How vocabulary and snobbishness

limits our economic growth

Scientists discover the world that exists; engineers

create the world that never was Theodore von
Karman

Friday, 5 May 2017

Sri Lankans love to exaggerate the importance of who they are.

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

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

Academics who have set our economic and development policies

for decades are convinced that more of them is what makes an
economy a success, and you will see a constant call from the
academic community to create more PhDs, file more patents and
spend more money on basic and applied research to advance our
economy. Unfortunately, they could not be more wrong.
Definitions
Before we go any further, it is important to understand the
difference between science, technology and engineering.
Science is about discovering how nature works,
whether it be physics, chemistry, biology or botany
etc. This basic research is done for the advancement
of humanitys knowledge, and shared openly in
papers published in journals and presented at
conferences, and never done for money. Basic
research has to result in some new knowledge, and
since it is difficult to unravel natures secrets there is
a high probability of failure of a research project.
However, even the failures are useful since we end up
understanding what does not work.
Applied research, takes the better understanding of
nature discovered in basic research and seeks to
invent new materials (e.g. graphene, carbon fibre),
new components (e.g. computer chips), and new
 processes (e.g. nano treatment of fertiliser, additive
manufacturing aka. 3D printing) with a commercial
intent. Applied research (also called Technology
Research) is less risky than basic research, and there
is some money to be made from the new invention
related patent royalties as they are licensed for
manufacture.
Engineering is about taking the results of basic
research, and using the now commercially available
technologies such as carbon fibre, computer chips,
etc. to design products that the world wants to buy
by the millions. Thus, Product Design Engineering
(PDE) is about the application of technology to solve
customer problems. Since only established
technology is used and careful market, competitive
and business case analysis is done prior to initiating a
PDE project, they are low risk with very high financial
benefit. PDE products are certificated to various
international standards and are issued Type Approval
certificates which allows them to be sold in global
markets. Compared to the world of academia where
discovery, invention and innovation rule, the world of
PDE is not necessarily about being first. In fact, it is
better if you are second or third and can learn from
all the mistakes the pioneers made and bring a better
product to market.
All major economiesother than for the ones doing dodgy
financial services or selling their oil/gas/people in services/etc.
have a strong PDE base. If you look at the list of Forbes 2016
rankings you will see automotive, airplane and electronics PDE
companies such as Volkswagen, Toyota, Honda, Apple, Boeing,
Airbus, etc. at the top. These are all OEM (Original Equipment
Manufacturer) systems integrator companies that design a
product based on components, modules, raw materials etc. from
Tier 1 suppliers. Some of them do their own manufacturing or
farm it out for others to build.
OEMs drive economies, not only because they are large, but also
because of the extensive supplier network they create. For
example, Intel which is the dominant Tier 1 computer chip
supplier has only about a quarter of the revenue of Volkswagen. In
addition, Volkswagen has thousands of Tier 1 suppliers, which in
turn have many Tier 2 suppliers and so on down the line.
Current situation

in Sri Lanka

Since our technology based economic growth focus for

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

Sri Lanka has a few shining PDE company examples in Lanka

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

Our snobbish national mindset is we have to be inventive,

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

The best example of an import substitute product being

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

If Soichiro Honda had been Sri Lankan, in the 1950s he would

have said Aiyo, why start a car company since Karl Benz started
one 70 years ago and we would not be first, men. Hondas
revenues ($ 116 b) far exceed the GDP of Sri Lanka (~$ 80 b).
What needs

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

To establish PDE companies, there are three potential sources of

funding. 1) Equity funding, 2) Company funding, and 3) Debt
funding.

Equity funding typically demands rapid, high returns which

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

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

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

The GoSL has included in its 2017 budget a small foundation (Rs.
500 m) for such an LTLF, and in the coming months it will get set
up via an act of Parliament. It is anticipated that the 2018 budget
will be much larger, and will result in a few PDE companies being
funded.
The need of the hour
All engineers gladly support basic and applied research, for
otherwise they would not have the understanding of nature nor
the materials and components with which to create the world
that never was. However, like no other time in the history of
mankind, currently engineers have available to them a plethora of
technologies, processes, and materials with which to design
products.

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

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