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Hog Heaven

Harley-Davidson wants more shipments of export cargo and import cargo in international trade.

Hog Heaven

Like so many others, Harley-Davidson has found itself inside the Trump vortex, the social phenomenon in which news becomes a swirl of entertainment, opinion, and super-heated argument.

The tempest began in February, just days after Donald Trump’s Jan. 20 inauguration and a Washington Post report that the new president would make as his first official trip a visit to Harley-Davidson’s production plant in Menomonee Falls, Wisconsin. It seemed a natural—a flag-waving brand that says it “has fulfilled dreams of personal freedom” since 1903 and a president who’s hat says he’ll Make America Great Again. Except that Harley quickly denied it, saying, “We don’t have, nor did we have, a scheduled visit from the president this week at any of our facilities.”

That left then-White House spokesman Sean Spicer to tell reporters, “Look, it was easier for the executives to come here, considering the week and all of the activity that’s been going on. No decision had been made about or announced as to what we were doing.”

None of the explanations deterred anti-Trump protestors, who claimed victory and raged against the machine-maker throughout Wisconsin. A scrawny gathering of 100 turned up in Milwaukee, World HQ for Harley-Davidson, to declare themselves part of a “resistance.”

Trump never showed up in Wisconsin, but a few weeks later he hosted Harley-Davidson execs and factory workers at the White House. It was a great look for the newly minted president: leather-clad bikers roaring out of the industrial heartland as Trump stepped out of the West Wing to greet them. In the press conference that followed, the president was ebullient. He thanked Wisconsinites for their support on Election Day, and thanked Harley-Davidson “for building things in America.”

In fact, the company has been expanding globally though not always successfully—a fact that Trump’s (and the company’s) critics were only too eager to point out. Two foreign acquisitions had puttered and clanged to failure within a few years, victims either of the Great Recession or lousy investment targets or both. Similarly, the 2014 debut of the Street, Harley-Davidson’s first new lightweight bike since the 1970s, was supposed to be huge for the company. But its foreign-made parts enraged the Buy America demographic, including union leaders and the sorts of voters likely to back candidate Trump. Global logistics experts joined in, pointing out that Harley’s move to offshore production came at the moment when major U.S. companies had decided that onshoring was the wiser bet. And then the foreign parts simply failed to appear on time at the company’s Kansas City factory. That breakdown delayed delivery of the Street motorcycles to Harley-Davidson’s U.S. dealers, and so nearly everyone in the world felt a reason to hate the company that nearly everybody loves. “We’re going through a learning curve,” the company’s CFO admitted during an investor call at the time.

The recycling of old bad news got a second life—a re-recycling of cycling news—just a few weeks after Trump’s grip-and-grin with Harley representatives. Speaking to a Feb. 28 joint session of Congress, Trump told Americans that Milwaukee-based Harley-Davidson is getting ripped off in the global marketplace.

They told me—without even complaining because they have been mistreated for so long that they have become used to it—that it is very hard to do business with other countries because they tax our goods at such a high rate,” Trump remarked. “They said that in one case another country taxed their motorcycles at 100 percent.

They weren’t even asking for change,” the president added of the motorcycle maker. “But I am. I believe strongly in free trade, but it also has to be fair trade.”

In fact, Harley-Davidson isn’t complaining because the company may have figured out the global trade game. The company’s ambitious strategy of global sourcing is working. And now Harley-Davidson projects international sales will account for half of its revenue by 2027.

To meet that goal will require the balance of a biker at high speed on the open highway, maybe standing on the saddle of his iron horse with his arms outstretched, a 70-mph zephyr blowing so hard through his Viking-style beard that the thing (the beard) has become a kind of flaming reddish pennant trailing behind him. Harley will have to do that—remain a boldly American brand even while going aggressively global—because as company insiders like to say, Harley-Davidson doesn’t sell transportation. It sells a lifestyle—“Since 1903, Harley-Davidson Motor Company has fulfilled dreams of personal freedom,” state the concern’s press releases.

But you have to be in business to sell anything.

YOU COULD CALL THE COMPANY’S 2027 GOAL the apogee of a 10-year plan to go global except that Harley has been a global company since its birth in 1903. The bikes have not merely followed but often led U.S. involvement in foreign wars. When the U.S. entered the First World War, the company sold almost half of its production to the U.S. government for use in Europe. You could say that war ended not with a rifle crack or even with the signing of the armistice but with the guttural roar of the first American into Germany at war’s end—Roy Holtz of Chippewa Falls, Wisconsin, in the saddle of a Harley-Davidson.

The company sold 90,000 bikes to the U.S. government during the Second World War, a third of which went directly to the Soviet Union. Back home, a couple of returning U.S. war veterans bought Harleys, put on leathers and created a biker gang that went global, the Hell’s Angels. Today, Hells Angels Motorcycle Corp., which claims more than 100 chapters in 29 countries, still prefers the Harley brand.

War is hell, of course, but the bike’s brush with violence actually burnished its global brand. High points in postwar global sales track nicely with the bike’s leading roles under the kiesters of such Hollywood anti-hero stars as Marlon Brando (in 1953’s The Wild One) and Dennis Hopper and Peter Fonda (in 1969’s Easy Rider). The brand’s association with rebellion and personal freedom was likely boosted when the ultimate square, Vice President Spiro Agnew, denounced Easy Rider as “playing right into the hands of the drug culture.”

But not even pop-culture celebrity could save the company from the rigors of the global economy. In the late 1970s and early 1980s, Harley-Davidson suddenly seemed a symptom of Rust Belt decline. Its oil-spitting, breakdown-prone motorcycles hadn’t kept up with remarkable industrial developments in former American enemies—now allies—Germany and especially Japan. Kawasaki, Suzuki, Honda and Yamaha bikes showed up in rising numbers on the docks of New York and New Jersey, Portland, Seattle, Los Angeles, Long Beach and Oakland, the very platforms from which Harley-Davidson had conquered the world.

The story of how the Reagan Administration rescued Harley from almost certain death represents something about the actual rather than ideal role of government trade policy—as well as a departure from the company’s reputation for rugged individualism. President Ronald Reagan talked about free trade, but his administration accepted the Rooseveltian concept of voluntary export restraints in order to save precisely one company: Harley-Davidson. There was, of course, nothing “voluntary” about the export restraints: in exchange for continued access to the U.S. market, Japanese manufacturers agreed to reduce sales of their motorcycles in the U.S., accepted nearly 50 percent tariffs on their bikes, and even helped apply the defibrillators to Harley-Davidson, teaching the benighted manufacturer to build a world-class bike.

HARLEY-DAVIDSON LEARNED FROM JAPAN. It has cultivated the tough-guy American image even as it became globally nimble. So when President Trump told Congress and America the company’s officials suffer a kind of industrial Stockholm Syndrome—that they can’t even see their own victimization at the hands of foreign powers—the president’s core constituents leapt for rage-fueled joy.

Trump didn’t mention it, but India is not the only country that discourages Harley’s international sales,” wrote Fortune commentator Alan Wolff. “Thailand imposes 60 percent tariffs and China 30 percent, levels not seen in the U.S. since the 1930s following the infamous Smoot-Hawley Tariff Act that raised tariffs to marked highs.”

And so the Trump vortex spun faster. Others familiar with the company’s Reagan-era history accused Harley-Davidson of hypocrisy. “The quintessential American motorcycle maker is going abroad because it is being punished by the same sort of trade rules it once championed,” said one. Another pointed out that Trump had already hurt Harley. “The high tariffs faced by Harley when trying to sell its bikes overseas would have been substantially removed by the Trans-Pacific Partnership, which Trump squashed his first days in office,” wrote Forbes commentator David Kiley. “In Vietnam, for example, Harley faces a 74 percent tax. It would have been zero if the U.S. signed on to TPP. Indeed, Harley’s CEO and chief lobbyist publicly advocated for TPP last year.”

Harley wasn’t complaining about tariffs because it was already working around them.

Duties and tariffs levied in foreign countries can make the product uncompetitively priced for local markets,” said Brian Smith, who was, until retiring in 2010, director of Logistics and Indirect Procurement at Harley-Davidson. “One way we mitigate that problem is through postponement strategies.

For example, we ship the product in component kits and delay final assembly until they reach Brazil. Doing final assembly in Brazil results in lower import duties. Using this strategy for Brazil reduces duties by nearly 85 percent.”

In the face of India’s 100 percent tariff on Harleys, the company in 2011 opened a local assembly plant sourcing U.S. parts. Indeed, India plays a role in manufacturing H-D’s less-expensive bikes for much of the global market. The company will do the same in Thailand. That plant, in Rayong province, southeast of Bangkok, will open in 2018, and like the Indian plant will reportedly assemble U.S.-built parts. It will also pave the road for Harley’s tariff-free entry into the 10 members of the Association of Southeast Asian Nations.

As industry expert Ryan Felton said, “The 100 percent tariff sounds drastic, but there’s far more to it than meets the eye.”

Harley-Davidson has been less successful in attempting another route to the global market: acquisition. In 2008, just before the recession, it bought Italian sport bike maker MV Augusta for $109 million. Critics called it a match made in hell, an attempt to merge the unmergeable lighter and faster sport-bike category with the beefy cruisers for which Harley is famous. They were apparently right. When new CEO Keith Wandell arrived in 2009, he ordered staff to dump the MV Augusta. They did, selling it back to Claudio Castiglioni, its former owner—for nothing. The following year, Wandell shut down Buell, a Wisconsin-based sport-bike maker Harley had acquired in 2006. Wandell said the sport-bike properties blurred Harley’s American-made, man-in-black, big-engine image and faced brutal competitors in the global market.

But Wandell left the company—beefier, more global and more profitable—in 2015. His successor, Matt Levatich, the bike-riding exec who met with Trump in February, is ready to try global acquisitions again. This time it’s Ducati, an Italian bike maker that was once only about super-fast sport-bikes but has recently gone head-to-head with Harley. Ducati’s move into heavy cruisers was controversial. “Purists will be pissed, Ducati will probably sell a ton of these, and old rich guys will finally be able to solve that mid-life crisis dilemma of choosing between a sexy import performance brand and, well, a Harley,” observed an industry expert.

Harley would like to resolve that uncomfortable choice by owning both brands, announcing its bid for the company, valued at $1.5 billion. Harley isn’t saying why it’s ready to take on Ducati and did not respond to requests for comment on the deal. Access to foreign markets? Ducati’s cutting-edge technologies? Short-term memory loss vis-à-vis Buell and MV Augusta?

The move has many perplexed. “Harley has chosen to remain fairly single-minded since the recession in its pursuit of its big-bore bikes,” said investor website Motley Fool. “A Ducati purchase would amount to a significant divergence from that path.” 

Divergence from the path?” Please. The Ducati deal may fail, but fear of failure ain’t part of the Harley-Davidson brand. Reflecting on second quarter earnings per share that down throttled 4.5 percent to $1.48 compared to $1.55 in the same quarter the previous year, Levatich on July 18 remained upbeat. “Our long-term strategy, focused on building the next generation of Harley- Davidson riders, is our true north. Our new product investment is one pillar of our long-term strategy to build riders globally and we are energized by the strength of our model year 2018 motorcycles coming later this summer.” If you’re a gambler, put your money on the manufacturer whose iconic American motorcycle will one day be chiseled into a granite cliff in South Dakota.

Death & 10 Other Life Lessons From An Exporter

IN THE MID-1990s, during 10 days of intense chemotherapy, Wes Dooley asked friends and family the question that death presents every one of us: “I asked everybody who knew me, ‘Who am I?” Dooley recalls. “And the answer came back, ‘You’re the ribbon-microphone guy.”

To understand what that answer meant—and why Wes Dooley’s Audio Engineering Associates is now world famous for an American-made microphone that you’ve probably heard but have never heard about—takes some time. Let’s start at the beginning.

ALUMINUM HAD ALREADY been in use in a primitive form for most of recorded history—for medicines and dyes, mostly—but only in the late nineteenth century, following a kind of pre-industrial space race among European scientists, did humans figure out how to isolate it into something like the stuff we use widely today. In the early 1920s, two Germans working in a Siemens lab produced a new microphone, the key component in which was pure aluminum beaten to ribbon-like suppleness—at 1.8 microns, “wafer” doesn’t begin to explain how thin this stuff is; a human hair is about 1,000 microns thick. When suspended between two magnets, this aluminum ribbon translated sound waves into electrical signals that could be amplified. Later that same decade, Harry F. Olson, an Iowa farm kid with a doctorate in physics, built upon the Siemens ribbon technology, creating for RCA—formerly the Radio Corporation of America—the 44 ribbon microphone. That RCA 44 microphone—“mic,” for short—was to sound engineering what the personal computer is to almost everything. It radicalized the possibilities of human communication. And it would give Wes Dooley existential meaning.

ADVANCES IN ACOUSTIC TECHNOLOGY have produced different, maybe even better microphones (Dooley calls them “hyper-articulate”), “but many people simply prefer the ear feel, the tonal quality of the ribbon mics.” He recalls that rock guitarist Eddie Van Halen, already the proud owner of one of Dooley’s 44s, came back for a second “because it sounded through a speaker like what his ears hear in the room.” Listen to that and consider: in a century when technology raced to produce “better” microphones that roared and whistled beyond human capacity, the boxy, art-deco 44 became the favorite of audiophiles, sound engineers, radio talent, filmmakers, orchestras, geeks, rockers and others because it produces a sound that resonates with our species. You know Nipper—that dog listening to His Master’s Voice through the trumpet of an early Victrola? We’re like Nipper. Dooley heard the 44 as a young man, and like Nipper knew it was something like his master’s voice.

