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4 Panel 2: International Programs in Advanced Manufacturing To start the workshopâs second day, Ed Morris, Consequence Consulting, LLC, welcomed participants and reflected on the outcomes of the previous day. He highlighted the concern, which came up several times during discussions, that the Manufacturing Extension Partnership (MEP) has not been successful in commu- nicating its offerings to small and medium-size enterprises (SMEs) or creating a broader understanding of how SMEs benefit by joining the institutes. In response, a workshop participant noted that MEP could use professional societies such as the Specialty Equipment Market Association, the Society of Manufacturing Engineers, and its International Exchange to network with SMEs. Morris introduced the dayâs first activity: a panel discussion of international programs relevant to the global manufacturing and technology investment land- scape. Susan Helper, professor at Case Western Reserve University, moderated the panel. Helper noted that understanding how other nations are investing in advanced manufacturing is useful for two key reasons. First, the United States will under- stand its competition better by knowing its strategy and budgets. The United States invests far less money in this area than Fraunhofer, Catapult, and China (although information on Chinese spending is unavailable), and that has policy implications. Second, learning from othersâ successes can help U.S. stakeholders generate new ideas or identify promising areas of focus for the institutes. For example, the United States may want to adopt a stronger focus on commercialization, which does have 25
26 S t r at e g i c L o n g - T e r m Pa r t i c i pat i o n b y D o D a historical precedent: in the 1950s, the Department of Defense (DoD) was the largest buyer of semiconductors, buoying that industry in its early years. It is also useful to recognize how the models differ from country to country. The United States and the United Kingdom, for example, have a fairly light touch on the part of the government and rely on markets and strong intellectual property (IP) laws, whereas Chinaâs government is much more involved, believing that state direction is more effective. While U.S. IP law is strong now, Helper pointed out that U.S. manufacturing roots began with âstolenâ textile and chemical patents, something worth noting when discussing ethics. A participant noted that some workshop materials and participants may be describing Fraunhoferâs funding model inaccurately, asserting that its government funding is closer to 90 percent, not 33 percent, and adding that the overall scope of the program is very different from that of the U.S. efforts in this area. Globally, the United States is far behind in state manufacturing support, including lacking formal industrial policies, which most countries have. Manufacturing Technology (ManTech) or the nonprofit Belgian research center IMEC, he continued, might be more worthwhile comparisons. Helper acknowledged that in order to be sure that the United States is accurately reading the global landscape, meticulous informa- tion gathering and appropriate comparisons are essential. The panelists were Scott Kennedy, senior advisor and director of the Project on Chinese Business and Political Economy Project at the Center for Strategic International Studies; James Mulvenon, general manager of the Special Programs Division of SOS International (SOSi); and Sir Michael Gregory, founding head, Institute for Manufacturing (retired) at Cambridge University. CHINAâS MANUFACTURING INVESTMENTS Scott Kennedy, Center for Strategic International Studies Chinaâs activities in manufacturing technology demand attention and affect supply chains, business models, and the global manufacturing landscape. Kennedyâs talk focused on Chinaâs manufacturing and innovation ambitions, the impact they may have on the United States, and what can be learned from Chinaâs successes and failures. Chinaâs Advanced Manufacturing Ambitions While China has long been focused on improving its industrial base and pursu- ing advanced technologies, the intensity of this effort accelerated over the past 15 years, especially since 2012. This increasing intensity has been accompanied by a
