Crisis looms as America exports innovation, imports products

Interview with William C. Norris, founder of Control Data Corp.

David Fettig | Managing Editor

Published October 1, 1991  | October 1991 issue

William C. Norris is founder and chairman emeritus of Control Data Corp., which he started in 1957. He retired as chairman and CEO in 1986. Norris currently serves as chairman of the William C. Norris Institute, a non-profit organization whose mission is to catalyze public/private cooperation to meet societal needs.

Following service in the Navy during World War II, Norris helped found Engineering Research Associates Inc. (ERA), which was the forerunner of the Twin Cities' computer industry. ERA eventually merged into Sperry Rand Corp., and Norris headed the Univac division of Sperry Rand before leaving to form Control Data.

In 1986, Norris was awarded the National Medal of Technology by President Reagan and he is also the recipient of the Institute of Electrical and Electronics Engineers' Founders Medal, as well as other industry awards and honorary degrees.

In the following interview, Norris reflects on the history of the Twin Cities' computer industry, makes dire predictions about the future of American technology and offers a prescription for future success.

fedgazette: To begin, please describe the economic environment of the Twin Cities during the high-tech genesis of the late 1940s and '50s. What made the Twin Cities special, or were those events largely happenstance?

Norris: It was something of each. At the end of World War II there was a group in the Navy, of which I was a part, that had been involved in code-breaking activities, using what was then the forerunner of the modern electronic digital computer. We could see that this technology had enormous application, for scientific computation, business and data processing; but it needed substantial further development. So we decided to set up a company to exploit the technology.

The Navy wanted us to stay on and continue the work because of the enormous expertise in our department, but many of us—not being career naval officers—didn't want to do that. So we made a counteroffer that we would continue to do the work, continue to advance the technology, but do it as a private company. This was acceptable to the Navy, so we went about setting up a company.

We had a difficult time getting somebody to finance us, and we finally ran into a guy named John Parker, who owned Northwestern Aeronautical in St. Paul, which made troop-carrying gliders, and, needless to say, the peacetime market for troop-carrying gliders was not very large. He was looking for a way to continue doing business in that plant, and we were looking for a home, and so we got together and started Engineering Research Associates (ERA).

ERA got very significant contracts with the Navy and other government agencies, which ultimately led to developments in the computer field. In other words, ERA brought to Minnesota this new leading edge technology that had been developed by the government.

ERA grew very fast—and this is where the environment comes into play—and I started becoming concerned about being able to hire enough qualified people. But an amazing thing happened—we started getting applications from engineers who had graduated from the University of Minnesota who had left the state but who wanted to come back. And they came back in large numbers, which provided ERA with an almost inexhaustible supply of highly trained people.

With the demand increasing for our products, and the supply of people, ERA underwent tremendous growth. John Parker eventually decided he wanted to sell the company, so it was sold to Remington Rand, then Remington Rand was sold to Sperry to form Sperry Rand, and suddenly I was in a big company. The flexibility and risk-taking advantages of a small company disappeared. So I left to start Control Data.

By then, another part of the economic environment, which was very valuable at that time, was the dollar stock market. In fact, it was Control Data that really started the dollar stock market in Minnesota. We financed the company that way to get started.

There are many companies that have spun off of Control Data, and with an environment of willing investors, the electronic computer business really exploded in Minnesota.

It's all changed now. The government changed procurement rules for research and development in 1976. Up until then a small company could submit a proposal and get some research funding. After 1976, most of the research went to large companies as a part of system contracts. From then on, small companies had to submit their proposals to a large company—as a part of the large company's package. And that large company usually wanted to do the work in-house. Suddenly, a very important source of technology was wiped out.

Today, that's one of the problems of the deteriorating environment for small business—access to technology has decreased.

fedgazette: Before we come back to the current environment, one more question on the past. If Parker's business had been located in another Upper Midwest city, for example, Madison, Duluth, Fargo or Sioux Falls, would the same outcome have occurred?

Norris: It wouldn't have worked as well, because of the supply of engineers from the university and the fact that most of them preferred to live in the Twin Cities.

fedgazette: What if you had decided to take Control Data to another location—home, for instance?

Norris: Well, I'm from Nebraska, and if I had had my druthers, I would have had the company in Nebraska. In fact, I'd have put it in Massachusetts if John Parker had had his operation there. It was the availability of financing that brought us to Minnesota.