IF YOU’VE RAISED A CHILD, you know that part of your job is to find the path of least resistance, to identify the thing for which your kid seems to have been born and to create the space for that thing to go Big Bang, exploding into its own remarkable fractal of the cosmos. Who knows where Dooley’s affection for microphones really comes from?

We can identify some possible causal relationships. Dooley is a descendant of the do-it-yourself hotrod culture of Southern California in the 1950s, except that his mad affection morphed from cars to electronics. He is an artisan and a brilliant tinkerer, and was so apparently even in youth. While a kid, he tore apart electronics to see what made them work. He talked a TV repairman out of a tube he could run off batteries. In high school, he and friends built radios from box kits and parts they bought at Pappy Dow’s. In mid-century America, when schools routinely offered shop, Dooley enrolled.

Beyond electronics and mechanical devices, there was something of music and radio in the Dooley DNA, too. He heard stories of an uncle who worked sports for WEEI Boston. When another uncle gave young Dooley a radio, the kid became infatuated with a steel-guitar country station in nearby Long Beach, where the U.S. Navy’s Seventh Fleet sat at anchor and the nation’s burgeoning aerospace industry brought Southerners—men and women who came for work, stayed for the weather, but insisted on their own music. Dooley’s mom was a pianist and dancer—“I grew up on Gilbert & Sullivan,” he says. A friend who worked sound for the Los Angeles Philharmonic introduced him to classical music and opera. There he discovered “it was really fun to set up mics for really good players.” He took an electronics course at Pasadena City College, hosted a local radio show, and engineered sound for acts at the high-profile Troubadour club in Los Angeles. In the 1960s, he and friends began tearing apart professional mics and putting them together again; they favor the RCA 44. In the years since, Dooley has worked as a forensics expert in criminal cases, has been a visiting lecturer and has taught courses all over the world. He earned a BA—in human development. He is, he says, an engineer not because he ever got a degree but because of the generosity, the openness of “real engineers—and 50 years of work.”


IN THE 1950s, while Dooley was just discovering his passion for something at the intersection of music and electronics, German sound engineers struck again, this time with condenser mics that “were much better [than ribbon mics] for tape recording, which was very big now.” RCA continued producing ribbon mics, but they became a marginal business for the electronics giant. The microphone that had been the disruptive technology from its introduction until mid-century was suddenly largely supplanted. In 1976, RCA abruptly quit manufacturing professional microphones. That’s how Wes Dooley found his bliss. Dooley’s chief engineer suggested they put their skills to work repairing the RCA mics. That colleague “introduced me to his friend Jon Sank, the RCA microphone production guy. Jon welcomed me into the basement of his home in Cherry Hill, New Jersey.” There, Sank gave them the equipment they’d need to repair RCA’s ribbon microphones, “and we started the business.” Eight years later, they began importing and selling BBC-designed ribbon mics, too. “They are lovely microphones,” Dooley says, and thus begins his hymn of praise to the thinness of the aluminum ribbon (“instead of 1.8 micron aluminum beaten leaf, they were 0.6 microns!”), the elegance of the BBC design.

EMERGING FROM HIS MID-90s cancer death-match with a new sense of mission, Dooley recalls, he ran into reality—his wife, Sara. “She asked, ‘So, do you want to do this as a hobby?’ I said, ‘What do you mean?’ She said, ‘Yeah, I’ve looked at the numbers, and we’re spending three times what we bring in.’ ‘Oh,’ he said, ‘you mean do I want to lose money at this hobby?’”

“I realized we had a market position,” he says. “We’d been importing and selling and servicing microphones. I knew there was something to this.” By the end of 1998, the Audio Engineering Associates began manufacturing RCA-style ribbon mics, and exporting them all over the world.

THE PASADENA, CALIFORNIA, FACTORY where Audio Engineering Associates (AEA) handcrafts ribbon mics is a modest place. “I wouldn’t really call it a factory,” says Sara. “It’s more like an assembly room.” Ten employees crouched over workbenches—we imagine their early-modern European clockmaking counterparts in similar postures, except for the fact that these guys are listening to audio books and lectures. They favor suspense thrillers, but on the day I’m talking with the Dooleys, the craftsmen are listening to Bill Nye the Science Guy. While Nye talks about varieties of human sexuality, the workers slice razor-thin aluminum into ribbons and pop wire grills over chrome-plated brass frames. The transformers are U.S.- and German-made. The industrial-cool carrying cases are made in Indiana. But everything else is sourced locally. When hand assembled, they are among the very best microphones in the world, shipped to clients around the world in ones and twos via UPS, FedEx, DHL and the U.S. Postal Service with a price tag of up to $5,000 per copy.

The Who’s Pete Townshend has called the AEA ribbon mic his favorite. Willie Nelson’s harp player carries one of AEA’s pre-amps on the road. Audio publications cheer. “A quality ribbon like the [the AEA R84] can take a production to the next level, injecting some butter into a margarine world,” enthused Mix. Said another: “The coolest thing about the R84 is that it sounds like a vintage ribbon with the advantage of lighter weight and smaller size . . . On brass and strings, it sounds divine, lending a ‘Hollywood film score’ vibe.” Other critics celebrated the AEA microphones’ “versatility,” “excellent wind-blast protection, the reduced proximity bass boost, the clean, even frequency response, great high end,” its “quiet gain.” Said another, “You truly have to hear it to believe it.” And, what can only be explained as true geek love, another reviewer concluded the AEA ribbon mic “rounds off transients in true ribbon fashion, adding a naturally compressed sound that flatters even the most strident source.” You don’t have to understand the recondite language of electronics to understand they’re all applauding.

Despite all the applause, the Dooleys were—and remain—determined to stay small, like monks producing beer. “At some point we decided we really were a mom-and-pop shop,” says Dooley. And they liked it that way. “We were never going to be a billion-dollar company.”

Dooley has boiled down the lessons he’s learned to these:


Wes Dooley needed a sense of mission to guide him compass-like through cancer. And he needed a business partner when he emerged. And that partner was Sara.

The daughter of a biblical archeologist, she spent part of her youth in the Mideast while her father taught at the Beirut College for Women, now the Lebanese American University. That’s where she picked up her love of the French she later taught in middle school. Her family lived in Europe “and all over Asia.” They lived everywhere, she says, but in sub-Saharan Africa. She aims to travel there—after she and Wes return from an upcoming trip to China to meet with an existing dealer in Shanghai and other places farther afield.


Remember scale. A friend of Wes Dooley’s was a financial VP for a $250 million company. Ask him questions about exporting and importing “and he will give you wildly different answers. It’s all about scale.”


The pair travel rigorously—like legendary touring artists Bob Dylan or Bruce Springsteen. Dooley says there’s no journey he enjoys so much as the three-block walk between home and office. But he kids: He travels around the globe to speak at audio conferences and to meet men and women like himself. “Anybody who loves audio is a friend of mine,” he says. “It’s the first area where I felt normal. I make friends.” Friends and business contacts: In their business partnership, it’s Sara who functions as the foreign diplomat. She loves language and mapping the cultural terrain—down to the personal likes and dislikes of potential AEA dealers. “My wife will try to figure out how to say something in Danish or Flemish in her notes to them,” Dooley says with admiration. “There’s nothing like reaching out that way.”

“Everybody has preconceived notions of what a place will be like,” says Sara. “But there’s always some shift that occurs when you spend time with people in that place. You’ll have no sense of the customer until you have been physically in that location. You can look at every picture, every [computer] app, and you’ll have no clue till you’re there. You can’t seriously understand a person’s business until you’ve been with that person, in that place. You don’t have to be there long, but you have to be there. When you spend time with them personally, you appreciate their lives. It’s always interesting to be with people to see how they handle business situations, because those are very cultural—and then there’s the personal on top of that. The more you learn, the better the relationship.”

Dooley says their favorite (but not exclusive airline) is American. If he had to pick a hotel, he’d stay with Hilton Express: “It’s predictably comfortable, and not so upscale that we look like rich Americans,” he explains. It’s affordable, too, he says—and that helps the Dooleys spend cash on something much harder to find at home than a comfortable bed: amazing food. His favorite international food memory: Buenos Aires. “Not many people realize that half of Italian emigrants from 1860 to 1960 ended up in Argentina.” They produce “absolutely amazing, unique Italian food.” He put on five pounds during his most recent visit.


“We assume everyone is like us. For example, in the U.S., most bands that tour rent sound systems or use the venue’s.” But in Mexico, “the bands all have their own sound systems and have their own sound crew.” That means his strategy for selling in the U.S.—sell to the major sound studios and tour companies—won’t work in Mexico. “You have a lot of people in Mexico making the buying decisions rather than a market like the U.S. where a small group of users makes the buying decision. It’s a different market. It changes the whole dynamic.”


“I’m astonished how helpful most people are, if you just ask them,” says Dooley. Of course, Dooley gets as good—to turn the old saying on its head—as he gives. He’s an active member in alphabet-soup audio engineering societies. He travels the world to meet men and women who, like Dooley, love the science of sound. He joins trade groups. Unlike those of us who run the gauntlet of tradeshow booths at conferences—picking up ridiculously large rubber gag pencils and branded thumb drives—Dooley actually talks to the exhibitors. And nearly everybody he meets becomes his friend. And those friends become his teachers—“as long as they’re not direct competitors.” He recalls “a guy who ran an outfit called Summit Audio. That owner, when I’d see him in like Copenhagen or Amsterdam at conferences, he and I would talk.” It was that guy who gave Dooley the solution to a international payments problem he couldn’t seem to resolve. “That guy was the one who told me to try credit cards before it became so easy to move small amounts of money around. In the early 1990s, that was real useful information: You give me money, it gets in my bank, I send you stuff.” He’s since adopted more thoroughly modern methods—credit card fraud became its own unique problem—but the point remains true: People are generally good, and they can become your global-trade teachers.

“It’s like the blind guys and the elephant,” he says of international networking. “You talk to as many people as you can. They tell you stories. You weave those stories together. And then you have something like reality.”


A few years ago, Wes and Sara met with a potential dealer in Hamburg, Germany. “We just went out for coffee,” Sara recalls. “We were at café shooting the breeze, talking about politics, and he said, suddenly, ‘The hotels in town are too expensive. Now that I know what kind of people you are, you need to spend time with me, on my farm.’” And they did, shifting their venue from a downtown hotel to a home in the country. That man is now among their best dealers, and to this day Sara writes to him—in German—and “I always ask about his tomatoes and his children, and I remind him of the enjoyable night we spent drinking wine on his farm. That’s doing business on . . . well, I’m not sure what that business model is, except that it’s exceedingly personal.”


In 2010, AEA’s “excellent, pioneering dealer” in Adelaide decided on a career change—more studio sound engineering work, less selling of Dooley’s microphones. Their dealer recommended “a guy in Melbourne,” Dooley recalls. In December 2012, the new dealer offered several explanations for his slow payment for a shipment of microphones, but emailed his bank’s documentation of a wire transfer. Dooley shipped the equipment and waited for the check. It never came. “The .pdf they’d sent us was photoshopped from an earlier wire transfer,” Dooley says. AEA lost big on the deception, and soon the relationship was over— “a disaster in an important market.” But Dooley still had connections through workshops in which he’d generously given away his expertise in audio engineering—an entirely separate, but equally important lesson that might be subsumed under the heading “Pay it Forward.” “It helped hugely that I’d been on the ground there,” Dooley says. Within a month, they were back in business Down Under, with a bonus: the company now had more and better Austrialian dealers and picked up one in New Zealand. Within a few months of that, business was back up to pre-fiasco levels.


In the early 1980s, Dooley designed, manufactured and sold an M/S stereo box—“m” for mid-channel and “s” for side-channel, a kind of coding that can be expressed in what is, for most of us, an incomprehensible algebraic-looking formula that’s well beyond the scope of the subject at hand, but which really, clearly intrigues Wes Dooley and other audio geeks, among them the sound and recording professionals in the movie and TV business who bought the things. “We thought it was cool, but really didn’t have any idea of the size of the market,” Dooley recalls. “We built only a few hundred,” including five for the Los Angeles Philharmonic. It was “a dangerous success,” something that was expensive to make and had no real market—“good enough to keep you going, but it never makes you a lot of money.” It was also, he can see in retrospect, a global loss leader, “a handy mousetrap,” a few of which “made it overseas” and into the hands of music geeks. It was like a high-tech calling card. His willingness to produce a high-end quality product on the thinnest of margins, and his readiness to sell that overseas, gave him name-recognition, the sort of global brand-awareness you can’t really buy any other way. “Fifteen years later,” he says, M/S stereo-box “dealers in places like London and Amsterdam” became dealers of Dooley’s more profitable ribbon mics—and gave him, he says, a foothold in Europe. “The M/S box got us London, and London got us Paris.”


Dooley considered manufacturing in China very briefly. But then he talked to friends. “I had a friend who went to work with people manufacturing electronics in China some years ago. This was in the 1990s, when labor there was still cheap. He said, Here’s how it goes: If I—or one of the other guys—is in China once a month, we get pretty good stuff. If we’re not there once a month, we don’t—the stuff we get starts veering off track.” And at Chinese New Year, between late January and mid-February—Chinese workers in industrial cities head home. Dooley picks up his friend’s tale: “Some of the crew doesn’t come back to work after New Year. So you absolutely have to be there then to make sure the people who do show up to work know what they’re doing.” So while he could have saved money by manufacturing in China, Dooley says, “if you factor in the lead-time, miscommunication, the amount of travel and such, maybe you saved about 15 percent. And this, remember, is at a time when labor there was astonishingly cheap.”

