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Intellectual Property and Outsourcing Risk in India


My presentation, Intellectual Property and Outsourcing Risk in India, given to GlobalAutoIndustry's "India: Leading Offshoring Center or Upcoming Manufacturing Power?" on 1 November, 2007, described India's uniqueness which separates it from other outsourcing and manufacturing regions:

  • India is unique in that risks to personnel and facilities coexist with IP risks throughout its regional supply chain.
  • Personnel and facility risk will rise over time despite prodigious efforts by the Indian security apparatus.
  • Commercial IP threat is presently more from foreign collectors and careless outsourcing in the Indian supply chain which will include outsourcing to China.
  • Indigenous commercial IP threat is largely "entrepreneurial."

Long-term readers of this weblog will not be surprised at the conclusions and their time horizons. This speaking request did, however, prompt a revisiting of previous Indian outsourcing, IP and counterterrorism projections. As an aside, I recommend frequent revisiting of projections; it's often humbling but embarrassment is preferable to an opponent's bullet:

It is my want to revisit projections and forecasts, mine and others, to look for accuracy in both substance and timing; are assumptions still accurate and if not, why not; what new players and tools have entered the market; and what has shifted. The assumptions and the development process are more interesting than the answer as too many people treat a situation in time as something fixed, instead of seeing it as a still frame in a motion picture (where the trick is to predict the next scene).

I found the Indian projections holding true and the risks rising as the target environment we've identified becomes irresistible. Consider this 30 October item on Cisco's plan to treble its manning level in India and place a third of its senior executives in its Globalisation Centre East campus in Bangalore by 2012:

The company's plan to have senior vice presidents, vice presidents, and directors, cutting across all corporate functions, in India is not aimed at cutting costs, but at nurturing talent in India, said Wim Elfrink, chief globalization officer for Cisco, who also heads the new center.

Cisco currently employs about 3,000 staff in India, which it plans to increase to 10,000 by 2010. The new center, which currently has 900 staff, is expected to grow to 3,500 staff by October next year, said Elfrink. Some of the technologies developed in India will be rolled out in other emerging economies, and also in developed countries, he added.

As prodigious as the Indian security apparatus is, I do not believe that it can scale to the growth and dispersal distribution of the target sets.

Bangalore is perhaps the prime example of a city rapidly expanding its satellite nodes to offset rampant congestion. Tyler Cowen flagged it nicely in 2004 and it has not improved:

I mean outsourcing from Bangalore, not outsourcing to Bangalore. Apparently production costs are rising out of control in a city that accounts for a third of India's software exports. The major culprit is congestion; a seven-kilometer commute can now take ninety minutes. Population has grown by a third since 1995, and the new metro and airport are badly behind schedule. Bombay has had similar problems.

The remedy? Madras (Chennai) is rising in popularity as is Calcutta, despite its propensity to elect communist governments.

The bottom line: Indian infrastructure is chaos. This economy has only a limited ability to absord outsourcing ventures. For instance it is common for current enterprises to supply their own electricity and other public services.

The presentation proceeded to encapsulate topics such as:

  • Why and how firms outsource - and where it often leaves them exposed
  • What is missing from traditional outsourcing
  • IP and outsourcing
  • Unique Indian characteristics

India's "al Qaeda" - Lashkar-e-Toiba (LeT)

Lashkar-e-Toiba (LeT), The Army of the Pure, is India's al Qaeda or Hezbollah. Were it not restrained by prodigious efforts by the Indian security apparatus, this Pakistani jihadist group would endeavor to destabilize the Indian state as its ultimate goals go beyond regaining Muslim control of Jammu and Kashmir to nothing less than reestablishing Islamic governance of India, forming a Muslim bloc with other predominantly Muslim states surrounding Pakistan.

The presentation proceeds to outline LeT's attack opportunities which I have come to call the "Two Twofers."

The two "twofers"

"Twofer" rose in American English at the close of the nineteenth century as a term for "two for the price of one" or more generally an "arrangement in which a single expense yields a dual return." LeT has recognized that India presents it with two "twofers":

In the first, LeT has recognized that attacks on outsourcers on Indian soil directly damages the Indian state and its economic capacity, while it opens the potential of striking US and European firms that would nominally be out of its reach.

In the second, what I call the "embedded twofer," an attack on a US or European data center or business process outsourcing (BPO) facility offers the potential of interrupting all the customers of the BPO/data center owner, e.g., attack a bank's data center or BPO unit and you impact all the bank's customers.

Forecasting LeT's attack progression

Extending the "twofer" concept, we forecast this attack progression (2005):

  • Personnel and symbolic targets.
  • Expat data and business process outsourcing (BPO) centers.
  • Manufacturing and development centers.

The former is almost all soft targets - gatherings of personnel. The latter two target groups can cause supply chain disruptions as well as personnel loses.

While I called the attack on the Indian Institute of Science (IISc) in Bangalore (2005) as the first iconic or symbolic target attacked by the LeT, outsourcers and their clients should not overlook LeT's 2001 suicide attack on the Indian parliament. Had it not been chance in a missed cellphone surveillance tip and two road collisions, LeT might well have decimated Parliament House and its occupants.

But far worse in my estimation was the effective failure of the western press to cover an Indian disaster that did not include large number of US/EU national casualties. I am speaking of the 2006 LeT attack on first class passenger trains in Mumbai that followed the IISc attack. More than 200 dead in an attack that was the equivalent of an assault on Manhattan or London. Indians companies must have been relieved at our appalling myopia as little or no damage control was required:

  • Mumbai Suburban Railway has highest passenger density of any urban railway system.
  • Seven bombs placed in first-class "general" compartments (some reserved for women) targeting professional classes.
  • Trains were running from Churchgate, the city-centre end of the western railway line, to the western suburbs.
  • Analogous to the Madrid and London train/tube bombings, 209 killed, over 700 injured.

The risks in India are both real and unfamiliar to many US/EU nationals. The only approach that does not carry a charge of fiduciary breach is to conduct a rigorous vulnerability assessment, then implement the appropriate risk mediation interventions for personnel, facilities, data and IP.

While the presentation can be considered an executive overview, readers are referred here for a deeper dive:

Intellectual property theft: the unspoken unknown of offshoring [ 8/11/2004 ]

India Inc. becomes another outsourcing gold rush: unwary firms get red ink [ 10/27/2004 ]

Emerging Information Technology (IT) themes in India and China [ 2/1/2005 ]

The world is flat save for the depression that we occupy: Friedman on global opportunity and competition [ 4/8/2005 ]

Commercial blindness: a "twofer" attack on the Indian state and US and European outsourcing assets [ 6/28/2005 ]

Multisourcing: belated recovery of forgotten first principles [ 10/18/2005 ]

Multisourcing: belated recovery of forgotten first principles, part 2 [ 10/20/2005 ]

Indian pipedream: "Our campuses are physically secure… The entire perimeter is guarded which we believe enable us to be fully secure" [ 1/14/2006 ]

Striking Mumbai is akin to striking financial centers such as Manhattan or London yet many in the west are oblivious [ 7/13/2006 ]

Cisco to have a fifth of its top executives in India
By 2012, India will be company's development hub and a base for technology and applications that can be deployed worldwide
By John Ribeiro
IDG News Service
October 30, 2007

At least 174 killed in Indian train blasts
Prime minister says 'terrorists' behind attacks
July 11, 2006; Posted: 10:12 p.m. EDT (02:12 GMT)

Outsourcing Bangalore
Posted by Tyler Cowen
Marginal Revolution
November 4, 2004 at 07:10 AM

Indian parliament attack 'bungled'
December 17, 2001 Posted: 3:52 AM EST (0852 GMT)

Gordon Housworth

InfoT Public  Infrastructure Defense Public  Intellectual Property Theft Public  Risk Containment and Pricing Public  Strategic Risk Public  Terrorism Public  


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Trends point towards Mexico's destabilization


How will you deal with the assassination of Calderon?: A working example of all-source risk analysis was my quickly assembled presentation when asked to step in and address the monthly meeting of the regional NAPM (National Association of Purchasing Managers) chapter this September.

I chose the title purposefully even though I might be accused of "profiting on assassinations and other terrorist acts" as was DARPA's Policy Analysis Market (PAM) futures market which actually was a superb idea designed to trade in, and gather knowledge of, "things that the US and incidentally the target country would be deeply interested in."

As an all-source risk analyst, I know that supply chain analysis must extend beyond mere commercial aspects, that while commercial calculations are an essential first step in risk evaluation, they are necessary but not sufficient to define total chain risk. Intellectual Property (IP), IT, criminal, terrorist, cyberterrorist and environmental issues - and their interactions - must be included.

In a low cost vacuum, solely commercial decisions lead to vulnerabilities, yet multinational firms habitually do not give politics and other factors sufficient attention in their countries of operation.

Looking beyond commercial issues with regards to Mexico shows the clear need for companies to prepare for tunable Just-in-time Disruption at one or more points (some likely simultaneous) in their Mexican supply chains, that they need to have mitigation strategies in place to address disruption. I take absolutely no pleasure in this forecast as I believe the Mexico's commercial capacity coupled with its engineering capability should make more manufacturers refrain from taking certain manufacturing and assembly operations to Asia (see pages 5-6).

By a show of hands to my questions, there was little recognition that Felipe Calderon was president of Mexico and, further, that he had assumed the presidency contested by Andres Manuel Lopez Obrador under conditions than made Bush v. Gore seem tame in comparison. Although "Tunable Just-in-time Disruption" was in boldface as a predicted outcome, it elicited few questions in the Q&A that followed. It remains to be seen how effective I was.

These purchasing audiences are typical of a system that has compressed its middle rank purchasing officers to focus solely on piece part costing and so has robbed them of the time, the inclination and the support to address a wider risk horizon. I personally saw this relentless pressure at one automotive OEM collapse their buyers' world view, robbing them of strategic flexibility. That pressure drove many tier one and tier two suppliers to China with unfortunate results for many US firms.

In an effort to bridge their world and mine, I took pains to demonstrate that we also dealt with the normal commercial aspects (cost, freight, lean, value-add at tier, et al) but that those criteria were, as Deming and Goldratt were fond of saying, "necessary but not insufficient" for all-source analysis, that one needed to get beyond piece part costing to assess total risk.

One listener in the Q&A said that his company had Maquiladora assets, that he was frequently down at their Mexican sites, but had heard nothing related to my comments. I thought privately that there goes a firm who lives at the whim of a stray bullet; publicly I encouraged him to dig deeper.

(For those not needing to dig deeper, Maquila program firms are Mexican companies open to 100% foreign investment participation and management, permitted special customs treatment allowing duty free temporary import, and whose products are exported, directly or indirectly, through sale to another Maquiladora or exporter. Maquiladoras festoon the Mexican side of the US border.)

