Category Archives: Business

Boiling the Frog. US Export of “Chemical Problematics”.

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Recent announcements by some of the big players in chemical manufacturing are stunning in their magnitude and implication for our western hemisphere. Like the movement of tectonic plates, business landmasses are shifting and grinding their way to other parts of the world.

Last summer AstraZeneca announced that it will leave manufacturing all together. According to C&EN, Merck is downsizing its staff by 7000 jobs and reducing its number of sites by 20 %. Pfizer is reportedly closing or otherwise trimming off 29 sites.

Recently, Dow announced its departure from commodity chemicals with the upcoming US$9.5 billion joint venture with Petroleum Industrial Chemicals (PIC) of Kuwait.

Some of this migration to the far side of the world will place the companies in a better market position to compete with rising demand in the distant corners of the world. Many of the players are already multinational in structure and have existing units elsewhere, so changes amount to consolidation.

What concerns me is the extent to which R&D and product development is being transferred off-shore. Like the frog in slowly warming water, no alarm is noted because from moment to moment the comfort level changes only slightly. But eventually, the warm water becomes hot and the inattentive frog gets cooked.  It is hard to escape the notion the US and EU are the frog in a warming pot of water.

Outsourcing is a choice, not a law.  A company has to choose to outsource rather than find other options. But to be fair, a company has its hands tied in many ways by regulatory or competitive constraints that are hard to contend with economically. 

Compliance with the confusing web of overlapping jurisdictions and increasingly harsh regulations pertaining to the manufacture, transport, and consumption of chemicals is wearing down the willingness of US companies to continue to manufacture in North America. Instead, we export “Chemical Problematics”.

A chemical product can become problematic in several ways- 1) commoditization, 2) patent expiration, 3) liability blooming, 4) raw material scarcity, and 5) regulatory compliance costs. 

In the life cycle of a successful product, it is inevitable that competition will discover the market and find a way to supply competing goods and services. This is commoditization. Eventually, you will lose control of your market exclusivity and others will set up their lemonade stand next to yours and sell for a nickel cheaper.

A major issue for pharma is the near term expiration of patents protecting highly profitable products. High cost manufacturing can be sustained by suitably profitable products. Exclusivity is the keystone that keeps the entry from collapsing. But when the patents expire, the Huns storm the gate and take over with lower priced generics.

What I call liability blooming is a circumstance wherein an existing product suddenly becomes the focus of some liability problem. It can be a drug that suddenly starts showing bad side effects, or it can be a product that has come into the  radar of the regulatory agencies.  Materials that carry a penalty for their use in terms of liability exposure are difficult or impossible to continue using. If an end product carries a legal liability, it is probably dead as a product. But if materials used in its manufacture- but not final composition- develop liability issues, manufacturing under the current regulatory environment can become prohibitively expensive.

Raw material scarcity is becoming a widespread problem for US manufacturers. As outsourcing becomes more prevalent, key raw materials for a given product may become unavailable in the US. As long as one can source the materials, this is not such a bad problem. But what about strateging substances needed for national defense? I have spoken with government procurement people who are increasingly having to resort to off-shore vendors for defense-related products and materials. Electronic products have a high reliance on some rather exotic substances and national defense is increasingly reliant on such technology. Indium and neodymium are examples of elements that are becoming quite scarce and whose loss from the market would have a high impact on many products. 

For any growing chemical company, the first real expense of regulatory compliance is for staffing. Increasingly, regulatory compliance requires a staff of specialists who serve as internal watchdogs for non-compliance and manage compliance programs that trail documentation much like a cable ship pays out cable into the murky ocean deep. 

Chemical products vary in their regulatory compliance paperwork according to type. Chemicals that are not used by the public out in the open like pesticides may be generally less complex to manage. TSCA is for materials that do not meet the criteria for food, drug, or pesticide use. Compounds that are used in B2B markets and will never be darkened by the shadow of consumers are still subject to complex TSCA regulations. But TSCA registry is not forever.  The ever shifting sands of TSCA registry may place a product into further examination by EPA if a new application is contemplated.  The all-seeing-eye of compliance managers may be strained as SNUR’s affecting product use can show up in the Federal Register at any time.