Then there’s the problem of piracy. Another business friend produced very high-end speakers. People told him, as they were telling Dooley, “to go to China. And he did. And that was the end for him. All over world, suddenly, his speakers—with a different label, at half the cost—started showing up. Once they have the factory and they have your procedures down, they’ll produce your product on their own and ship ’em anywhere.” He points to the case of Sennheiser microphones, a story that’s infamous in the audio world. “They produced in China, and 18 months later an engineer at Sennheiser is talking to someone who shows him Sennheiser-labeled mics that aren’t Sennheiser: You pull the little three-pin connecter, and it has different colored wires. That’s the Chinese copy.”

Sennheiser did not respond to a request for comment. But its website hosts a list of more than 500 “non-authorized dealers,” and the Internet is almost overpopulated with consumer advice on spotting the knockoffs. All of that is evidence enough for Dooley: “Whatever you’re making in China, unless you’re being supervised closely the way Apple, for instance, supervises, everything you’re making is suddenly available to anybody in the world.”


In August 2011, the Dooleys traveled south to Montevideo, Uruguay, for the Audio Engineering Society’s Latin American conference. Following Wes’ presentations, the Dooleys made the short boat ride up the Rio de la Plata to Buenos Aires. “We knew [Buenos Aires] was the largest market at the southern end of the continent. And we knew some people we should talk to. Most were too busy to meet, but there was one dealer who made time for us. I carry demonstration mics with me all the time.” Inside the Buenos Aires studio, Wes set up his ribbon mics for a guitarist already strumming his magnificent 12-string. Wes recalls the studio had set up “normal Neumann mic—pretty much top of the line—and I just put up a couple of our mics where I thought they might sound good.” Sara joined the studio owner in the control room, and she recalls that when he switched the sound between the Neumann mics and the American-made pair from AEA, the studio owner “audibly gasped.” It turns out that good ribbon mics had not gotten down to Argentina yet; “they’d heard nothing like that before. The studio owner turned to us and said in Spanish, ‘I’ll take everything you’ve got.’ He met us at the hotel and gave us cash.”

Wes sums up the experience this way: “We were fortunate. Nobody had tried to do anything with the new generation of ribbon mics in Argentina. I was prepared, and, of course, my wife speaks Spanish.”

Target of a Trade War

By the middle of 2009, the U.S. economy had already driven off a steep financial cliff, with the rest of the global economy screaming in the back seat.

It was perhaps an odd moment for TGV Partners, a boutique private-equity firm, to think about buying Horton Archery, a leading American manufacturer of hunting equipment swirling down the bankruptcy drain. American consumers were striking non-essentials from their shopping lists. Retailers were locking their doors and turning off the lights for good. International credit markets were iced over.

But TGV’s Geoff Moore and Mitch Vance saw an opportunity. Confronted by declining tax revenue, state and local governments, constitutionally bound to balance their budgets, were looking everywhere to boost revenue. In many states, one piece of that strategy was to extend the deer-hunting season several weeks on either side of the traditional Thanksgivingish start—to extend it only for hunters willing to track their prey in ways mostly recognizable to our ancient forbearers, armed with bows and arrows, including, now, crossbows like those manufactured in Ohio by Horton.

The expansion of deer season for such old-school hunters satisfied environmentalists—who might tolerate a sport that gives the hunted a fairer shot at escape and still controls deer populations. And the expanded-season hunting license offered a new source of revenue for squeaky-tight county and state budgets. Everybody won, it seemed, except for the fur-covered, four-legged guy with the antlers.

TGV was betting that the market for crossbows would boom. And it did—at upwards of 20 percent, Moore figures. “Across the next three years,” Moore says, “we had one state after another extending the special season, and that increased the potential crossbow market by almost 10 million hunters”—hunters who might become potential Horton customers.

“There was almost no other consumer category growing like that,” Moore says.

Then, just as it did for Bambi’s mom, everything went red for TGV’s crossbow business—a victim of global supply-chain problems it inherited but did not immediately grasp and a U.S. trade war it could not have foreseen.

“It was that classic situation where, as you get older and encounter a problem, you say, ‘I’ve dealt with all these situations before and handled them,’” says Vance, one of TGV’s founding partners, “but never all of them at once and for so long.”

IN THE BEGINNING, it was all happy hunting for TGV. Founded in 1990, the boutique firm staffed by brilliant financial guys already had a record of extraordinary investments. One of the firm’s early deals came in 1990, with the $44 million buyout of Manischewitz, the company whose food products including matzo are Jewish staples. When TGV liquidated its holdings six years later, Manischewitz’s valuation had risen to $65 million. TGV parlayed its $42 million purchase of Empire Kosher Poultry in 1992 into a $95 million sale in 1997.

But the deal that had TGV thinking about mounting deer heads on the walls of its Newport Beach, California, office was its 2004 purchase of Thompson/Center Arms, the fifth-largest manufacturer of firearms in North America, and the leading maker of old-fashioned muzzle-loaded black-powder rifles. In partnership with the company’s senior executives, TGV bought Thompson/Center for $40 million; three years later it sold the business to legendary Smith & Wesson Holding Corp. for $102 million.

Horton Archery “was so much like Thompson—the same marketing, the same distribution, the same sales channels,” Moore says. Under TGV, Thompson/Center sold single-shot rifles to the very customers (including such big-box retailers as Bass Pro, Dick’s Sporting Goods and Cabela’s) and consumers (hunters) who would buy Horton’s crossbows. And there was this historical parallel: “About a decade before, the black-powder rifle market experienced extraordinary growth as states added special seasons for muzzle-loading hunters. Now the same dynamic was being repeated in the crossbow hunting segment.”

And TGV had a special weapon in Gregg Ritz, Thompson/Center’s CEO and TGV’s partner in the Thompson/Center acquisition. Ritz is one of those rare men who does not at all look preposterous wearing camouflage and kneeling in a dun-colored field under a slate-colored sky while holding the young-adult-sized antlers of a beast he’s just knocked down or while propping up the apparently grinning, man-sized ram he’s shot through the heart. And Ritz was—you’ll pardon the mixed-animal metaphor—bullish on the crossbow business. He would head the new Horton Archery.

The Wall Street Journal reported the late-2009 sale was about $5 million for a company that produced roughly $15 million in annual revenues.

“When you cut all the way through it, it was a regulatory-driven growth play. And we tried to repeat the success we’d had with Thompson/Center,” Vance says. “It just seemed like a perfect fit.”

Except that it wasn’t.

SOME OF US LEARN THE WRONG LESSONS from our greatest successes. What TGV Partners learned from Thompson/Center’s manufacturing operations turned out to have little to do with the reality of running the 100-percent sourced, supply chain-driven Horton Archery.

Thompson/Center was a vertically integrated domestic manufacturer with a 600-employee plant in Rochester, New Hampshire, and no international supply chain. When TGV acquired it, Horton Archery was down to just 10 employees in Akron, and an unwieldy, recently outsourced global supply chain. While Thompson/Center produced almost every part that went into its rifles, Horton sourced parts for its shockingly complex modern crossbow—with upwards of 150 distinct parts—from scores of vendors around the world.

Says Moore: “We just didn’t appreciate the complexity of working with all those vendors on a seasonal production cycle”—a seasonal cycle that meant designing, prototyping, producing and delivering new models in a very narrow window, just before that extended fall hunting season. “Unlike Thompson/Center, we were totally the hostage—or the beneficiary—of third-party vendors.”

Nor did TGV completely understand the hellishness of the global supply chain it had inherited. Horton Archery was in bankruptcy because its previous private-equity owner had been caught short of cash in the middle of a grand plan to offshore U.S. manufacturing and supply to China. When TGV arrived with cash, expertise and enthusiasm borne of success at Thompson/Center, Horton was still using legacy software to manage its untested global supply chain and, in early 2010, already bumping up against the official opening of hunting season. That season is not, as you might believe, the appearance in fields and forests of orange-jacketed armies of bow hunters in September, but the neon-and-casino-bing-bong of the January trade show in Vegas, or the slightly more sedate February show in Salt Lake City, or the myriad, regional shows from Sacramento to Pittsburgh that launch new products in the outdoor business in the first quarter of the calendar year.

In retrospect, Moore says, it’s clear that TGV ought to have looked closely at Horton’s decision to move production to China. Instead, TGV pushed forward.

AT FIRST, “EVERYTHING went exactly to plan,” Moore says. The market for crossbows turned out to be “stronger and grew more quickly than we anticipated.” The January and February 2010 trade shows produced a bumper crop of sales based on new Horton Archery designs that looked splendid on paper.

And then Horton’s untested global supply chain nearly brought down TGV’s newest investment. The company’s legacy software system couldn’t manage its untried, elaborate vendor network. “Our database was littered with inaccurate parts specs and bad supplier-purchasing parameters,” Moore says. Horton’s half-established “master-sourcing” office didn’t master much. A Chinese GM, a bookkeeper, and a few employees in Changzhou—set up to manage communication and product flows between the new American owners with their new designs and just-in-time delivery demands, on one hand, and new vendors, on the other—broke down.

TO THE POINT Mitch Vance, Geoff Moore’s counterpart at TGV Partners, says he had dealt with every problem, but never all at once for so long.
TO THE POINT Mitch Vance, Geoff Moore’s counterpart at TGV Partners, says he had dealt with every problem, but never all at once for so long.

It was Global Trade 101.

“We immediately started having translation, time and distance problems,” Moore recalls. Language turned out to be more critical than anyone guessed it would be. The vast distances made communication and travel more difficult. The result: Parts were either badly built or arrived late—or both.

“What seemed really obvious, simple challenges became amplified and heightened when you started dealing with literally millions of different parts trying to come into tens of thousands of units to assemble,” Moore says.

Outside, retailers were hungry to feed the growing market for crossbows. “And we were there with 30 percent of our orders unfilled because of our Chinese vendors,” Moore says. “The market is growing up to 20 percent that year, and we couldn’t meet demand.” Missing parts appeared miraculously but late and had to be caught up with otherwise complete crossbows awaiting shipment.

Looking back on it, Moore says, “We should have leveled out the production cycle.” Instead of introducing annual innovations, selling and producing in just a few months before the seasonal sales cycle, that is, maybe Horton should have spread out the process over the course of a year or more. But just as the company learned the wrong—or at least very different—lessons from its wild success with rifles, it didn’t fully vet the mission-critical information system it had inherited and, most critically, failed to appreciate the risk associated with the unproven China supply chain that came with the company it purchased out of bankruptcy.

TOWARD THE END OF 2010, the first full year of operation, vendors began hitting their delivery deadlines. Parts fit and product shipped. “We thought we had China figured out,” Moore says.

And then Horton Archery made its third mistake: it introduced more change into the system.

“We had a better-functioning supply chain,” Moore says, “and then we brought out a new product.” The frantic global supply-chain fire drill began again in earnest—design new crossbows, sell those new designs while they’re still on the drawing board, produce and test prototypes, fix production problems, postpone delivery, play catch up.

“It was as much our fault as the China end,” Moore says. “We had these great designs and specs, with a level of detail that would have been sufficient if we were operating with a one-hour time-zone difference—if you have a problem, you know, it’s a one-hour plane flight or maybe a three-hour drive. But the distance and cultural difference amplified all the problems.”

The problems of 2011 sound like a rerun of 2010, and they killed the introduction of Horton’s state-of-the-art, unprecedented reverse-draw crossbow. The traditional crossbow is like a rifle stock with a horizontal bow at the far end. Because the weight is out there at the end of the stock, the conventional crossbow is a little unwieldy—certainly clumsier vis-à-vis Horton Archery’s new reverse-draw. On the new model, the bow is located on the stock above the trigger—about the middle of the crossbow. Even if you’re a non-hunting vegan pacifist you can appreciate the subtlety of that design, perhaps the most significant change in bow technology since our forebears tracked beasts that no longer roam the planet, or since the devastating deployment of huge numbers of longbows—six-foot monsters—by Henry V’s troops at Agincourt.

“Moving the weight like that created a revolutionary bow,” Moore says with evident and reasonable pride. “We were the first producer, and the leader by a long-shot in that new crossbow category.”

Celebrity hunter and Horton CEO Ritz was convinced the reverse-draw was the future. But the company was undone by its own innovation and subsequent global supply-chain demons. “We crippled ourselves, crushed our supply chain,” says Moore. “We left 50 percent of the demand on the table, simply because we couldn’t ship product. We knew we had great, patented designs, and we knew we had the dominant first-mover position in this new category”—a new category that was growing faster than the rest of the fast-growing crossbow marketplace, a new category that would go hungry for Horton.

EVERYTHING CHANGED AGAIN IN 2012. And because everything changed, you might say, nothing changed.

Horton Archery hired a new chief operating officer, a top exec out of the hospital-supply business, a man who knew supply chain and who came in with a strategy: forget China. Onshore all production in the U.S.—all design, manufacturing and assembly.

“He said, ‘Let’s shut down China. Get out of the wholly-owned subsidiary business, eliminate that layer of cost [and create] a more compressed supply chain,’” Moore recalls.

The company applied the painful lesson of 2011: in 2012, it would limit product innovation. Where possible, it would standardize components across crossbow models.

