Outsourcing Knowledge

A couple weeks ago we told you about transnational flights of knowledge created by short-sighted government tax or regulatory situations.  Highly-skilled professionals are fleeing the likes of Venezuela, France, Germany, Canada, and even the United States.  This is partially due to a similar lack of understanding and accounting of the value of knowledge as we discussed yesterday, and will lead to analogous unfavorable long-term consequences.

There is also a more direct and immediate multinational transfer of knowledge going on, one that has been talked about quite often but rarely dealt with.  Once again it is partially due to the short-term thinking of traditional accounting that does not place a numerical value on knowledge.  As companies outsource to other countries in search of lower labor costs, those countries aren't just sitting idly by content with providing more employment opportunities for their citizens.  They are looking further into the future, learning about new technologies and industries, and dreaming of the day when they can also be a player on the global stage. 

It isn't necessarily a negative.  Truly cheaper products (which don't necessarily need to be made cheaper by simply chasing low-cost labor instead of focusing on internal waste) benefit everyone.  New technologies created by nascent emerging market industries raise the bar for all companies.  Factories placed closer to their final customers, one of the only valid reasons to outsource or go overseas, can improve customer service.  But companies need to be aware of how the outsourcing of knowledge and intellectual property can affect them over the long term, and traditional accounting distorts that equation.

Airbus, Embraer and Boeing may soon confront that long-term reality.  Both have built factories in China to supply key subassemblies and even entire airframes.  Some components are shipped back to the home country for final assembly, and some remain to service the regional market.  But the knowledge has been transferred.

Reuters tells us that China is now considering the development of its own large passenger jets.  This isn't the first time, and their effort back in the 1980's failed to attract buyers for a China-designed 150 passenger jet and was eventually cancelled.  But now they have new know-how thanks to collaborative arrangements with three large multinational airplane companies.

The two state-owned aircraft companies, AVIC-I and AVIC-II (perhaps the naming suggests that the creativity gap remains large?), build components for Boeing and Airbus.  AVIC-I has already secured orders for 30 of its ARJ21 regional jet.  Selling a new design from a new company to an international market is very difficult due to the risk associated with aircraft.  But with China expected to need 2,650 aircraft over the next 20 years to satisfy domestic traffic, the demand is there.

Airbus and Boeing don't seem too concerned, believing their designs have higher quality and therefore less risk.  That sounds remarkably similar to what GM and Ford were saying about Toyota and Honda in the late 1970's. 

What was the value of knowledge again?

Comments

[Richard Silkey]

How do you measure knowledge? Intelligence?Can a value be placed on such things?

We have a test, the IQ test that, with reasonable success, is a good indicator of intelligence. However, is the testing skewed to book knowledge, common sense, practicle experience or a little of all three? Can it grade value?

Then again, are knowledge and intelligence tangible objects in which an actual value can be applied? Is there a direct corelation between value and knowledge?

It is dependent upon the situation and what is called for. The smartest guy in the world may be God-awful at building widgets. Therefore, his knowledge and skills have little value. However, if you have the ability to perform certain tasks and do them well then you have a direct releationship between value and knowledge.

An example are professional athletes. They are rewarded based upon their ability to provide results.....WINNING. If a said athlete performs at a high level and gives the team success then he/her is reward with a value (money) based upon that success. Therefore, you have a direct corelation between value and knowledge, be it the knowledge from the athlete is knowing how to win.

Can this scenario be translated into the workplace? Asbolutely. That is why there are so many different career paths one can go down. Not everyone is capable of being a doctor, lawyer, plumber, sheet metal worker, etc., etc. In a capitalist society we apply a value to the knowledge that it takes to perform any of the jobs mentioned. That goes for any job really. Knowlege equals skills. Skills equal a return.....value.

Having said all of that, outsourcing, in my humble opinion, is just another tool to take advantage of a given situation. It has nothing to do with knowledge or the value thereof. Albeit, a rather sad tool but, none the less, a tool that has been utilized for both good and bad.

[Todd Hudson]

The 'Big 3' in the commercial airline industry ARE creating their future competitors and will rue the day they outsourced. Of course, the execs who made this disastrous decision will have already retired fat and happy, but I digress...

The semiconductor industry embraced outsourcing AND protected their IP. When Taiwan Semi (TSMC) started providing contract-mfg for IC fabrication, they explicitly stated they would NEVER become an IC designer and sell their own chips.

This 'no compete' model created an entire industry, i.e., fabless semiconductor designers, and gave 'fabed' semi companies the assurance they could use contract manufacturers and not sow the seeds of their future destruction.

As a result, IC contract manufacturing grew by billions of dollars annually for the last 15 years. More and more chips are being created for more and more applications and at affordable prices. Everyone is winning.