There are lots of good reasons not to start a chemical business in the US these days. Public or private companies are increasingly in competition with nationalized business entities abroad. Petroleum, petroleum products, and defense in particular are markets where western companies are having to compete with nationalized organizations that can swing a big money stick as well as influence national policy.

The US and EU are sliding into a Nanny State mentality microgoverned by those schooled in the Precautionary Principle.  Timid acolytes shuffling along the hallways of regulatory agencies and cock-sure MBA’s strutting like roosters in their corporate headquarters are independently guiding US culture to an epoch of de-industrialization. 

Catalyst Recovery. Gaussling’s 6th Epistle to the Bohemians.

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In catalyst development literature it is often stated that the particular catalyst under study can be recovered for re-use with full or nearly full activity.  I have heard this proclamation at meetings and in conversation as well.  Having spent a bit of my adult life analyzing process economics, I would like to comment on this matter. 

The world of chemical processing can be coarsely divided into two regimes- continuous and batch processing.  Since my hands-on continuous processing experience amounts to less than a year of time, I’ll limit my comments to batch processing. 

In this post I’ll define catalyst recycling as an operation wherein a catalytically active substance is recovered from a process stream and made available for another run. There are a great many catalysts and a great many applications, so generalizations are hazardous.  Nonetheless, there are a few generalizations to be made.

For a batch liquid-phase process performed in a multipurpose reactor, there are operations that are common to all processes.  Charging the reactor with raw materials, heating or cooling, agitation, reflux/distillation, discharging the contents, and cleaning. All of these operations consume resources and plant time. Generally speaking, any change that reduces consumption without harming the product could be considered a process improvement.

For catalyst recycling to qualify as a process improvement, some kind of consumption would have to be reduced over the useful lifetime of the material: i.e., reduction of time and/or materials. Obviously, reuse of a catalyst holds the potential to reduce the consumption expense of the catalyst over the course of the campaign. 

Before we draw any conclusions, it is useful to review the requirements put upon any material that might be used in a process. In bulk processing, raw materials are obtained from suppliers who have the necessary experience to provide the material.  But of equal importance, the vendor must have the necessary quality control mechanisms in place to warrant that the delivered product meets the promised specifications.

For instance, if you use butyllithium, you must be assured that all of the raw materials going into the process- reagents, solvents, etc.- meet a low water specification.  You have to know that the aryl bromide you are using isn’t contaminated with HBr or a polybrominated side product. There has to be assurance that all raw materials going into the pot meet some minimum purity.  A chemical processing company must know how to manage change.

Bulk processing is all about stability and predictability. You can’t rely simply on having ordered the proper grade of raw material. You need a certificate of analysis showing that the composition of the lot meets your in-house spec. When a vendor issues a cert, they are warranting the purity and accepting some risk as a result of sending bad product.

Management of change is a business methodology compelling an organization to adopt a standard procedure for the evaluation and approval of chemical process changes.  For instance, just because the chemists say that a change should be made to a scaled-up process doesn’t mean that it has to happen tomorrow if ever. The proposed change has to go through a protocol that exposes it to safety and economic scrutiny.  Frankly, it also spreads the potential blame for mishaps and economic disasters, so others have motivation to evaluate the process from a fresh view and sign-off.

The re-use of a catalyst brings forth the possibility that the activity of the catalyst could be altered in some way from one run to the next. There could be a downward trend in activity or some kind of variability. This means that a reused catalyst charged into the reactor could be a different catalyst from one run to the next. Potentially, what you saved in catalyst costs you might lose in extra plant hours or lower yield due to degraded performance or from outright process upsets.

Naturally, any kind of catalyst recycle has to be researched and understood by the R&D group and by the cost accountants.  Catalyst recycling will involve an operation to retrieve the material from the product or raffinate streams and to prepare it for the next run. Stable activity will have to be demonstrated, preferably under the influence of a variety of off-normal conditions.

