How vocabulary and snobbishness limits our economic growth

01
  • “Scientists discover the world that exists; engineers create the world that never was” – Theodore von Karman

Friday, 5 May 2017

Sri Lankans love to exaggerate the importance of who they are. Or what they do. You will meet more people declaring themselves “Dr.” or even “Professor” with no such qualifications to their name. And worse than that when it comes to what they do.
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We seem to have an inordinate love for the phrase “Research & Development” or R&D as it’s commonly known. Even a guy putting a nut on a bolt will say they “are doing R&D”.

Interestingly the titles “Dr.” and Professor,” and the phrase “R&D” are academically oriented, and perhaps because only seven out of 100 Grade 1 entering students ever make it to university, there is a tendency to value things academic in our society because it is what distinguishes you from the hoi polloi in our feudal culture.

Academics who have set our economic and development policies for decades are convinced that more of them is what makes an economy a success, and you will see a constant call from the academic community to create more PhDs, file more patents and spend more money on basic and applied research to advance our economy. Unfortunately, they could not be more wrong.

Definitions

Before we go any further, it is important to understand the difference between science, technology and engineering.

  • Science is about discovering how nature works, whether it be physics, chemistry, biology or botany etc. This basic research is done for the advancement of humanity’s knowledge, and shared openly in papers published in journals and presented at conferences, and never done for money. Basic research has to result in some new knowledge, and since it is difficult to unravel nature’s secrets there is a high probability of failure of a research project. However, even the failures are useful since we end up understanding what does not work.
  • Applied research, takes the better understanding of nature discovered in basic research and seeks to invent new materials (e.g. graphene, carbon fibre), new components (e.g. computer chips), and new processes (e.g. nano treatment of fertiliser, additive manufacturing aka. 3D printing) with a commercial intent. Applied research (also called Technology Research) is less risky than basic research, and there is some money to be made from the new invention related patent royalties as they are licensed for manufacture. 
  • Engineering is about taking the results of basic research, and using the now commercially available technologies such as carbon fibre, computer chips, etc. to design products that the “world wants to buy by the millions”. Thus, Product Design Engineering (PDE) is about the application of technology to solve customer problems. Since only established technology is used and careful market, competitive and business case analysis is done prior to initiating a PDE project, they are low risk with very high financial benefit. PDE products are certificated to various international standards and are issued Type Approval certificates which allows them to be sold in global markets. Compared to the world of academia where discovery, invention and innovation rule, the world of PDE is not necessarily about being first. In fact, it is better if you are second or third and can learn from all the mistakes the pioneers made and bring a better product to market.

All major economies—other than for the ones doing dodgy financial services or selling their oil/gas/people in services/etc.—have a strong PDE base. If you look at the list of Forbes 2016 rankings you will see automotive, airplane and electronics PDE companies such as Volkswagen, Toyota, Honda, Apple, Boeing, Airbus, etc. at the top. These are all OEM (Original Equipment Manufacturer) systems integrator companies that design a product based on components, modules, raw materials etc. from Tier 1 suppliers. Some of them do their own manufacturing or farm it out for others to build.

OEMs drive economies, not only because they are large, but also because of the extensive supplier network they create. For example, Intel which is the dominant Tier 1 computer chip supplier has only about a quarter of the revenue of Volkswagen. In addition, Volkswagen has thousands of Tier 1 suppliers, which in turn have many Tier 2 suppliers and so on down the line.

Current situation

in Sri Lanka

Since our technology based economic growth focus for decades has been on basic and applied researc02h as espoused by academics, we have ended up with a dismal economy. And even more dismal high tech exports. For example, a wild claim was made almost 10 years ago (and still on their webpage) that the Sri Lanka Institute of Nanotechnology (SLINTEC) would drive our high tech exports from 1.5% to 10% of GDP by 2015. Those who understand the difference between science, technology and engineering and where money gets made, were appalled at the claim. And sure enough, other than for a few patents which have been sold by SLINTEC (for a few million US$) our high tech exports continue to hover around 1%.

Sri Lanka has a few shining PDE company examples in Lanka Transformers, Neil Marine, Orange Electric, and Jinasena, etc. These are all successful import substitute, established technology PDE companies. Lanka Transformers exports over 50% of their transformers and have become a reputed power plant systems integrator in developing countries as well. Our engineers are highly capable and can design products that the “world wants to buy by the millions”.

