MEP Roundtable

Group Discussion on Industrial, Policy and Operational Challenges Facing the MEP

Chair:
Philip Shapira
University of Manchester and Georgia Institute of Technology


Rob James, National Research Council, Canada
James Griffith, MAGNET and Timken Company
Luis Proenza, University of Akron
Phillip Singerman, National Institute of Standards and Technology

Beth Colbert said that she had felt a disconnect between research about manufacturing, how to create a policy for manufacturing, and actually having a policy. Phillip Singerman responded that “the nation has not had a manufacturing policy before.” With the economy in disarray, he said, the country is “finally getting around to it. There’s been a major imbalance in our private sector and particularly in our federal investments in technology, which are focused on defense, sometimes on energy, and of course health. But there has not been an investment in manufacturing technology for decades.”

This began to change with the America Competes Act, he said, in 2007, but the Act was not fully implemented.29 The Obama administration has recognized this, Dr. Singerman said, and a manufacturing strategy has emerged not from the need to stimulate the economy, but from the innovation agenda alluded to throughout the meeting. There has been a strong recognition that in order to maintain our innovation ecosystem, the nation needs a strong manufacturing sector. “It’s not sustainable to think we can design it here and it

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29Congress passed the America Creating Opportunities to Meaningfully Promote Excellence in Technology, Education, and Science (America COMPETES) Act of 2007 with the overall goal of increasing federal investment in scientific research to improve U.S. economic competitiveness. U.S. Government Accountability Office, NIST Manufacturing Extension Partnership Program Cost Share, GAO-11-437R, op. cit.



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112 STRENGTHENING AMERICAN MANUFACTURING MEP Roundtable Group Discussion on Industrial, Policy and Operational Challenges Facing the MEP Chair: Philip Shapira University of Manchester and Georgia Institute of Technology Rob James, National Research Council, Canada James Griffith, MAGNET and Timken Company Luis Proenza, University of Akron Phillip Singerman, National Institute of Standards and Technology Beth Colbert said that she had felt a disconnect between research about manufacturing, how to create a policy for manufacturing, and actually having a policy. Phillip Singerman responded that “the nation has not had a manufacturing policy before.” With the economy in disarray, he said, the country is “finally getting around to it. There’s been a major imbalance in our private sector and particularly in our federal investments in technology, which are focused on defense, sometimes on energy, and of course health. But there has not been an investment in manufacturing technology for decades.” This began to change with the America Competes Act, he said, in 2007, but the Act was not fully implemented.29 The Obama administration has recognized this, Dr. Singerman said, and a manufacturing strategy has emerged not from the need to stimulate the economy, but from the innovation agenda alluded to throughout the meeting. There has been a strong recognition that in order to maintain our innovation ecosystem, the nation needs a strong manufacturing sector. “It’s not sustainable to think we can design it here and it 29 Congress passed the America Creating Opportunities to Meaningfully Promote Excellence in Technology, Education, and Science (America COMPETES) Act of 2007 with the overall goal of increasing federal investment in scientific research to improve U.S. economic competitiveness. U.S. Government Accountability Office, NIST Manufacturing Extension Partnership Program Cost Share, GAO-11-437R, op. cit.