And that was kind of a quirk. If Parker hadn't had the business that needed a product, he wouldn't have been interested. And there wasn't anybody else in Minnesota—I can guarantee you—that would have been interested.

fedgazette: You've written that this country's high-tech industry is on the verge of disaster and you've called for fundamental changes.

Norris: That's right. There are quite a few elements to the problem. The most serious is the lack of public-private cooperation in expanding innovation; that is, the process of developing manufacturing and marketing of new products and/or the improvement of existing ones. Whereas, there is extensive public/private cooperation in Japan, Germany, France, the Netherlands, Sweden, Norway and Finland, for example.

Last year, the Department of Commerce had an allocation of $10 million for developing generic, commercial technology. It should have been more like $2 billion or $3 billion. This year, Congress may increase it, but it won't be nearly large enough to be commensurate with the competitive situation.

This is doubly important because back at the time that Control Data started, a lot of the military technology was applicable in the commercial area. Now it's the other way around. The military is utilizing a lot of commercial technology. So at a time when commercial innovation has become so important, and at a time when the new procurement rules are in place, small companies get very little support from the government in any respect—even for the development of military technology.

A second serious issue is the short time-horizons that are placed on companies. The stockholder expectations are very different here than they are in Japan or Germany, where their interests are not in quarter-to- quarter performance but in long-term appreciation. In Germany, for example, where banks own large percentages of company stock, their only concern about the next quarter is how it fits into a long-term trend. Whereas in this country—a chief executive officer gets bounced if he doesn't keep earnings going up. This makes it very difficult to invest in long-term projects like the Japanese and Germans do.

Another extremely serious situation is the threat from Japan. There is an enormous imbalance between the United States and Japan in high- technology flows between the two countries and in high technology-based products. Our open society shares its markets and technology, whereas Japan's society is largely closed. This has been a major factor in Japan achieving a superpower status in global competition.

The Japanese are a very serious menace to the United States and they're undermining our standard of living. This is not widely understood. Now, in the area of high-tech products, they're accumulating enormous wealth in high value-added products that are shipped here—computer memory chips, VCRs, integrated circuits, robotic equipment and television sets. Their barriers, however, on the import of U.S. high-value products create an enormous momentum in their favor, and it's building.

And we're fueling that momentum with our technology. Again, our society is open, and they have virtual open access to our university research results and our leading edge technology in small companies; whereas in Japan we don't have that opportunity. Most of the research there is done in large companies, and if they share technology, boy you really pay for it through the nose. Japan doesn't have many small high-tech companies. Their small companies are mostly suppliers to larger ones. So, we don't have the opportunity to get technology from their small companies.

And because of the scarcity of start-up capital for small companies in this country, the Japanese are able to invest in a small start-up, and for bargain-basement prices get access to the technology. That's really hurt us and it continues to hurt us.

fedgazette: But U.S. companies also have access to U.S. research. Is the fact that Japan is taking advantage of American research a result of their ability to capitalize new ventures?

Norris: Yes, early-stage financing is awful hard to come by, it has damn near dried up. And that's why the Japanese find it so easy to get hold of small company technology.

Again, people don't realize the seriousness of this. They don't realize that over half of the important product innovations come from small companies. IBM didn't invent the electronic digital computer; Eastman Kodak didn't invent the instant camera. Start-up companies invented those products.

It was the smaller companies that made this country into a superpower, and we've lost sight of that, particularly in this day and age when big companies don't want to take risks—they're more worried about that next quarter. They don't want to invest for the long term; whereas some wild- eyed entrepreneur will put up the house and savings and go for it.

So here we are in a situation where the environment is damn rough and small companies have a hard time starting up, and that's hurting our overall ability to innovate.

Now, every state, including Minnesota, provides some support services for small business in financing, business assistance and that sort of the thing. But in every state the effort is underfunded. Minnesota is no exception.

Underlying a lot of this—the lack of support for small business—is the fact that most people don't understand the management of technology and the process of innovation. They just don't have a grasp of it. In fact, most people shy away from the use of the terms technology and innovation; they think you're trying to browbeat them if you use that terminology. They erroneously believe that it requires a technical education to understand then. As a matter of fact, that's not true.

Technology is knowledge, and it's the application of knowledge in the form of products. It's that simple. And furthermore, the process of innovation is the pivotal force in determining the well-being of any society. Money is important, but without the necessary technology money alone isn't going to get improved products and services.

