Wednesday, March 11, 2009

The Next Innovative Hardware Industry?

In my last blog, I was musing about the electric car. The early history of an industry intrigues me. The automobile industry seems very much like the early history of personal computers: lots of tinkerers working in their garages (in both cases) to bring out machines that were initially more like toys than mainstream products. Early automobiles were thought to be the playthings of the rich, not practical transportation. And early personal computers were the toys of the geeks, not day-to-day information appliances.

What is similar between these two industries is that anyone who was a little savvy in the technology could experiment and build a new machine. The earliest pioneers didn’t need a lot of capital to get started. Much of the technology could be hand-crafted right in the garage or purchased as components from other sources. In the case of the automobile, the first focus for the individual innovator was usually on the engine. Ford hand-built a working gasoline engine before he attempted to build his Quadracycle. He could buy wheels and tires from bicycle shops and seats from buggy makers. Early personal computer makers could buy the integrated circuit components from suppliers. They couldn’t buy the assembler language software code that turned their digital circuits into useful devices. The code was homegrown and in many ways “the engine” of their devices.

Economists like to describe the automobile and the personal computer as industries that had low barriers to entry. The field was wide open to anyone with an inventive spirit. Patents were few. Large, entrenched players were non-existent. The buggy makers and railroads were no more competition for the automobile than IBM and mainframe manufacturers were competitors to the personal computer makers. What results in early industries like this is an exploding number of entrants. Hundreds of would-be innovators jump in when they see the early interest beginning to develop around the pioneer businesses. Of course, this can’t last. Darwinian selection starts to weed out the weak, the players without a competitive advantage. After a decade or two, consolidation reduces the competitors to a few companies who are now competing on price, scale and efficiency.

These sorts of industries are the complete opposite of capital-intensive industries like railroads, electric utility companies, or even cable television companies. These are all networks and by their very nature networks take lots of investment simply to get to the stage where they provide any value at all. It doesn’t do any good to have a train without tracks or a home cable box without the copper or fiber cable. These industries have a very different kind of birth. Their parents are capitalists and investors more than inventors and tinkerers. Thomas Edison invented the first electric distribution system but it was limited as a business by the geography it could power. It took Samuel Insull, a protégé of Edison’s, and a shrewd businessman to create the first modern electric utility, Commonwealth Edison in Chicago.

In this current economic crisis the government is proposing to put a large sum of money into repairing and replacing our infrastructure. Having been in the Twin Cities when the I-35 Bridge collapsed, I can confirm how much investing in our infrastructure is needed. Besides fixing the highways and bridges, there is also a lot of money set aside for high-speed rail. This is also very much needed. Anyone who has enjoyed the rail networks of Europe or Japan can easily see the lamentable condition of American passenger rail. But, I would argue, we also need to set funds aside to identify and fund the hundreds of startups that could flourish around the next automobile or personal computer industry. These bring out the innovations that spill over to create thousands of jobs and even local manufacturing.

The internet and the dot coms have certainly followed the garage model. Thousands of software programmers have created everything from Google to the software in our cellphones. These have been terrific businesses and more are needed. But while these have done much for innovation, they have not had a manufacturing component. Maybe this is where Green comes in. The industries I dream about could be in solar panels, wind energy, and other forms of Green technology. Biotech and Nanotech will certainly continue to have their strong place in advancing cutting-edge businesses but these businesses are both capital intensive as well as patent intensive. No, what I am thinking of are industries that are within the reach of the person in the garage, the person with a passion to create who doesn’t have access to millions of dollars of financial backing. I would be willing to bet that there is yet another nascent automobile or personal computer industry out there just waiting to be born. As a country, we need it now more than ever.

[Images: Apple IIe Personal Computer and Wind Turbine from Wikipedia.]


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