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PROCEEDINGS 113 can be built overseas. We cannot design it here if it’s built overseas, and this is an important recognition.” GREATER SCRUTINY FOR THE ROLE OF MEP The PCAST report on advanced manufacturing, he said, was a step forward in that process. The administration is interested in an Advanced Manufacturing Partnership that brings together major research universities and global corporations. NIST will have a central role in implementing this policy initiative, he said, and the writings of Dr. Tassey of NIST have influenced the thinking of the administration. The role of MEP is receiving greater scrutiny in large part because manufacturing has risen to the top of the administration’s agenda. THE UNITED STATES’ ‘LAISSEZ-FAIRE’ MANUFACTURING POLICY Dr. Singerman then asked Mr. Griffith whether he, as a corporate leader, would favor a national manufacturing policy, or whether he would prefer that the federal government not intervene in manufacturing activities. Mr. Griffith replied that the United States, in the absence of a formal policy, has a laissez-faire policy. “Our great need as a company is to maintain a level playing field, so there is fair competition. And once there is fair competition, we want to be able to win or lose based on that competition. The reality is that today there isn’t fair competition among countries. So there has to be activism on the part of the government to be sure that more leveling occurs between countries in terms of currencies, hidden subsidies, market access.” That concern, Mr. Griffith said, is different for Timken than it is from an MEP point of view. For SMEs, the major issues are the infrastructure within which they must work. In different regions of the world, he said, these infrastructures are different. Where manufacturing is strong today, it is usually accompanied by universities that are strong in engineering and technology and able to spin off benefits for the private sector. On the other hand, regions where manufacturing was strong in the past are more likely to have complex tax structures, labor laws, and regulations that were designed for a world with workforces of 20,000 or 40,000 people and large fixed assets. The concern for such regions in the past was to balance the tax revenues between the inner cities and the suburbs. A NEED FOR MORE FLEXIBLE REGULATION “The problem with government regulation from that point of view,” Mr. Griffith said, “is that they are not very flexible. We have been stuck with inner cities that are dying because the entrepreneurs won’t move into them. So the challenge for MEP and for those of us who are trying to build a world in

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114 STRENGTHENING AMERICAN MANUFACTURING which SMEs can be successful is to revive that infrastructure and recognize where history has created barriers to the success of small business.” ARGUMENTS FOR A ‘HOLISTIC’ MEP Robert James of the Canadian National Research Council said he sensed that a several-tiered policy is emerging in the United States, but at a local level where local agencies are building competitiveness. He said he agreed with Mr. Griffith on the importance of community mobilization and the need for a private-sector champion who acted above self-interest in leading a community to achieve that kind of collaboration. He said that the MEP also plays a larger role in the nation’s competitiveness framework, but it needed a holistic approach to form strong partnerships with other elements of the innovation system. A challenge was to bring together the MEP program with sources of capital, clusters, and universities across the nation to develop an environment that is difficult to replicate. “That’s where the sustained competitive edge, I believe, will be found over time. If you focus solely on lean manufacturing, competitors can over time replicate that with greater ease. The mix of disciplines in these partnerships is really good footing for a long-term, sustained competitive advantage.” THE NEED FOR A BROADER INNOVATION MODEL Dr. Singerman added “a footnote” to the comments of the two previous speakers about a level playing field and a broader innovation agenda. The good news, he said, is that “manufacturing is connected to the innovation agenda.” The bad news is that we have a skewed notion of what innovation is. The current models are the biotech and IT model. The IT model is Hewlett-Packard or Apple, where “two guys in a garage build the world’s best company.” For biotech, the model begins with hundreds of millions of dollars of NIH investment in university academic medical centers, and technology is licensed to large pharmaceutical companies or intermediary biotech companies fueled by venture firms. Our policies and attention at the federal level has been narrowly focused on those two models, he said. Obviously, innovation varies by industrial sector; it looks very different from these two models in energy, materials science, and other fields. “So I think the challenge for the manufacturing community is to develop a more sophisticated and nuanced model of innovation for the policy discussion at the federal level.” Joseph Houldin, of the DVIRC, said he agreed with Dr. Singerman and urged the manufacturing community to speak more forcefully and coherently as a group. He observed that many had voiced the assumption that universities and federal laboratories have major roles to play, and “I think that should be challenged” to “clearly articulate what their role should be.” In our “little world of SMEs in southeastern Pennsylvania,” he said, “there is minimal involvement with universities and labs, yet innovation occurs.”

