#113 – An Interview with Scott Miller - Sudden SinoAmerican Synthesis

Chris Gammell: This is The Amp Hour Podcast, recorded September 16, 2012. Episode 113, with guest Scott Miller, Sudden Sino-American Synthesis.

Dave Jones: Welcome to the Amp Hour. I'm Dave Jones from the EEV blog.

Chris Gammell: And I'm Chris Gammell of ChipReportTV and Chris Gammell's Analog Life. And I'm Scott Miller of Dragon Innovation.

Dave Jones: Thanks for joining us, Scott. All the way from... I'm thrilled to be here. Where is it? Boston.

SPEAKER_01: Yes, yes, from Boston.

Chris Gammell: And sometimes not just Boston, right? Sometimes overseas.

SPEAKER_01: Yes, yes. We spent a long time, in fact, four years for iRobot living in Hong Kong, China, and then all sorts of trips around Asia Pacific.

Dave Jones: Did you have to move your family around?

SPEAKER_01: I did. So at that time, I was single. Well, in fact, I recently got married. Yeah, it made it a lot easier. Yeah, I got married, I think, two or three months before I moved over. And then had a honeymoon, hopped on a plane, and pretty much landed in Hong Kong by myself, sort of as the sole representative of iRobot to try to figure out how to build the Roombas.

Chris Gammell: Wow. And what time frame is this?

SPEAKER_01: This was in, let's see, it was 03. So I lived over there from 03 to 07. Wow.

Dave Jones: Had the movie been out, the iRobot movie?

SPEAKER_01: No, I don't think that it launched yet. It was one of these situations where I came to iRobot from Disney and was originally hired by Colin to build a R2-D2, so a full-size working R2-D2 for Toy Fair. Cool. And I think I had like a month to do it. And I was lucky enough to come in and get the job. I didn't know what my project would be. And Colin said, hey, we want you to build this R2-D2. So I said, oh, that sounds fine. But of course, being in a new job and having an insanely tough time frame would have been probably my last, you know, I would have lasted maybe a month and a half at iRobot before they canned me for not getting it done. But thank God for Lucas, who said that R2-D2 does not serve people beer at Toy Fair. So they canceled the project and thus saved my job.

Chris Gammell: All right. Go George Lucas. The first positive thing said about him in the past 20 years. Yeah, right. That's funny.

Dave Jones: So, George, what we're going to talk about is China, right? Because what you guys – tell us about what you guys do.

SPEAKER_01: Sure. So we are a team of 14 people. We've got five in the Boston area and then two in Hong Kong and seven in China. And we really love working with startups and find from our own experience at iRobot that there's a lot of resources out there now to help entrepreneurs and startups get to what we call the 80% point. So, you know, at this stage, they've got a prototype working. It might not work more than two or three minutes before it breaks. But they've managed to cobble together some hardware and some software. And usually most of our clients have – are VC-backed. We have a few private equity-backed and can demonstrate the concept. They've got the funds to go ahead and buy the inventory as they move to higher volume. And they, for the most part, understand the market. And they're right at the stage where they're just starting to think about, geez, how do we pick a factory in China? How are we going to do this without getting screwed and losing everything from having somebody take our money, take our IP, and waste a lot of time? And sort of beyond that is once they've picked a factory, then how do we hand over this project and actually be able to go and take it from this one prototype that lasts minutes into ideally tens or hundreds of thousands that will last, you know, maybe one or two thousand hours? And based on our experience at our robot where we – pretty much all of our team has done this for many of the Roomba generations as well as the Scubas, we can apply that expertise and help both walk them through the process as a guide but also be in the boat paddling so that we can take work off of their plate and let them do what they do best, which might be more engineering or marketing or anything of that nature. So our goal is really to be there, Far East Office. And having set up Far East Offices in the past, I know first how hard it is to do from an opportunity cost standpoint because you're flying back and forth all the time. And you can really only – you need to be in two places at once, here and over there, but you can only be obviously in one. How do you find great people you trust? How do yourself as an entrepreneur build up the expertise to both be able to have a great network in China and then know how to fit into that network? And those are all things that we can help our clients with to get rolling. And then once – oh, yeah, go ahead.