It seemed brilliant. But if you’re following along at home, you already recognize that, as they entered their third full year under TGV, Horton Archery was introducing more noise in the system, more chaos into its supply chain.

“It was as if we were back to being new again—or maybe more like ‘New Cubed,’” Moore says with perfect hindsight. “The company’s production was newly moved to China when we bought it. In some ways, it was new again in 2011 when over 80 percent of our sales came from new products. And it was new again, for the third time, in 2012 with a new U.S. supply chain. You look at that and you say, ‘Were you out of your minds?’”

Problems quickly emerged with the new U.S. vendors. In testing 2012 post-production models, Horton found bowstrings snapping—literally kertwanging in the process of being drawn back. That led them to investigate the cam—what you and I might call a pulley, a little wheel at each end of the bow’s outstretched arms, around which runs the bowstring. When drawn back to fire, the crossbow generates tremendous force on several key parts—the arms, the cams, the string itself; when released, all that force rockets the arrow at something in excess of 200 miles per hour. Close inspection revealed tiny abrasions on the U.S.-supplied cams. Horton voluntarily recalled several thousand crossbows dispatched to retailers’ warehouses. The company scrambled, ordering immediate delivery of cams from old vendors in China—at a huge markup in manufacturing and air-cargo costs.

Even that wasn’t the end of Horton’s supply-chain terrors. With the re-machined cams fixed and the reverse-draw crossbow shipping out to retail warehouses, internal testing discovered yet another problem, one that “as much as anything,” Moore says, “sank us.”

To understand that problem, you have to understand something about the physics of crossbows and the inexpensive mechanism manufacturers use to keep the weapons from dry-firing—that make it impossible to draw and fire the crossbow without an arrow notched in the bowstring. Dry-firing is a practice which, like nervously clicking a ballpoint point or rapping your knuckles on your desk or dry-firing an unloaded pistol, can produce a kind of comforting, satisfying snap. But dry-firing a crossbow unleashes so much force without any resistance—like a baseball player swinging for the fences and completely missing the ball—that it can shred the bowstrings and even wreak havoc upon the weapon itself.

Consumers who are new to crossbows will often dry-fire their crossbows—regardless of grim industrial warnings about the dangerous practice. So industry has developed a kind of safety mechanism to make dry-firing nearly impossible.

With cams fixed and the crossbows shipping to warehouses, Horton Archery discovered that its $2.50 anti-dry-fire device—Moore describes it as tiny spring inside a little metal box—did not work, or worked so well that when engaged would not unlock for anything.

“The problem came out of a China vendor,” Moore says. “We say it was wrongly installed; they say our specs were bad. They had the spring reversed. That was it.” On a more than $300 product, a $2.50 mechanism made in China with the spring installed backwards had “locked the bow so that it wouldn’t fire at all.”

There was an easy fix, of course, and that was simply to remove the anti-dry-fire mechanism and remind hunters of the dangers of firing an unarmed crossbow. “That proposed fix didn’t satisfy some of our big-box retailers” who, Moore says, worried about a perception of danger—“despite the fact that the dry-fire issue didn’t affect crossbow safety.”

It was already August. Opening day was just weeks away, in September. “And right then, in the middle of the selling season when we’re supposed to be refilling product orders because they’re so hot, we had to actually stop our production line and launch a field warranty repair program on about 20,000 bows.”

They cut a deal with two of their big-box retailers “to send our Ohio production people to these distribution warehouses just to change out a $2.50 anti-dry-fire mechanism.”

SOMETIMES, THE TRADE GODS make playthings of intelligent, honorable, struggling men and women. In the midst of resolving what Moore calls “self-inflicted” wounds to its supply chain, the U.S. government was acting on allegations that Chinese manufacturers were selling solar panels in the U.S. at “dumping margins ranging from 18.32 to 249.96 percent,” according to the Commerce Department.

The Obama Administration struck back with a series of measures aimed at everything connected with solar panels except the sun itself—and including the aluminum that went into the manufacture of Horton Archery crossbows.

There’s an old saying, sometimes attributed to ancient Africans but more recently employed by dramatic pro football, soccer and even cricket commentators: When elephants fight, the grass gets trampled. Moore recalls the day TGV was notified there was trouble at the Port of Los Angeles. A random inspection of Horton Archery’s inbound container of China-made crossbow parts had turned up aluminum covered by the federal government’s bland-sounding but lethal 120-page trade document, “Certain Aluminum Extrusions From China.” Horton, desperate for the $100,000-worth of parts in that container, could have them, Customs officials said, for a price: a “countervailing duty” of 170 percent of the value of the goods—$170,000—plus the same 170 percent duty on all similar products imported by Horton Archery dating back to beginning of hostilities in 2010.

“It’s hard for me to say whether the Chinese were dumping in terms of solar panel pricing—that’s what [the Administration was] going after them for, not the aluminum,” Moore says. But in the Administration’s broadband assault on what it called dumping, Horton was collateral damage—trampled grass, a victim of something no one could have foreseen. And if someone in the U.S. was getting huge discounts on Chinese aluminum products, it wasn’t Horton: “We certainly weren’t getting ‘dumping margins’ on those aluminum parts from China. In fact, for that identical part we had recently secured a second supplier in the U.S. who was quoting about 10 percent cheaper price than the China supplier.

“We just got swept up in a policy decision.”

geoff-2Horton decided not to pay.

Along with supply-chain problems, Moore says, the Administration’s trade war with China meant “we were toast. We just couldn’t fill orders.” He figures the company failed to fill 25 percent of its booked sales that year. “And, once again, we ended another production season with too few finished goods produced, but millions of dollars of unused parts inventory. “Our bank lender was unwilling to advance further working capital loans,” Moore says, “and we had reached the limit on how much of our own capital we could risk on this business.”

In June 2013, TGV reluctantly let go. Horton’s assets, mostly its huge parts inventory, was sold to one of the company’s primary crossbow competitors.

THE HORTON ARCHERY EXPERIENCE was for TGV “a very painful lesson in what can go wrong in the global supply chain,” Moore says.

But in the middle of getting schooled, Moore and colleagues did at least one thing right, and they did it several times: as new information became available, as reality seemed to shift from moment to moment, they revolutionized their business model instantly—radically, dramatically, courageously.

“It’s true,” Moore says. “We shook up the Etch A Sketch a few times.”

Man of Steel

In 1998, Drew Greenblatt purchased Marlin Steel Wire Products, a 30-year-old company with a business model that worked until, suddenly, it didn’t.

You might have known Marlin only by the ubiquitous baskets it produced, those wire racks that hold bagels—onion, blueberry, egg or standard-issue plain—in your local bagelry. Business boomed until the anti-carbohydrate diet made famous by Dr. Robert Atkins emerged in the early 2000s.

As bagel sales dipped so did demand for the Baltimore-based company’s wire baskets.

Things got worse when Marlin suddenly found itself in a commodity market with a shrinking customer base, competing with Chinese manufacturers who sold wire baskets for less than the price Marlin paid for steel.

“It was,” Greenblatt recalls, “a horrific place. It just all fell apart. We were floundering around getting hammered, just hemorrhaging cash. The world had changed and we were going to be extinct.”

But then—call it the great bagel-shaped circle of life, Simba—an engineer from Boeing rang. The U.S.-based aerospace giant was looking for a basket that could hold a very specific airplane part. They needed it customized. They needed it made to hyper-precise specs. And they needed it fast. But they needed just a handful.

Now, Marlin was built to supply major bagel chains that bought wire baskets “in lots of a thousand or 2,500,” Greenblatt says. On the one hand, that market was winding down. On the other, there’d be additional costs in gearing up to produce, like, four or six wire baskets just one time.

He told the Boeing engineer that what he was describing would cost a lot—maybe about twice as much as your conventional bagel basket.

The Boeing engineer “was unflappable,” Greenblatt remembers. “He was like, ‘Yeah, yeah, whatever.’”

That was Greenblatt’s miracle moment: “We’d found a market where they appreciate engineering, quality.”

A new business was born, a business Greenblatt calls “custom-engineered materials-handling containers.”

“We just morphed,” he says.

The word “just” implies that the process was simple, overnight; elsewhere in our conversation Greenblatt describes the process of reinvention as “extremely difficult,” “terrifying,” “incremental.” At one point, he even acknowledges ruefully that it was one of those transformations that you might not take on if you knew in advance how dizzying, unhinged and scary the path would be.

But this revolution unfolded slowly, over the course of several years. In that time, Marlin has invested in robots, managers, and engineers as varied as bagels—“process engineers, mechanical engineers, industrial engineers.” He describes his sales process as “engineer-to-engineer.” And Drew Greenblatt has become something of American industry’s Man of Steel.


Today, about 40 percent of Marlin’s super-engineered products move offshore—to 18 countries in Europe, eight countries in Central and South America, and five in Southeast Asia.

And everywhere it sells, Marlin eschews price. That’s because Marlin sells custom. Marlin sells American-made value. Marlin sells fast.

“We ignore markets that are focused primarily on price. In fact, we have exited from all commodity business, because they don’t appreciate well-paid employees making high-quality parts, or engineers coming up with really slick ideas,” Greenblatt says. “We have had seven years of record growth, each and every year, despite the recession, and I attribute a lot of that to exporting.”

“You won’t find Marlin manufacturing ‘baskets for socks in Vietnam.”

Greenblatt cites a Japanese automaker’s recent order of $100,000 worth of material-handling racks. The racks would attach to a robot that loads parts—a function that demanded a highly engineered basket. And the buyer needed them quickly.

“We used a laser made in Connecticut and steel made in Pennsylvania, and all the brains were out of Baltimore,” he says. “That combination developed something so effective that the Japanese automaker went with us. We shipped very quickly, and it worked out so well that they gave us two reorders.”

Greenblatt studiously avoids price by focusing on highly developed markets like Japan. “What moves the needle for us in a certain country is high labor rates in that country, such that we can save them time and money in terms of processing time and also the ability to reduce their scrap,” he says. “These are countries that appreciate quality. As a result, for example, we aren’t going to do so well in countries in Africa and a lot of countries in Southeast Asia.” While Marlin has some customers in higher-end factories in cheap-labor countries—telecommunications or precision sheet-metal fabrication in China, Taiwan, Singapore, New Zealand, and Australia—you won’t find the company manufacturing “baskets for socks in Vietnam.”

And don’t bother asking about the revenue that Marlin might lose because it has eliminated from its target-market list every country with low wages. “Revenue does not generate the cash that you need to invest in new equipment, to invest in employees, or to create a new marketing campaign,” he says. “Focus on profit.”

Competing on quality means buying on quality, too. And though he could inarguably find a less-expensive place to manufacture, “there was never a thought to leaving” Baltimore, in part because of the area’s “excellent port, BWI Airport, road and transit system.” Access to air, port and ground transit have helped make Marlin the company you call when you need something amazing and you need it there fast.

And when it comes to ocean, Greenblatt has mastered the art of the half container. “For example, we may have a bill of lading to Brazil. My products may take up half a container” moving out of the Port of Miami, he says, “and then the other half of the container is filled with other products also going to Brazil. But the bill of lading will read Miami.”

But Marlin isn’t primarily soliciting bids on price. “We only work with qualified companies to begin with,” Greenblatt says. “Our main requirement is that (carriers) can guarantee the safety and integrity of the products we ship. Second is how quickly it will get there because most of our customers have time elements that are involved.”

Price, he says, even for his own vendors, ranks a lowly third.


Greenblatt is one of those guys whose enthusiasm is like a tugboat nudging an entire industry—an entire country—out to sea. He is not merely about self-promotion. Sure, his company’s website banner reads “Marlin Rising,” but also “Leading an American manufacturing renaissance.”

Such enthusiasm—and business success—may account for Greenblatt’s presence on the board of the National Association of Manufacturers. He’s chairman of the board of the Regional Manufacturing Institute. In 2011, the World Trade Center Institute gave him an International Business Leadership Award. He has been featured on CNN, CNBC, NPR and BBC, and in the New York Times, Washington Post, Fast Company magazine, the Wall Street Journal and The Economist. He has testified before the U.S. Senate and Congress more than half a dozen times on topics including small business, taxation, regulations that stifle small business, effects of trade policy on job growth, and techniques to grow the economy; has visited the White House on two occasions, meeting with Presidents George W. Bush and Barack Obama to discuss manufacturing and foreign trade. His plant is often a destination for national leaders, including Treasury Secretary Timothy Geithner.

In 2007, Marlin was awarded Regional Employer of the Year from Baltimore City & Baltimore County. Last year the company was named one of the Inner City 100 Fastest Growing Companies in the U.S. and hit No. 4,112 on Inc. Magazine’s 5,000 fastest-growing manufacturers—its sixth appearance on the list. The company earned $4.4 million in revenue in 2011, up an astonishing 33 percent from 2008.

Inc. called Greenblatt “the Go-To Spokesman for U.S. Manufacturing.”

OUTSIDE THE BOX Training means Marlin staff “know how to use technology better than our competition.”
OUTSIDE THE BOX Training means Marlin staff “know how to use technology better than our competition.”

“One of the reasons he’s such a great spokesman for manufacturing is that he believes in the future—he believes in the future of manufacturing,” Mike Galiazzo, president of the Regional Manufacturing Institute of Maryland, told the Baltimore Sun. “He puts his money into it. Small companies ought to take note that this guy is not sitting there saying, ‘Woe is me.’”