It was difficult to escape feeling extraterrestrial as I pointed out that a piece part/commercial focus failed to include key Mexican factors such as:

  • Mexico's $30 billion USD black market.
  • $20 billion from drug smuggling. Balance from kidnapping, protection, bank/casino robbery, prostitution, fake merchandise, arms and gems smuggling and human trafficking.
  • Felipe Calderon's massive military crack down on Mexico's drug cartels (also here).
  • Cartel counterattacks.
  • Resurgence of Marxist EPR, Ejercito Popular Revolucionario (Popular Revolutionary Army).
  • Restive Lopez Obrador supporters (also here).
  • Weakness of PEMEX and Mexican oil production.

A piece part focus would not flag the analogous relationship of the ERP and the drug cartels to that of al Qaeda-in-Iraq and related jihadist groups to the larger assembly of Baathists, nationalists and insurgents:

  • Iraq: Iraqi Baathists, nationalists and insurgents vastly outnumber the jidahists. When it no longer serves the larger interests, the smaller will be exterminated.
  • Mexico: ERP, paid or autonomous, is educating the cartels. When it is in the cartels' interest, the ERP can be exterminated or co-opted by a combination of money and force.

The upshot will be that the cartels will continue on with tunable Just-in-Time Disruption activities once they have decimated or co-opted the EPR.

A piece part focus would not address this thumbnail assessment of drug cartel counterattacks, many of which are already underway:

  • Hyperviolence at the low end (also here).
  • Bribery and threats at the high end.
  • Expand control of local state police assets.
  • Cow and co-opt up the judicial chain.
  • Attack the military intelligence community.
  • Attack incorruptible senior judiciary.
  • Co-opt fractious political opponents.
  • Selective state disruption, damaging businesses.
  • Isolate, emasculate Calderon.
  • Failing that, assassinate him.

I will get the full weblog item up on Calderon in due course. There is so much more to say on the threats to Felipe Calderon and the Mexican government.

Consider the analysis of Mexican petroleum woes, the impacts of failing to replace Cantarell, the popular Mexican resistance to any unwinding of the oil's nationalization in the 1930s, the international pressures that can be applied to Mexico and the US by Russian energy policy, the cartels' awareness of those weaknesses and their willingness to exploit them. Then there is the pan-national destabilization of the interlocked narcotics corridor stretching from Brazil to Columbia, the Isthmus and Mexico, the rise of Mexican cartels at the expense of the Columbians. The cartels have militarized and expanded to the point that they have formed Temporary Autonomous Zones outside control of the Mexican state; those autonomous zones effectively control significant stretches of the US-Mexican border. The cartels have both grown strong even as they have lost command & control over critical assassination and enforcement assets. Either singularly or in concert, the cartels and their enforcers have broached plans to assassinate US journalists on US soil that have reported critically on cartel activities. (Deaths among Mexican journalists already put Mexico among the big three (Iraq, Mexico and Columbia).) Marxist and other splinter groups that fitfully operated in poorer regions well south of the DF (Mexico City) now operate with remarkable effectiveness in the wealthier north. Calderon has undertaken not just a war against the cartels but a war on a failing Mexican social infrastructure all the way down to the national sport of tax evasion.

It is daunting to consider the success of a simultaneous attack on so many elements of the Mexican economy and its elites; it is all too easy to envision entrenched patches of privilege in Mexico that would aid the cartels in a short-term fix of its Calderon problem.

Mexican drug gang attacks government intelligence network
The Associated Press
September 17, 2007

Mexico: A Nation-State Dissolves?
Posted by Jeff Vail jeffvail
The Oil Drum
July 12, 2007 - 10:00am

The War in Mexico
Posted by Mike under 4th Generation Warfare
Net Wars
June 26, 2007 at 10:37 pm

Mexico Purges 284 Police Commanders in Antidrug Effort
New York Times
June 26, 2007

Shooting for the Top
Mexico's Drug Gangs Take Aim at Calderon
May 21, 2007

Calderon, Mexico's Drug War Commander in Chief
By Allan Wall
Monday, January 8, 2007

Mexico's New President Sends Thousands of Federal Officers to Fight Drug Cartels
New York Times
January 7, 2007

Plotters Work to Disrupt the Mexican Government
By Barnard R. Thompson
Monday, November 6, 2006

Election Ruling in Mexico Goes to Conservative
New York Times
September 6, 2006

The China Challenge to Manufacturing in Mexico
Ralph Watkins
Program Manager for Foreign Assembly in the Office of Industries
Office of Industries, U.S. International Trade Commission (USITC)
China Challenge
September 2006

Beaten leader plans 'parallel' rule
From correspondents in Mexico City
The Australian
September 09, 2006

Lopez Obrador Supporters Occupy Heart of Mexico City
by Pablo Perez
Agence France Presse
Monday, July 31, 2006

Mexico's Uppermost Threat is Organized Crime
By Sam Logan
International Relations and Security Network (ISN)
Center for Security Studies (CSS) at ETH Zurich (Swiss Federal Institute of Technology Zurich)
Monday, May 1, 2006

The Policy Analysis Market: Why It is a Great Idea.
By khallow in Op-Ed
Aug 14, 2003 at 09:48:59 PM EST

Poindexter Resigns but Defends Programs
Anti-Terrorism, Data Scanning Efforts at Pentagon Called Victims of Ignorance
By Bradley Graham
Washington Post Staff Writer
Wednesday, August 13, 2003; Page A02

Business intelligence worth betting on
By Dan Farber,
Tech Update
July 31, 2003 9:35 AM PT
Scrolled off


Gordon Housworth

InfoT Public  Risk Containment and Pricing Public  Strategic Risk Public  


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A China facet: White light vehicle cloning driven by absence of indigenous vehicle designs and packaging


Previous: A China facet: Defective materials and products driven by greed and ineptitude

BMW and Mercedes have commenced legal action against Shuanghuan for its "blatantly, unashamedly copies. On display in Frankfurt are the Shuanghuan UFO and CEO SUVs. UFO is a Toyota RAV4 clone, and CEO is a 95% copy of the BMW X5. (We say 95% because Shuanghuan apparently elected to copycat Mercedes-Benz for the CEO's front end design.)" The "Nobel is said to be a replica of Daimler's SmartFortwo":

Charging that the [Shuanghuan] CEO is a copy of BMW’s popular X5, the company has filed suit to prohibit its sale in Germany by the Chinese carmaker Shuanghuan Automobile. That did not prevent Shuanghuan’s European importer from showing off the CEO on Tuesday at the Frankfurt Motor Show.

[The Frankfurt Motor Show showed] that the struggle over intellectual property rights between China and the West — a battle that has ranged over products from designer handbags to computer chips — now extends to cars.

[Neither BMW or DaimlerChrysler] which is taking legal action against Shuanghuan to prevent it from selling the Noble, a subcompact that bears an uncanny resemblance to Daimler’s Smart minicar. The Noble did not appear at the show, though the importer, China Automobile Deutschland, insisted that it decided on its own not to distribute the car in Germany…

Chinese carmakers sometimes copied the exterior of a car from one model, and the interior from another. In the case of the CEO, for instance, it is not clear that the BMW X5 was the sole inspiration for its design. Auto critics have said that while the rear end of the vehicle is a dead ringer for the X5, the front end looks more like a Toyota Land Cruiser.

BMW emphasized that under the hood, the CEO is no X5 [unlike other Chinese clones of which we are aware]...

The BMW X5 is pictured on the left and the Chinese CEO SUV is on the right

The term clone bears explanation. We differentiate vehicle or vehicle component reproduction by mathdata, clone and copy methods:

  1. Computer Aided Design (CAD) "mathdata": Original automotive OEM design data in its native form; if not sold or otherwise intentionally transferred to an outside party, it is obtained illegally, i.e., IP theft (in competitor hands a solid/physical object so produced IS the identical component).
  2. Clone: Vehicle/component copied by the use of white light photogrammetry; for a solid/physical object it produces a near perfect copy of the target (but does not address materials, coatings, dynamic design criteria or internal software).
  3. Copy: Vehicle/component copied by the use of more simplistic engineering analysis; for a solid/physical object it produces a nominally similar product but requires much more time and cost (due to the dropping cost and increasing availability of white light scanning, the 'copy' function is fading).

Whereas the Chery QQ minicar was produced from illegally obtained mathdata of the Chevy Spark/Daewoo Matiz, the CEO clone of the BMW appears to be produced by white light scanning. This process will become increasingly common and so vastly compresses the revenue window available to the original designer.

Reverse engineering broadly refers to analyzing and dissecting something with the goal of recreating it. In 3D scanning, reverse engineering typically means the process of measuring an object using a 3D scanner and then creating CAD data that reflects its original design intent. This can also be done by using rulers, calipers, or a CMM. Reverse engineering is sometimes referred to as Reverse Modeling.

For those unfamiliar with photogrammetry, white light scanning or structured light scanning, used in reverse engineering, here is a short summary with a deeper introduction to the technique. Here is a before and after; a photo of a physical Porsche body panel and the reverse engineered surface file of that panel. Two useful/short case studies are here and here. I recommend this masters project, Reverse Engineering of Automotive Parts Applying Laser Scanning and Structured Light Techniques, as a straightforward description of the reverse engineering process shorn of vendor technicalities.

While white light scanning is a pan-industry norm for legitimate reverse engineering, inspection, hybrid modeling and archiving, and is known to be used for conventional competitive analysis, the emerging norm is a Chinese-led wholesale cloning of vehicle subsystems or, increasingly, entire vehicles.

From a limited distribution 2006 ICG report:

Driven by competition from other Chinese automotive manufacturers as well as foreign badges Chinese OEMs have targeted foreign OEM design information, specifically CAD or "mathdata" as a means of leapfrogging the design cycle. In the absence of obtaining mathdata for coveted designs, Chinese OEMs will increasingly resort to brute force copying of entire platforms that they perceive as valuable to the Chinese market and early export penetration. US and EU OEMs should expect collection activities from multiple Chinese OEMs and component manufacturers locked in a domestic competition that considers foreign Intellectual Property (IP) as little more than harvestable assets.

Having surrendered basic manufacturing technology in Joint Ventures (JVs) with Chinese partners, US and EU OEMs have progressively less to offer the Chinese other than design data and marketing know-how not tendered as part of a JV. The foreign OEMs Daimler Chrysler and BMW, recognized by the Chinese as possessing superior manufacturing technology, will continue to suffer predation against their proprietary technologies as well as design data.

Collection activity will not be limited to China. In many cases, the asset will be defended less outside of China than within China. Low cost is not low risk: realities of IP Loss notes:

While certain assets are likely targets inside China, the key is to think "asset" instead of "country". Risk cannot be based on countries or "risky areas" but rather wherever a sufficiently valuable asset is accessible at any tier in any country - as the collector will move to the least defended point that contains the IP.