Dave Jones: Would you say it's essential that you really need somebody on the ground over there? Are you a fool if you try and just do it all from here – do it all from Australia or do it all from US or the UK or wherever and expect it to work in China, expect your production to work?

SPEAKER_01: Well, it depends a lot on the project. So if you were building a – and also the person's experience. If you were building a swizzle stick for McDonald's and done it a thousand times, then you'd probably be fine, especially if you knew the factory. But as we found with the Roomba, there's – without having a beachhead in China, it would have been nearly impossible to pull this off for a couple reasons. One is the time change. So you really only have two windows to overlap with the Far East team, morning and evening. Same thing as Australia and Cleveland.

Dave Jones: Far East, by the way, is not Far East for us. It's North. That's right. A good point.

SPEAKER_01: All right. So as you know, you've got this narrow window. You've got pretty big language differences. There's culture differences and also a giant plane ride in the middle. Right. So it's just really hard. Even if you knew the person inside and out on the other end of the Pacific, it's just insanely difficult to transfer anything that's remotely complex from a hardware standpoint. And certainly, as we were working on the Roomba with five degrees of freedom, autonomous mobile robot, that's probably one of the hardest things you could do. And it also hadn't been done before. So with our clients at Dragon Innovation now, we see many of them are in the same boat. And we find that we can really help accelerate their progress, hopefully save them considerable money, and also get them to the market a little bit quicker.

Chris Gammell: Yeah. I think of it like the relationship with my boss, even. Right. And just, you know, the difficulty in communicating when you're down the row of cubes from them versus having to do that over, you know, however many miles and hours difference and cultural differences and everything. It's just, I've heard, you know, you hear horror stories about, you know, just people ducking, you know, factories ducking you for weeks, basically, because you can't, you don't have, you can't walk down there and start yelling at someone. You know, it's like, it's just the accountability side is very difficult when you are putting out that kind of huge cash outlay to get something made. So I could see where that would make a lot of sense. Right. Yeah.

SPEAKER_01: It's all about closing the loop locally. So as you say, if the squeaky wheel is going to get the oil. So we see all the time that clients will fly over before they work with Dragon, and they'll get a tremendous amount done during that week. And then they'll fly home and another client from a different company will fly over and everything. And the first guy will stop and the second guy will take off. But it's just really hard to get any sort of momentum. So just being a physical presence right at the factory is, you know, maybe nine tenths of the law, you can get a lot more done right there. And then being able to close the loop. So to answer those questions in real time, and then not have to deal with the really late night phone calls and poorly written emails. But just to have somebody that is knowledgeable and experienced on the ground.

Dave Jones: So would you go as far as to say it's not – it's probably not worth getting manufactured – your stuff manufactured in China in general unless you have somebody there? So you're better off just paying more and getting it made locally unless – so you either make the decision, pay more, get it made locally, or go to China and have somebody manage it all for you.

SPEAKER_01: All right. Well, the intermediate – so both the – let's say we look at both the U.S. and China. They certainly have their strengths and their weaknesses. But if China was the right manufacturing base to pick, there is an intermediate stage where you'll be slower. But basically, you might fly over for two weeks a month and get as much done as you can. The trick is that you're always going to be exhausted. It's expensive to fly back and forth. And there's a pretty significant opportunity cost. When you start to look at what's the difference between the U.S. and China, a few things stand out. One is – probably the easiest one is volume. So if you're building, let's say, less than 1,000 units, then potentially the labor is a lot less important than if you're building a very high volume. That's right. So the labor is going to be considerably higher in the U.S. than it is in China. It's also easier just to drive or take a short domestic flight to sit down with the manufacturing house and say, hey, this is what I was thinking. This is how I want it done. Answer any questions. Then having to deal with all of the overhead that comes with dealing with China. And if you're under 1,000 units, that would also make a lot of sense. You get typically much better IP protection in the U.S. And you can also go much faster. More often than not, our double E spin time – or if you want to build boards – is quicker in the U.S. than it is in China, not even counting the shipping time. So you can do a quicker design-build test cycle here. Where you might think about China is if your units are 5,000 units and more. And part of the reason is the factories are a lot less interested for units under 5,000 because they make all their money on volume. The volume coming from the labor component and then also what's called their markup. So it's really hard to get their attention for that. In China, though, unlike the U.S., unfortunately, is just a remarkably robust and diverse supply chain. So you can find almost anything you want in terms of components, in terms of vendor capability, all within, let's say, the Pearl River Delta.