Someone- a chemist or engineer- will have to sit down and do the calculations to see if there is a net benefit to the re-use of the catalyst against the backdrop of diminished performance, variability, or added operation costs. 

The point is that catalyst recycling isn’t automatically desirable. A recycling scheme that requires many labor hours to purify the catalyst may sour the benefit of the action. Another issue that may arise is the matter of validation of the re-used catalyst.  The company will have to decide if or when activity validation is necessary.  For a pot full of expensive precursor, a wink and a grin from the analysts may not be enough. A qualification run at the bench may be needed.

Here are my favorite catalyst attributes for batch processing- 1) high turnover number, 2) selective, 3) cheap enough to use once and send to waste disposal, 4) not a PGM (Platinum Group Metal)- PGM’s are subject to large market price variations, and 5) doesn’t contain one of the bad actors that trigger EPA thuggery or public protests- Hg, Cd, Cr(VI), etc. Metals are forever.

Catalyst recycle makes no sense, of course, in a one-time process run. A wise operator will calculate a price to cover the catalyst cost. But it may make sense if a plant is to start an extended run of batches, or if the catalyst is rare or expensive. Sometimes recycle has merit.  The point is that a sober cost calculation should be made prior to the implementation of recycle schemes.

At the beginning of the article I stated that some generalizations were possible. I will modify that in saying that PGM’s in the catalyst may necessitate the recovery, though not necessarily the re-use, of the metal for return credit to the supplier.

The Value Proposition

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One of the most deleterious influences on the creative person is the naysayer. A person possessed by the need to be creative must eventually choose his/her companions wisely.  Naysayers are not usually bad people. They most often have your best interests at heart. But the impulse to give conservative counsel is irresistable by many well meaning folk.

For the creative person, the negative vibe is a type of noise that must be dealt with. In my own experience in business development, I have found that many people will choose risk avoidance as opposed to risk acceptance as the default condition. New ideas must be sold and every sale needs a value proposition.

Even sales people can participate in creative business.  Bringing in a new type of customer or entry to a new market segment can stimulate the creative juices at a company.  Business development people are by nature folk who are deeply tied into the technology capability at their company as well as the buzz in the market. Business development people often have two kids of sales activity- 1) sell the customer on capability, and 2) sell R&D and management on the new project with its long term possibilities. The customer may be the easiest sell of the two.

The customer must be able to take a value proposition back to management in order to make a reasoned buying decision. As a business development person, your job is to give an irresistable pitch to the prospective customer. Simultaneously, you have to pitch your own management as to the potential business the new project may bring.

It seems as though the impulse to say “No” when in doubt is hard wired into the brain. But it does serve a useful purpose by way of providing checks and balances to the decision to move forward.

Creative people are very interesting and very useful to have around. They can perform all sorts of technical services and can lead the charge to the next generation of products. But, they can lead the charge over a cliff as well. This is where skilled people management comes into play.  A good manager will ask for a value proposition for a new product, though it probably won’t be called that. They’ll ask for a business plan or a market survey or even an economic analysis. The idea is to put the onus of justification on the shoulders of those who propose to charge off into the battle.

The art of leading technical people is to herd them into the focal point of the value proposition. By combining a value-adding product to a pot of demand, you can produce a stream of profit.  Clever technical folk can invent new wonders all day every day. The trick is to lead them to do something that satisfies a current or a latent demand.

A good technology manager must manage the negative feedback, or naysayer input, that accompanies any group of people working on any project.  Most companies have talented but sour people who are good at finding fault or who practice negativism-by-wandering-around. Managers who can inspire loyalty to a project and to the company are called leaders. Sadly, in the real world, such people don’t always float to the top.  Often as not, project managers are ass-kickin’ SOB’s who made it to the top by merely surviving.

The Flame of Innovation

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It is amazing how delicate the innovative impulse is.  Like most brain related activities, innovation is a use-it-or-lose-it kind of affair.  Innovative folk can be inspired by management to go forth and devise products that will keep the company afloat 5 years from now. They can also be contradicted or neglected by management and as a result the innovative flame can extinguish.