I n t e r n a t i o n a l P r o g r a m s i n A d va n c e d M a n u f a c t u r i n g 27 broadening of the array of industries targeted for growth and a new emphasis on bridging the military and civilian economies. The âMade in China 2025â program outlined Chinaâs goals for improved manu- facturing productivity in order to strengthen Chinaâs market share in an array of industries. While the program received unexpected and unwelcome international attention and was officially scrapped in 2018, the countryâs leadership has replaced it with a lower-profile program with a similar thrust. China is taking advantage of globalization by acquiring international compa- nies and sending students abroad while enticing its highly educated emigrants to return home through the â1,000 Talentsâ program, which offers expatriates money and research opportunities. Chinese companies are also using globalization for less ethical ends. For example, the telecommunications manufacturer Huawei was recently accused of allowing the Chinese government to use its phones to spy on other countries. China spends more than 2 percent of its gross domestic product on research and development (R&D), Kennedy noted. With 80 percent of that investment supporting development activities, 15 percent advancing applications, and only 5 percent spent on basic research, these investments are targeted much more toward short-term commercial impacts compared to the United Statesâ investments. Com- panies (many of which are under state direction) receive 80 percent of the funding and the rest goes to research and government institutes. Outcomes These efforts have propelled China into the Top 20 countries on the Global Innovation Index, edging the country closer to advanced industrial economies in indicators such as academic papers, patents, and value-added manufacturing. Areas of particular success include telecommunications, quantitative computer science, and financial technology. China is the worldâs number-one market for electric cars, although the technology in this area is improving only modestly, partly because top-down mandates created overcapacity (a challenge also seen in the areas of solar energy, wind energy, and robotics). On the other hand, Chinese manufacturing efforts in the areas of commercial aircraft, processors, and semiconductors have largely come up short, although memory capacity is a growing area of strength. It is unclear whether these shortcomings in the commercial sector are reflected in the military sector as well, Kennedy emphasized, since better integration between these two arms is a stated goal in China but not yet an on-the-ground reality. Chinaâs large market can be a boon to U.S. companies, many of which are open- ing R&D centers in China to scale up their technologies and reduce costs, which benefits both sides. On the other hand, U.S. companies are losing market share to Chinese companies because of the marketâs overcapacity, stemming from the larger
28 S t r at e g i c L o n g - T e r m Pa r t i c i pat i o n b y D o D problem of economic volatility from heavy state involvement. China also does not emphasize ethics or encourage protections for IP, patientsâ rights, or individual privacy, Kennedy noted. Policy Implications Kennedy outlined several policy implications of Chinaâs activities for the United States. First, he emphasized that the United States must continue to defend U.S. and international laws, including for IP protections and counter-espionage tactics. Second, he said that the United States must create a greater supply of and demand for advanced technologies. For example, the electric car market in the United States is so small that even though federally funded U.S. R&D created better batteries, it makes better business sense to sell them in China, where the market is much larger. Also, the United States must go beyond promoting new technology R&D; it must also promote its commercialization, scaling, and applications, Kennedy noted. While the United States traditionally has not had an explicit industrial policy, a clearer strategy is needed if the institutes are to successfully respond to Chinaâs ambitions. The institutes could also be more broadly structured to fill gaps in the private sector and build more bridges with industry, Kennedy said. This restruc- turing would require objective criteria to determine funding and support, audits to assess return on investment, demonstrated civilian or military applications or commercialization, and the courage to stop funding technologies that lack an obvi- ous market or application. During the discussion, Bill Frazier, Naval Air Systems Command, noted that China is currently estimated to graduate as many engineers each year as there are people born in the United States today. Given that, how is it possible for the United States to continue to compete in the generation of IP? In response, Kennedy noted that there is a difference between an engineer capable of innovation and one who is merely a technician. However, even if a large proportion of Chinaâs rapidly grow- ing engineering workforce are technicians rather than innovators, there are indeed still a large number of engineers overall. The United States should still expect high performance and fierce competition, Kennedy said, emphasizing the challenge for the United States to stay competitive. An overall U.S. strategy is needed to create a roadmap for a successful manufacturing sector, better jobs, and a well-trained workforce, especially as manufacturing becomes increasingly automated.