Dave Jones: That's right. That's probably the main advantage, right? It's all there. I mean, that's one huge advantage they have. Like labor cost differences aside.

SPEAKER_01: Yes, it's all right there.

Dave Jones: That all the parts are there. They've got 20 million billion pick-and-place machines and factories to do it.

Chris Gammell: Is that the Shenzhen area? I'm sorry. I don't know the Pearl River. Oh, sure. Yeah.

SPEAKER_01: The Shenzhen area is on the southeastern side. So Shenzhen, Dongguang, Guangzhou, Huangyu, Zhuhai sort of go around it. But yeah, Shenzhen is certainly one of the main areas.

Chris Gammell: Okay.

Dave Jones: What is the difference between Hong Kong and mainland China in the electronics manufacturing business? Are there any cultural differences? Are there any price differences, you know, time frame, availability, all that sort of stuff? How does it work?

SPEAKER_01: Yeah, they're pretty much night and day in my experience. So even though it is one country, it does seem like two very different systems. So Hong Kong is just an amazing, beautiful city with, you know, very – I sort of think of it if you took New York and put it on the hills of San Francisco at the latitude of Miami, you'd have Hong Kong.

Dave Jones: Yep.

SPEAKER_01: And to my knowledge, at least I've never bought a – spun a board down there or really sourced any components in Hong Kong proper. All of that action happens in Shenzhen, which is – you go across what used to be kind of a murky, scary river with concertina wire. And then through a lot of customs guards that don't smile, you get to Shenzhen and it's just completely out of control in a fun, great, exciting way, but very, very different from Hong Kong. And that's where you'll find all the, you know, all the incredible manufacturing and electronics market capability. And one thing that – so back in the day before China opened up, Hong Kong was that center. And then manufacturing is just over the course, I believe from the 1980s onward, just migrated north across the border.

Dave Jones: So there's not much left there now?

SPEAKER_01: It's mostly financial and services. I can't imagine ever manufacturing anything there.

Chris Gammell: Okay. So much like San Francisco and New York used to be also manufacturing hubs and now they're – Right. Now they're financial hubs. Yeah. Financial and – Business and hubs. Creative hubs, yeah.

SPEAKER_01: Yeah. I mean what happens is you've got a lot of factories. So many of the factories that we used to use were toy factories that started in Hong Kong. And then to chase the lower cost labor, they moved to China, set up, and have gone from there. So many of – there's a couple of different types of factories. But many of the better ones are Hong Kong owned. So that's still the link between Hong Kong and the mainland. Interesting. Is that you'll have the engineers and managers and factory bosses based in Hong Kong. And then some local project managers and then all the workers hail from China.

Chris Gammell: So it was a pretty regular commute. When you were living in Hong Kong, you were following a lot of other people that were doing that regular commute over to Shenzhen.

SPEAKER_01: It's like the tide. It goes into China on Monday. It comes out on Friday. Right. And now there's a new law that you can't be – well, new as of the last five years that you can't be in China more than I think 181 days. Otherwise, you have to pay Chinese taxes. So all of the Hong Kong guys will be in exactly 181 days to the day. Yep.

Chris Gammell: So could you tell us a little more about the beginning? I mean, so you said 2003, but I was reading on the Roomba wiki page that it was 2002 that it was released. I don't quite remember when it was happening, you know, like in a commercial mindset because I obviously wasn't there. But what was it like? I mean, first off, did it move over from the U.S.?