It is not unusual for organizations to go to the considerable expense of hiring research chemists yet not let them do what, ostensibly, they are best at- developing new art.  New art can lead to new goods and services, or it can lead to more cost efficient approaches to existing product.  Research chemists can also capture the nuance of a given process, leading to a better understanding of quirks and diagnostic signals.

Or not.

It is quite possible for a company to be run by people who have no interest or ability to use a research chemist in a broadly productive way. In my experience, it is not uncommon for chemists to be hired on to perform a very narrow range of activities. A wise chemist in the job market should be alert to the possibility that their creativity will not actually be sought by the employer. Rather, the chemist might become just a mechanical arm for some character whose ambitions may not include you.

Research is very expensive and the wary R&D chemist should always have an ear to the ground to listen for the galloping horse of the axeman.  Some organizations have a policy of spending a certain fraction of the proceeds on R&D every year. Others are more project or product line oriented and staff-up or staff-down as the circumstance requires.  R&D resources may get re-jiggered when a project changes. It is always best to be on a winning project that management is enthusiastic about.  Dark horse projects are prone to being jettisoned at the first sign of trouble.

My Dear Libertarian Friends

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Something I have learned while working alongside fundamentalist libertarians is this: Libertarianism is a political philosophy that seems to provide a framework for the justification of isolationism and selfishness. It is an economic theory that conveniently validates the inherent stinginess of its adherents. It has an appealing and complex theoretical basis. But like all economic theories, is idealistic and requires universal alignment by the population.

That being said, I agree that the US could use a healthy dose of libertarian pragmatism these days. Government is  far too big and too many resources are being channeled into foreign adventures while the national debt accrues.  Our elected leaders resemble an angry mob with a credit card throwing debt bombs.

But when I hear libertarians talk about their resentment at sharing resources in the form of taxation (or, being forced to share their resources), I can’t help but wonder what is really behind this restrained anger.  All of my libertarian friends have benefited enormously from the infrastructure provided by the pooling of resources. They drive to work on the interstate highways, fly safely in controlled airspace, benefit from the safety provided by the military, learned to read from public school teachers, use the system of currency for their wellbeing, flush their toilets thanks to public sanitary systems, eat safely thanks to the local health department (food safety is a big one), have drugs to treat their illnesses with the help of NIH, and on and on.

Of course there are problems with all of our public institutions, some of them quite serious. But the marketplace is just as prone to corruption as the government. I think that libertarians want to get off the merry-go-round and disconnect from the manditory and expensive socialization that keeps creeping into our lives. I do too sometimes. But it seems painfully obvious that our path to this point has not been all bad and our public institutions have contributed to our stability and well being.

All organizations work better under structural tension- the balance of forces. Libertarianism is a useful counterpoint to liberal socialization and conservative militarism. Like the three legs of a stool, these competing political influences can serve the betterment of our society and keep each other in check.

Precautionary Principle or Precautionary Anxiety

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Our technological culture is slipping into a kind of Nanny State where risk aversion has become institutionalized at all levels.  Much of this trend has to do with the Precautionary Principle. I won’t elaborate on it because it well presented elsewhere. 

My concern with the Precautionary Principle is not because I have dismissed the threats of deforestation or extinction or global warming. My concern is not because I believe we should freely and wantonly expose people to chemcials substances.  I am concerned about the effect of this principle on innovation.  I believe it is possible and necessary to maintain our technological advance while minimizing the total environmental insult.

In regard to chemistry, innovation is being made far more difficult because of precautionary anxiety.  Part of the issue is fear of chemicals, or what some have called Chemophobia. Chemophobes know in their heart that “chemicals” are bad. 

Chemophobia is real.  Chemophobia derives from a lack of understanding of the chemical sciences and the meaning of risk.  To the chemophobe, any “chemical” odor is a prelude to cancer or other illness.  Bad smell equals toxic.  Good smell equals safe. However, such conclusions are easily toppled when you consider manure and phosgene. Manure is foul smelling, but not especially toxic. Phosgene is fragrant but highly toxic. Stink and toxicity correlate poorly and are a weak basis to judge safety.