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PROCEEDINGS 115 THE AKRON MODEL: CREATING RELEVANCE, CONNECTIVITY, AND PRODUCTIVITY Dr. Proenza said he would comment on the Akron model for university and company involvement in regional development. He said he was impressed by the fact that the Timken Company, together with MAGNET, had taken a strong interest in the health of an economy that “many other companies chose to abandon,” some of them moving their corporate headquarters elsewhere. The universities, he continued, cannot move, and the University of Akron some years ago decided that unless it assumed leadership in the redevelopment of the economy, “it was going to die along with the large firms.” He said the university also decided to challenge the notions that “academic is synonymous with irrelevant,” that universities are not part of the community, and that the attributes of academic excellence are expense and lack of productivity. Instead, he said, the university “created a model that is focused on relevance, connectivity, and productivity.” This model embraces not only the biotech or IT industries, but touches the economy wherever it can, including SMEs to “make a difference that will be felt incrementally, gradually.” He said the university would not restrict its economic development activities to its tech transfer office or commercialization group. The university as a whole would be available as a platform or tool chest to engage every discipline in whatever way is appropriate, sometimes by collaboration. “What we’ve done over the years,” Dr. Proenza said, “is to develop first of all a very low-cost model that we think is sustainable. We look at our community and try to assemble assets that in isolation are weak and perhaps not even usable. But in combination they begin to make a difference.” An asset might be space or equipment that a company isn’t using, he said, or people who have lost positions or retired and are eager to be involved as “entrepreneurs in residence.” “In working with companies like Timken,” Dr. Proenza continued, “we recognize that the only winning strategies are strategies in which both of us can win and reduce our cost. For example, we’ve just started a program with Timken in which they are bringing a small group into the university to work side by side with our own researchers and thereby have a synergistic model of technology development. This ultimately will spin out, either back into Timken or into a startup with some form of joint ownership.” Grace Hu, of the Office of Management and Budget, asked whether the new U.S. patent law, allowing “first-to-file” patent rights, would favor small firms, as advertised, or larger firms, which have the “deep pockets” to file

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116 STRENGTHENING AMERICAN MANUFACTURING numerous patent applications.30 Mr. Griffith replied that there is no simple answer because manufacturers do not all speak with one voice. “If you’re at a meeting of the National Association of Manufacturers,” he said, “you’ll see different factions sitting and wrestling. I could even hear some say, ‘I don’t care about U.S. industrial policy because I run a global manufacturing company, and if the United States doesn’t do the policy well, I’ll pack it up and move to India or France or Brazil.’ ” On the other hand, he said, some very large manufacturing companies do invest in the United States, and have a different view of free trade treaties, tariff barriers, dumping suits, and other policies. A KEY FOR THE STUDY: WHAT DO SMES NEED MOST The small manufacturers tend to be divided in the same way, Mr. Griffith continued. Some think of small manufacturers as being regional and domestic, and not engaged in the global marketplace, but that image is not accurate. One MAGNET board member, he said, runs a $17 million manufacturer that has a factory in Taiwan and does technology development in China. “So as you think about MEP policy for small business innovation and development,” he said, “you have to be very specific about the policy issue you’re going to support, and then determine what it takes to make it happen. It’s like saying I’d like to have a balanced federal budget. It’s not going to happen, so now let’s talk about what it is that we really have to have. I think that has to be the key for this study as we think about MEP: What things do we need to drive a generation of innovation in SMMs. Then we can go after that from the point of view of federal and state funding.” DRAWING UNIVERSITIES OUT OF ISOLATION Paul Wright, of the University of California at Berkeley, asked Dr. Proenza whether he thought the MEP centers, as they sought to move in the direction of innovation and new technology, would benefit from being placed adjacent to or even inside a research university. Dr. Proenza said that the kind of partnerships between the University of Akron, Timken, and others might suggest that. He said there is room for different models, but that the MEPs might be connected not just to universities but to other sources of R&D and technology development, even outside the home community or region. “There is just a great need for partnerships. Universities are one part of those, and certainly they 30 The America Invents Act, signed in September 2011, overhauls parts of U.S. patent law. One change is the “first to file” clause that awards patent rights to the first party to file. Existing law requires a more expensive and time-consuming process proving “first-to-invent” status, and allows a claimant to gain a patent already held by another by proving that an invention was made prior to one already on file.