This wholesale cloning is seen as IP usurpation by the legitimate owner. The Chinese generally do not so much disagree as decline to comment; that changed with the curious defense by Shuanghuan:

The Chinese carmaker accused by BMW and Mercedes-Smart of copying their designs has rejected the claims, citing that it had approval from the Chinese government to build the cars as its defense. Shuanghuan manufactures the Noble minicar, an almost identical replica of the Smart Fortwo, as well as the CEO, a SUV with the rear-end of a BMW X5…

"Noble and CEO cars, approved by the Chinese government, are legal products," a spokesperson for Shuanghuan told reporters from AFP. Further, the spokesperson explained that the Noble is only sold in China, while the only export markets the CEO is sold in is in parts of Africa and Southeast Asia.

White light scanning has many limitations that will spawn ancillary IP collection efforts. From a limited distribution 2006 ICG report:

The marriage of design to manufacturing and assembly will hinder their aggressive effort. Many products are specifically designed for a process, not well understood from reviewing a print or a scanned image. Vehicle dynamics is a product development process unique to each OEM’s developed testing methods. If not married with the prints and manufacturing methods, the clone will not reproduce the same results.

A sample forecast of Chinese IP collection efforts to supplement white light clones. From a limited distribution 2006 ICG report:

We would expect collection efforts against OEM product development processes, which might be reasonably achieved by hiring staff from [redacted] or key suppliers in order to reduce the unknowns in vehicle dynamics affecting manufacturing…

Materials and coatings knowledge will face increasing collection to support dimensional characteristics of scanned/cloned parts and act as a driver for materials cost reduction. Expect key Tier One and Two suppliers and base materials producers possessing these skills to be targeted.

It remains to be seen what actions that US/EU OEMs can take without suffering retribution elsewhere by Chinese authorities, a response standard to the Chinese.

BMW sues Chinese carmaker over X5 clone
Motor Authority
Posted on 12 September 2007

Germans See Imitation in Chinese Cars
New York Times
September 12, 2007

Car Companies See Counterfeits in China
24/7 Wall St
September 12, 2007

Rumormill: China Automobile almost kicked out of Frankfurt show?
by Alex Nunez
Auto Blog
Posted Sep 12, 2007 3:35PM

Chinese companies copy tires, too
Motor Authority
Posted on 6 September 2007

Chinese Carmakers Will Not Show Their 'Clone' Cars in Frankfurt
Pure Green Cars
By on September 04,2007

Chinese Taking "FAKES" to another whole level: Cars
August 31, 2007

There will be no stopping the Chinese-built Smart clone
by Sebastian Blanco
Posted Aug 31st 2007 1:15PM

Clones are perfectly legal, says Shuanghuan
Motor Authority
Posted on Thursday 30 August 2007

BMW joins smart in threatening copy-cat Chinese
Damon Lavrinc
Auto Blog
Posted Aug 27th 2007 9:58AM

Chinese Toyota RAV4 & BMW X5 Clones Coming To Frankfurt
submitted on 07/19/2007: 10:51 AM

White-Light Scanning Validates Faster, Better Processes for Molded Auto Interior Trim at Eifel Inc.
The use of white-light scanning and photogrammetry ensures accuracy of tool building programs.
By Jack Thornton
Moldmaking Technology
February 2007

3D Scan IT and InnovMetric help Eifel Inc. halve injection-mold delivery times and maintain margins
PolyWorks Case Study

Solving leakage problems on car door assemblies
PolyWorks Case Study

The Basics of Photogrammetry
Geodetic Services

Chinese tigers prey on Europe’s roads
Cheap labour and low costs prove a challenge for EU car manufacturers, writes Lorraine Mallinder
European Voice
8 March, 2006

Reverse Engineering of Automotive Parts Applying Laser Scanning and Structured Light Techniques
Ngozi Sherry Ali
Project in Lieu of Thesis, presented for the Masters of Science Degree
The University of Tennessee, Knoxville
May 2005

Reverse Engineering
Using digital processes accelerates design and increases manufacturing quality.
Aerospace Engineering
September 2004

Similar material here:
Reverse engineering: the catalyst behind the next big aerospace leap
by Ping Fu, CEO & President, Raindrop Geomagic

Reverse Engineering: An Overview of the Options
By Lisa Federici
Moldmaking Technology
March 2001

For Steel-Wool Maker, Chinese Lessons
New York Times
Published: May 28, 1996

Gordon Housworth

InfoT Public  Intellectual Property Theft Public  Risk Containment and Pricing Public  Strategic Risk Public  


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A China facet: Defective materials and products driven by greed and ineptitude


Our clients are familiar with our longstanding forecast of Chinese 'thrifting' in materials, coatings and platings, more so when they occur on interior surfaces, on in internal components, where testing is more difficult. Such thrifting occurs frequently in Chinese supply chains, often evidenced by multiple, substandard parts from different suppliers in the same subassembly.

This thrifting is matched by an aggressive IP theft/harvesting by the Chinese as these same materials areas are key to significant cost and structural improvements in sectors such as autos and elsewhere. Often the US/EU supplier possessing these skills is a tier two or three almost completely unaware of the attack. This bifurcation is understandable as the thrifting and the thefts are being executed by different entities with different goals in the greater Chinese supply chain. No one ever said that China was not a land of contrasts.

Unrecognized by many, the risk has been there

In advising clients that they cannot rely on their Chinese supply chain to enforce part quality, Harris & Moure states that the problem is not new and that they must "take action to ensure the safety and quality" of their products in order to minimize their liability:

Dangerous Chinese products were entering the United States and Europe long before the Melamine pet food tainting hit the news.  But that incident and those which quickly followed it (bad toothpaste being the most prominent) mean everyone is now on notice these issues are real.  From now on, it will be impossible for any Western company to plead ignorance.  Western companies that refuse to take proper action will increasingly be subject to to severe penalties, even including punitive damages, where such damages are available.  In other words, any Western company that does nothing to assure the safety of its Chinese products and then steps into court claiming it had every reason to trust its Chinese supplier (based on faith alone), is likely to face real anger and major damages.  Plaintiff's class action lawyers in the United States should be and are salivating.

And get this straight, we are not just talking about food products here, though that is the most obvious and prominent right now.  If you are selling Chinese bikes, do you know whether the nuts on your seats are really strong enough to withstand a 200 pound Westerner?  If you are selling Chinese electrical goods, do you know if that Underwriters Laboratory (UL) sticker is counterfeit or not?  Is the plastic in your Chinese made baby item really nontoxic?  Will your cigarette lighter explode?  Are you certain the fake fur on your coat is not from a dog?  The time for complacence is over.

As any automotive supplier has painfully come to know, PPAP (Production Part Approval Process) and APQP (Advanced Product Quality Planning) proficiency is thin in China beyond already established suppliers to long standing automotive OEMs and tier one suppliers. As one cascades down the part and commodity chain, production values are problematic:

Sure, greed factors into why Chinese suppliers make defective, even harmful products. But often it's because of just plain ineptitude. If you visited a typical Chinese factory, you'd see why. It lacks capital, technology and know-how. Its workers place obedience over quality. And it sits along an endless chain of middlemen.

On average, it takes China 17 separate parties to produce a product that would take us three. Unlike Japan in the 1980s, little companies drive China's economic growth, not big ones. China's industries are composed of hundreds of thousands of tiny factories and farms -- plus traders, brokers, haulers and agents, all of whom take control of the goods and materials but add little value to the product. With every additional player in the chain, the cost, risk and time grow. Effective quality control in this environment is difficult.

So is effective cost control. Despite cheap labor, making goods in China is often more expensive than in the U.S. Far from being a bottomless ATM of cheap consumer goods, China is a risky, costly and time-consuming place to do business.

Yet polls show a majority of Americans believe China has mastered basic manufacturing -- and it's now barreling into our high-tech backyard. That's false. As the product recalls demonstrate, China can barely make low-value goods reliably, much less higher-value ones. The problems are structural, not the result of a few bad apples.

Faults in areas more critical than toothpaste

China has fundamental faults in essential fabrication materials; start with steel:

Steel imports from China that fall apart easily are making U.S. manufacturers and constructions firms more than a little nervous. Reports of failures during initial fabrication and questions about certification documents will mean closer scrutiny... The biggest concern is hollow structural sections widely used in construction of skyscrapers, bridges, pipelines, office, commercial and school buildings. This high-strength steel is also commonly used in power lifts, cranes, farm equipment, furniture and car trailer hitches.

Chinese high-strength steel tubes and pipes are also a potential problem. They're used extensively in power plants and in large industrial boilers, and must withstand enormous pressures and hellish heat around the clock for weeks or months on end... Inferior high-strength steel could cause catastrophic failures of buildings, pipelines or in power plants' boiler tubing...

"Most of China's 800-plus steelmakers are small fabricators who have no idea what quality is about, so there is a risk that some guy with a welding torch buys some hot-rolled coil steel and just welds it together"

As critical material failures occur regularly in key Chinese infrastructure projects, what makes a US purchaser is going to fare any better? Witness the recent failure that occurred at the 300MW Huadian Datong Power Station Unit 2, Qinghai Province, when the HP main steam line, supposed to be seamless Grade 91 pipe, failed (photos here and here), killing two and scalding one. The failure path was consistent; note that the Chinese government has now banned Chinese pipe for critical power plant applications:

"It is very important that we deal with reputable companies and know the origin of the materials we supply. The material that failed was supplied by a company in Houston TX, called S.M.A.N.T,who certified it as US pipe when it came from questionable sources in China. These details have been confirmed by the Bechtel QA Manager of Power. Bechtel China has also conducted an investigation and the supply chain is ugly due to the extent of how many agents, brokers, and mills are involved. The Chinese Government has stepped in and has called for a formal investigation. The Chinese Government has also banned Chinese made pipe for use in major power plant critical applications. Thus far there is evidence to support that over 30 plants contain similar or other "fake pipe" all over China."

Comissive-omissive chain of actors in government and industry

The Chinese government believes "that more than 40 [Chinese] plants have used the [bogus, noncompliant] Hyrdatic or SMANT pipes." The analysis was:

  • The cost of bogus pipes is only 40% of those imported and margin from a 2x600MW could be 70 million RMB or 9 million USD.
  • Sometimes they do import some genuine product but only a small portion to cheat inspect and examination.
  • The trader and dealer actually know the fact of forge and share the interest together with the counterfeiter, however, they pretend as to be deceived once the reality was disclosed.
  • Normally, owners order the critical pipes directly and then lack of strict inspection and examination.
  • For Huadian Datong Power Plant, the pipe trader, Huadian Piping Engineering & Technology Co is actually a related firm to the owner, both of which under the same umbrella of Huadian Group, one of the five major IPPs (State controls most of shares)
  • Plentiful plants built simultaneous with aggressive schedule furnish markets to low cost fake pipes.
  • Legal and administration penalty is too insignificant to deter to counterfeit manufacture.