We need to keep safety in a proper perspective. We need to have places where we can handle hazardous chemicals for research and manufacturing. The process of education will filter out those who are uncomfortable with the risks and produce those who are willing to work in such places in order to advance science. Students who have an interest in chemical sciences need to have the chance to work with reactive chemicals without undue constraint. Yes, they need to be in a lab and under the supervision of a trained mentor.  But students need to get experience working with reactive materials in order to develop judgement.

Industrial Life and the Golden Handcuffs

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Today is one of those days when I would happily give back half of my pay to return to academics.  Since starting this blog I have waxed rhapsodic about the fabulous world of chemical industry and along the way have hazed and taunted the cloistered world of academia.  Being in industry is like being in the engine room of a ship.  There is comfort in the steady thrumming of the engines and not a little excitement in the scale and power of the thing.

But industry offers a great deal in the way of discomfort as well. Whereas career buoyancy in academia is based on at least some pretense of meritocracy, moving up the pecking order in industry is a more complicated affair.  A productive academic can expect to become tenured and finally promoted to full professor after time in service with some grants, a book, committee work, or a handfull of papers, assuming the student evaluations aren’t too bad.

In industry, it is more about “what have you done for me lately”? Even if you do your best and make progress, there is no assurance that upper level management won’t cancel the project. 

In large corporations, plum jobs are subject to project cancellation or redundancy after a merger.  You can be making great progress on a project and suddenly the word comes down that your division is about to be sold or there is to be a reorganization.  Budgets, requisitions, and staffing are all frozen.  Then the call for early retirements comes out.  Finally, the first wave of layoffs arrives.  If you are a survivor, you are chastened by the experience and resolve to make the company work or die trying.

Eventually you discover that you could work 24/7 and still, your destiny is entirely in the hands of others. Then one morning you are called to a conference room and a sober member of HR has an announcement.  Everyone in the room is to be let go and out of the building by noon. There is a dreadful silence as people attempt to digest what was just said.  You feel the room close in around you and there is a metallic tang on the sides of your tongue. Confusion turns to panic and then to anger. How could they do this?

The HR person drones on about benefits, COBRA, and then reveals that the modest severance package has strings.  In exchange for silence and a clean separation, you will be offered two weeks of pay per year of service as “the package”.

So, you sign the paper and drop off your security card as you leave the room.  As you pack your things into the boxes they have thoughtfully provided, you begin to wonder just how you will make ends meet.  Not 2 hours earlier, you were immersed in the technical details of your project.  How things can change in just a few heartbeats.

Another pickle the mid-career chemist may encounter is the “Golden Handcuffs” scenario.  There are many variations of this phenomenon, but I’ll describe the variation I’m most familiar with.

As you climb the career ladder, you naturally climb the salary scale.  As your salary increases you find that your lifestyle develops expenses that closely match your income.  Eventually, you find that you can’t afford to leave because the starting salary elsewhere is lower. Unless you can be hired in elsewhere at your senior salary, you’re pretty much stuck.

At some point the company finds itself beset with a lot of expensive middle aged managers who will continue to draw heavy salaries for the remainder of their career. So, not only does a mid-career professional face the Golden Handcuffs, but they have a big target on their back during hard financial times at the company.  Mid-career can be a very treacherous time with dangerous shoals to navigate.

The Aldrich Distribution Machine

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It was interesting to note in the recent C&EN report on the Top 50 chemical companies that among the most profitable was Sigma-Aldrich (SIAL), or colloquially, Aldrich.  Sigma-Aldrich controls an expanding complex of companies all targeted for more specialized domains of chemical technology.  Anyone who has received an invoice from Aldrich would not find their profitability surprising.   But what most customers may not realize is the extent of relatively transparent infrastructure that has been put into place to enable this profitability. 

Aldrich is not profitable merely because their prices are, well, high. Aldrich is profitable for some subtle reasons as well. Easiest to recognize is their shrewd choice of market.  Aldrich’s customer list includes nearly every research and academic chemistry and biology department in much of the world, or at least anywhere FedEx delivers. What is important about the R&D market is certainly not the volume of chemicals each research group orders- 5 g here, 100 g there, a liter of this, or 50 mL of that.  Rather, it is the constant buzz of orders coming in for premium grade (and premium priced) chemicals virtually all of the time.  While each order may be modest relative to bulk chemical transactions, a constant stream of orders begins to add up. 