Unlike those who believe America is headed for a blissed-out, post-industrial economy, Greenblatt believes the future is with companies like his—small and mid-sized world-class manufacturers that provide good jobs and real benefits.

He underscores the point with an anecdote: When he first arrived at Marlin Steel, Greenblatt says, his was the only car in the parking lot. His employees—all of them, he says—were earning minimum wage and couldn’t afford their own cars. There was no health insurance. There was little worker training. There was almost no investment in new technology.

These days, Greenblatt says, one-fifth of his workforce consists of degreed mechanical engineers, and he’s hiring more. Wages for the factory floor workers (not including those engineers) range from a respectable $30,000 to a flat-out upper-middle-class $80,000 a year.

“Our people are our most important asset,” Greenblatt says. “While most companies look at employees as a variable cost, we look at them as a fixed cost.”

The company spends five percent of its direct labor budget on training, so that the employees are actual craftsmen. “This allows them to come up with better ideas than our competition,” he continues. “In addition, they know how to use technology better than our competition.”

Greenblatt even has an acronymic industrial initiative—Quality Engineered Quick, or QEQ.

“Companies need to identify what really impresses clients today,” he explains. “For us, it is QEQ. We’ve literally trademarked the words because that’s our niche: We want to have the best quality parts, the best engineered content of any company, and the ability

to ship quicker than anyone else in the world.”

“We use engineering as a way to differentiate ourselves from our competition. We become an integral part of their supply chain, rather than someone they can beat up on pricing.”

It wasn’t always thus. Back when Greenblatt first purchased Marlin Steel—back when there was one car in the parking lot—the company used tape measures to determine quality: the tolerance for variances was measured in baskets that were held to a fairly loose standard: baskets that could hold one more or one less bagel were considered ready to ship. Now, accuracy is defined at four one-thousandths of an inch. The company hits that number while producing products 60 times faster than in the past.

The ability to meet more exacting standards is a product of engineers and new technology. While many companies have used the recession as a reason to trim capital investment, Greenblatt says Marlin pumped more than $3 million into robotics. In the last two years alone, the company’s investment in technology has been over 15 percent of revenue.

“This is another way we differentiate ourselves from our competition,” he continues. “We want our people to have the best tools available so that we can ship higher-quality parts with tighter tolerances. The technology also allows us to ship faster.”


Everybody, Greenblatt says, should be as enthusiastic about exporting as he is.

“Our economy is limping along,” he says, sounding every bit the industrial evangelist. “It should be doing much better. Businesses in the U.S. should stop being so parochial. Ninety-five percent of the world is overseas, so we should vigorously pursue exports. Whatever the Canadians do, we can do, so our goal should be at least 28 percent exports. That would end the recession. I’m not even talking about getting to German levels.” He reels off the export numbers of Germany (where, he says, 40 percent of the economy is export-oriented) and Great Britain and Canada (28 percent). “The U.S. is at a pathetic 11 percent,” he says, incredulous.

He thinks government can help. Like Marlin, Greenblatt says your company should invite elected officials to tour your facility. “In this way, the representatives can understand the hardships and challenges that we go through,” he says. “They can also understand how good of an environment we provide to our employees, and how important these manufacturing jobs are. The average American manufacturing employee makes over $77,000 a year. These are jobs we should be coddling. The only way for elected representatives to understand this is for manufacturers to invite them in for tours.”

Take advantage of the Export-Import Bank and its various programs, he says. “We have an advantage in this country with the Export-Import Bank, which is a good ally for us,” he asserts. “More manufacturers should take advantage of it. By working with this bank, you can extend credit to a foreign company and have your receivables protected up to 95 percent. We pay a modest premium of about half a percent, and they guarantee 95 percent of our credit. This allows us the opportunity to take more chances with exporting than we might otherwise.”

And leverage the Commerce Department’s Gold Key program. “This is an effective way to interact with new prospects,” he says. “I have used this during trips to China, Korea and Vietnam. It was a tremendous help. They provided a driver and a translator, since I didn’t speak the languages.”


There’s always reason to be anxious, of course, but little of that anxiety emerges in conversation with Greenblatt. He’s got a record of success to look back on, to be sure, but he also sees lots of reason for optimism. First, there’s all that opportunity for export growth—bridging the gap between the U.S.’s “pathetic” export economy and the German example, for instance. Indeed, he’s launching his own export revolution: “I am personally going to shoot for 40 percent growth, but we are currently budgeting for 20 percent growth.”

There are also huge, hopeful macro-economic factors.

“First, re-shoring is definitely here”—that’s the movement back to the U.S. of American companies that moved manufacturing jobs to such low-wage countries as China. “And it is definitely going to be increasing,” he says. One reason is that Chinese wages are rising fast. In 2006, the average Chinese employee was making 26 to 28 cents per hour. In 2011, when Greenblatt visited China, he found the average was almost 10 times that—about $2.38 per hour. In the next four-year plan, Chinese wages will rise up to about $5 per hour. After that, Greenblatt figures, some Shanghai factory workers could be making $7.50 per hour.

At that point, it’s advantage U.S.A., Greenblatt says.

“If a customer has a choice between a $7.50 per hour worker in China or a $12 per hour worker in America—where we have intellectual property rights, the rule of law, and significantly lower freight costs—people are going to move their business and factories to America.”

Another big shift: the natural gas revolution. “We hit the lottery in the last four years, in that we have found two times the amount of natural gas that Saudi Arabia has,” Greenblatt says. “We have found it in places like Pennsylvania, New York, the Dakotas and Texas. As a result, we won’t have to trust people who hate us to provide us with fuel. This is a major shift. In Europe, they pay $12 for natural gas. The Chinese and Koreans are paying $16 and $18. We are blessed with $2 natural gas.”

“That’s making U.S. companies that used to be at a price disadvantage now uniquely positioned to win contracts they never won in the past—or haven’t for a while,” Greenblatt recently told NBC News. “Everyone talks about what’s going on in North Dakota, but it’s filtering down now to conventional factories throughout America.”

There is, of course, nothing “conventional” about Marlin, or about Drew Greenblatt, its energetic Man of Steel.

 Additional reporting by William Atkinson and Patrick Dooley.

Horse Course

Following the mid-January announcement that European inspectors had discovered horse DNA in “beef” products, diners across the continent pushed away from the table. Even gastronomes in such horsemeat-eating countries as Italy, France, Belgium, and Switzerland

Tabloidhad reason for anxiety: some of the meat may have come from the U.S., an unintended consequence of the global trade cycle—and a well-intentioned effort to end the domestic slaughter of horses.



Beginning in 2006, the U.S. Congress, bowing to pressure from animal rights groups, defunds federal food inspection at slaughterhouses specializing in horsemeat. Without federal certification, horsemeat processed in the U.S. can no longer be sold into the largest export market, the European Union.



That congressional effort, designed to end the slaughter of horses, literally drives the business elsewhere. Horses—family pets, racing animals, or captured in the wilds on federal land—are transported to Canadian and Mexican packing facilities.



“U.S. horses were slaughtered in greater numbers in Canada and Mexico from 2007 onward, with the meat exported to the European Union (EU) and Russia,” Huffington Post reported.

 44 traced the journey of one prize-winning horse, Silky Shark, from American racetracks to a foreign slaughterhouse. “Silky Shark was everything you’d want in a racehorse,” said his former owner. “He was vibrant, fiery, a very happy horse.” But when the owner “fell on tough times, he sold Silky Shark to a buyer he trusted. Then the horse was resold again and again, eventually winding up in a Canadian slaughterhouse.”



Like many competition horses, Silky Shark was shot up with the equine anti-inflammatory, phenylbutazone, or bute. It’s legal and common in veterinary circles, and harmless to horses. But in humans, bute may cause cancer.


6 6

Because Canadian slaughterhouses are held to rigorous standards where bute is concerned, U.S. horses were increasingly moved to Mexico because, some say, “Mexico does not test for phenylbutazone contamination,” the Huffington Post reported.



European Union (EU) regulators found horsemeat in 5 percent of all beef meals they tested. One half of 1 percent of all beef showed trace amounts of bute in the horsemeat—levels low enough that they are “a matter of food fraud and not of food safety.” Said European Commission spokesman Frederic Vincent. “You would have to eat hundreds of horse burgers for months to have problems.”



The regulators speculate that criminal enterprises helped ship illicit—and cheap—horsemeat, including some from Mexico, through otherwise legitimate European slaughterhouses.



How could that happen? The European Commission “believed the EU had one of the best food safety systems in the world but it relied on a complex web of suppliers,” the BBC reports.



That complexity is the system’s weakness. “If a Swedish company makes a lasagna by using French, Dutch and Cypriot firms to source Romanian meat via Luxembourg, then the supply chain is long enough to be corruptible,” writes the (London) Daily Telegraph’s Fraser Nelson. “Long business supply chains are corruptible and can hide a multitude of crimes if no one checks for fraud or criminal activity.”



No horsemeat penetrated Iceland’s supply chain. But don’t ask Icelandic business execs for advice. Investigators there say they found something else: in some cases, products labeled “beef” were 100 percent vegetarian.



In March, New Mexico businessman Rick de los Santos sued the federal government to certify his new horse slaughterhouse in Roswell. “I’ve seen 130,000 horses a year on their way to Mexico—they go right through our backyard—and I wanted to tap into the market,” he told the Los Angeles Times. “I could have hired 100 people by now. Everyone in our community agrees we need this type of service. And I’m tired of waiting.”



Gov. Mary Fallin of Oklahoma isn’t waiting. In March, she signed a bill legalizing “the humane, regulated processing of horses.” Significantly, Fallin noted that her measure, “which takes effect Nov. 1, strictly prohibits selling horsemeat for human consumption in Oklahoma.”

Postcards From the Edge

A high-flying b-school prof asserts that global companies born in the tumult of emerging markets have lessons to teach U.S. exporters

In January, you remember, a group of terrorists operating in an impossibly remote stretch of the Algerian desert captured an isolated gas refinery and took hundreds of employees hostage. A few days later, beginning on Jan. 18, special-ops soldiers of the Algerian military responded—not with a cell phone chucked through an open window, cash in a briefcase, or the promise to free jailed Islamic militants, but with a bloody raid that reportedly killed most of the terrorists and their hostages.

It was a weird time to speak with Mauro F. Guillen, Wharton School professor and co-author (with Esteban Garcia-Canal) of Emerging Markets Rule: Growth Strategies of the New Global Giants, a 2013 book with a big idea: that instability is the new normal, and that some of the world’s most volatile places are shaping multinational firms from which we can learn something about growing a successful global company.

The Chinese appliance maker used what Wharton prof Guillen (above) calls the Trojan-horse approach to fill “niches that Whirlpool and GE were neglecting.”
The Chinese appliance maker used what Wharton prof Guillen (above) calls the Trojan-horse approach to fill “niches that Whirlpool and GE were neglecting.”

“Emerging markets have become key launching pads for new multinational firms,” Guillen told the Wharton School’s website ( “Many enjoy production cost advantages in the home country. Others have ventured abroad using the brands and technologies developed in an emerging economy, which have proved to be useful in developed markets as well as other emerging economies. They have also learned in the home country how to deal with government regulation.

“The global economy has become a two-way street,” Guillen concludes. “Firms from emerging economies are now every bit as capable and competitive as companies from the U.S., Europe and Japan. The global playing field is now level.”

Fortunately, Guillen tells Global Trade, “it’s not like they have a magic formula. The sources of their strength, the reasons for their success can be emulated.”

Guillen and Garcia-Canal offer seven lessons from the edge.

Execution is more important than strategy.

“We talk about this disease in U.S., European and some Japanese companies, that they over-strategize,” says Guillen. Yes, he says, strategy is important. But too many executives lose valuable time “trying to come up with perfect strategy, and then don’t execute, don’t implement.”

Writing in the Harvard Business Review, Guillen and Garcia-Canal compared such analysis-paralysis with the more impulsive behavior of emerging-market multinationals. Born in “business environments that are in constant flux—where labor is abundant and inexpensive but often unskilled, infrastructure is far from state-of-the-art, regulations may change unpredictably, and political instability is common,” emerging-market multinationals “are more impatient than developed-world companies. Their internal clock speed seems faster. They’re open to opportunities neglected by established multinationals. They have a higher appetite for risk and a higher tolerance for failure.”

So these emerging-market multinationals spend less time worrying over which market to enter, and more time implementing their best business practices in that market. Guillen and Garcia-Canal point to Bimbo, the improbably named Mexican baker. Established in 1945 by a Spanish immigrant, Bimbo came to the U.S. in the late 1990s when it bought out Sara Lee’s bakery division. It then focused intently on execution, providing for its U.S. customers a service system sharpened in Mexico, where the company delivers to far-flung mom-and-pop shops via Mexico’s notoriously challenging transportation system.

“Bimbo’s leaders are continually on the road, looking for ways to improve the productivity of its 100 plants on three continents, its huge truck fleet and other operational elements,” the pair wrote in Harvard Business Review. “For instance, it uses tricycle delivery bikes in urban areas of China where streets are too narrow for trucks, a practice it first implemented in Latin America. At the same time, all of its trucks are equipped with sophisticated computer systems to optimize delivery routes.”

 Cater to the niches.

“There’s a subtle message in that principle,” Guillen says. “It’s not just saying, ‘I’m going to sell to this well-defined group of customers.’ You can use niches as Trojan horses” to enter far broader markets.