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PROCEEDINGS 117 should not be isolated. But they have to be committed to improving the economy and collaborating with industry and the community.” A CONTINUING SEARCH FOR NEW MODELS Mr. Griffith added that he hadn’t experienced a desire from the marketplace for MEP to be driving innovation. “I think what you hear is a need among small and medium manufacturers to have a way to drive innovation. Today, MEP has insufficient funds to support that. We have heard about a lot of people searching for the right partnerships to leverage existing resources to generate innovation, whether it comes out of MEP, universities, or the foundation world. We’re all looking for what those models are.” Dr. Wright asked whether there was a “gaping hole” between the high- tech research supported by the Advanced Manufacturing Partnership (AMP) announced by President Obama and the lower-tech, business-oriented consulting of the MEP. Mr. Griffith agreed that no one is offering help that would bridge that middle ground. “The OSTP has recognized that they need to broaden the participation both of large firms and universities and especially of smaller and medium-size manufacturing firms to be able to take full advantage of the resources and the energy that will flow from the development of this new AMP initiative.” THE CANADIAN MODEL: MORE DIRECT SUPPORT Dr. Wessner asked Robert James, of the Canadian National Research Council, for an assessment of how the Industrial Research Assistance Program (IRAP) of Canada compares to the MEP. Mr. James said that as MEP is evolving, it has come to resemble IRAP more closely, except that IRAP emphasizes direct funding. He said that IRAP is housed in the National Research Council, and was created in the early 1960s to promote innovation and entrepreneurship across Canada. “It is highly recognizable and highly cherished by both politicians and private sector people alike for many different reasons,” he said. IRAP is focused on how to spur innovation, he said. Its presence extends to about 100 cities via roughly 260 industrial technology advisors who provide a range of business advice, technical advice, and funding, depending on a company’s needs. This support is intended to help position the SME to move to the next stage of its development. He said that IRAP is similar to MEP in a several ways. Both are geographically dispersed and have their own consultants and advisors. A difference, he said, lies in Canada’s federal transfer payment policy. This means that when the federal government make a contribution agreement and transfers monies to an external organization, those organizations are “on the hook—in this case to the National Research Council”—to report back every five years on the impact of the program and the details of expenditures. “The federal

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118 STRENGTHENING AMERICAN MANUFACTURING government takes advantage of those contribution agreements,” he said, “to lever a certain set of core principles across the country.” Mr. James added that the Canadian R&D system itself was at that moment undergoing some significant changes. Within the last year, the Minister of Industry, who has overarching policy authority for science, technology, and innovation, had commissioned an external panel of private sector and university leaders to examine the workings of the federal R&D system. Amongst its recommendations, the Panel suggested a restructuring of the National Research Council of Canada and a possible revision of the largest federal S&T program in Canada, the Scientific Research and Experimental Development Program. This is an indirect tax credit program which awards some $3.4 billion annually to industry, and is “very, very popular, as you can imagine, across the country. It’s been largely untouchable for a quarter of a century until this year. THE ISSUE OF PENETRATION Dr. Helper asked a question of the center directors and staff: Why, if the services of the MEP are as useful as they sound, are there not more clients? “Is it that so many SMEs are ‘lifestyle businesses’? Or that CEOs don’t know how to allocate their time, or don’t trust MEP?” Mr. Kill agreed that among SMMs, the “bottom 70 percent at least are lifestyle businesses.” In his state of Minnesota, he said, those are not interested in MEP services or in investing in their business. The top 15 percent, which are very advanced, present the best opportunities. “But the next 15 percent, we call engaged; they want to be advanced; they want to be the suppliers to the Timkens of the world, and would like to be on the high road. So I think the top 15-30 percent is where you can make a difference.” The top 15-30 percent also thinks of themselves as innovators, he said, and they compete globally. Mr. Kill cited a disconnect between the way the participants have been using the word innovation and the way those clients use the word. “When I talk with the people at the NAM, or to our senators who are engaged with manufacturers, they’re focused on innovation as the incremental improvement they do every day to compete. That’s not a shiny object in the sky. So it’s the top 30 percent that we focus on and I think that we’ve done the job with those 30 percent.” Dr. Singerman followed up Mr. Kill’s description of the structure of SMEs, asking if we should focus limited resources on expanding market penetration, or should we segment and develop the higher-end, more customized projects within the most productive group. Is it depth or breadth where we’ll get the most bang for the buck?” Mr. Kill replied that the MEP should do both. The larger clients need depth, but they also need the breadth of services MEP can offer them. “But we have learned to separate companies of under 200 employees from those with 200 to 500. For the larger group, you need project management. They want a long journey; the CEO has bought into it.”

