Applied to buildings industry perspective:

My sense is that the collective process knowledge of the industry has diminished due to the channel structure of the buildings system world. A manufacturer sells through a distributor who in turn liaises with a system integrator to deploy the system. Then, facilities teams or some 3rd party (sometimes the services branch of the system manufacturer itself) maintains the system. Over its life, each system evolves characteristics unique to the building it is deployed in.

I find this framing is useful because it (1) helps me evaluate different vendors based on their retained process knowledge (2) encourages me to think about how to retain our own process knowledge. In our distribution, deployment, and service-- how do we use process knowledge as an accelerator and not a burden?

Time: July 31, 2018
Place: Sushi
Pointer from: Rec over dinner
Note type: Hybrid

  • LT: technicans
  • LT: strategy
  • ST: distribution: how use process technology as an accelerator and not a burden. This is tricky. Everyone wants to offload it, and I want to argue that incentives, importance of keeping knowledge and understanding in house / close by, is important

Pair this with outsourcing considerations from Boeing’s 787 Dreamliner

Technology should be understood in three distinct forms: as processes embedded into tools (like pots, pans, and stoves); explicit instructions (like recipes); and as process knowledge, or what we can also refer to as tacit knowledge, know-how, and technical experience. Process knowledge is the kind of knowledge that’s hard to write down as an instruction. You can give someone a well-equipped kitchen and an extraordinarily detailed recipe, but unless he already has some cooking experience, we shouldn’t expect him to prepare a great dish

I submit that we have two big biases when we talk about technology. First, we think about it too much in terms of tools and recipes, when really we should think about it more in terms of process knowledge and technical experience. Second, most of us focus too much on the digital world and not enough on the industrial world. Our obsession with the digital world has pushed our expectation of the technological future in the direction of cyberpunk dystopia; I’d like instead for us to look forward to a joyful vision of the technological future, driven by advances in industry

Process knowledge is represented by an experienced workforce. I’ve been studying the semiconductor industry, and that has helped to clarify my thoughts on technological innovation more broadly. It’s easy to identify all three forms of technology in the production of semiconductors: tools, instructions, and process knowledge. The three firms most responsible for executing Moore’s Law—TSMC, Intel, and Samsung—make full use of each of these tools. Each of them invest north of $10 billion a year to push forward that technological frontier.

The tools and IP held by these firms are easy to observe. I think that the process knowledge they possess is even more important. The process knowledge can also be referred to as technical and industrial expertise, which includes knowledge of how to store wafers, how to enter a clean room, how much electric current should be used at different stages of the fab process, and countless other things. This is the kind of knowledge that’s won by experience. Anyone with detailed instructions but no experience actually making chips is likely to make a mess.

There are many other examples of industrial clusters. Taiwan’s semiconductor industry was founded and is still centered around a small industrial park south of Taipei. Silicon Valley is so-named because it’s the center of semiconductor production (and it has enough toxic Superfund sites nearby to prove that heritage). It’s not just chips: autos, electronics, biotech, aviation, and machine parts all tend to be geographically clustered.

What happens when we stop the flow of knowledge up the stack?

The US industrial base has been in decline. But I think that sustained innovation in semiconductors is an exception in US manufacturing. The country used to nurture vibrant communities of engineering practice (a term I like from Brad DeLong), which is another way to talk about the accumulated process knowledge in many segments of industry. But not all communities of engineering practice have been in good shape.

When firms and factories go away, the accumulated process knowledge disappears as well. Industrial experience, scaling expertise, and all the things that come with learning-by-doing will decay. I visited Germany earlier this year to talk to people in industry. One point Germans kept bringing up was that the US has de-industrialized itself and scattered its production networks. Whereas Germany responded to globalization by moving up the value chain, the US manufacturing base mostly responded by abandoning production.

Knowledge should circulate throughout the supply chain, flowing both up and down the stack. Successful industries tend to cluster into tight-knit production networks. The easiest way to appreciate the marvel of clusters is to look at Silicon Valley, where capital, academia, a large pool of eager labor, and companies both large and small sit next to each other. To any of us who have spent some time in Silicon Valley, it’s obvious that this concentration of economic linkages is part of the magic that makes the system work.

