Ongoing unfair competition, fueled by stolen software, is a significant drain on manufacturing throughout the U.S., according to a recent report.
The analysis finds that such piracy has cost the American manufacturing sector nearly $240 billion in manufacturing revenue, $70 billion in GDP, and 42,200 jobs between 2002 and 2012.
Authored by Bill Kerr, an associate professor at Harvard Business School, and Chad Moutray, chief economist for the National Association of Manufacturers (NAM), the study is among the first to statistically show how stolen software use damages various sectors of the U.S. economy beyond the software sector.
“The startling losses manufacturers have suffered in the last decade due to intellectual property (IP) theft should jumpstart action by our policymakers and law enforcement officials,” said NAM President and CEO Jay Timmons. “It’s absolutely clear that the effects of IP theft overseas are significantly felt here at home, threatening jobs, investment and growth.”
Timmons adds that the study “paints a stark picture of what we’ve already lost due to software IP theft, and how much we stand to gain if manufacturers in the U.S. can compete on a level playing field. Until proper enforcement action is taken, our nation’s innovators will remain at a disadvantage.”
The study also revealed that a 10 percentage point reduction in global software piracy over four years would add an estimated 65,745 jobs to the U.S. economy.
“The use of pirated software by foreign manufacturers hurts manufacturers in the U.S. that pay the full cost of their inputs, costing the U.S. economy jobs, revenues and GDP. This represents an unfair practice that deserves attention,” Kerr said.
According to NAM, one-third of its members reported theft of IP, trade secrets, or proprietary knowledge being stolen by competitors in emerging markets.
Likewise, three out of five NAM members say that IP and trade secret theft impacted their overall global competitiveness, including a third who say it has a strong impact.
And manufacturers are now reportedly more reluctant to do business with firms in emerging markets out of rising concern for theft or use of IP, trade secrets, and proprietary information in direct competition with their interests, NAM officials said.
“About 90 percent of manufacturers are concerned about global IP theft,” Moutray said. “That shows the extent to which this is a major issue for manufacturers, and I suspect the entire business community as a whole.”
THE GROWING IMPORTANCE OF SOFTWARE IN MANUFACTURING
Kerr said that one of the more noteworthy themes from the report is the underlying trend that “software has almost doubled in importance for manufacturing and its production capabilities and related costs” over the last decade.
“That trend will only go up, so we need to be thinking about these issues a lot more as we understand the implications that the piracy of software has in terms of its unfair advantages,” he tells Leo Rommel of Industry Today. “There’s clearly many dimensions of intellectual property trade theft, of trade secret loss, and of software piracy.”
The concept is not lost on manufacturers, Moutray said. They’re well aware of the news, of all the recent cyber-security breaches throughout many brand name organizations worldwide. “I think, if anything, it’s the public that isn’t aware that piracy is a big challenge for manufacturing,” he adds.
But Moutray said “many people, when they think about technology, don’t think about manufacturing.” They simply don’t tie the two together, he said.
He and his colleagues at NAM have been worked extensively in recent years to change that mindset.
“We’ve been trying to do our best to make sure that people recognize that manufacturing is a very high-tech endeavor,” Moutray tells Leo Rommel of Industry Today. “We have manufacturers who are certainly going out there doing a lot of innovation.”
And much of that innovation, he adds, has materialized with the extensive use of state-of-the-art software.
“In general, manufacturing today, given the events that we see in the sector, really relies an awful lot on technology and innovation,” he said. “In general, many manufacturers worry about intellectual property theft as well as just simple piracy.
That’s why he and Kerr put together said report, to better illustrate, with jaw-dropping statistics, this mounting concern throughout the industry.
“This study really was put out there really to do two things,” Moutray said. “One, to once again reinforce just how high-tech manufacturing is, and two, to put some dollars around the notion that software piracy actually costs manufacturers jobs and costs manufacturers in terms of the economy.”
WHY SOFTWARE PIRACY WILL GROW
Kerr sees this piracy issue escalating in the years to come for a pair of significant reasons.
“First, there’s been no slow down it the growing importance of software in manufacturing,” he said. “We have the data, basically, year by year, over the last five to 10 years, by several vendor sources, and that’s increasingly pointing upwards.”
The second reason, he adds, is that the piracy rate has continued to increase despite greater awareness by manufacturers.
“About a decade ago, let’s say circa 2002, the worldwide piracy rate was in the order of 44 percent,” he said. “Today, that number is at 52 percent.”
Moutray adds: “It mirrors the concern you’re seeing in the overall economy about cyber theft and cyber security, and how both are growing concerns. You would expect that to be true of manufacturing as well.”
