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?