Proximity makes it easier to generate process knowledge. But what happens when we tear apart these production networks by separating design and manufacturing? Sometimes it’s no big deal, sometimes it works out great. But I believe that in most cases, dislocation makes it more difficult to maintain process knowledge.

Both the design process and production process generate useful information, and dislocation makes it difficult for that information to circulate. I think we tend to discount how much knowledge we can gain in the course of production, as well as how it should feed back into the design process. Maybe it’s easier to appreciate that with an example from computing. Arjun Narayan tells me that good software design requires a deep understanding of chips, and vice versa. The best developers are those who understand how processes interact both up and down the stack.

What happens when we stop the flow of knowledge up the stack?

Let’s try to preserve process knowledge. The decline of industrial work makes it harder to accumulate process knowledge. If a state has lost most of its jobs for electrical engineers, civil engineers, or nuclear engineers, then fewer young people will enter into these fields. Technological development slows down, and it turns into a self-reinforcing cycle of decline.

Japan’s Ise Grand Shrine is an extraordinary example in that genre. Every 20 years, caretakers completely tear down the shrine and build it anew. The wooden shrine has been rebuilt again and again for 1,200 years. Locals want to make sure that they don’t ever forget the production knowledge that goes into constructing the shrine. There’s a very clear sense that the older generation wants to teach the building techniques to the younger generation: “I will leave these duties to you next time."

Regularly tearing down and rebuilding a wooden temple might not sound like a great use of time. But I’m not sure if local priorities are entirely screwed up here. These people understand that it’s too difficult to write down every instruction necessary for building even a single wooden structure; imagine how much more difficult it is to create instructions for a machinery part, or a chip. Every so often we discover ancient tools of which we have no idea how to use. These shrine caretakers have decided that preservation of production knowledge is important, and I find that admirable.

The future should be more than services. Isn’t manufacturing always the low value-added stuff, and that the future should be driven by services instead? I’m not so sure. I’m skeptical that we can pin all our hopes on the services sector because it tends to have two big problems: a lot of it is winner-take-all, and much of the rest is zero-sum.

One of the issues with services jobs in the US is that most of the gains are captured by very few workers. Two services sectors are enormously productive: tech and finance. But other sectors, like retail, hospitality, and food services don’t generate productivity growth quite as quickly.


Another issue with a lot of service work is that much of it is zero-sum, a point made very well by Adair Turner. Too many service jobs are meant to cancel out the efforts of other service jobs, for example in litigation, where a plaintiff’s lawyer creates a job for the defendant’s lawyer.

The internet is important, and we’re likely still underrating its effects. But I don’t think that we should let innovation be confined entirely to the digital world, because there’s still too much left to build. The world isn’t yet developed enough that everyone has access to shelter, food, water, and energy at a low share of income. Hundreds of millions still live in extreme poverty, which means that manufacturing and logistics haven’t overcome the obstacles of delivering cheap material comfort to all.

And I submit we can’t bring ourselves to calling it the “developed" world until we’ve built so many other things. We go to work in subways built in the ‘70s, guided by signals equipment put in place in the ‘20s. We’ve been moving more slowly across the planet ever since we decommissioned the Concorde, at a time when global travelers want faster access to major hubs. Are we sure that the developed world is not undergoing its own premature deindustrialization? When people bring up that the fact that the digital world has become very fun, I tend to think that the response smacks of “Let them eat iPhones.

I was there earlier this year to study its excellence in industry. I can’t claim to totally understand how the systems all work, but I can identify at least a few factors of success: academic collaboration, corporate encouragement, and a commitment to pass on skills all play a part. I’m especially struck by the attitude of older workers, who feel they have a responsibility to transfer their knowledge to younger workers. Today, German companies remain leaders in many segments of industrial technologies

Germany and the US have different strengths. The former is good at industry, the latter is good at information technology. But I find it odd that each is poor at what the other is good at. There’s no principle I can discern that forces us to choose one or the other, and I’m optimistic that a country should be able to excel at both industry and the internet.

