Could Evergreen Solar keep its U.S. plants if it applied the new design constraints for American business?

January 15, 2011 by  

A few days ago, I wrote about some new design constraints that I believe should shape corporate thinking about innovation. Today, my friend Ken Jarboe at the Athena Alliance sent me a link to this article about Evergreen Solar, a company located here in Massachusetts. This company built a manufacturing plant for solar panels in 2008, created 800 local jobs. Now, the company is closing down the plant and moving production to China. Ken asked me how this case fits into the standards I laid down. (It’s a hard question but I appreciate Ken asking it). So here goes.

First, I want to say that a big part of the story is the imbalance in the support that the Chinese government is willing to give to get the plant built there versus the support the government of Massachusetts and the U.S. is giving. I always get a kick out of this kind of argument because it demonstrates the hypocrisy we often see in American politics: taxes and government spending are bad. But if someone else’s government does it, we have no choice but to take the money. In this thinking, you get the short-term cost savings and worry about the long-term implications later.

In Evergreen’s defense, it is behaving consistent with the current mindset of the stock market and the still-dominant although highly discredited (see comments by Warren Buffett and Jack Welch) approach to maximizing shareholder value that we still accept as gospel–over the last thirty years, the concept of value somehow got to the point where short-term stock prices came to be a measure of how a company was husbanding its resources and building long-term value.

Evergreen has no balance sheet that shows the value of its knowledge intangibles: its workforce, its technology, its processes and its partners. (Not because it isn’t possible but because we have a collective refusal to consider the possibility that our accounting systems are broken and doing real harm). In the absence of good information about its net knowledge, there is no way to measure the shift in value in these intangibles that will occur when it moves its production off shore. Evergreen will have to write down their tangible investment but not their intangible investment. The only objective way to judge them, so the logic goes, is to look at their cash flow generation. And, here a lower short-term price is a positive.

Which gets me back to the design constraints. Since I don’t know more than I have read in the newspapers, the best I can do is to ask a series of questions about Evergreen:

Constraint 1. Maximizing knowledge – Will moving production to China increase the creation of knowledge and future innovation by Evergreen? This is a question that is difficult to tease apart. Clearly Evergreen loses control of its IP by offshoring. This question is more about whether the knowledge would increase more in value by collaborating with Chinese partners or with local partners—and how much of that knowledge will be re-usable by Evergreen.

Constraint 2. Leveraging local talent – The big question here is whether the talent in Massachusetts is better than the talent in China. Did Evergreen maximize the strengths of its workforce? Could the experience of these workers have been tapped to increase innovation and performance?

Constraint 3. Creating local jobs – This was of great interest to the Commonwealth of Massachusetts when they provided incentives to build a plant here. Could Evergreen have used this fact to its advantage in its marketing? Would its stakeholders have valued this aspect of its operations if it had communicated it? (My guess is that, while this is not a sufficient reason for keeping a plant open, it does have some publicity value)

Constraint 4. Minimizing energy use – Does the move to China increase or decrease the carbon footprint of the Evergreen product? This has long-term cost implications but also short-term sales implications—how many of Evergreen’s customers are worried about carbon footprint? Could they have used this in their marketing and stakeholder communications?

Constraint 5. Minimizing/eliminating waste – What is the cradle-to-grave implication of this move? This is about efficiency in the production process but also potential for recycling at the end of the product life cycle.

Constraint 6. Maximizing health and wellness – How will the Chinese plant compare with the U.S. plant in terms of pollution to its local environment? Are there other heath concerns that should be considered?

No one is asking Evergreen these questions. They don’t appear to be asking them of themselves either. If a company wants to change the rules by which it is judged, it has to be proactive, along the lines of Interface Flooring which has set as a goal to “eliminate any negative impact Interface has on the environment by 2020.” (Here’s a short video about the Interface vision, think about IC–people, process and relationships–when you watch this).

What if Evergreen changed the rules of the game? Would it be enough to save them in the short-run? I can’t answer the question but I can tell you that it is wrong that no one is asking the questions. I can also tell you that a few companies are beginning to on-shore production to the U.S.

And I can tell you that we are not going to find answers by asking about short-term costs and stock prices. The right answers will only come when companies and their stakeholders ask about the effect on underlying intangibles and realize that these new design constraints will eventually become the key differentiators for every company.

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