That’s how China-based refrigerator manufacturer Haier got into the U.S. market. “They looked for niches that Whirlpool and GE were neglecting,” Guillen says. They settled on student fridges and wine cellars. “That became the beachhead. They went in in a way that the majors didn’t expect. And they didn’t stop there. They thought of niches not as ‘This is our mission, and this is the only thing we’re going to do.’ No, they thought of niches as stepping stones into the mainstream of the market.”

Haier didn’t stop there. Guillen says the company “listened carefully to the customer to design new products” that took market share—however modest—from the North American giants.

By approaching the market through under-served niches, Haier learned that the established giants were vulnerable, that access to the world’s largest market was not an impossible dream. But it didn’t stop there. It listened carefully to the customer to design new products.

Running against the general trend of Chinese manufacturing for export, Haier now builds full-size refrigerators for the North America market in Camden, South Carolina.

Scale to win.

Begin with this premise: “Unless you grow big, someone else is going to grow big and then have lower costs to produce than you”—and they’re going to win on the global playing field. So increasing scale is hardly an option: it’s a necessity if you hope to compete on price in any way.

Fortunately, Guillen says, “In this age of customization, where customers want specific features in the products or services you are selling them, because of technologies we have a lot of opportunities for so-called ‘mass customization.’” So it’s much easier to reduce costs while increasing scale. Translation: You can scale up production even across markets with very different taste requirements.

For example, a separate study of one of the author’s favorite examples, China’s Haier, reports the company has scaled up while producing “extra-large-capacity washers that can accommodate the robes of Middle East consumers; electronically sophisticated washers that can cope with the frequent power fluctuations in India; whisper-quiet, timer-equipped washers for Italians who want to take advantage of the lower power rates available late at night; and other locally targeted variants.”

Guillen also likes the example of Arcor, the Argentina firm that is the world’s largest candy maker. Privately owned and managed by its founding family, and based in a country that is seemingly a once-per-decade basket case of nationalizations followed by privatizations, labor strife, currency fluctuations, and wild (even violent) political swings between the left and right, Arcor has still managed to scale up and win production jobs for the world’s largest candy brands. They didn’t try to create new products—in the candy business “almost everything, every flavor has been invented,” Guillen says. Instead, “Arcor was able to find a profitable place under the sun” by going big, “by building big factories” to supply its global clients, and they did that by focusing on production at the molecular level. Guillen sums it up this way: “It’s all about efficiency.” Several major global candy brands decided to outsource production to Arcor given that they couldn’t match prices or quality.

Embrace chaos.

The volatility of the global marketplace goes beyond such high-profile events as January’s Algerian terror attack or the 2011 tsunami in Japan. It extends to equally significant though subterranean changes—like subtle movements in the global energy market, the death or removal from office of key foreign officials, the unfunded liability of public-employee pensions in distant countries.

‘A distinct capability’ Instead of avoiding risk, Egyptian telecom Orascom raced into such turbulent hotspots as North Korea.
‘A distinct capability’
Instead of avoiding risk, Egyptian telecom Orascom raced into such turbulent hotspots as North Korea.

Emerging-market multinationals run toward such frontiers. Guillen and Garcia-Canal offer the example of Cairo-based Orascom. Founded in 1950 as a construction company, “the firm got a taste of political risk in 1971, when it was nationalized by the Egyptian government,” the authors write in Harvard Business Review. Privatized again a few years later, Orascom evolved, partnering with Motorola and France Télécom to win a majority of an Egyptian mobile phone company. As global cellular service exploded in the late 1990s, so did Orascom. CEO Naguib Sawiris “recognized that despite the promise of rapid growth, developed-world telecom firms were reluctant to enter those markets, in part because of the risk for instability.” The firm moved aggressively into such “turbulent hotspots” as Pakistan, Zimbabwe, Algeria, Iraq, North Korea, Central African Republic, and Lebanon—“places,” Guillen says, “no other telecom company wanted to go. Instead of avoiding chaos, they embrace it. This is a distinct capability.”

Acquire smart.

Guillen says he and Canal-Garcia “observe too many CEOs” who see acquisitions as ends in themselves. Pushed by shareholders or ego to grow globally, “they acquire a company in a foreign market and say to themselves, ‘Mission accomplished.’”

But that’s like planting a flag to declare ownership of a continent. “They make an acquisition and don’t worry about the details of integrating that acquisition into the operations of the company,” says Guillen. The results can be catastrophic for the acquirer and acquired alike.

The logic here is simple, Guillen says: Use acquisitions as smart emerging-market multinationals do, only “when they feel that they cannot do something on their own.”

Take on the sacred cows.

Working against the U.S. exporter is a pervasive nostalgia, a longing for the Cold War world in which dramatic change was exceptional. Nostalgia accounts for the sense among many Americans—including business leaders—that upheaval is temporary and unusual rather than a permanent feature of the global economy. “For the next 25 years, we might want to build a new set of expectations around uncertainty. This,” says Guillen, “is the new normal.”

Each of the emerging-market multinationals’ lessons requires examining “the assumptions of ways we’ve been thinking, and the ways we’ve been doing things for a long time.”

The market has changed, customers change, and their preferences change, Guillen says, but “complacency and inertia and past dependence—on the idea that what brought you success in the past will work in the future—are the big dangers.”

Expand with abandon.

Guillen says he’s logged a lot of miles over the last decade to track down companies who’ve made much with little (when he’s traveling south, it’s the Star Alliance’s United Airlines and US Airways; headed to the Far East, he looks forward to flying on Singapore Airlines). And what he’s seen allows him to offer this note of caution: Ignore the global marketplace at your own peril.

Recall the example of Argentina’s Arcor: “there’s always going to be someone with a product or service similar to your own, and they’re going to get into those other foreign markets,” Guillen observes. “At some point, they will go to where you’re strong and challenge you there. This is the whole point of globalization. If you don’t expand with abandon into all of those niches—large niches and small niches—then somebody else will. And they will dominate the market you choose not to enter.”

Once there, those competitors will generate cash holdings, sharpen their customization and increase their scale. They’ll start to eye your home market. “And then,” says Guillen, “it’s game over.”


Trade Cycle March-April ’13


Japanese kids have always been early adopters of global cultural trends—consider baseball (the country’s national sport) and Santa Claus, whom the Japanese have transformed into a kind of Jewish matchmaker presiding over a Christmas that looks more like Valentine’s Day.

Now Japanese youth are storming fast-food joints to order belly-busting volumes of fried potatoes, disgusting some observers by eating them all, and outraging others by leaving some behind. Blogger Brian Ashcraft reports that one scold took to Twitter to admonish the revelers: “Look, buying 23 large French fries is fine, but you gotta eat them all, you gotta eat every last one.”

Fried potatoes are truly international—whether they make a cameo in Canadian poutine (put to bed beneath blankets of gravy and a kind of cheese), as chips in England, as Belgian fries or a freak Japanese trend. But no matter where you eat them, the global trade cycle of what Americans call “French fries” begins in the Andes. 


1In the 1550s, Spanish infantry encountered the potato in the arid Peruvian highlands. Shipped back to Europe, the tuber slowly grew in popularity, imbedding itself in Ireland, for example, as the chief staple. “No London merchant ever formed a new company to trade potatoes,” writes Steven Topik, my Global Trade colleague and co-author (with Kenneth Pomeranz) of The World That Trade Created. “But crises created needs to which the potato was beautifully suited; today, potatoes are the second-largest food crop in the world.”


2In 1875, Luther Burbank, a self-taught Massachusetts botanist, cultivated what we now call the Idaho potato. When blight wiped out the Irish potato crop in the middle of the nineteenth century, it was Burbank’s Russet, shipped across the Atlantic, that ended years of famine—but only after one million Irish died and another million fled the island, many for the U.S. Burbank’s potato followed the path of Americans themselves—westward with Burbank to California, Colorado and Idaho.


The Idaho Potato Commission website describes local growing conditions in terms that might apply equally to the Andes of Peru: “snowcapped mountains provide the perfect elevation,” “free-flowing rivers contribute cool, clear water,” “rich, volcanic soil” and “warm days and cool nights.”


Idaho remains famous for its potatoes—it says so right on the state license plate.


5But Idaho is also rightly famous for global trader J.R. Simplot, the man who ran away from home in 1923 at age 14 and bought his first potato-processing machine a few years later. Simplot learned the principles of international logistics while supplying dehydrated potatoes to U.S. troops serving around the globe in World War II.


In 1967, Simplot expanded on that vision, cutting a deal with Ray Kroc to produce the fries that flowed through the McDonald’s international burger empire.


Simplot picks up potatoes in massive 18-wheelers that thread two-lane country roads throughout Idaho bound for the company’s plant in Caldwell, Idaho. Growers farther afield ship via the Boise Valley Railroad, one of 30 shortlines run by Kansas-based Watco.


“Twenty years ago, I could have told you that every McDonald’s French fry you ate in Mexico was grown in Idaho,” says Brad Foster of Foster Land and Cattle in Rigby, Idaho, a company that produces for J.R. Simplot. But these days, Simplot and Canada’s McCain Foods also grow potatoes overseas to satisfy McDonald’s desire for local sourcing.


Simplot grows potatoes for the chain’s China stores right in the People’s Republic, opening that nation’s first potato-processing plant in 1993. In December, when members of the Indian parliament charged the company was importing foreign potatoes into that country, McDonald’s quickly dismissed the allegation. Company officials explained that, yes, Simplot routinely rejected inferior potatoes, but had in fact worked with local farmers to grow the “process-grade varieties” it used in all Indian stores.


10Simplot potato products are shipped around the world, whether through the Port of Portland or from its foreign processing plants. The company’s Australian unit, for example, serves markets throughout Southeast Asia, including Malaysia—where the Idaho Potato Commission promotes the tuber-centric menu.


The French fry name can occasionally become political. When France refused to OK the 2003 U.S. invasion of Iraq, North Carolina restaurant owner Neal Rowland renamed his fried potatoes “freedom fries”; Republicans in the U.S. House of Reps followed suit, amending the menu in the House cafeteria. These days, they’re called French fries again.



Sayonara, China

Once upon a time, Americans freaked out about Japan. Today, it’s China. Here’s why the U.S. ain’t finished yet.


I was a boy in the 1970S when America experienced the last wave of Yellow Peril. With my family, I was visiting Disneyland in Anaheim, California, observing hundreds of Japanese tourists as if they—and not the Matterhorn, the Tea Cups, the Monorail—were the most remarkable feature in the world. They wore brightly colored t-shirts that apparently identified them as members of distinct, well-organized groups within the larger group. Each team was led by a woman wearing something like an amateur welder’s visor to protect against the blazing summer sun; each woman wore delicate-looking white gloves and held aloft a small pennant the color of the t-shirts.

“They seem very polite,” said my mother who, even as a retired schoolteacher, continues to value social order. But a resort guest standing behind us—maybe a World War II vet—responded, “They can afford to be polite. It looks like they’ve finally won the damn war.”

Back then Americans trembled in the face of rising Japan, a magical kingdom where disciplined workers performed daily, spirited calisthenics before tending machines that cranked out cheap products fueled by a powerful banking sector and managed by government officials who operated with piratical commitment to boosting exports while heading off imports. Japanese successes in the semi-conductor industry drove U.S. chipmakers into Sematech, a consortium that belied American devotion to individual success—but not before the digital wave of Japanese clock radios, tape players and cameras swamped the U.S.

Flush with cash generated by record sales abroad, Japanese investors bought up real estate in major U.S. cities, from Rockefeller Center in New York City to the Pebble Beach Golf Club in California and almost everything on Waikiki. Japanese carmakers crushed Detroit, the very symbol of American industrial power. President Ronald Reagan talked about free trade, but reintroduced the Rooseveltian concept of voluntary export restraints. There was, of course, nothing “voluntary” about them: in exchange for continued access to the U.S. market, for instance, Japanese manufacturers volunteered to reduce sales of Japanese motorcycles in the U.S., and even helped apply the defibrillators to Harley-Davidson, teaching the benighted manufacturer to build a better bike.

Americans sought everywhere for an explanation of Japanese ascendancy; some meted personal vengeance. In one gruesome case, in 1982, two Michigan autoworkers beat to death Vincent Jen Chen, a Chinese-American the pair mistook for Japanese. More reasonably, some cited the work of W. Edwards Deming, the American management guru whose “Plan-Do-Check-Act” rigor seemed to resonate among Japanese who (the narrative went) were simply more disciplined than Americans. Others argued that the Japanese government manipulated the yen and encouraged the theft of U.S. technology. It is undeniable that the Japanese blocked imports of U.S. farm products; in the case of meat they argued that Japanese—so different from other homo sapiens—could not digest U.S.-grown beef.

Running against incumbent President Reagan in 1984, Walter F. Mondale stoked the Japanophobic anxiety spreading among Americans: “What do we want our kids to do? Sweep up around the Japanese computers?”

Just a few years later, it was all over. The sun had set on the land of the Rising Sun.

Writing in 1995, a Los Angeles Times reporter observed, “Today, the Boeing 747s landing at Honolulu International Airport are disgorging somber bankers, accountants and lawyers assigned the messy task of cleaning up a disastrous Hawaiian real-estate binge that has cost Japanese investors, by one estimate, a staggering $6 billion.”

Now, Japan looks like the sick old man—or woman—of Asia. Sony was recently delisted. The killer 2011 earthquake and tsunami clearly fall under the category of Acts of God; but the government’s response and resulting nuclear crisis at Fukushima have undermined the country’s reputation for high-tech skill. Ditto for a recent tunnel collapse outside Tokyo.

