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Hemorrhaging intellectual property to Asia


In response to a comment regarding one's risk detection and amelioration posture when venturing offshore into a region, or an industrial segment, of high value to nations such as France, Israel, Germany, Russia, or the PRC, a private list member noted:

"I truly believe that your analysis applies to the current "outsourcing" outcry. But, the outcry is just about jobs now. It's the future (the USA's) that is in economic peril. Our industrialists don't seem to get it."

Unfortunately the commercial stampede at both the industrial and venture capital level has long been underway and the PRC is harvesting the bounty.

We have painfully learned that at the Venture Capital (VC) level, investors are driving their stable of firms to create product and produce revenue. Risk assessment is very low on their horizon. Private conversations reveal that VCs preach the mantra "to their portfolio companies to outsource hardware development and manufacturing to China or become uncompetitive." Some VCs have already made the next step of forming development groups in the PRC precisely to serve their entire stable of firms. Now the VCs have put a superb target-rich environment under one roof. Unlike established industrial firms that already have revenue streams, VCs have little of value in their stable of firms save their intellectual capital.

On the established industrial side, the OEMs (Original Equipment Manufacturers at the top of their respective supply chains) have been virtually ordering their suppliers explicitly or implicitly to China (a) to produce lower cost products for resale back to the OEM or one of the subsuppliers in the chain, or (b) support OEM plants in-country. The demand for cost reduction is the pole star. Our prediction is that the OEMs, whose hubris leads them to mistakenly feel themselves above the risk horizon, will not protect their suppliers as new Chinese or other low-cost country providers come on line and will shift purchases to those new firms, hollowing out their own industrial infrastructure, even as OEMs press those same suppliers for cost reductions on a year-to-year basis.

I can speak to the means and actors that would gain access to the technologies being developed. It is extreme in its impact on US interests and I think that the VC and industrial communities are blind to it. We are in the process of contacting certain VC and commercial firms to outline the intellectual property (IP) theft being carried out by overt and covert subsidiaries. It is our opinion that the charge of fiduciary breach can be leveled at anyone who callously lets the IP of their stable be stolen.

Certain firms have a sensitivity to risk analysis (Intel, IBM, and HP come to mind), but their horizon has more to do with minimizing time and delivery/availability risk (above and beyond direct costs) in their supply chains. What they almost universally do not do is extend that risk assessment and mitigation to a level that generates legitimate security. It is too often 'feel good' security uniformly applied to all assets instead of a prioritized response against the assets most at risk.

Our experience has shown that there is a lack of tailored, proactive due-diligence and surveillance put in place to identify, and then mitigate. All technology leaks over time. The trick is to degrade and delay that leak. A major component of that is to put in place a process that, in simple terms, drives the bad guys down the street to a less well protected firm.

Gordon Housworth

InfoT Public  Infrastructure Defense Public  Intellectual Property Theft Public  Strategic Risk Public  
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Please see Hemorrhaging intellectual property to Asia Part II above for additional comments4/21/2004 8:19:27 AM
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