What is shrewd about focusing on the R&D supply market is this:  Over time R&D money is relatively constant. The big academic and institute money is federal in origin and as such tends to be reliable in supply. Out in the world, projects start and projects end continuously.  It may not be reliable to an individual researcher, but overall, the monies are dispersed every year and someone out there gets them. So from a marketing view, the players in the game may change, but the spring of money flows every year.

Other people develop the Next Big Thing and SAFC supplies the raw materials. Just like the gold rush. A few miners hit a big strike. But the more reliable money came from selling supplies to the miners.

As I alluded above, Aldrich charges a premium price for its products and, to my knowledge, has never discounted its wares.  It offers a valuable service and is unapologetic about how it does business.  Any given product in the catalog has a substantial markup on it. I think that many people find this galling when they compare 25 g unit prices to bulk prices.  But I would caution that there is a substantial and unrelenting cost associated with having certified quality material prepackaged and waiting on a shelf in some warehouse.

It’s easy to get bulk pricing- buy in bulk!

A bottle of maleic anhydride sitting on the shelf is functionally equivalent to cash sitting in a bottle.  You have to pay up front to have material in inventory and the cash or credit used to buy the inventory could have been used to do other things. It could have been given to Warren Buffett for investment or to the stockholders.  Management has a fiduciary responsibility to the stockholders. It is to provide the best possible return on stockholders investment.

Another hidden talent of Aldrich is logistics and distribution. Getting things to where they should be on time does not happen easily. Much of Aldrich’s success depends on its ability to move product into and out of inventory rapidly and accurately. On the input side, purchasing, receiving, quality control, manufacturing, and warehousing are highly organized to assure that orders can be fulfilled when the time comes.

When the order does arrive, the business data system has to issue the right part number from inventory and be assured that there is no shelf life problem that would disqualify the product for sale.  Any chemical product must have a certificate of analysis, an MSDS, and be available in the right unit configuration, or SKU- stock keeping unit.

Order fulfillment involves entry of the purchase order into the data system, issuance of a work order to obtain the material, pulling the SKU from the inventory data base, and sending the order to shipping for final containerizing for land, sea, or air shipment.  Here, the product must be packed in a way to conform with DOT and IATA regulations.  Shipping documents must be packed, boxes placarded, and the parcels must get onto a truck for delivery.  Foreign deliveries are complicated by customs issues, which often include inspection and import duties. Customs clearance is a subspecialty in the shipping world.

In many ways, making the chemical is the easiest part.  Getting clean product is just the beginning of the adventure in product distribution.

Growth occurs by acquiring new brand loyalty and by expansion of the collection of products. One stop shopping for lab supplies.  The “80/20 rule” applies to such collections of products. This rule  of thumb states that 20 % of your products do 80 % of the business.  Chances are good that this ratio is even more skewed than 80/20. 

So, one way to grow is to expand the collection size. This ensures that as much demand is covered with product as possible.

Another way to grow is to dial in annual price increases- say 5-7%. This renders the prices in the catalog obsolete soon after they are distributed, but that is unlikely to be fatal to any given buying decision. 

MS Cyborg. Resistance is Futile.

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Much has changed in the consumer computer world in the 3 years since I last bought a computer. We recently purchased an HP Pavillion laptop computer. It comes with MS Vista and a bunch of other applications already installed. No program discs or manuals at all. And, like an infant, it pops out gasping for life sustaining air. Only in this case, it gasps for connection to the internet. 

What moves me to write this post is my naive refresher on the extent to which we are becoming enveloped and intertwined by the internet. Increasingly, the internet is becoming the central nervous system of our civilization.

While standing in front of a display at Circuit City I called the HP customer service number to inquire about the warranty on their Pavillion. I eventually spoke with a fast talking character who flat out said that I should not buy from Circuit City, one of their own distributors (!), and that I should have a custom laptop assembled by HP.  After 10 minutes of irritating hard sell, we eventually hung up on him.