Today, it’s China we’re worried about.

DURING THE RECENT PRESIDENTIAL CAMPAIGN, observed that Republican candidate Mitt Romney pledged “he would label China as a currency manipulator on his first day in office—a promise he frequently works into his campaign speeches. And he accused China of ‘stealing’ designs, patents and technology pioneered by U.S. companies.”

Romney wasn’t alone. President Barack Obama has taken Reaganesque actions to limit Chinese imports (of tires, famously), and a Pew Center poll found that a majority of Americans “describe China as a competitor and few say the U.S. can trust the Asian nation.”

Here’s betting that China will go the way of Japan.

AS THIS ISSUE OF GLOBAL TRADE goes to press, the Ob River, a massive natural-gas carrier, is cruising eastward from Norway to Japan through the Arctic Circle, the first ship of its kind to make the winter journey.

Environmentalists are, reasonably, wigged out by the prospect of a voyage that’s aided not just by a Russian nuclear-powered icebreaker but by global warming and a changing international energy market. “We have studied lots of observation data,” the ship’s owner told the BBC. “There is an observable trend that the ice conditions are becoming more and more favorable for transiting this route. You are able to reach a highly profitable market by saving 40 percent of the distance. That’s 40 percent less fuel used, as well.”

The gas aboard the Ob River was supposed to have gone to the U.S. But the U.S. is now producing so much energy that experts at the Paris-based International Energy Agency predict the U.S. will be the world’s No. 1 producer by 2017.

So LNG that was headed west for sale is now headed east.

“The people on board have been seeing polar bears on the route,” the ship’s owner said.

Depending on your perspective, the journey of the Ob River may be terrifying or wonderful news. Or both. It’s certainly evidence that the U.S. is gaining an advantage in global manufacturing: cheaper energy means cheaper manufacturing—and that likely means more industrial jobs in the U.S.

In addition to cheaper energy, the rising cost of Chinese labor is likely to help some manufacturers reconsider the good old U.S.A. About the time the Ob River slipped anchor in Hammerfest in the north of Norway, workers rioted at a plant in Shanghai, China. “The unrest was noteworthy because the factory site is managed by Foxconn Technology, one of the world’s biggest electronics manufacturers and an important supplier to companies like Apple, Dell, Microsoft and Hewlett-Packard,” the New York Times reported.

The Ob River: One sign that America is a major energy producer again LNG bound for the U.S. now heading to Japan.
The Ob River: One sign that America is a major energy producer again LNG bound for the U.S. now heading to Japan.

The unrest was also noteworthy because it wasn’t unusual. “The incident put a spotlight on growing tension in China’s factories as companies struggle to meet worker demands for better compensation and work conditions even as economic growth slows,” the Wall Street Journal reported. “China’s gross domestic product rose 7.6 percent in the second quarter from a year earlier, the slowest pace since the global financial crisis. The China Labour Bulletin, which tracks strikes and protests, reported an increase in such incidents, logging an average of 29 a month for the first eight months of this year, up from 11 a month for the same period last year.”

“Many of the protests this year appear to be related to the country’s economic slowdown, as employees demand the payment of overdue wages from financially struggling companies, or insist on compensation when money-losing factories in coastal provinces are closed and moved to lower-cost cities in the interior,” the Times reported.

Then, too, there’s the simple fact that factory work—particularly factory work that is dis-integrated from creative innovation—is simply soul-crushingly dull. “Many [Chinese] youngsters increasingly prefer working in China’s restaurants and stores to the tedium of making widgets,” reports the Financial Times. In response, some Chinese companies have turned to workers who complain less: robots, those emblems “of a new industrial revolution in China driven by the changing nature of the labor force.”

Many companies—often pushed by the Chinese government—are simply paying up. Earlier this year, government officials raised the minimum wage by nearly 14 percent, about $2,880 per year. That’s still far less than American pay, but high enough that manufactures are looking elsewhere. “If you are only focused on reducing labor costs, then outsourcing work to places like Vietnam may be a better option,” an American factory manager told “However, this strategy involves chasing a few cents savings and moving to new factories or new vendors every few years.”

THAT SORT OF INTERRUPTION to the supply chain exacts its own toll. But even in the absence of supply-chain screw-ups, there’s increasing awareness that the whole outsourcing movement was dumb at birth.

Writing in the current issue of The Atlantic, Charles Fishman says outsourcing severed crucial relationships between manufacturing, innovation, operations and marketing. “In the first blush of cheap manufacturing, it’s easy to overlook the slow loss of your own skills, the gradual homogenization of your products, the corrosion of quality and decline of innovation,” he writes.

Fishman studied GE’s decision to bring home to Kentucky the manufacturing of its GeoSpring water heater. “A funny thing happened,” he reports. “The material cost went down. The labor required to make it went down. The quality went up. Even the energy efficiency went up. GE wasn’t just able to hold the retail sticker to the China price. It beat that price by nearly 20 percent.”

GE’s Tom Zimmer: Bringing it back homeOnce part of the company’s outsourcing effort, he’s helping GE reverse course.
GE’s Tom Zimmer: Bringing it back home
Once part of the company’s outsourcing effort, he’s helping GE reverse course.

And then there’s speed. “It used to take five weeks to get the GeoSpring water heaters from the factory to U.S. retailers—four weeks on the boat from China and one week dockside to clear customs,” Fishman reports. “Today, the water heaters—and the dishwashers and refrigerators—move straight from the manufacturing buildings to Appliance Park’s warehouse out back, from which they can be delivered to Lowe’s and Home Depot. Total time from factory to warehouse: 30 minutes.”

“What we had wrong was the idea that anybody can screw together a dishwasher,” GE’s head of design told Fishman. “We thought, ‘We’ll do the engineering, we’ll do the marketing, and the manufacturing becomes a black box.’ But there is an inherent understanding that moves out when you move the manufacturing out. And you never get it back.”

IF IT SERVED NO OTHER purpose, outsourcing may have helped bring China into the global community—something Karl Marx and Friedrich Engels predicted nearly 200 years ago.

If you haven’t had the pleasure, read Marx and Engels’ iconic Communist Manifesto for yourself. Yes, yes: there’s much that’s wrong here: far from spreading poverty, as they claim, capitalism actually raises living standards—consider the side-by-side experiment on the Korean peninsula, for just one example. And the infamous workers-in-chains declaration near the end now feels obsolete given that organized labor is working with U.S. corporations to bring jobs back.

All of that will be familiar to you. But what’s surprising is Marx and Engels’ admiration for capitalism and capitalists—and their understanding that the only constant in capitalism is constant change. Their own language is worth quoting at length, reading, as it does, like a hymn of praise to capitalism rather than its obituary:

Karl Marx: Unknown fan of capitalism Global trade—not love—will bring  us together.
Karl Marx: Unknown fan of capitalism
Global trade—not love—will bring us together.

The bourgeoisie has through its exploitation of the world market given a cosmopolitan character to production and consumption in every country. To the great chagrin of Reactionists, it has drawn from under the feet of industry the national ground on which it stood. All old-established national industries have been destroyed or are daily being destroyed. They are dislodged by new industries, whose introduction becomes a life and death question for all civilized nations, by industries that no longer work up indigenous raw material, but raw material drawn from the remotest zones; industries whose products are consumed, not only at home, but in every quarter of the globe. In place of the old wants, satisfied by the production of the country, we find new wants, requiring for their satisfaction the products of distant lands and climes. In place of the old local and national seclusion and self-sufficiency, we have intercourse in every direction, universal inter-dependence of nations. And as in material, so also in intellectual production: The intellectual creations of individual nations become common property. National one-sidedness and narrow-mindedness become more and more impossible, and from the numerous national and local literatures, there arises a world literature.

There will be holdouts, they acknowledge. But the holdouts will be overcome—not by violence/war/invasion but by their own desire to participate in the global economy:

The bourgeoisie, by the rapid improvement of all instruments of production, by the immensely facilitated means of communication, draws all, even the most barbaric, nations into civilization. The cheap prices of commodities are the heavy artillery with which it batters down all Chinese walls, with which it forces the barbarians’ intensely obstinate hatred of foreigners to capitulate. It compels all nations, on pain of extinction, to adopt the bourgeois mode of production; it compels them to introduce what it calls civilization into their midst, i.e., to become bourgeois themselves. In one word, it creates a world after its own image.

In that “bourgeois” world, China’s time as a threat to American industry has likely already passed. Next, India or Brazil, or any of several other rising manufacturing centers will come to embody American fears of decline.

But fear of decline is part of the American DNA, antedating baseball and apple pie by centuries. It arrived here with our forebears, carried like a virus to Plymouth Rock. Its symptoms include a terror of corruption and sloth, or (conversely) of great wealth and cosmopolitanism, but in every case of Satan himself unleashed upon the new continent. When we grasp that—can step outside the icy grip of the fear, can see that the fear is sometimes just a random, misfiring impulse, just background noise, part of what it means for better and worse to be an American—then we might actually get to enjoy the coming American renaissance.


Please Call Again: The Second Life of Cell Phones

Taken together, Samsung, Nokia, Apple and other cell phone manufacturers will soon produce about a billion new devices per year—and most of those will end up in the trash within two years.

“A billion anything is an ecological disaster waiting to happen,” says Joe Mckeown, VP of marketing and communications at ReCellular, a Michigan-based company that earns “in the high double-digit millions” giving millions of cell phones a second life—and keeping them out of landfills.

Here’s how ReCellular makes reverse logistics work.


FedEx delivers about 25,000 phones per day to ReCellular’s 60,000-square-foot facility in Dexter, Michigan, 12 miles from the company’s Ann Arbor headquarters. “We get almost every phone ever made, every day,” says Mckeown—even such museum pieces as 1980s-era brick phones the size and shape of, well, a brick.


The phones arrive from several sources: Major carriers (such as Verizon, Sprint and AT&T) and non-carrier retailers that offer in-store disposal of used devices; consumers who send phones through ReCellular’s online system; and what ReCellular calls its “enterprise collection channel”—big companies turning in used phones they provided their employees.


There’s a fourth channel: such charities as Susan B. Komen, Petco, and Cell Phones for Soldiers, a Massachusetts-based organization that collects and sells used phones to ReCellular. Founded by twin teens Brittany and Robbie Bergquist, Cell Phones for Soldiers uses revenue it earns from ReCellular to buy prepaid phone cards for U.S. military serving abroad.


The used phones move from the loading dock to a sorting floor. Like a high-tech catch-and-release program in the wilderness, ReCellular tracks each incoming phone by its unique electronic serial number (ESN). With the ESN, ReCellular can determine whether phones have been reported lost or stolen. The ESN also allows Mckeown to say that, despite the immensity of the global marketplace, ReCelluar sees some phones more than once. “We’ve seen the same phones show up three times in our factory,” he says.


Phones, “particularly smart phones, have lots of embedded value,” says Mckeown. An obscure U.S. Geological Survey document confirms that fact: “The amount of metals potentially recoverable would make a significant addition to total metals recovered from recycling in the United States and would supplement virgin metals derived from mining.” So, like Native Americans and their buffalo, ReCellular partners with U.S. recycling firms to mine virtually everything in a used phone—spare parts or even such elements as gold, silver and platinum from circuit boards; copper wiring from phone chargers; nickel, iron, cadmium and lead from battery packs; plastic from phone cases and accessories. Everything else—and there’s nearly nothing left—goes into one small dumpster out back, says Mckeown. That dumpster is usually filled with employee lunch leftovers and gets dumped just once a month. Says Mckeown: “We’re a zero-landfill company.”


Most of the phones ReCellular processes are fully functional; their owners simply traded up. Among those that require repair, Mckeown says, “the things that break on a cell phone are relatively straightforward—the screen, headphone jack or charging jack.” Some phones can be fixed in the Dexter facility; others requiring more work are packaged in bulk and shipped via air to facilities in Mexico, Indonesia or Hong Kong.


If any of the phones shipped offshore turn out to be beyond repair, they’re returned via ocean carrier through the ports of Long Beach or Ft. Lauderdale for recycling in the U.S. “We never recycle offshore,” says Mckeown, emphasizing the company’s determination to make sure toxic components don’t end up outside the reclamation process. “It’s a closed-loop system, and it allows us to track at the ESN level every unit inside or outside the country.”


At the end of all that collecting, sorting, tracking, shipping and reshipping, there’s money to be made. “The repurposed mobile device can have a second and even third life,” Mckeown says. “It’s better than building a new one.” And certainly less expensive: The retail price of an iPhone without a carrier subsidy is up to $699. A repurposed iPhone is about $299. You’ll likely end up with a repurposed model if your phone is replaced under warranty. Ditto if you buy a prepaid phone.


Most of the company’s refurbished phones are shipped directly out of ReCellular’s offshore repair plants to retail and wholesale sellers in one of 40 markets worldwide. The company’s sweet spot: emerging markets. “Almost 90 percent of the globe’s population lives in cell phone coverage so the issue now isn’t so much building out networks so that people can have access, it’s that so many of the world’s people can’t afford new phones—can’t afford 30 or 50 or 100 dollars on a new phone,” says Mckeown. “A refurbished or used phone is a great opportunity for them to get access to the technology they want.”


To donate your used phones, go to or

Patently Evil

What if ‘intellectual property’ is bad for business?