A list member added this comment:

Fake seamless pipes is a huge racket prevalent in China. There are any number of unscruplous manipulators in this trade. Last year I had an export enquiry for seamless pipes. My rates were high obviously by 20%. I was asked to quote a lower price,and win the bid. Thereafter I was asked to supply good original samples for approval. Thereafter I could supply fake ones just by placing the stamp of original manufacturer. I refused. The Chinese guy accepted and to this day the orders go to him and the business goes there. [Question as to who the writer was working with] Government tenders are always cornered by the traders,middlemen and are considered a largessse doled out to political beneficiaries. This is a standard practice in Asian countries.For government is the biggest buyer.


Imports of specialized structural pipe and tubing steel from China are soaring, up from almost nothing two years ago to 102,000 metric tons in the first six months of this year, according to American Iron and Steel Institute data. China now provides about 25% of U.S. supplies of this high-strength steel, making it the second-largest source behind Canada. U.S. steel mills supply about 16%.

On the heavy fabrication side, caution and the recognition of need to aggressively test are emerging, albeit not widely enough; too much product is still being accepted at face value. This on Chinese steel products from the Boiler and Pressure Vessel engineering Forum:

One of the vendors we deal with regarding boiler pressure parts is Chicago Tube and Iron (CTI). They (CTI) will not purchase tube mill products from China unless the customer specifically requests it. I happen to be in the CTI shop an an audit for our parts and one of the floor guys showed me a batch of tubing from China. It was poor quality - surface finish and tolerances...

The general feeling is that if the Chinese can sell an item and the "value added" (i.e. heat treatment) cannot be easily determined from a visual inspection, then they will try to get away with it...

As a fabricator on the Gulf Coast, we are seeing most users/buyers specifying Domestic,Canadian, Western European, and Japanese manufacture for materials. Many are adding a "melted & manufactured" clause in their specifications. Substantial AMLs [Approved Manufacturer's Lists] are now the norm and Chinese materials are generally excluded due to poor quality which relates to risk...

There is quite a bit of seamless tubular manufactured in the US, from Chinese hollows. It makes sense, the size control, heat treating and NDT are all controlled on this end. And you save some money on the starting hollows. The guys that I know that are doing it are sending people to witness every manufacturing run in China...

Confronted, China assumes the role of aggrieved party or the bully

The CCP suppresses bad news, news that would embarrass the party or its luminaries; when it cannot suppress, it goes on the offensive as the systemic issues resist correction. Witness China's sustained data suppression over the SARS and Avian Flu outbreaks.

In each emergency or embarrassing discovery, China shatters the rules of good public relations and crisis management, doing few or none of the following:

  • Prepare to engage fully
  • Have all the facts
  • Take immediate action, minimizing danger to human life
  • Tell the truth
  • Show care and sincerity
  • Use common sense

To larger states such as the US, the initial response to the recent appearance of poisonous diethylene glycol (DEG) in toothpaste and cough syrup, killing more than 100 in Panama is typical:

"So far we have not received any report of death resulting from using the toothpaste. The U.S. handling (of this case) is neither scientific nor responsible," China's General Administration of Quality Supervision, Inspection and Quarantine said in a statement posted on its Web site over the weekend. "All the toothpaste exported to the United States had been registered by the U.S. Food and Drug Administration for marketing in the States."

While such stonewalling does nothing to resolve matters and establish trust, this response received by smaller states is instructive:

In dealing with product safety complaints from the United States, China has sought to convince a concerned American public that it has reformed and is doing all it can to ensure the safety of its products. But its dealings with other, less-developed countries or those in vulnerable political positions are a different story, according to Husniah and officials in the Philippines and Malaysia...

Chinese food-safety officials argue that the recalls and bans by other countries amount to technical trade barriers that attempt to legitimize what would otherwise be unfair trade practices.

But to a regional state as prominent as Indonesia:

Indonesian officials accuse China of pushing shoddy products and inferior standards on poor countries that have no choice but to depend on it for cheap goods, aid and investment. They say that China, in closed-door meetings, has refused to share basic information, attempted to horse-trade by insisting on discussing disparate issues as part of a single negotiation and all but threatened retaliatory trade actions. The Chinese respond that their products have been the victim of unfair trade actions.


After hearing about dangerous Chinese products elsewhere, Indonesia this summer began testing popular Chinese-made items on its own store shelves. What it found has added to the list of horrors: mercury-laced makeup that turns skin black, dried fruit spiked with industrial chemicals, carcinogenic children's candy.

The Chinese government called up in August saying it had a possible solution. [The] the Chinese suggested Indonesia lower its safety standards. [Head of Indonesia's food and drug safety agency] Husniah said she was "very upset and very surprised." "I said to them, 'I respect your standards for your country. I hope you respect ours.' "...

In the Philippines in July, a state-owned Chinese company threatened to sue for defamation after the Philippine government released a public warning saying a popular brand of candy was contaminated with formaldehyde. In Hong Kong, China pushed the territory to reconsider its recall of toothpaste contaminated with a chemical that other countries said might be poisonous but that China argued was present at levels safe for human consumption. It then ordered Hong Kong to submit a report on how and why it called back the toothpaste.

In Malaysia, a ban on fungus-infested nuts and dried fruit with a carcinogenic sweetener from China was met with a Chinese alert on litchi-flavored yogurt from Malaysia that it said didn't meet labeling requirements. Malaysia has long had a history of food safety issues with Chinese products.

When the smaller states do not relent, China enacts countermanding measures;

[Soon after the Indonesian meetings], China had announced a ban on Indonesian seafood. Husniah said she accused the Chinese of taking retaliatory trade actions. "You banned our seafood because of our public warning about your products"... She said Chinese officials denied this was the case...

Days after the Philippines announced the problem, the Chinese government enacted its own recall of banana chips from the Philippines, saying they contained high levels of sulfur dioxide, which is used as a preservative but can be toxic at high levels. China dispatched representatives all over Asia to talk to food inspectors in other countries...

One is left with the impression that China is more aggravated than repentant, and that it will continue to sell defective materials and products where possible. This does little to build trust that China will move to rectify its defects.

Next: A China facet: White light vehicle cloning driven by absence of indigenous vehicle designs and packaging

New Threat From China: Shoddy Steel Imports
By Jim Ostroff
Kiplinger Business Resources
September 7, 2007

PRC tries to clean up image in Sydney
FIGHTING BACK: Hu Jintao pointed out that 99 percent of exports from China to the US, EU and Japan from 2004 to the first half of this year were up to standard
By Jessie Ho
Taipei Times
Friday, Sep 07, 2007

Importer to recall Chinese-made car fuses
Auto parts company alerted regulators to fuses that don't blow when they should and could cause fires.
By Peter Valdes-Dapena
September 6 2007: 11:34 AM EDT

Asians Say Trade Complaints Bring Out the Bully in China
By Ariana Eunjung Cha
Washington Post
September 5, 2007

AISC Requests Data from Independent Testing of HSS
From American Institute of Steel Construction, Inc.
September 04, 2007

Steel Products from China
Boiler and Pressure Vessel engineering Forum
Eng-Tips Forums
Aug 18, 2007

Also these threads:
Fabricated Vs Forged Flanges-National Board Report
Chinese steel tube
origin of material
Stainless Steel Pipe

Massive Subsidies and the Great Protectionist Walls of China
By Peter Navarro
FT Press
Aug 17, 2007

China the defective-product king
Beijing's attitude about quality of its goods reflects its Maoist legacy.
The Orange Grove
Tuesday, August 14, 2007

Cracks in the Great Wall of China
Nicholas Vardy
Global Guru
7/25/2007 12:01 AM ET

The China Syndrome
July 16, 2007

Dangerous Made-In-China Products: 2007 Timeline
by Jefferson
Who Sucks?
July 7, 2007

Dangerous steel
Felix Weinstein
Tower crane engineer Felix Weinstein argues that steel impurities are threatening the safety of cranes. Steel produced in ingots from recycled steel is most at risk to contamination. The only solution is extra testing.
Craines Today
July 2007

The End Of Cheap China
July, 2007

450,000 Truck Tires Made in China To Be Recalled in US
Posted by chinaview on June 26th, 2007
Status of the Chinese People

original report from

FDA and The Crisis of China's Poisoned Products News
By Gordon Gibb
Lawyers and Settlements
June 17, 2007

China says US toothpaste warning irresponsible
Mon Jun 4, 2007 12:33AM EDT

How To Protect Your Company From Bad China Product
Posted by Dan Harris
China Law Blog
June 6, 2007 at 08:52 AM

P91 failure in China - 3 fatalities
Boiler and Pressure Vessel engineering Forum
Eng-Tips Forums
11 Dec 06

The China Syndrome: How Subsidies and Government Intervention Created the World's Largest Steel Industry
Alan H. Price, Christopher B. Weld, D. Scott Nance, Paul Zucker
Wiley Rein & Fielding LLP
July 2006

Growing experience with P91/T91 forcing essential code changes
By Jeffrey F Henry, Alstom Power Inc and ASME Task Group
First Quarter 2005

Bird Flu: Communicating the Risk
by Peter M. Sandman and Jody Lanard
Perspectives in Health
Pan American Health Organization (PAHO), WHO
Volume 10, No. 2, 2005

Commentary: While China Stonewalled
Business Week
APRIL 14, 2003

Product Quality Law of the People's Republic of China (Amended on 7/8/2000)
Ministry of Science and Technology of the People's Republic of China
(Adopted at the 30th Meeting of the Standing Committee of the Seventh National People's Congress on February 22, 1993, and amended at the 16th Meeting of the Standing Committee of the Ninth National People's Congress on July 8, 2000)

Gordon Housworth

InfoT Public  Intellectual Property Theft Public  Risk Containment and Pricing Public  Strategic Risk Public  


  discuss this article

Bets are off or bets change: implications of risk curve flattening, rising probabilities of the tails


"In a world where there's a possibility of things going extremely well or extremely badly, the tails of the bell curve are much fatter (and that can) lead to different behaviors. There's the idea that the singularity would be very successful, (causing) the biggest boom ever, or blow up the world, with nothing to invest in ever." [Peter Thiel]

Thiel's comment at the Singularity Summit on the progress of Artificial Intelligence (AI) pulled me up short. My first thought was 'all bets are off' or at least 'the bets have shifted' in ways few understand. In conditions where possible outcomes are increasingly polar, and their costs/benefits are exponentially larger, the traditional bell curve distribution flattens as its tails rise, i.e., the long tail is on its way to becoming the fat tail. If few genuinely understand statistics and probabilities today and pay the price, the future is going to create radically lopsided winners and losers.

Yes, Thiel was talking about the implications of the Singularity, the "technological creation of smarter-than-human intelligence," or "the point at which advances in artificial intelligence will bring about self-improving machines that are smarter than humans," but his comment applies equally to other fields. While AI has the nod in the race to the Singularity, the current runners-up are "direct brain-computer interfaces, biological augmentation of the brain, genetic engineering, ultra-high-resolution scans of the brain followed by computer emulation":

Some of these technologies seem likely to arrive much earlier than the others, but there are nonetheless several independent technologies all heading in the direction of the Singularity several different technologies which, if they reached a threshold level of sophistication, would enable the creation of smarter-than-human intelligence.