Our snobbish national mindset is “we have to be inventive, innovative or first in something” which has value in academia since originality is required to get a paper published. This has resulted in industry leaders shunning import substitute, established technology PDE projects citing various reasons with the favourites being “we won’t be first” or “there is not enough volume in import substitutes because the local market is too small”. Somewhat bafflingly, they don’t seem to realise that you can sell import substitute products globally as Lanka Transformers does and that it does not have to be a straight “copycat” product.

The best example of an import substitute product being developed for a single local customer is MillenniumIT’s (MIT) stock trading system for the Colombo Stock Exchange. That speed benchmark setting trading system which debuted locally, currently has many tens of installations worldwide. Unfortunately for our economy, the London Stock Exchange Group bought out MIT. Thus, we have outsourced some of our finest engineers to work as intellectual labourers for a UK company rather than having them design products for a Sri Lankan company to drive our GNP.

If Soichiro Honda had been Sri Lankan, in the 1950s he would have said “Aiyo, why start a car company since Karl Benz started one 70 years ago and we would not be first, men.” Honda’s revenues ($ 116 b) far exceed the GDP of Sri Lanka (~$ 80 b).

What needs

to be done

PDE companies take about three to five years to define the concept, demonstrate and certify a product. Once certification is done, product manufacturing can begin and the PDE company’s royalty revenue stream starts. Usually, it takes a few years for a PDE company to become cash flow positive following start of manufacture depending on market demand for the product.

To establish PDE companies, there are three potential sources of funding. 1) Equity funding, 2) Company funding, and 3) Debt funding.

Equity funding typically demands rapid, high returns which usually can only be achieved by rushing the product to market and going public. What follows after is being subject quarterly share value based performance pressures. PDE companies with their long three to five year lead times are a poor match for impatient equity investors, especially since tens, or sometimes even hundreds of millions of dollars may be required to start up a PDE company.

Given the risk averse or rapid return seeking nature of Sri Lanka’s industry leaders, trying to convince a big company to start a PDE venture is a fool’s errand.  They would rather invest in another hotel or casino not realising that a PDE company has a greater, and more rapid return than putting up buildings.

Debt funding is the only sensible source, and since Sri Lanka’s development banks (NDB and DFCC) have been privatised and become risk averse, the Government of Sri Lanka (GoSL) needs to set up a Long-Term Loan Facility (LTLF). The LTLF will provide GoSL guaranteed, low interest, long grace period (10 year) loans that can be paid off in 15-20 years. The loans would be granted not based on collateral, but on the economic impact potential, so the applicants would need to provide a detailed business case with competitive analysis and market potential.

The GoSL has included in its 2017 budget a small foundation (Rs. 500 m) for such an LTLF, and in the coming months it will get set up via an act of Parliament. It is anticipated that the 2018 budget will be much larger, and will result in a few PDE companies being funded.

The need of the hour

All engineers gladly support basic and applied research, for otherwise they would not have the understanding of nature nor the materials and components with which to “create the world that never was.” However, like no other time in the history of mankind, currently engineers have available to them a plethora of technologies, processes, and materials with which to design products.

Sri Lanka has long ignored the entire aspect of PDE and focused only on Science and Technology research because our policies have been set by academics. To that end it would be best of the “Ministry of Science, Technology & Research” be transformed into the “Ministry of Science, Technology and Engineering” so that the tax revenues from the LTLF funded PDE companies can be earmarked for even greater investment in basic and applied research to create a symbiotic system.

Our scientists, like our engineers, are second to none in the world for their creativity, but what they lack is sensible funding for R&D. So let the PDE side which makes money to drive the economy, feed the R&D side that does not make money, but contributes to the advancement of human knowledge. And to our prestige.

(The writer is a product design engineer with over 39 years experience in a variety of fields. After 30 years in the US, he has been back for 16 years and is designing a robotic air cargo network for high-speed, middle mile transport. He can be contacted at tilak@antsglobal.lk)

– See more at: http://www.ft.lk/article/613097/How-vocabulary-and-snobbishness-limits-our-economic-growth#sthash.cCihMO2B.dpuf

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