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Want to Patent Less? Move Production Overseas

July 22, 2014
I recently had the privilege of speaking before a group of motor manufacturers on the topic of bringing manufacturing back to the U.S. from low-wage countries. One aspect of the subject that surprised many of them was the amount of evidence that has accumulated in favor of reshoring.
I recently had the privilege of speaking before a group of motor manufacturers on the topic of bringing manufacturing back to the U.S. from low-wage countries. One aspect of the subject that surprised many of them was the amount of evidence that has accumulated in favor of reshoring.

Some of this data is worth reviewing. One point in particular concerns what happens when advanced technologies are pioneered in the U.S. but manufactured overseas. The evidence is that the development of intellectual property slows down simply because there’s more money in producing low-tech products in low-wage areas.

These conclusions come from economic researcher Erica Fuchs at Carnegie Mellon University, who has studied two areas pioneered here — plastic car bodies and optoelectronic components. The commonality between the two is that they both involve early-stage fabrication processes.

The integrated photonic parts were noteworthy because their economics defied conventional thinking. Most engineers would say that a design integrating several discrete functions on an integrated circuit will always be more economical than an assembly of components, assuming a reasonable production volume. This turned out to be true in the U.S. But the reverse was true in Asia, where a discrete version of the same device was cheaper to make. Thus, the cheapest option globally was to produce the old, discrete technology in Asia.

But cost was only one part of the equation. Fuchs found manufacturers that sent photonic-chip fabrication overseas saw a drop in patenting related to fabrication technology. She concluded that, “firms not only lose incentives for producing the emerging technology — they also reduce their innovation activities back home in the same technology.”

Fuchs found a similar effect when she looked at polymer composite-vehicle bodies, a technology critical for lightening up vehicles and meeting tough mpg mandates. It turned out that polymer car bodies were less cost-competitive in China than in the U.S. Specifically, most car bodies made there were cheaper if done in steel. Composite designs only made sense for relatively low production volumes, about 60,000 vehicles or less. The technology is cost-competitive in the U.S. for higher volumes, up to about 100,000 vehicles/year.

Fuchs’ point is that moving work to Asia distorts the cost-benefit curve for high-tech products severely, so much so that there’s a danger of falling behind the technological curve of U.S. companies that keep their production closer to home.

As is the case for many of the arguments in favor of reshoring production back to the U.S., the results of the car-body and optoelectronic studies contradict conventional wisdom. And that is probably the reason there is only a trickle of production work returning to the U.S.

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