The air around the Republican convention in Tampa, Florida, in August was stifling, and not just because of meteorological phenomena. As Hurricane Isaac wheeled through the Gulf of Mexico, the humidity spiked and otherwise easygoing Floridians became a little edgy. In the city’s historic Ybor City district, a mostly young crowd of about 1,500 protesters marched for several blocks, noisily but peacefully denouncing Republicans, capitalism and even meat. Geographically (and perhaps symbolically) closer to the St. Pete Times Forum where Republicans were gathered to hoist Massachusetts Gov. Mitt Romney to their shoulders, libertarians—again, mostly young—protested the Republican Party’s rough handling of Ron Paul, the Texas congressman and erstwhile presidential candidate.

Inside the convention center, delegates put the finishing touches on the Republican Party’s platform document, this year titled “We Believe in America.”

If you’re a global trader, reading the platform’s statement on intellectual property, or IP, might have sent you into the streets to join the lefties and libertarians outside.

Like their Democratic counterparts, the Republicans who drafted the GOP statement of ideals fail to understand the possibility (just the possibility) that protecting ideas the way you would your home or your wallet—as actual “property”—is bad for America.

After properly celebrating exports as “crucial for our economy,” the 2012 Republican platform bemoans the theft of intellectual property, the “downside” in the “worldwide explosion of trade.”

“Some governments have used a variety of unfair means to limit American access to their markets while stealing our designs, patents, brands, know-how, and technology—the ‘intellectual property’ that drives innovation,” the platform reads. “The chief offender is China.”

We expect the Democratic Party, with its roots sunk firmly in organized labor, to amplify protectionist anxieties. But the Republicans? The party of limited government?

The GOP platform suggests that a Mitt Romney administration would resort to trade wars in order to punish intellectual property theft abroad with the hammer of righteousness. “Republicans understand that you can succeed in a negotiation only if you are willing to walk away from it,” it reads. Under a President Romney, “[c]ounterfeit goods will be aggressively kept out of the country. Victimized private firms will be encouraged to raise claims in both U.S. courts and at the World Trade Organization. Punitive measures will be imposed on foreign firms that misappropriate American technology and intellectual property.”

The convention also featured a kind of Exhibit A, speaker Steve Cohen, president of Screen Machine Industries of Etna, Ohio, a U.S. exporter meant to represent all exporters.

Cohen started with the inarguable (“As a manufacturer, our products are the heartbeat of our business”), before telling the audience that his company spends “tens of thousands of dollars to achieve patent status. Once granted, we expect it to be protected. Our products are often stolen and copied overseas for a mere fraction of the price. We can’t tolerate other companies stealing our hard work without compensation.”

Cohen concluded that, among other things, “We need a new president that will protect America’s patented inventions.”

But do we need such a president? What if IP, as a concept in law, is bad for America?

Let’s pause for a moment to acknowledge that party conventions are to economic philosophy what a child’s Halloween costume is to her actual desire to live as a sharp-toothed vampire. It’s aspirational theater, mostly, theater that is, in this case, aimed at attacking the incumbent president and appealing to American anxiety about the rise of China.

Free trader Kinsella His take: IP is a form of slavery.

And while we’re paused, let’s note that Democrats say President Barack Obama has already delivered everything on the GOP wish list where IP is concerned. “The administration is vigorously protecting U.S. intellectual property—our technology and creativity—at home and abroad through better enforcement and innovative approaches such as voluntary efforts by all parties to minimize infringement while supporting the free flow of information,” the party’s official website says. There’ve been “customs seizures” of counterfeits, prosecutions of “illegal overseas transfer of trade secrets” and the promise of more of the same in the future: “we will continue to work with all stakeholders to protect the security of the nation and its knowledge assets, U.S. intellectual property, the functioning of fair and competitive markets, and the privacy, free expression, and due process rights of Americans.”

But the fact of such bipartisan agreement on IP doesn’t make it right, and ignores experts who believe that patent, copyright and trademark laws supporting intellectual property limit global trade and slow economic growth.

“The case against patents can be summarized briefly: There is no empirical evidence that they serve to increase innovation and productivity,” write Michele Boldrin and David K. Levine in their forthcoming book, The Case Against Patents. The authors go further, declaring that IP is actually damaging—that patents and copyright laws are “trade restrictions” that “prevent the free entry of competitors in national markets, thereby reducing the growth of productive capacity and slowing down economic growth. The same way that trade restrictions were progressively reduced until reaching (almost complete) abolition, a similar (albeit, hopefully less slow) approach should be adopted to ‘get rid’ of patents.”

Far from sparking innovation, the authors say, intellectual property law is “the dead hand of dying institutions—Texas Instruments was famous for this and now we have the example of Microsoft . . . . When an industry matures, innovation is blocked by the ever-increasing appeal to intellectual property protection on part of the insiders.”

“Patent and copyright law are anti-competitive, artificial state grants of monopoly privilege with their roots in mercantilism, protectionism, censorship and thought control,” Stephan Kinsella, prominent IP attorney and leading libertarian and intellectual-property theorist, tells Global Trade.

In Against Intellectual Property and other works, Kinsella underscores that his disdain for IP is not just logical and ethical (though that’s key to his thinking). It’s also immensely practical.

His lifetime of meta-study (that is, studying the studies) into the actual impact of intellectual property law leads him to this conclusion: “There is no evidence whatsoever that these laws do anything other than enrich special interests—like Hollywood, the music industry and Big Pharma—at the cost of reduced innovation, competition, consumer choices and higher prices.”

Even if you could show that IP law produces innovation, there’s the question of its burden in costly litigation, which Kinsella figures “in the hundreds of billions of dollars.”

What would Kinsella want to see in place of saber-rattling talk of trade wars around the issue of foreign IP theft? “America should be busy limiting, restricting, or even repealing its own draconian, anti-market patent laws, not pressuring other economies to change their laws at the threat of reducing consumer choice by imposing free trade restrictions or other punitive measures on developing economies.”

“We should lead by example by re-examining our own anti-market laws, and by unilaterally adopting free-trade policies.”

There’s an old joke about a wise, aging fish who swims by two young guppies and says to them, “How’s the water, boys?” One of the guppies turns to the other and asks, “What’s water?”

Intellectual property is like that, so much a part of American culture that we’ve stopped noticing. We hardly consider the concept at all and, when we do, our arguments in favor of IP generally come down to the vague sense that we ought to protect designers’ investments in their designs in order to reward innovation.

In part, this confusion might be related to the use of the phrase “intellectual property” and the resonance of the word “property” in American political history. The Constitution promises to protect Americans’ right to “life, liberty and the pursuit of happiness”; but that was a last-minute change to the earlier “Declaration and Resolves of the First Continental Congress,” in which “the pursuit of happiness” had been “property”: life, liberty, property.

Not So Different After All When it comes to IP, they’re practically soulmates.

Embedded in the Constitution’s copyright and patent clause, the notion that ideas are things that can be owned also resonates in such antipodal places as Hollywood and wherever followers of Ayn Rand gather. Hollywood has led the way in fighting piracy of ideas (movies and music, for instance), at home and abroad. And if you’ve ever seen the bumper sticker “Who is John Galt?” you’ve heard of the late Ayn Rand. Her stock jumped recently when it was revealed that Congressman and GOP vice presidential nominee Paul Ryan gives out copies of Rand’s novel Atlas Shrugged as Christmas gifts and requires his staff to read it. John Galt is the nearly divine presence in Atlas Shrugged, the ur-capitalist into whose mouth Rand places her own philosophy on the primacy of ideas, including the line, “Man’s mind is his basic tool of survival.” Naturally, anything man builds with that “basic tool” is his to keep, and “Patents and copyrights,” she writes in Capitalism: The Unknown Ideal, “are the legal implementation of the base of all property rights: a man’s right to the product of his mind.”

So why shouldn’t an idea be considered property? Because it’s self-contradictory, says Kinsella: “A copyright, for instance, is a grant by the state that permits the copyright holder to prevent others from using their own property—e.g., ink and paper—in certain ways.” That’s not protecting property, he concludes. It’s slavery.

An idea can’t be the source of a property claim, agrees libertarian Sheldon Richman. “Ideas contribute no necessary additional factor” to a product. “If I build a model airplane out of wood and glue, I own it not because of any idea in my head, but because I owned the wood, the glue and myself.”

Chapman University professor of law Tom W. Bell puts it this way: “Were I now to start singing a copyrighted song, for instance, I would thereby infringe on someone else’s intellectual property rights. But it’s my throat; it’s your ears. Where does anyone get the power to tell us we can’t do that?”

They get it from the Constitution (Article I, Section 8, Clause 8), which empowers the Congress “To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”

In fairness to the Founders, they didn’t see intellectual property as property like land that ought to be protected, Kinsella says. They saw “patent and copyright as temporary, limited measures the state might adopt to try to stimulate innovation.”

“When the founders authorized patent and copyright law in the Constitution in 1789, they had no empirical studies showing that it generated net societal welfare gains,” Kinsella says. “And in the ensuing 200-plus years, no studies show this. Most empirical studies are either inconclusive or suggest that IP law imposes overall costs on innovation and the economy. So if you are a sincere utilitarian, you would be against IP. The problem with the empirical argument for IP is that it has ethical problems and methodological problems, and even ignoring these, there is simply no empirical evidence to prove the basic assumptions underlying IP law.”

August was a busy month for intellectual property. A few weeks before the Republican convention in Tampa, a New York judge dismissed Paris-based shoemaker Christian Louboutin’s request that the United States stop Yves Saint Laurent, another Paris-based designer, from selling shoes with red soles. The judge reached his conclusion despite the fact that Christian Louboutin had a trademark from the U.S. Patent and Trademark Office granting it the exclusive right worldwide to produce shoes with red soles.

You might believe reason had triumphed in the case of the red-soled shoes, except for the fact that (1) Christian Louboutin got a trademark for red soles in the first place and that, (2) a few weeks later, a judge agreed that the trademark was enforceable. “We hold that the lacquered red outsole, as applied to a shoe with an ‘upper’ of a different color, has ‘come to identify and distinguish’ the Louboutin brand and is therefore a distinctive symbol that qualifies for trademark protection.”

In reaching this conclusion, the appeals judge, writing with that quality of a medieval monk describing winged bodies at movement on the head of a pin, proceeded to describe in detail that the trademark covered only those women’s shoes on which the upper was a color other than the red, but not “monochromatic” shoes.

Thanks for the fashion tip, judge. Also: never wear socks with sandals.

You and I might agree that red soles are hardly critical to the economy. But the point is that patents are exploding everywhere—not just in fashion, but in software, pharmaceuticals and engineering.

High-tech, for instance, is awash in IP lawsuits. Around the time of the Christian Louboutin decision, a Silicon Valley jury ordered South Korea-based Samsung to pay Apple Inc. $1 billion for infringing on Apple’s iPhone patents. It was the third-largest patent award in U.S. history, and will likely become the largest ever when Apple requests additional damage payments.

That was a huge award but not an isolated decision, even in the relatively niche field of smartphones where lawsuits are common. Why? Because “the average smartphone may arguably infringe as many as 250,000 patents, not to mention myriad copyrights and other design-related intellectual property,” Brian J. Love, assistant professor of law at Santa Clara University School of Law, wrote in the Los Angeles Times.

That could lead—has led—to an avalanche of lawsuits, and those lawsuits would likely stall innovation and infringe on freedom. That’s why Apple co-founder Steve Wozniak criticized the Apple-Samsung decision. “I hate it,” Wozniak told Bloomberg. “I don’t think the decision of California will hold. And I don’t agree with it.” He dismissed Apple’s technology advances as “very small things. I don’t really call that innovative.”

Wozniak’s solution: trust the free market. “I wish everybody would just agree to exchange all the patents and everybody can build the best forms they want to use everybody’s technologies,” he said.

Once upon a time, Apple seemed to foresee the same free (or at least freer) society. That was when it helped form the Coalition for Patent Fairness, a group of tech and financial industry giants dedicated to limiting bedeviling IP lawsuits and gigantic damage awards. “When the shoe was on the other foot,” Love wrote in the Los Angeles Times after the Samsung decision, Apple “was content to check its patent law principles at the courtroom door: It actually asked for far more than it received, about $2.5 billion total in ‘compensatory’ damages.”

When I ask Kinsella to describe a world in which intellectual property as property no longer exists, I await his answer almost breathlessly. Does he see personal space-transport vehicles? A cell phone chip in my skull that I activate by slapping the Star Trek brooch on my chest? Red soles on almost everybody’s shoes? Would innovation proceed so rapidly that our machines would soon design, build, market and deploy our newer machines at a rate of speed almost immeasurable until we would be liberated from our physical bodies and become nothing more than pure consciousness?

Kinsella is surprisingly laconic. “I think it would be much as now,” he says. “Reputation would matter a lot. People would compete and innovate as before, but they would be even freer to innovate and compete.”

That would be reward enough.

There’s one last reason to be skeptical about the virtues of intellectual property: the U.S. will soon no longer dominate worldwide filings—not if the government of the People’s Republic of China has anything to say about the matter. “According to a . . . document provided by the [Chinese] patent office, China’s goal for annual patent filings by 2015 is 2 million,” the New York Times reported. That’s about a quarter of all filings approved by the U.S. Patent Office in its 221-year history, and the Chinese say they’ll do it in the next two years.

Republicans and Democrats—Americans—may want to consider that the Chinese are likely to emulate our own tough talk on the defense of intellectual property. Already a weapon in the war against freedom, IP litigation will suddenly be a weapon in someone else’s hands. Then, maybe too late, Americans will come to appreciate the virtues of a free market.