. in the 1950s in Silicon Valley. By the ’80s, several Japanese companies ranked in the top 10 in IC sales, and in the late ’90s Samsung brought South Korea into the picture. In 2013, just one Taiwanese company ranks in the top 20, and none from mainland China. The sales picture doesn’t tell the story of the many production facilities in China, or the active community of IC chip designers in India.

As professor Fuller describes it, both countries are now defining policy to completely revamp their domestic IC industry. India with its long history of a “design service” model — which held the advantage of low required investment, but offered limited opportunities for capturing value — is hoping to transform into a full-fledged manufacturing system by investing in its manufacturing base and building an electronics infrastructure. China, which has plenty of semiconductor factories owned by or producing for foreign companies, is targeting $20 billion towards expansion through its IC industry investment fund.

The panelists offered their own takes on the viability of these policies. Jimmy Goodrich questioned whether China’s “Indigenous Innovation Policy” (State Council Document 4) and its associated “forced localization” may have hurt the industry. David Isaacs of SIA took the pragmatic approach, stating that “no single country can go it alone and be successful.” Rob Atkinson was more blunt, insisting that these policies, especially China’s, are “not good for global innovation in the semiconductor industry” and are simply “not good economic policy.”

Atkinson brought the discussion back to U.S. policy and highlighted a “two-prong strategy”: 1) reduce distortionary policies and 2) avoid commoditization. He also mentioned that the U.S. has the 27th worst R&D tax incentive policy in the world, and that 5 times the current R&D investment is needed to remain competitive. Fuller compared the trend that IC is following to the steel industry. The U.S. is one of the only big economies whose steel production is lower than consumption, he says. He warned of the “danger for the U.S. to continue to look short-range” at off-shoring production. One such danger is that because the new generation of IC employees are being hired primarily in India, in 20 years the U.S. won’t have the managers and designers it needs to remain competitive.

Isaacs may have summarized the concerns best: “In other industries, we’ve seen this movie before, and we know how the story ends.”

Appomattox and Fremont: closed factories and two different stories of recovery

Two stories in the Washington post about globalization and manufacturing caught my attention this Sunday. The reports told of two American towns: Fremont, CA and Appomattox, VA.

The first article (“A Hard Slog“, by Howard Schneider) tells the story of the closing of the combined GM/Toyota factory in Fremont. The factory was supposed to be a great victory of globalization: Toyota would trade increased access to the U.S. in exchange for letting GM in on the secrets of its operations. The recession, GM’s bailout, and sluggish sales eventually forced the plant to shut its doors. Auto workers making relatively high wages began seeking new work wherever they could find it, and city leaders worked to find a way to replace the 5,000 lost jobs.

The second article, “Surrendering” by Ken Otterbourg, in the Post’s Sunday magazine, described preparations for the 150-year anniversary of the end of the Civil War. The town will host a celebration next April, commemorating Lee’s surrender at Appomattox Court House. But as much as Otterbourg told us about the town’s heritage, he painted a bleak picture of a Virginia Piedmont town that once thrived thanks to the Thomasville furniture plant. The story of decline would be familiar to the Virginians of Beth Macy’s “Factory Man“, who live just a hundred miles south-west, in Bassett, VA. (I’ll be writing more about her captivating book in a few days.) The Thomasville factory was the primary economic driver in the town. The push of globalization that Macy describes presumably played out in Appomattox much as it did in Bassett and elsewhere across the south-eastern United States: cheap labor and free lumber in Asia, combined with consumer demand for inexpensive furniture led to increased imports — and Furniture Brands couldn’t afford to keep the factories open.

Meanwhile, Fremont was able to take advantage of its location in Silicon Valley, half-way between San Francisco and San Jose. The town has survived, but the impacts of global trade are evident. New factories and offices have opened.  The former Toyota/GM plant is now home to a Tesla factory. Much like the remaining furniture plants Macy describes in Galax, VA, highly automated machinery has reduced labor requirements. While the jobs lost in the plant will never fully be “re-shored”, the former auto workers seem to have fared better than the displaced furniture workers. According to Schneider, some have found other manufacturing work at high-tech plants or at a bus maker, while others have become bus drivers, transporting commuting programmers.

Appomattox’s factory closing followed a year behind the closing in Fremont, but the Virginia town’s prospects for recovery may lag further behind. We can hope the town’s bet on increased tourism for the anniversary pays out.