Aggravating this whole thing are economists and government officials who dwell on fiscal and monetary policies. Their models of the economy ignore the force of technology, and as a consequence they don't provide any type of roadmap for economic growth. You won't find two economists who agree on the future, and they do nothing to help the general public gain an understanding of the importance of technology. In fact, not only do they not contribute to it, but they confuse the situation by the constant reference to money and monetary policy.

fedgazette: More precisely, what do you mean by public-private partnership—funding from government, actual research by government?

Norris: Public-private partnership between the private sector and the government is a situation where there's cooperation developing a new product and the government provides part of the funding—shares in the risk.

For example, in Japan, they pick an area for generic research, the government throws in—for example—$5 million and they get about 20 companies to add about $200,000 a-piece. And that's been tremendously effective. They knocked us out of the computer memory chip market that way. The only effort that we have in this country that has been encouraging is Sematech, where the government put in $500 million and the private sector matched that over a period of years. I think we ought to be doing a lot of those.

fedgazette: As U.S. high-technology industries lose market share to foreign competitors and, as you say, fall behind in research, what does that mean for the future of the industry?

Norris: Well, it's not just technological industries, as such. High technology permeates everything. For example, you can't name an industry that doesn't use computer chips. There aren't any. So, if you lose the leadership, you don't just lose in that particular field, but you're disadvantaged in other fields.

On the other hand, there is an opportunity for the United States to greatly improve its position in the high-technology race. One, as I've just mentioned, is to improve its support of public-private partnerships, on both the state and federal level.

A second one—extremely important—is to provide funding to expand the high-tech national infrastructure; for example, formation of a national supercomputer network. That would be an enormous national resource. Set up a fiber optic network that reaches into homes. The cost could be shared with the Bell companies and other firms. This could lead to many applications, like a massive digital computer data base library that could be accessed through the fiber optic network from anybody's home or business.

Doing these things would give us an enormous benefit, and in some cases advantage, because we still have a lead in application software, artificial intelligence and computer modeling (simulation), optical character reading and a number of other areas. By having this infrastructure network, we would be able to keep moving very, very rapidly to maintain and enhance our position.

And then, of course, another very important matter is to improve our education system. We talked before about the effects of the university on the high-tech environment, well, we're just not training enough people well enough.

We need a massive education program in schools to teach kids about innovation, the application of technology and economics. Kids can learn about innovation—I've got grandkids that understand innovation and technology. We've got to build this understanding from the grassroots up so we can develop a culture where there would be support for public-private cooperation, and there would be an awareness of how to better meet international competition.

fedgazette: One school of thought suggests that if the Japanese are ahead of us in innovation, and if they're beating American producers in price and quality, then the American consumer ultimately benefits, and that's the nature of laissez-faire economics. If the consumer benefits, why should we care?

Norris: Well, the Japanese are the ones getting all the money.

My dad always taught me—we used to raise mules—and he said the way you judge a trade is by who gets the cash. Who is getting the cash here? They are, we aren't. Our money is going over there for all their value- added products. And that's part of the problem, people don't understand the concept of value added, and they look at the trade we do with the Japanese and they say: But we're sending products over there. Sure, but we're sending pork bellies and wood pulp, with extremely small amounts of value added. Even the Japanese automobiles manufactured here have little value added in this country; most of the high-value added components are shipped in from other countries.

An example of value added is the computer chip, which starts out with just sand, silicon. And you go up the scale and you add design effort, you put in a lot of programming effort, that's all contained in the price and when you sell it you have an enormous value-added product that was created with professional labor, for the most part.

fedgazette: Some analysts believe this decade may be America's last chance to muscle back into the technology markets; they say that if the country doesn't move soon, it will be left out of most new technological innovations for years to come. Is there a time-frame ...

Norris: If we can't do some of the things I've been talking about we will continue to go down. Our standard of living is eroding, that's obvious, and it's going to continue.

And we can't seem to be able to solve any major problem. For example, in education, you can find any number of studies telling you about the problems in education, but what have we done about it? Not very much.

We have a rugged individualism culture in this country; people don't think in terms of cooperating. There's a lot of people who think that government shouldn't be involved in innovation. They say that government should just get out of the way and individuals will compete. That's nonsense. As long as we were competing among ourselves that's fine—go out and knock each other off. But that ballgame's done, it's over. We're competing in a world market now, and the rules have changed.