I n t e r n a t i o n a l P r o g r a m s i n A d va n c e d M a n u f a c t u r i n g 29 CHINAâS INNOVATION STRATEGY James Mulvenon, SOSi Mulvenon, a political scientist and Chinese linguist, leads a team of Chinese, Russian, Arabic, and Farsi linguists at SOSi, a consultancy that specializes in pro- tecting U.S. national security interests. He is an expert in Chinaâs defense science and technology, patents, and industrial espionage. He detailed the Chinese govern- mentâs goals and current actions and explored what he believes the United States must keep an eye on for the future. Chinaâs Goals Chinaâs goal is not just to innovate, Mulvenon said, but also to edge foreign firms out of the Chinese market through long-range state industrial planning that favors national champion companies, such as telecommunications giant Huawei. To that end, China has been passing new laws to legitimize its counter-espionage, counter-terrorism, cybersecurity, and national security strategies. From the U.S. perspective, it can be overwhelming to consider the enormous scale of Chinaâs well-coordinated and highly funded technology innovation system. Chinaâs secrecy makes it difficult to determine the countryâs exact strategies, and sometimes the United States struggles to keep up. For example, the United States learned about Chinaâs mid-to-long-range science and technology plan, launched in 2006, only in 2010, and when âMade in China 2025â and â1,000 Talentsâ became well known, censors removed any mention of them from the Internet. Current Actions China has found some creative approaches that can be frustrating for other countries. In particular, Mulvenon said, China frequently uses state subsidies in ways that circumvent World Trade Organization (WTO) regulations. For example, to circumvent WTO rules against state subsidies for industrial development, China created a nonprofit, Integrated Circuit Fund, which launched with $150 billion in investments from state-owned enterprises and was staffed by the top 40 industrial policy officials in the semiconductor industry and the Ministry of Industry and Information Technology, all of whom resigned from their previous positions on the same day. Because the organization is officially a nonprofit, its efforts to buy large foreign companies do not violate WTO rules. China also frequently engages in cyberespionage. However, Mulvenon noted that while Chinese operators may be skilled at stealing, reverse engineering, and repro- ducing technology, they generally lack an understanding of the organic innovation
30 S t r at e g i c L o n g - T e r m Pa r t i c i pat i o n b y D o D that leads to new technology. This limits Chinese engineersâ ability to innovate beyond existing technologies, forcing them to instead rely on stealing subsequent generations of a particular technology. This, Mulvenon emphasized, makes it vital for U.S. companies to be extremely protective of IP and for the United States to pass and enforce laws such as the Foreign Investment Risk Review Modernization Act. China has also weaponized international standards, especially in information and communication technologies. For example, China refused to use the code- division multiple access standard and developed its own version, which interna- tional standards bodies unanimously rejected but were powerless to stop. Most information technology manufacturing equipment is made in China, and by requir- ing foreign companies to use its own standards, China was able to force foreign companies to reveal internal source code to the same Chinese companies against which they compete. The Chinese companies then used that code to improve their technologies, push non-Chinese companies out of the domestic Chinese market, and improve Chinaâs global market share. Future Prospects In contrast to Kennedyâs observations, Mulvenon said that he has noticed increasing integration between military and civilian manufacturing in China, es- pecially in artificial intelligence (AI) and machine learning. In part, the growth of these fields stems from how Chinese society views its values and risks. Chinese citizens by and large believe that AI and big data make society, government, and the economy work better, whereas U.S. society is much more wary of the potential for damage. Chinaâs âsocial creditâ scoring system can be highly punitive, but it is popular because it creates a reason to trust (or distrust) other people. China is a very low-trust society and lacks social or regulatory safety nets that can inspire trust, Mulvenon noted. Overseas investment strategies, such as the Belt and Road Initiative, are improv- ing Chinaâs international stature and could improve the atmosphere for innovation. China has also made tremendous strides in quantum communications and biotech- nology. However, ethical research practices are not prioritized, and China offers little protection for human subjects, leading to instances like the recent Â uman genome h editing scandal. In addition, plagiarism is rampant in Chinese higher education. Mulvenon, agreeing with Kennedy, stated that with a stronger defense and offense, the United States can stay ahead of China despite its size. In response to participant questions, he said that the sheer number of Chinese engineering graduates may be impressive but underscored the fact that there has been no Chinese equivalent to Steve Jobs because China lacks structures that support true innovation, such as strong IP laws, independent courts, creative education, and a hands-off governing style.
I n t e r n a t i o n a l P r o g r a m s i n A d va n c e d M a n u f a c t u r i n g 31 Developing a better offense and defense means increasing federal R&D fund- ing while recognizing that the United States has the structures that create the ideal environment for innovation and resilience. China can beat the United States in increased manufacturing investments and strategic industrial planning, but it can- not force innovation into existence, Mulvenon concluded. Nicholas Usechak, Air Force Research Laboratory, pointed out that the United States needs more manufacturing workers, but recent college graduates are not mo- tivated to pursue manufacturing work, especially with offshoring likely. Mulvenon agreed that job security programs are needed and also noted that the United States needs a better overall understanding and acceptance of the benefits of government funding for industry-wide projects. For example, implementing 5G would be more appropriately viewed as akin to building out the interstate highway system, not as âsocialism.â Building on this point, Helper noted that DoDâs support of the semiconductor industry propped up that ecosystem in its beginnings and led to onshoring, trusted foundries, and market dominance. HIGH-VALUE MANUFACTURING WITH CATAPULT Sir Michael Gregory, Cambridge University (Retired) Like the U.S. manufacturing institutes, the UK initiative known as Catapult was designed to bridge the researchâindustry gap. The germ of the idea began in the late 2000s in response to concerns that the UKâs strong science base was not trans- lating into wealth-creating industries or advancing manufacturing opportunities. Sir Michael Gregory, the only academic member of Catapultâs original supervisory board, described the initiativeâs creation, organization, and outcomes. Creation and Organization Catapultâs launch, in 2012, was part of an overall trend in the United Kingdom toward developing sector-based industrial strategies. At the time, British universi- ties had been quietly developing innovative manufacturing centers, and this strat- egy was further propelled by the publication of an influential Foresight study.1 Now, Catapult has grown into a network of seven technology innovation centers with 2,500 employees and a yearly government subsidy of nearly Â£100 million. The initiative has a similar funding model to the Fraunhofer Institutes, with funding equally divided among government, industry, and grants (although with a much smaller budget). Each center has regional and national engagement and well- 1 Foresight, 2013, The Future of Manufacturing: A New Era of Opportunity and Challenge for the UK: Summary Report, The Government Office for Science, London, https://www.gov.uk/government/ publications/future-of-manufacturing.