WHAT OTHERS ARE SAYING
The National Alliance for Jobs and Innovation (NAJI), a nonpartisan organization of nearly 400 American member companies and associations, commissioned said study with NAM.
NAJI is a coalition working to stop unfair competition from the use of stolen IP, whether it be through piracy, counterfeiting, or trade secret theft.
The report was made public at a panel discussion at NAM headquarters in Washington, D.C., in late January. Rob McKenna, former attorney general of Washington and cofounder of the State Attorneys General Intellectual Property Taskforce, served as its moderator.
McKenna, now a partner at Orrick, Herrington and Sutcliffe, echoed concerns similar to those shared by Kerr and Moutray.
“We have legal and diplomatic tools to fight this problem,” he said. “We need more efforts at the state and federal levels now that we know the severity.”
Additional NAM and NAJI member companies participating in the panel discussion expressed similar concerns about software and IT piracy.
“Marlin Steel has experienced the losses and competitive disadvantage revealed in the study released today,” said Drew Greenblatt, owner and president of Baltimore-based Marlin Steel Wire Products. “Our innovations are critical to our growth and success—our IP is our ‘secret sauce’ and it must be protected. Manufacturing jobs in the U.S. will certainly accelerate when we can compete on a level playing field.”
Similar comments were made by Daniel J. Abdun-Nabi, president and CEO of Emergent BioSolutions, based in Rockville, Md.
“In the business of manufacturing pharmaceuticals that save lives, safeguarding IP and IT infrastructure is a critical component in ensuring that products in the market are safe, effective, dependable, and work as intended,” he said. “Respect for the rule of law and a decrease in IP piracy will certainly benefit the manufacturing industry and have a positive impact on patients and public health.”
Michael Sigourney, president and CEO of AVTECH Software Inc. said “software is critically important at every stage of my company’s design, manufacturing and sales processes.”
He adds, “We’ve had direct experience with many of the unfair competitive practices we see abroad, including theft of trade secrets and proprietary materials, which not only hurts our ability to provide local jobs, but, at a larger scale, slows the process of innovation.”
WHERE SUPPORT IS COMING FROM
According to Moutray, support for combating this conundrum continues to pour in from a variety of reliable sources. Aside from ongoing legal and diplomatic tools, companies continue to pitch in.
For instance, there’s Microsoft Corporation, a member of NAJI, which reportedly supported the study after uncovering numerous examples of unfair competition impacting its manufacturing customers.
Microsoft is working on multiple fronts to help stop IP theft, including the recently unveiled Cybercrime Center, which works with law enforcement, industry, security organizations, and academia to help fight technology-related crimes.
“Not only does software piracy undermine manufacturers in the U.S., it also poses significant risks to our citizens, businesses and IP,” said David Finn, executive director of the Microsoft Cybercrime Center and Microsoft’s Digital Crimes Unit.
“As the FBI has declared, pirated software enables malicious code and identity theft. So we’re working with government and law enforcement, as well as NAJI and the NAM, to help stop software piracy and build a safer digital environment for everyone,” Finn added.
What’s most important, Kerr says, is continuing to get the word out there about software and IP piracy and how it continues to place unnecessary barriers to industrial growth.
“Our study helped break through this barrier by putting figures and case studies around this problem, jumpstarting discussions on how important this issue is,” he said. “Now, we need to be thinking about the best ways of developing remedies.”
He adds: “Some of those remedies could be through the private sectors, some could be through the public sectors, and some could be through international sectors. But they’re all paths we have to go down now.”
About Bill Kerr
Bill Kerr is an associate professor at Harvard Business School, where he focuses on entrepreneurship and innovation. Kerr has researched agglomeration and entrepreneurship, and how government policies aid or hinder the entry of new firms, cluster formation and growth. He has worked extensively with the World Bank, the Massachusetts Technology Leadership Council and the National Science Foundation, and has received several awards for his research papers.
About Chad Moutray
Chad Moutray is the chief economist for the National Association of Manufacturers (NAM), where he serves as the NAM’s economic forecaster and spokesperson on economic issues. Prior to joining the NAM, Dr. Moutray was the chief economist and director of economic research for the Office of Advocacy at the U.S. Small Business Administration.
About the National Association of Manufacturers
The National Association of Manufacturers (NAM) is the largest manufacturing association in the United States, representing small and large manufacturers in every industrial sector and in all 50 states. Manufacturing employs nearly 12 million men and women, contributes more than $1.8 trillion to the U.S. economy annually, and has the largest economic impact of any major sector and accounts for two-thirds of private-sector research and development. The NAM is the powerful voice of the manufacturing community and the leading advocate for a policy agenda that helps manufacturers compete in the global economy and create jobs across the United States.