September 1, 2005

Hemorrhaging Technology

All too often, American companies create technologies only to have them profitably exploited by other nations.

In 1986, two IBM Corp. researchers shared the Nobel Prize in physics for their invention of a powerful microscope, the “scanning tunneling microscope.” The device could zoom in on molecular particles with unprecedented clarity and is credited with ushering in the era of nanotechnology. The benefits of nanotechnology have yet to be fully imagined, much less realized, but the advance should prove as important as developments such as nuclear engineering and micro-electronics.

The invention of the device that started it all should have given IBM and its partners control over the technology for years. But this was not the case. In 1991, Japanese researcher Sumio Iijima, working at NEC, went a crucial step further. Using a related microscope, he discovered carbon nanotubes—tiny, durable cylinders of carbon atoms that are cheap to produce and have a broad variety of potential uses.

Today, these tiny particles are used in such products as metal-cutting tools, lens coatings, water repellents for clothing and magnetic “skins” for computer hard drives. IBM’s first nanotechnology-based product was “the introduction of hard disk drives with magnetic data sensors,” says Thomas N. Theis, director of physical sciences at IBM’s Watson Research Center. That didn’t happen till 1998, seven years after NEC’s launch.

NEC has stayed ahead of competition from Motorola, Intel, Texas Instruments, Advanced Microdevices, Freescale and IBM with a vast pipeline of nanotechnology-related products. And although Theis sees none of this as direct competition “since the targeted applications and potential markets are different,” there is no denying that NEC stole a march on Big Blue.

It’s premature to say who will emerge as the dominant player in this diverse, rapidly growing market. Yet it’s clear that nanotechnology, the brainchild of an American corporation, isn’t controlled by U.S. companies. This is but one example of a large problem—the loss of innovative American technology to overseas competitors. Unless U.S. businesses can protect their products and intellectual property, they will remain vulnerable to foreign competition. More importantly, they will find it increasingly difficult to stay competitive globally.


To be sure, this loss of American technology to competitors around the world isn’t a new problem. After all, the United States once dominated auto- and television-making. True innovations—RCA’s first all-electronic TV or Amana’s original Radarange microwave oven—remained market leaders for so long precisely because no one else knew how to make them. The difference now is that new technologies can be analyzed, duplicated and even improved upon faster than ever before using what the President’s Council of Advisors on Science and Technology calls “emergence of the global (24 hour) design cycles.”

“By 1947, we made a pretty good television; the Koreans didn’t make a good television until 1963,” says Fariborz Ghadar, director of The Pennsylvania State University’s Center for Global Business Studies. Now, “if you come up with a new product or process, somebody in Asia is going to copy it very quickly, sometimes in a matter of weeks.”

This rapid-fire ability of foreign companies to duplicate American technology can actually stifle efforts by U.S. companies to innovate. “You spend money for research, then Joe Blow in China or Korea can copy it,” says Ghadar. “All the money you invested, you can’t really recoup.”


The dynamics and details of this kind of technology transfer can vary greatly, depending on the product type. The higher the fixed costs of making the product, for instance, the less likely it is to be copied—and the safer the inventor’s patent. “I don’t think anybody can copy an Intel chip,” says Barry Jaruzelski, a managing partner at business consulting firm Booz Allen Hamilton, in New York. “It would take a whole semiconductor fab facility, a huge fixed cost.”

Nonetheless, for less labor- or facilities-intensive inventions there have been innumerable instances of direct pirating and what some call “reverse engineering.” In the latter case, a competitor examines a new product and independently figures out how it was made, and then replicates a reasonable facsimile. Companies don’t want to talk about it much. Most are “trying to handle these issues discreetly,” Jaruzelski says.

Such intellectual property abuses can occur in any number of nations. Many observers, however, point a finger at China and India, in particular, as sources of the problem. Specifically, China does not have “very good protections in place,” Jaruzelski says.

“Nearly every product turned out of a Chinese factory for export benefits from the country’s loose intellectual property regime. That includes the goods that made up the United States’s $160 billion-plus trade deficit with China last year,” says Ted C. Fishman, author of China, Inc.: How
the Rise of the Next Superpower Challenges America and the World
(See Forward, Jan./Feb. 2005.)


But the dearth of enforceable laws is only part of the problem. Workers in China, India and elsewhere have become increasingly sophisticated technologically. In a March 2005 presentation, Caterpillar Vice President Sid Banwart said India recently produced 350,000 engineering graduates, China 207,000, and Japan 103,000, while the United States produced just 76,000. Clearly, the United States isn’t keeping pace with other countries.

Shirley Ann Jackson, president of Rensselaer Polytechnic Institute in Troy, New York, agrees, citing benchmarks from the U.S. Council on Competitiveness in Washington, D.C. “The overseas pool of scientists and engineering talent is increasing briskly, and the quality of patents by foreign inventors is strong,” she says.

Line workers in Asia also are becoming increasingly sophisticated, many times due to training by U.S. outsourcers. Outsourcing makes American companies almost “partners in the theft,” Fishman has said. “American manufacturers get all that low-cost labor, as well as access to the huge Chinese market of potential consumers, but is it worth giving up some control?” asks Jaruzelski.

In his online autobiography, NEC researcher Sumio Iijima, the father of that company’s nanotechnology business, freely acknowledges that the 12 years he spent in the United States before joining NEC in Japan in 1987 were his “apprenticeship.” He then took what he’d learned at Arizona State University and elsewhere in the United States and returned to Japan to ply his trade. In short, American institutions helped train foreign competition.


In other instances, foreign competitors attempt to buy U.S. technology outright. Last year, China’s Lenovo Group, that country’s largest PC maker based on sales, bought IBM’s PC business. When the embattled Maytag Corp. invited bids for a takeover last spring, the Chinese home-appliance maker Haier Group quickly threw its hat in the ring. The examples go on and on. In the first half of this year alone,
a record-setting 4% of the aggregate valuation of all mergers and acquisitions transacted in the U.S. were executed for Chinese businesses. (See chart.)

If there is any good news surrounding the issue of technology transfer it’s that manufacturers at home needn’t stand powerless in the face it. Some experts advise U.S. manufacturers to focus on highly specialized products for niche markets—products that no one else can make as well. Such differentiated wares come only from the kind of creativity that infuses American entrepreneurship, and they are among the hardest to copy. Of course, that won’t stop someone from trying.


The U.S. Commerce Department estimates that the counterfeit trade in China is worth between $19 billion and $80 billion annually in lost sales to non-Chinese companies, principally American and Japanese. That’s just the counterfeit products—DVDs of Hollywood movies, copied without permission (worth $168 million in lost sales in 2002 alone, or $3 billion globally in an average year, the latter according to the Motion Picture Association of America); bootleg software (totaling $3.8 billion a year, says the Business Software Alliance, a trade group); and assorted brand-name fashions and other goods.

Products that aren’t so much counterfeited but closely imitated represent even greater losses.