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PROCEEDINGS 119 THE COMPLEXITY OF MANAGING MEP CENTERS Mr. Kill also said that it is hard to charge for the true value of the services delivered by MEP. “These SMEs can’t pay what Timken will pay for consultants with our skills,” he said. “I grew up in this business, and it is complex: managing the public/private, keeping our head above water, managing the cash flow. It requires more public/private intervention than sometimes we say we do.” Dr. Proenza added that many firms do not know what to ask of MEP, or even to ask at all, so an important activity is to visit parts of the manufacturing economy, learn what the problems are, and explain what is possible. This has to be done free of charge, and followed by a gradual fee structure. This is vital because, he said, because there are so many disconnects in the manufacturing component of the innovation ecosystem. “Somehow we’ve got to find a way to reduce some of those disconnects, and provide the linkages necessary for success and innovation.” MEP AND THE ISSUE OF MARKET FAILURE Dr. Singerman said that these points led naturally to the question of market failure. The meeting had not discussed the political environment in Washington, he said, “but even now the question of the role of the federal government in providing services and supporting companies is debated, and certain actions by some federal agencies don’t help in that debate.” He said that from his position as an observer of the MEP program since its inception, it had uniquely responded during the early 1990s to market failure. This he defined as small firms’ lack of time, resources, and expertise to be able to obtain high- quality technical assistance. “The MEP network pivoted and managed to provide that service, and I would say a major metric of that success is the extraordinary revenue that the MEP network as a whole has been able to generate over the years, which is now equivalent to the level of federal funding.” As the MEP moves into a new model of innovation, he said, it is faced again with the market failure issue and the need to articulate the strong rationale for the MEP centers to address the market failure in innovation that they found 15 or 20 years ago in quality. He urged the panel to place that need on its list of topics to consider. Mr. Griffith returned to Mr. Hill’s discussion of how many of a region’s firms an MEP could hope to reach each year. One estimate of penetration rate was 2 percent to 3 percent per year, which was considered low. However, when Mr. Griffith reviewed the numbers, a different perspective emerged. He recalled Mr. Hill’s statement that about 70 percent of the companies are lifestyle companies that are seldom candidates for MEP services. If the MEP reaches 2 to 3 percent of companies every year, it reaches about 10 to 15 percent of companies every 5 years, virtually all of which are in the top 30 percent. “So that’s a significant portion of the population,” he said. “And if you think about that top 30 percent, there’s not much turnover there, so you have

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120 STRENGTHENING AMERICAN MANUFACTURING a fairly fixed population of target firms in a given state, and you actually are touching a lot of them. An interesting strategic question is whether your outreach should be directed more at firms you haven’t touched, or firms you already know.” Dr. Shapira called the session and the conference to a close, and thanked all participants and speakers for their time and ideas. “This is really the kick-off workshop for the review, as I mentioned this morning,” he said. He closed by urging all participants to “continue to communicate your ideas, suggestions, and comments as our review moves ahead.”