32 S t r at e g i c L o n g - T e r m Pa r t i c i pat i o n b y D o D funded, state-of-the-art facilities, enticing craftspeople and technicians to reengage with manufacturing. Some centers, such as the Advanced Manufacturing Research Centre, were converted from existing facilities, while others, such as the National Composites Centre, were built new. While academia is involved, industry needs drive the research process. In re- sponse to a comment by Mark Johnson, Clemson University, Gregory added that while Catapult does not focus on academic interests, its centers do want to hire recent graduates, especially manufacturing engineers with masterâs degrees. He reiterated Mulvenonâs point that while there are many more Chinese graduates in these fields than UK graduates, size is not necessarily the most important thing. The United Kingdom is much smaller, but it is still able to be innovative and suc- cessful, even in large-scale manufacturing. Catapult is self-governing, with an independent supervisory board, although it is also subject to oversight by Innovate UK, the governmentâs innovation agency. During the initiativeâs launch, this supervisory board, on which Gregory served with senior industry leaders, was effective in creating a unified set of priorities re- lated to improving the overall manufacturing industry. Many companies were also instrumental in encouraging Catapultâs formation and advocating for government funding, and now use the centers to their advantage. The supervisory board moni- tors budgets, key performance indicators, and monthly progress. There is also a management board, made up of the individual center directors, and each center has its own independent board. Centers are granted a large degree of freedom, although progress reports are expected, and are allowed to fund-raise for their own projects. In response to a question by Ken Jarboe, National Academy of Engineering, Gregory described Catapultâs workforce training initiatives, which were recently added to the original mission. Although only two centers currently offer next- generation manufacturing training, he said that Catapult is working on an overall strategy, which will likely be self-funded, like the institutesâ training. Outcomes Catapult enjoys close engagement with companies, and those companies see real benefits, Gregory said. For example, Rolls Royce was able to quickly add a new assembly line component to its facilities after testing the component in a Catapult center. Researchers also benefit, since their funding proposals are more likely to be approved if they work with Catapult. Catapultâs projects cover a wide range of areas, including aircraft, aerospace, food and drink, health care, petrochemicals, and autonomous vehicles. Recent successes include reshoring McLaren manufacturing and supporting advanced coolant production. The initiative also makes a particular point of engaging small businesses and SMEs, in part by making a certain portion of centersâ core funding
I n t e r n a t i o n a l P r o g r a m s i n A d va n c e d M a n u f a c t u r i n g 33 contingent on engagement with SMEs. As a result, out of 3,800 clients engaged in 2018, 54 percent were small businesses. Understanding global supply chains is also very importantâto this end, Cata- pult encourages exports and international partnerships, including by helping for- eign companies to establish UK bases and engage with UK companies. Although it is challenging to have a national-level view of the technology landscape, Gregory argued that Catapult is able to do so by incorporating several government initia- tives that support manufacturing, developing technologies in a systematic way, and measuring them against global benchmarks. In closing, Gregory asserted that Catapultâs impacts reflect a value greater than the sum of its parts: it has become a magnet for companies to invest in the United Kingdom and a confident voice that is restoring the national manufacturing ecosystem and creating global benefits. The passion and dedication that launched Catapult has spread throughout the centers, and while each center has its own goals, joint technology projects keep them united. Catapult has nonpartisan support, and its recent 5-year renewal provides a strong sense of purpose and momentum as it moves toward the future.