This isn’t just about commerce. This is about anthropology. A commercial tool is absolutely altering how we do nearly everything and how we expend scarce resources.  It is a tool that uses features you cannot own- you can only agree to the terms of a license. This tool is held together by the sinew of invisible electronic code. This tool is both pleasurable and fearsome. It can be swung by governments, accountants, and 9 year old Hindu children.

To even inquire about these computer tools, we are forced to use computerized telecommunications and speak to computerized devices that filter and channel us into packing house chutes like pigs to slaughter. This sorting process can identify willing consumers, plump with credit, and prepare them for flensing.

We have become giddy and willing participants in a change that is almost biological in its transformation of our social structure. The very first thing that a MS program wants to do is to connect with the Mother Ship at Microsoft. Increasingly, our DSL connected computers are becoming assimilated into the control of the collective being.  It would be an exaggeration to say that it resembles the Borg of Star Trek. But the idea of assimilation of information flow into a master network is beginning to take shape. A master network suggests master control.

Consumers have control of the situation, you might say. At some level, yes. But there are disturbing trends that need to be recognized.  The playing field of global commerce is neither egalitarian, democratic, or laissez faire. While there may be harmonized regulations that cut across national borders to slow down the more obvious scams, the nature of the players is changing.  Increasingly,  nationalized organizations are participating in the market place in a big way.  In the petroleum market for instance, NOC’s control approximately 75 % of the worlds petroleum reserves. That means that soverign nations can modulate scarcity directly.

Autocratic and paranoid governments do what they have always have done. They restrict access and reduce transparency. When such governments have control of commodity production (i.e., Gazprom), their resilience in the market is magnified by the fact that overhead can be subsidized and scarcity can be driven by politics.  Nationalized commodity suppliers do not suffer the full forces of the market place because they can be floated by the government.  The cleansing effect of the market place on inefficient operation is ineffective.

The openness of the internet can only go one direction. It will increasingly be subject to contrivance and control by organizations that seek facile extraction of dollars from you. Today, buying a computer means giving increasing consent to automated integration into the net.  We willingly comply because we are first and foremost primates who are dazzled by flashing lights, pretty colors, and a new axe to swing around.

Uncle Merck and Aunt Lilly

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According to the November 26, 2007 C&EN, Merck has for a second time engaged the Indian firm NPIL to develop cancer drugs for two targets that they have disclosed. Merck will have the option to buy rights to the compounds, providing they successfully get through Phase IIa of clinical trials. The article discloses that Eli Lilly has made a similar agreement.

It is disappointing to see companys like Merck and Lilly outsourcing their R&D. I do not intend to besmirch NPIL. They have obviously crossed a threshold in their own R&D activity that meets the standard of major league pharma. But I do believe that Merck and Lilly deserve some scolding for outsourcing R&D.

R&D is one of the remaining activities for which the US maintains a bit of an edge. It is our magic.  To accelerate the development of R&D expertise in India is to act against our self interest as a country. India will eventually develop this capability on their own- why help? Drug discovery is an art that should be jealously guarded by a company. To farm it out to a hard working developing country with lower overhead rates is ultimately foolhardy. Even though some particular art is protected, this activity is always stimulates a company.

Lucky India. They get to exploit advanced technology without having to have paid for 100 years of R&D. Instead of having to pay to develop synthetic chemistry, they can plug and chug with a newly educated populace and access to the literature.

And who paid for the universities and the NIH post-doctoral fellowships and the research assistantships for grad students who developed and published the technology and who became the scientists whom Merck hired? Take a guess.

Investors may reap near term gains and Merck may get a better market foothold in India. Some executives will look like bloody geniuses. The presidents and CEO will prattle on over brunch about bringing home shareholder value. But when R&D goes the way of garment manufacture and automobiles, these “heroes” will be retired to their gated community in Palm Springs. In the end, they have eroded the competitiveness of the USA in an aggressive and contentious market.

Thumbs down to Merck and Lilly.