I submit that we don't even have to reach, or even near, the singularity to create this fat tail risk condition - and to be unaware of a fat tail climax event until it underway. Consider the complexity of embedding the products and services of many current fields into systems that are beyond the risk calculus of its users and consumers to understand. Witness the radiating meltdown in the hedge market and banking community over the securitization of subprime mortgages (here and here). All done with technologies known at least to the quants, but which escaped the understanding and control of the quants, sellers, purchasers, regulators and (collateral damage) bystanders.

And why not cascades of fat tail events where one exceptional event exceeds the program constraints or assumptions in another system and causes it to fault? Witness the recent failure of program trading "when stocks started moving not only in ways that commonly used models didn't predict, but in precisely the opposite direction from what was expected." (Continued here and here). While the description of such a Complex Adaptive System (CAS) can be somewhat dry, I particularly like this trader's description:

Complex adaptive systems are typically composed of diverse sets of many agents that are programmed to accomplish some goal. The interaction of these agents can make the population smarter than any individual agent. By emulating biological systems (e.g. - reproduction and gene mutation), such a system can "evolve" to produce emergent, very interesting behavior… each agent will act as a trader following some trading rule that can evolve with time. Agents that are good make money and survive. Agents that don't die out. It's survival of the fittest.

We, unfortunately, may not number amongst the fittest. A bioethicist, Wendell Wallach, speaking at the Singularity Summit made this prediction:

"We are just a few years away from a catastrophic disaster from an autonomous computer system making a decision." It will elicit a response similar to 9/11, [9/11 costs] he added. "We should not underestimate the political consequence of fear [of AI systems]." This kind of event wouldn’t likely stop scientific research, but it could slow it down, Wallach said.

"We need a mechanism for evaluating when thresholds that hold dangers have or are about to be crossed, and helping public policy leaders and the public at large to discrimatine real challenges from highly speculative challenges," Wallach said.

Should this error cause significant death to foreign nationals, as opposed to our own, it could be a casus belli for hostilities. If it is the malfunction of Fail-Safe or the doomsday device of Dr. Strangelove, the system itself will effect the war. Given my understanding of command and control systems, this autonomous computer system could already be in place, needing only a future 'upgrade' or an unforeseen series of events and/or interactions to cause that catastrophe.

Enter insurance, reinsurance and exotic risk management

Thiel's investment advice in the singularity - and by my extension to near-singular events - is catastrophic insurance which was said to be "the strategy, however inadvertent," of Warren Buffett. From Thiel's viewpoint, as one progresses "along the bell curve of plausible outcomes, the most likely scenarios eventually migrate toward the tails: very wonderful or very catastrophic. And of these two possible outcomes, either is acceptable to investors":

On the "wonderful" hand, the run-up to AGI creates the biggest investment boom in the history of humanity, and the positive results yield a world of never-ending promise. On the "catastrophic" hand, advanced AGI gone awry causes humanity to disappear in a cloud of [insert your favorite existential risk scenario here] dust. In that scenario, the investor has bigger problems than the lack of return anyway...

Thiel believes [Buffett's shift to insurance] is a classic adoption of the wonderful vs. catastrophic philosophy of Singularity investors. For Buffet, Thiel sees 4 possible outcomes for his investments:

  1. Nothing bad happens: Buffet happily collects the premiums from his policy holders and maybe even lives to 1000.
  2. A Mild disaster like 9/11 occurs: This helps the insurance industry in that it allows them to raise rates and drives more policy purchases.
  3. A big catastrophe happens [Thiel showed a rendering of nukes exploding over Manhattan]: In this scenario, the rules get changed. The Government steps in and makes things whole for the insurance industry.
  4. [Again, insert your favorite Existential Risk scenario] – No one is around to collect.

I thought Buffett's approach to be more financially driven than propelled by singularity. Buffett appears to employ an expanded value investment strategy pioneered by Benjamin Graham:

  • Fundamentals: undervalued securities possessing margin of safety to meet expected return-to-risk criteria
  • Arbitrage events: M&A, liquidations, et al, unrelated to market shifts
  • Controlling positions: unilateral, allied or proxy positions to force change
  • Wide moats: quality firms with significant barriers to competitive entry

I was under the impression that Buffett entered the insurance market, and subsequently reinsurance (or catastrophic insurance), for its cash flow and the float. (For me, reinsurance (re, cat) was merely a bookmaker's laying off of the bet.):

[Float] is money we hold but don't own. In an insurance operation, float arises because premiums are received before losses are paid, an interval that sometimes extends over many years. During that time, the insurer invests the money. Typically, this pleasant activity carries with it a downside: The premiums that an insurer takes in usually do not cover the losses and expenses it eventually must pay. That leaves it running an "underwriting loss," which is the cost of float. An insurance business has value if its cost of float over time is less than the cost the company would otherwise incur to obtain funds. But the business is a lemon if its cost of float is higher than market rates for money.

A caution is appropriate here: Because loss costs must be estimated, insurers have enormous latitude in figuring their underwriting results, and that makes it very difficult for investors to calculate a company's true cost of float. Estimating errors, usually innocent but sometimes not, can be huge. The consequences of these miscalculations flow directly into earnings. An experienced observer can usually detect large-scale errors in reserving, but the general public can typically do no more than accept what's presented, and at times I have been amazed by the numbers that big-name auditors have implicitly blessed.

Buffett, float and super-cat insurance

Presumably the greater the risks, the greater the premiums and the float, but I wondered how Buffett saw matters. Indicative of Buffett, Berkshire Hathaway issues what are the benchmark for clear, plain-spoken summaries of operation. They are worth the read; other financial statement are wanting in comparison. The 2006 Chairman's Letter notes the "40th anniversary of our entrance into the insurance business" where it has become dominate among the operating sectors of Berkshire. My amateur review indicates great attention to float and super-cat performance:

At the end of 2006, our float had grown to $50.9 billion, and we have since written a huge retroactive reinsurance contract with Equitas [that] boosts float by another $7 billion. Much of the gain we’ve made has come through our acquisition of other insurers, but we’ve also had outstanding internal growth, particularly at Ajit Jain’s amazing reinsurance operation…

Whatever [the size of the float], the all-important cost of Berkshire’s float over time is likely to be significantly below that of the industry, perhaps even falling to less than zero. Note the words "over time." There will be bad years periodically. You can be sure of that.

In 2006, though, everything went right in insurance really right. Our managers… simply shot the lights out… Of course, the overall insurance industry also had a terrific year in 2006. But our managers delivered results generally superior to those of their competitors…

In 2007, our results from the bread-and-butter lines of insurance will deteriorate, though I think they will remain satisfactory. The big unknown is super-cat insurance. Were the terrible hurricane seasons of 2004-05 aberrations? Or were they our planet’s first warning that the climate of the 21st Century will differ materially from what we’ve seen in the past? If the answer to the second question is yes, 2006 will soon be perceived as a misleading period of calm preceding a series of devastating storms. These could rock the insurance industry. It’s naïve to think of Katrina as anything close to a worst-case event.

Neither Ajit Jain, who manages our super-cat operation, nor I know what lies ahead. We do know that it would be a huge mistake to bet that evolving atmospheric changes are benign in their implications for insurers.

Don’t think, however, that we have lost our taste for risk. We remain prepared to lose $6 billion in a single event, if we have been paid appropriately for assuming that risk. We are not willing, though, to take on even very small exposures at prices that don’t reflect our evaluation of loss probabilities. Appropriate prices don’t guarantee profits in any given year, but inappropriate prices most certainly guarantee eventual losses. Rates have recently fallen because a flood of capital has entered the super-cat field. We have therefore sharply reduced our wind exposures. Our behavior here parallels that which we employ in financial markets: Be fearful when others are greedy, and be greedy when others are fearful.

My takeaway

Buffett is paying the closest attention to super-cat performance while maintaining float and minimizing float cost. Implicit in that position is aggressive risk analysis. I presume Buffett's attention to fat tail risk will manifest itself in the pricing of risk assumption in each of its major insurance sectors (General Re, B-H Reinsurance, GEICO et al).

Firms that do not define and factor their risks appropriately for an increasingly complex and less predictable environment will find themselves at an operational disadvantage, will find risk coverage unaffordable, or both.

What is the Singularity?
Why Work Toward the Singularity?
Singularity Institute for Artificial Intelligence (SIAI)

Singularity Summit 2007

Is Warren Buffet Betting on The Singularity?
posted by Jonas Lamis
Singularity News
September 10, 2007

Facebook backer Thiel's investment strategy for singularity
Posted by Stefanie Olsen
September 9, 2007 12:42 PM PDT

Google's director of research talks AI
Posted by Stefanie Olsen

September 9, 2007 11:43 AM PDT

A call for machine morality
Posted by Stefanie Olsen
September 8, 2007 2:13 PM PDT

Liveblogging Singularity Summit 2007
Michael Anissimov 10:12 am
Accelerating Future
Saturday, Sep 8 2007

Singularity Summit Talk: Openness and the Metaverse Singularity
Posted by Jamais Cascio
Open the Future
September 8, 2007 2:00 PM

Counting the cost of the home loan crisis
By Greg Wood
BBC Radio 4 Today programme
Last Updated: Thursday, 30 August 2007, 11:10 GMT 12:10 UK

Ten Reasons
Michael Anissimov 8:35 am
Accelerating Future
Saturday, Aug 18 2007

Q&A: World stock market falls
BBC News
Last Updated: Thursday, 16 August 2007, 08:15 GMT 09:15 UK

Quant "Bloodbath" - The continuation
CASTrader Blog
August 16, 2007

Quant "Bloodbath" - The lessons learned
CASTrader Blog
August 12, 2007

One 'Quant' Sees Shakeout For the Ages -- '10,000 Years'
Wall Street Journal
August 11, 2007

Second Earth
The World Wide Web will soon be absorbed into the World Wide Sim: an environment combining elements of Second Life and Google Earth.
By Wade Roush
Technology Review
July/August 2007
Contains additional content not published in the print edition. Print version

Metaverse Roadmap Report
Posted by Jamais Cascio
Open the Future
June 25, 2007 3:26 PM

Metaverse Roadmap Overview (PDF)
Pathways to the 3D Web
A Cross-Industry Public Foresight Project
John Smart, Jamais Cascio, Jerry Paffendorf
Acceleration Studies Foundation

Peter Thiel on Bloomberg.
Marco Hunter
Land of Black Gold
Sunday, April 15, 2007

2006 Chairman's Letter
Warren Buffett
Berkshire Hathaway

Previous shareholder letters

Peter Thiel says be careful out there.
Marco Hunter
Land of Black Gold
Posted on 11/08/2006 08:42 AM

Twelve Things Journalists Need To Know to be Good Futurist/Foresight Reporters
Jamais Cascio
Open the Future

Originally published (in somewhat modified form) June 14, 2006

Peter Thiel - Tar Baby.
Marco Hunter
Land of Black Gold
March 21, 2005

Economic Costs to the United States Stemming From the 9/11 Attacks
by Robert Looney
Strategic Insights
Volume I, Issue 6 (August 2002)

Question 5: What is float and how does it impact Berkshire?
Berkshire Hathaway Frequently Asked Questions (FAQ)
Source: 1997 Berkshire Hathaway Annual Report

Gordon Housworth

InfoT Public  Risk Containment and Pricing Public  Strategic Risk Public  


  discuss this article

A comedic expose of flawed APEC security; had security protocols been effective the end should have been more tragic


The simplest of penetrations: fabricate a motorcade (two SUVs sandwiching a sedan), complete with passes (albeit completely and intentionally bogus ones - more on that below), place the lot under false flag (Canadian - "something not to obtrusive or excessive"), add a few motorbikes and pose one member as a security guard running alongside the motorcade, and then barge ahead with the expectation of being waived through into the inner sanctums of the Asia-Pacific Economic Cooperation (APEC) summit in Sydney Australia that housed 21 world leaders, Bush43 included.