I wish that more of us would study the ‘30s, a decade which saw the systematic application of American ingenuity to the improvement of machinery. That was a time of fantastic advances in chemicals, rubber, electrical machinery, scientific instruments, and many other things. It was a decade in which “technology" referred to advances in aviation, radios, oil recovery, cinemas, and more. How refreshing to consider that people thought that technology was accelerating on many fronts, not just a handful

I’d like more of us to have greater exposure to industrial processes. Let’s look more at heavy machinery, chemicals, rockets, and all the marvels of the industrial world. Would anyone else like to subscribe to a magazine on industrial goings-on? I’d like for there to be a monthly publication that features interviews of engineers in different segments of industry. We can hear about the current state of the art, how they got here, what are the current constraints, what’s coming down the pipeline, and then to speculate a bit: If we solve some of the big constraints, what kind of advances can we look forward to?

Andy Grove. The former Intel CEO became a vocal advocate for American manufacturing in his later years. He laid out his case in a 2010 Bloomberg Businessweek essay. I’ll just lay out the most bare of summaries here: Grove was skeptical that startups can provide a large number of jobs; that the US should focus on scaling up the startups into big companies; and that when the US exports jobs, it also exports innovative capacity and scaling expertise. In other words, he lamented the loss of process knowledge. He recognizes that when manufacturing jobs left the US, “we broke the chain of experience that is so important in technological innovation."

Here’s more from Grove: “Our pursuit of our individual businesses, which often involves transferring manufacturing and a great deal of engineering out of the country, has hindered our ability to bring innovations to scale at home. Without scaling, we don’t just lose jobs—we lose our hold on new technologies. Losing the ability to scale will ultimately damage our capacity to innovate."

Grove ended his essay with a call to rebuild the US industrial commons; or as I would put it, to regain the pools of process knowledge. A lot of this piece is driven by what I’ve been learning about the semiconductor industry, and I find it heartening to discover that one of the industry’s most important figures thought in similar terms.

My fundamental argument is that technology ultimately progresses because of people, and in particular the amount of process knowledge they’ve managed to accumulate. In my opinion, the US financial sector has underappreciated how important it is to have a deep pool of technically-experienced workers. It’s certainly much easier to identify and measure the stock of tools and IP instead of process knowledge, which exists in people’s heads. As a result, investors and financial analysts have systematically rewarded the firms that are most eager to reduce headcount, which they see as a cost. But just because we can’t straightforwardly measure process knowledge doesn’t mean that we should dismiss its existence.

I believe that tools and IP are the natural consequence of developing process knowledge. The opposite sequence, however, doesn’t hold: merely having a large stock of tools and IP is no guarantee that we can create more of them. Thus I’m nervous about the loss of process knowledge, and admire countries like Germany and Japan that have kept up the health of their communities of engineering practice.

One day, we can throw up our hands and declare that we’ve had enough innovation in semiconductors. “The future is in services instead, not in this kind of toxic manufacturing work." We can fire all the nerds, throw out all their books, and shut down all these fabs. Let’s say it takes a few years for us to come back to our senses. When we subsequently want to revive the industry, it may not be as simple as plugging in the machines, blowing the dust off of the blueprints, and then happily expect production to resume at prior levels. The hard-won process knowledge held by these engineers will have decayed, and the workers will have to relearn a bunch of things.

I wish that more of us would study production networks. That means thinking more in terms of systems. Healthy ecosystems are hard to maintain, but if you build them up and continue to inject vitality into them, they deliver sustained breakthroughs.

I don’t contend that the internet is anything but amazing. But I think that the marvels of the digital world have made it harder to see how slowly everything else has moved. Many segments of technology have made cautious progress, and we neglect to see that because our phones engross us so. Our apps keep getting better while our physical world is mostly stagnant; I think that the wonders of consumer internet have deluded us on how contingent our technological foundations have been.