And passed through they were, even though the esteemed passenger in the motorcade was dressed as Osama bin Laden. The badges were intentional frauds, designed to shout out their falsity to even cursory inspection.

The penetrators made hollow the "massive $170 million security net thrown up around the city for APEC" in what was the "most significant, international, diplomatic event in Australia's history... the biggest security operation in Australia's history. We've got 21 world leaders arriving in the city at the one time and it needs to be taken seriously."

The punch line is that few of the covering articles state that after being waived through at least two checkpoints, the bogus motorcade revealed itself rather than actually falling prey to inspection. The security services had apparently provided the comedic team with maps of restricted areas but the satirical team was being passed through checkpoints much faster and farther than expected. As they approached the hotel hosting APEC, the comedic motorcade believed that they had breached the APEC security perimeter and proceeded to turn about. Only then was it discovered.

Predictable reactions from police and officialdom:

  • Pompous statements to the effect that 'we got them a block away' (actually quite close to the Hotel InterContinental). Had the motorcade been a genuine attack, a limo scale car bomb would have put paid to the neighborhood, and who could calculate the impact had it has been a chemical or biological attack. (Or both; it was a three car cavalcade after all: the first detonation for brisance (blast) and a second (low order explosives) for gas or biologics.) Secondly, had it been a genuine attack, there well could have been other serial or parallel attacks in motion.
  • Misplaced emphasis in focusing on the 'danger' the bogus motorcade posed to themselves and bystanders.

What was missing:

  • Abject apology for an egregious security breach, with fulsome thanks to the Australian Broadcasting Corp (ABC) TV comedy team from the The Chaser's War on Everything that pulled it off.

A formal police viewpoint:

"This is the most complicated security operation that Australia has seen since the Sydney Olympics - $250 million, several thousand people, it involves airspace protection corridors, maritime corridors, venue security," he said. "Somebody getting through an outer vehicle checkpoint hardly impacts or reflects on the standard of the entire security operation."

Reality of the security shield was somewhat different:

Police sources said no motorcades were being let through the first cordon unless accompanied by police escorts.

Officers involved in this country's largest security operation have told The Daily Telegraph that the police manning CBD [central business district] roadblocks are frequently not told whether motorcades coming toward them are legitimate.

"We're amazed at the lack of communication that allowed this to happen but how are they to know whether a motorcade is legitimate when they're not supposed to stop them and nothing is broadcast over the (police) radio,'' an officer said.

Stopping the motorcade would have been instructive:

IF ONLY the police had stopped to read the fine print on the "APEC 2007 Official Vehicle" sticker. "This vehicle belongs to a member of The Chaser's War on Everything. This dude likes trees and poetry and certain types of carnivorous plants excite him."

The comedic team outstripped the operating envelope envisioned by their legal advisors:

A source inside the show has told The Daily Telegraph the team never expected to get so far. The skit had been approved by ABC lawyers but was written in the assumption they would be stopped at the first checkpoint.

Instead they were waved through the first on Macquarie St, then a second, which had sniffer dogs, and eventually stopped themselves at Bridge St.

"As they did Chas got out of a car dressed as Osama bin Laden and said something like 'I'm an important world leader why don't I have a seat at the APEC table?'. Apparently that was the first time the police realised it was not authentic and they swooped in and arrested everybody," the source said.

Text from one of the 'badges' used in the 'penetration':

Chas Licciardello's badge (picture here) contained the following text and imagery, typical of each member of the team:

APEC 2007
Chaser's War
It's pretty obvious this isn't a real pass
[Image - Chas Licciardello]
Chas Licciardello
[Seal - containing "JOKE" in caps]
Insecurity [bold face]

Other badge photos and photos of the three car cavalcade and the bin Laden character are here. Video clip here.

This bogus badge reminds me of an event at NSA (early 70s if memory serves) when the security officer, tiring of the marine guards posted at the top and bottom of every escalator not rigorously inspecting every badge of each passerby, placed the photo of a gorilla over the photo on his badge, armed himself with a sheath of security violation and proceeded to walk purposefully up and down the escalators. For each inattentive marine that allowed him to pass unchallenged, the security officer turned and gave the hapless marine a citation.

Soon the marine detachment was bordering on the frantic; the word spread among the unit even as the security officer continued his rounds without donning disguise. Still, the mind numbing effort (ask anyone who is tasked with watching security monitors), complicated by periodic gluts of personnel that clogged the escalators, yielded more security citations.

Welcomed rather than interdicted:

All pretence of interdiction of the comic team (eight Chaser cast members, one crew member and three hire car (limo) drivers) by the security cordon collapses as the Chaser team describe the end game:

In a statement, The Chaser team say they had no intention of breaching security.

In fact, they say police welcomed them through the check point.

"When The Chaser reached the perimeter of what they thought was the APEC restricted zone, they voluntarily turned around," the statement said.

"The police only detained The Chaser motorcade when it was turning around and after Chas Licciardello emerged from a car dressed as Osama bin Laden.

"Members of The Chaser team were all wearing mock 'insecurity passes' which expressly states that it was a joke."

Without knowing the security protocols in place, I find it difficult to accept the self-congratulatory summary police have made of the comedic event, i.e., since it was a spoof rather than terrorists, the police were justified in withholding deadly force:

The police appear to have made a rather self-congratulatory summary of the comedic event, i.e., since it was a spoof rather than terrorists, the police were justified in withholding deadly force:

"The reality is there were people that, through their actions yesterday, put security services in a position where they may have had to take an action that no one would want,"… "We had snipers deployed around the city. They weren't there for show."…

"People can talk over each other on radios and there can be confusion, so the police response - I think - was terrific," he said.

"And thank God it was what it was. You've only got to look at the experience that a very professional police service had in London when a young Brazilian was tragically shot by anti-terrorism forces.

"As that motorcade approached the InterContinental Hotel, if the call had gone out on the encrypted radio that it was bogus, if there had been any miscommunication, any misunderstanding, any lack of professionalism or just confusion - unlikely as it is - somebody might have been shot.

"So I think the police are to be commended with the professional way that they did identify the incursion, the restraint that they showed in handling it and the fact that what we're talking about today is a bad and irresponsible joke, instead of a more tragic set of circumstances."

Restraint or failed protocols? Most of the details that screamed hoax were invisible without closer inspection; the motorcade's externals, save for motorbikes in place of police motorcycles, appeared genuine, especially when in motion.

At a mimimum, the police should have challenged and interdicted. Police performance in this instance would not have known it was a terrorist event until a suicide team had disembarked and the vehicles detonated. I would at least accuse the police of a failure of imagination.

Had it been a terrorist attack, instead of crowing, the police would be stammering to explain the security breach of the quarter-century to a stunned population and the embassies of attending nations.

One wonders what the Secret Service After Action Report (AAR) looks like for this event. I would have felt more secure had the Chasers been aggressively contested.

APEC Security Savaged by Satirists
Posted September 7th, 2007 by Vera
Sydney Indymedia

Chaser comic convoy beats summit security
David Braithwaite and Andrea Petrie, Sydney
The Age
September 7 2007

Chasers 'might have been shot'
ABC News
Posted Fri Sep 7, 2007 2:26pm AEST
Updated Fri Sep 7, 2007 3:47pm AEST

Top cop livid over Chaser APEC stunt
By Rhett Watson and wires
The Daily Telegraph
September 07, 2007 01:10pm

Lucky it was us and not Al Qaeda, says Chaser
ABC News
Posted Fri Sep 7, 2007 11:43am AEST
Updated Fri Sep 7, 2007 12:19pm AEST

Chaser stunt raises questions about APEC security
ABC News
Posted Fri Sep 7, 2007 9:00am AEST
Updated Fri Sep 7, 2007 10:49am AEST

We had permission, Chasers say
By staff writers and wires Sun
September 07, 2007 08:47am

Cops gave us the okay, say Chaser
By Paul Carter
Herald Sun
September 07, 2007 02:07am

11 charged over Chaser APEC stunt
ABC News
Posted Thu Sep 6, 2007 8:00pm AEST
Updated Thu Sep 6, 2007 8:06pm AEST

Gordon Housworth

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Risk management by other means to forecast a future state


In response to Risk management gets tougher when key science fiction author cannot forecast a future state, a colleague replied:

[You] might be interested in a body of work devoted to technology evolution. Although the principle aim of the work is to provide technical guidance for product development, one result of this work is that technology evolves along certain well defined patterns. Although there are many possible paths, some are much more probable than others, similar to biological evolution. Using this knowledge one can make good estimates of which paths are likely to be successful investments and which are not. The original work was done by a Russian engineer named Genrikh Altshuler. I worked with one of Altshuler’s students, Victor Fey, a Russian emigrant, [in] an effort to start a consulting firm using these techniques. Victor and I made several presentations on Technology Evolution in the Detroit area. Victor has authored several books on the subject... [private email]

My response:

You're speaking about TRIZ. Have used it actually. I was one of those geeks that was reading early translations from the Russian during my time in federal service, then lost track of it as I moved back to the commercial sector where it was then utterly unknown. More interestingly, I knew Rivin and Fey back in 1995 when I approached the pair about diversifying TRIZ outside engineering and into business processes. From my notes:

18 Oct95: Rivin [and I] spoke at length of the Ford culture (he's been a fellow at Ford, a specialist in NVH, cultural differences in general (ex: reducing vibration in auto transmissions, while he did it in a [redacted] model at a mere cost of $2.50, this has no value in Europe where automatics are uncommon and for those that do exist, drivers reflexively put them into neutral at stoplights, thus no chance for vibration.) He was a bit floored at the suggestion of applying TRIZ to a business application, but felt that it was very possible and that he would be willing to work together on it. No text exists in English for TRIZ, [the] Altov book was really written for children, and the "Creativity as an Exact Science" published by Gordon & Breech is a bad translation but is the most comprehensive text extant.

Rivin is now writing a text on TRIZ. [Which may be the Innovation on Demand that you cite]....

23 Oct95: Chris Magee is the driving force behind TRIZ [at Ford] and sat through [our] half day session. Magee felt that TRIZ could be slotted into a [Value Analysis Workshop]. In theory, I said yes, but in practice the VA process is [increasingly] discredited, especially in the eyes of the supplier, and is being so compressed in time by Ford, and both Ford and supplier [personnel] are disenchanted with the VA program output. Magee also considered its application to benchmarking. Rivin asked if me were involved in [benchmarking] and I said no, that the BM process was fixed on where the competitor was [today] and not where they are or will be -- Rivin said, yes, they look five years back and then implement five years late. Rivin said that TRIZ could be used in technology forecasting (evolution of a system) and benchmarking but that it requires some substantial study. [private email]

We were never able to do anything substantive with the Russians as they were very protective of their process, understandable in hindsight as there were less than ten competent TRIZ practitioners extant in the US at the time. (The Detroit area was fortunate as it had a goodly Russian emigre population.). We were small and could not fund a major development effort.

As a matter of record, Value Analysis had another renaissance at Ford but was then again reduced to as little as a one-day affair that was VA in name only. TRIZ stayed small:

TRIZ has never made it into the Ford mainstream, remaining a boutique implementation among the core devoted to resolving key problems. Arguably the best practitioner was a colleague of mine, [redacted], who was the key investigative engineer on the Ford side of the Firestone firestorm. We proceeded to work together on a number of quality issues. He retired [recently] and is a major loss to the firm although few know it. [private email]

As an aside, we went on to design a Competitive Analysis Benchmarking process for Ford that would put quality competitive benchmarking data into the hands of Ford engineers; It became a linchpin in Ford Total Cost Management (TCM) here in the US after which we trained European engineers such that it became a fixture in Total Value Managment on the continent. Unfortunately, Ford continued to evaluate current release vehicles (which are three to four years old in design time when you get them) instead of developing phase two which implemented the classic benchmarking "Z-Chart" predictor (see figures 2 and 3) that would allow us to architecturally predict where a competitor's subsystem would be at a future point in time.

We were already able to see in certain Toyota vehicle series the emerging dominance of a particular passcar (passenger car), SUV or truck subsystem as it migrated to other vehicles. We also knew that certain subsystem changes were introduced in particular low(er) end vehicles, perfected, and then migrated up the luxury chain. We had good reason to believe that we could predict which subsystem architectures with what general characteristics would appear in which future vehicles. As Ford was never able to move to the next step, it too often relegated itself to being a mediocre follower instead of a feature leader. Systematically "surprised" by new functionality, it would habitually scramble to enhance subsystems already in the pipeline, thereby impacting cost, quality and timing.

Returning to TRIZ, I agree with my colleague that TRIZ can help in identifying likely development paths for a specific technology, but it is not clear to me how it addresses the sudden, even chance, interaction of multiple unrelated technologies, larger families of technologies, emerging social transitions and their interactions that can be flagged by the McLuhan Tetrad food chain analysis process. With that caveat, I recommend the following TRIZ and technology forcasting sources:

TRIZ Journal

TRIZ applied to innovate in Design for Disassembly
Daniel Justel, Rosario Vidal, Mercedes Chiner
13th edition of the CIRP International conference on Life Cycle Engineering
May 31-June 2, 2006

Innovation on Demand: New Product Development Using TRIZ
by Victor Fey and Eugene Rivin
ISBN-10: 0521826209
Cambridge University Press

General Scenario of Technological Evolution: System’s Evolution beyond its Original S-curve
Boris Zlotin and Alla Zusman
Ideation International
Detroit, MI
September 2003

Technology Forecasting: From Emotional to Empirical
Michael S. Slocum, Catherine O. Lundberg
Previously published in "Creativity and Innovation Management"
Volume 10, Number 2, June 2001

Development and Integration of Winning Technologies as Key to Competitive Advantage
Armin Schulz, Don Clausing, Ernst Fricke, herber Negele
Systems Engineering, the Journal of INCOSE, Volume 3, Issue 4, pp 180-211
Accessible Mirror

Guided Technology Evolution (TRIZ Technology Forecasting)
Victor R. Fey, Eugene I. Rivin
The TRIZ Journal

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Tipping point in Unique Selling Proposition of complex mechanical systems and the industries that provide them


The trade press appears to now acknowledge my decade plus automotive forecast of the progression of computer intermediation in the driver-passenger experience. In the 1990s I called the car a computer with curious electro-mechanical actuators. That was succeeded in early 2000 by the car as a microprocessor array with curious electro-mechanical actuators:

The self-parking Lexus LS 460 has already shown that sensors, cameras and software can get a car to parallel-park itself. Automakers are now gearing up to include more automated driving features for even the most budget models. And further down the road, the computerized car will become part of an even larger network of highway communication.

As car systems get more complex, automakers are looking to the tech industry for help in translating their designs into working software and hardware, according to both carmakers and analysts.

That's why technology specialists like [IBM] are investing in the automotive industry and the companies that serve it. The potential payoff could be grabbing the driver's seat in a market worth billions of dollars.

"All the features you see--adaptive cruise control, autopark, lane departure warning--those are all driven by software," said Patrick Milligan, senior manager for in-vehicle software development at Ford Motor.

"Complex-software development is now increasingly critical to (automotive companies') success in innovation and competitive advantage,"

The singular computer (more a simple chipset) has become an array of microprocessors and their embedded software. The "curious electro-mechanical actuators" remain and improve, as one of my hyper-car colleagues noted:

If you don’t have the right hardware [motor/suspension/etc] no amount of computer intervention will help.

That said, the Corvette was the first mass produced active handling car, with three different computer intervention settings [traction control, yaw control, etc.] It includes a non-invasive "Competition" mode, where the active handling only kicks in a severe transient event [off road, spin, collision etc.] [[private email]

I continue to remind him that he is 6+ Sigma driver with the skill and opportunity to match vehicle to driver. Conversely, the ordinary driver will drift to his scorned "rice burners" and their ilk that, much like Japanese stereo systems that have what we call a "high science fiction coefficient" of knobs and adjustments coupled with median audio performance whose low cost relegated mainline US producers to audiophile niches, will gain the bulk of production volumes, revenues, growth - and dare I say - jobs.

I had long ago said that Sony (when it was at its electronic zenith) could badge a vehicle and that the trust factor then imbued in their electronics would transfer. (A car like the Honda Element was the kind of vehicle that I had in mind, more a mindset on wheels, a mobile den or living room, than a muscle car.) I was told that Sony "could not build a car" yet a few years later, a Tier One supplier, Magna, built a complete car just to showcase its capacity to do so. The supply base can supply ample 'mechanical actuators.'

In contrast, one of the great automotive "metal bashers," Mercedes, continues to fall on its consumer complaint sword, primarily driven by its overly complex, failure prone electronics systems. From comments from suppliers the rule seems to be that, out of its depth, Mercedes designs a flawed architecture, watches in frustration as it fails, then foists the lot onto Siemens or Bosch to sort out. Many unhappy customers inhabit that interval.

From Mercedes to Ford, metal bashers have tried to dictate too much of their electronic architectures instead of leaving them to competent suppliers moving at the speed of their industry. (In the late 1990s, we watched an OEM dictate features to a cellular phone manufacturer, thereby gaining an expensive, low volume car phone that fell behind its competition, rather than provide packaging data to the supplier and let them fill it with the state-of-the-art functionality):

One of the hottest areas in automotive technology is the development of a standard "car operating system." Just as computer operating systems, such as Microsoft's Windows Vista, allow multiple applications to communicate with one another, an automotive operating system enables different driving systems--from fuel injection to brakes to power steering to power windows--to work together.

A standard operating system that pervades multiple car brands would make it easier for developers, component manufacturers and automakers to incorporate more-sophisticated driving systems, like self-parking, into multiple car models.

IBM is deeply involved in this area, as are automakers. A group of Japanese companies, including Honda Motor, Toyota Motor, Nissan and Toshiba, is reportedly planning to forge a car operating-system standard.

There are entire product families that are shifting, or are going to shift, their unique selling proposition (USP) to computer intermediation over mechanicals, their respective 6+ Sigma users not withstanding.

I do not see the established US or European automotive OEMs having the mindset to make the turn (and I do not count battery technology or hybrids as evidence of proaction).

Projecting the high performance automobile to its margin, I look to fly-by-wire aircraft such as the Lockheed Martin F-35 Joint Strike Fighter whose advantage is said to be based on "airframe, autonomic logistics, avionics, propulsion systems, stealth, and firepower." That said, I put my money on software, electronics, materials and coatings to make the difference. Mechanicals will continue to be important but they will not be the winning differentiator.

Body of a car, brains of a PC
By Candace Lombardi
Story last modified Mon Aug 13 05:53:14 PDT 2007

Gordon Housworth

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Risk management gets tougher when key science fiction author cannot forecast a future state


Leading indicators come in many forms; the first hat trick is to recognize them as they are rarely labeled as such, the second is to take appropriate action without undue blowback.

As a risk analyst, I pay attention when one of science fiction's greatest modern authors, William Gibson, who has explored the "relationship between technology and society" since his 1984 Neuromancer, coining cyberspace and predicting a number of technology-driven societal impacts, states that he can no longer make reasonable predictions/projections about the future because of its complexity. Gibson is now so cautious about attempting prediction/projection that he has set his current book, Spook Country, in the recent past.

I pay very close attention and so should any strategic planner, product designer, culture pundit and investor as each will need better tools and a faster clockspeed (decision cycle time - think Boyd's Loop) to adapt to change that will effectively emerge beneath their feet.

Readers unfamiliar with his work should know that Gibson is neither "Luddite or a technophile," nor does he make moral judgments about technology, feeling as I do that "technologies are morally neutral until humans beings pick them up and use them for something":

Most societal change now is technologically driven, so there's no way to look at where the human universe is going without looking at the effect of emergent technology. There's not really anything else driving change in the world, I believe...

[Technology is] a positive thing depending on what happens when we use it. Nothing that I can see other than the market drives the emergence of new technologies. The technologies that change society most profoundly aren't legislated into existence...

All of the big changes that emergent technologies bring us are, for the most part, completely unanticipated by the people that introduce those technologies. It's out of control by its very nature and if you could control it, it wouldn't work...

Why Gibson believes it so difficult to write intelligently about a coherent future

I regularly comment that systems fail and complex systems tend to fail more frequently as they must obey Ackoff's three rules of systems and that "systems fail [most often] at their boundaries, and that includes boundaries between components and clusters of components that act as subsystems." As had many, I knew that that technology creation was rising and the resultant system complexity was rising exponentially but I had no calibration until Gibson:

The trouble is there are enough crazy factors and wild cards on the table now that I can't convince myself of where a future might be in 10 to 15 years. I think we've been in a very long, century-long period of increasingly exponential technologically-driven change.

We hit a point somewhere in the mid-18th century where we started doing what we think of technology today and it started changing things for us, changing society. Since World War II it's going literally exponential and what we are experiencing now is the real vertigo of that - we have no idea at all now where we are going.

Will global warming catch up with us? Is that irreparable? Will technological civilisation collapse? There seems to be some possibility of that over the next 30 or 40 years or will we do some Verner Vinge singularity trick and suddenly become capable of everything and everything will be cool and the geek rapture will arrive? That's a possibility too.

Every corporate planner should feel their ears burning:

You can see it in corporate futurism as easily as you can see it in science fiction. In corporate futurism they are really winging it - it must be increasingly difficult to come in and tell the board what you think is going to happen in 10 years because you've got to be bullshitting if you claiming to know. That wasn't true to the same extent even a decade ago.

It appears that Gibson will stay in the present until he can again grasp a viable future; I might add that he is far more honest than most commercial analysts:

I think what I may be doing here with this current batch of books is attempting to take the measure of the present, which will allow me to try that sort of projection again. I sort of hope so, otherwise I don't know what I'll do!

What to do if you are not as good as Gibson

I make no pretense to see where Gibson cannot, but if I have to start under such ambiguous conditions I would use the McLuhan Tetrad originally designed to examine media effects in combination with technology food chain analysis.

Traditional technology food chain analysis examines multiple streams of technologies and the rate at which they are maturing. Imaginary lines are drawn through all streams at various time intervals thereby offering 'slices of technologies' that when combined offer the potential of discovering otherwise invisible applications, products or services.

Technology food chain analysis can be used to identify future needed bits of technologies which can then be bought, or an investment made in the firm, when the cost is low. Food chain analysis is superb for identifying investment opportunities and for ascertaining the "moment" in maturity that merits investment or partnering. Investment at that time diminishes risk of failure, avoids development costs, and lowers acquisition costs. Japan, among other states, has used food chain analysis to evaluate US companies being considered for investment, frequently detecting an opportunity unknown to the firms being approached for investment.

Opportunities in each technology time slice are often not visible beyond the trivial without enhancement, which is where McLuhan comes in handy. Originally formulated to examine the effects of an emerging technology (or medium) on society, McLuhan posed four laws:

  • Enhancement or extend: new media provide improved performance over the old
  • Obsolescence: new media render previous models passe
  • Retrieval: new media contains existing elements from the cultural inventory
  • Reversal: we tend to over do the new until we run out of benefits and into detriments

Later phrased as questions:

  • What does the medium [technology] enhance?
  • What does the medium make obsolete?
  • What does the medium retrieve that had been obsolesced earlier?
  • What does the medium flip into when pushed to extremes?

The tetrad is explored for each technology stream at time t along the maturation cycle, after which the tetrad is explored against the results of the entire slice composite (all technologies at time t), i.e., a structured brainstorming and analysis session is conducted around the tetrad implications at each intersection along the time slice after which the results of these individual sessions are inputs for a final tetrad-structured brainstorming session of the entire time slice.

Where I attempting to answer Gibson, I would do the same against societal trends with the goal of discovering what technologies might be needed to satisfy human expectations, then I would merge the technological and the societal.

Grant Czerepak has recently extended McLuhan with his Six Hats, Six Coats Framework which, I think, will make it easier to merge the technological and the societal:

The Six Hats represent:

  • REVISE: Conceptualize. Expand Meaning. What are you enhancing or making right? Creativity.
  • RELATE: Contextualize. Focus on Uniqueness. What is your mantra? Relativity.
  • REPORT: Logicalize. Maximize Value. What are you normalizing to the limit? Optimicity.
  • RECORD: Physicalize. Minimize Cost. What is your business model? Pessimicity.
  • REFINE: Mechanicalize. Humanize Interaction. How do you lower the barriers to adoption? Anthropicity.
  • REPEAT: Operationalize. Synchronize. Increase Availability. How do you make yourself convenient? Synchronicity.

While the Six Coats represent:

  • MOTIVE: Motivational. Why? Concepts affected.
  • LOCALE: Spatial. Where? Contexts affected.
  • OBJECT: Formal. What? Logics affected.
  • METHOD: Functional. How? Physics affected.
  • PERSON: Personal. Who? Humans affected.
  • MOMENT: Temporal. When? Synchrons affected.

I also invite unusual people, young people and 'outlier' personalities to comment, people that might seem to be dreamers or those deemed 'impractical' by their peers in order to break though orthodox thinking. Some of these sessions are truly remarkable in their breadth. Call it a special wisdom of crowds session (also here).

It is not Gibson but it is where I start, then continue to refine and question through each time t interval. When I get a new, unexpected result at time t + 1... t + n, I ask what we missed, what blinded us or did not consider at the previous time t. The answers can become new threads for analysis in and of themselves.

The results of the tetrad-food chain analysis process can then be run through both risk and development analyses.

Part 2: Risk management by other means to forecast a future state

Q&A: William Gibson, science fiction novelist
Heading into Spook Country with the cyberspace guru
By Steve Ranger
Published: Monday 06 August 2007

The Energy Blog
The Energy Revolution has begun and will change your lifestyle

Battelle's Technology Forecasts
Battelle Memorial Institute

Moore's Law

The New Chrysler - Next 100 Years Manifesto
Auto Channel
August 6, 2007

The Six Hats, Six Coats Framework
Grant Czerepak

Posts filed under 'tetrad'
Grant Czerepak

Charles Feld on 20 Years of IT Change
The "always on," global-information-at-your-fingertips-with-Bluetooth-in-your-car world that doesn't go away when you leave work has flipped the paradigm.
May 11, 2007

The smartest (or the nuttiest) futurist on Earth
Ray Kurzweil is a legendary inventor with a history of mind-blowing ideas. Now he's onto something even bigger. If he's right, the future will be a lot weirder and brighter than you think.
By Brian O'Keefe, Fortune senior editor
FORTUNE Magazine
May 2 2007: 11:08 AM EDT

The new Seven Sisters: oil and gas giants dwarf western rivals
By Carola Hoyos
Published: March 11 2007 21:23 | Last updated: March 12 2007 17:46

Human Space Exploration: The Next 50 Years
By Michael D. Griffin
Aviation Week On Space
March 2007

When Apple Hit Bottom
David Pogue
Pogue's Posts
September 20, 2006, 4:34 pm

An Overview of Twenty-Five Years of Electrical and Electronics Engineering in the Proceedings of the IEEE, 19631987
Proceedings of the IEEE
Digital Object Identifier 10.1109/JPROC.2005.859606
Volume 93, Issue 12, Dec. 2005 Page(s): 2165 - 2169

Naval Research Invests in Future Warfighting
by CAPT David Schubert, USN
Navy Office of Information
US Navy

The Economic Future of China
By Nicholas R. Lardy
Asia Society
April 29, 2002

Gordon Housworth

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Beyerchen on disruptive innovation (amplification)


Innovation SIDEBAR to: The Warfighter Insurgency: Focus on kinetics, coupled with resistance to stability ops, threatens US success in future war

Beyerchen has much to offer on understanding the boundary of change: technical change expanding to operational change and finally a sweeping technological change. His ideas apply universally to change, be it commercial or military.

As Beyerchen's seminal 1996 From Radio To Radar is not readily accessible online, I have gathered two sources that will give you the gist of his thinking on innovation:


The Structural Relationships of Military Innovation

Regardless of whether military innovation is evolutionary or revolutionary, its impact derives from how well it solves a series of problems, exploits emerging advantages, or assists an organization to better perform its mission. These challenges exist at the tactical, operational, and strategic levels and may involve respective equipment, procedural, or contextual solutions. A model aligning these relationships is useful for understanding the impact of a specific change and the difficulty one might expect in implementing it. The greater contextual impact a change brings, the more difficult it may be to implement.

Context <--> Technological Change <--> Strategy

Procedures <--> Operational Change <--> Operations

Equipment <--> Technical Change <--> Tactics

"Technical change" is a function of equipment or physical devices whose contribution lies primarily in the realm of tactics. Issuing a service a new airplane, radar set, or antiaircraft artillery gun are examples of "technical change." When a military force adopts new procedures for existing equipment or new equipment combined with new procedures for their collective employment, then "operational change" has occurred. As Alan Beyerchen explains: "To envision radar as the technique of detecting targets by means of radio echoes, generating a range of devices and practices, is to focus on operational change." "Technological change" occurs when the context of warfare changes as the result of interaction of technical and operational change with each other and with the current operating environment. Radar working within a "system" that also included ground and fighter based air defense platforms transformed the context of air combat over the United Kingdom, helped win the Battle of Britain, and ended Hitler’s expansion westward expansion. Combined arms maneuver warfare that linked armored formations, air power, and radio communications with well-trained units, mission-type orders, and bold leadership changed the context of ground combat in Europe beginning in 1939.

And a quote from From Radio To Radar:

It took real imagination to sort out the possibilities of something so new [as radar]. ... The key to the timing that turns a discovery or invention into successful innovation lies in whether laymen can envision its possibilities. ... [The developers of radar] blurred the boundaries between technical and operational change, as they pressed for operational innovation that would spur technical advance. ... Technical innovation emerges not just from an additive combination of technical and operational change, but from their interaction. ... The fluidity of circumstances, the feedback processes with entrainment, and the general feel of the onset of technical change, are more akin to weather systems or biological (or historical) processes than to mechanical structures.

And it is always good to keep in mind Beyerchen's Clausewitz, Nonlinearity and the Unpredictability of War whatever your field of endeavor.

By Bryon E. Greenwald
Ohio State University
NOTE: If asked what app to read the item, select PDF

10. Nonlinearity and a modern taxonomy of general friction.(Clausewitzian Friction and Future War)
Barry D. Watts
McNair Paper Number 52, Chapter 10, 01 October 1996
National Defense University

From Radio To Radar: Interwar Military Adaptation to Technological Change in Germany, the United Kingdom, and the United States
By Alan Beyerchen
Military Innovation in the Interwar Period, Williamson Murray and Allan R. Millett, eds.
Cambridge University Press, 1996

Clausewitz, Nonlinearity and the Unpredictability of War
By Alan D. Beyerchen
International Security, Vol 17: No 3, pp. 59-90 (Winter, 1992-1993)
Also reprinted as Appendix 1 in Tom Czerwinski, Coping With the Bounds: Speculations on Nonlinearity in Military Affairs (Washington, DC: National Defense University, 1998), and in French as "Clausewitz: Non Linéarité et Imprévisibilité de la Guerre," in Theorie, Littérature, Enseignement, 12 (1994), pp165-98.

Gordon Housworth

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