SPEAKER_01: I mean, did it start in the U.S.? Yeah, we did all the development here and a lot of prototyping here. But we had a long-term involvement with one of the factories in China for I think probably three or four years preceding the launch. And when it came out in 2002, at that stage, I was flying back and forth. So basically the way it happened is I – after R2-D2 fortunately got killed, we had a JV with Hasbro. And we're building this audio animatronic intelligent baby doll, which was an awesome product. Unfortunately, we only sold 100,000 and learned one lesson. Yeah, I know. That was sort of considered a failure. But the thing we learned that got drilled into us is you absolutely cannot miss Christmas. So with this one, because it was our first time through, we just kept – we didn't know what we were doing. And we're trying to solve fundamental engineering problems. And as a result, it just got pushed out and didn't – I don't think we really got to the shelves until around Thanksgiving time. But by that stage, all the other competing products had run their ads and the little girls had written the competing baby on their list. So it drilled into us. You absolutely cannot be late for the Christmas season because it's all exponential sales. And every week you're late, the tall part of the graph falls off. But what that did is gave us – and it's most of the team that's on the Dragon Innovation team now is the sort of an insight into what it takes to build a high-volume product from design for manufacturing assembly and then contact with the Far Eastern working with a great factory. And then when we had a reorg at iRobot, I had the chance, based on the little knowledge I had there, to move over to the Roomba team and run the development for that. So in 2002, before I moved over, I was that guy flying back and forth a couple times a month. And it really became crystal clear to me that to do anything of that level of complexity absolutely required a beachhead and ideally a great team based in the Far East. And that's sort of the idea that has stayed with us through – and was one of the founding principles for Dragon is being able to provide that service for entrepreneurs and startups that wouldn't have the funds of a larger company to go and set up their own office.

Dave Jones: So what happened there with – when did you decide to leave?

Chris Gammell: Yeah, did you take your whole team with you?

SPEAKER_01: And it looks like you took everyone.

Chris Gammell: Yeah.

SPEAKER_01: Yeah, I took – I definitely took the cream of the crop. And you took everything but the kitchen sink.

Chris Gammell: Was it like a – was it a spin-out or was it just kind of a, all right, we're going? Well, here's what happened. Who's with me? Who's coming with me?

Dave Jones: And of course in hushed tones during the call, I was, psst, you want to – come on, let's go do this, you know, Dragon startup thing. Let's, you know, come on, don't tell anyone but, you know.

SPEAKER_01: Yeah, well, I've been lucky just to get – be surrounded by phenomenal people. But it did take us about two or three years – well, I guess about two years before we had built up our team. So in terms of the way it sort of came about, I moved back in 07 having had an amazing time in Asia and really learning from the ground floor all the way up to when I left as a VP of Asia Pacific. All the different steps of, you know, both working with the workers on the line to negotiating the contracts. And in Asia it was – since I was sort of the highest ranking guy, it was easy to focus and get stuff done. When I moved back to the U.S., I got integrated into the rest of the system.

Dave Jones: Ooh, integrated, yes.

SPEAKER_01: And so that was a challenge in that it felt like we were moving a lot slower. And I love iRobot. They're a great company with really gifted people and have done a tremendous amount for robotics. But just the nature of the beast, it would have been the same anywhere else, is to go from a lot of freedom to get things done to being part of the machine. And when I came back, I had the opportunity to lead the engineering group. So I had about 75 people, and the challenge I had there was that I was too far away from the front lines. You know, when you're manufacturing, you know exactly what's going right and what's going wrong, and you have to fix it. There's no let me finish my sandwich and we'll get to that. It's – you know, you have to jump on it. And in the U.S., I just felt so far removed from the bullets whizzing by my head and found I was sitting in a lot of meetings doing this resource allocation and reviews and things that weren't really using the hands-on skills that I had. So that was part of it. And then the other part was – so I became a little less happy. And then it was the middle of the summer. I'm an avid sailor and had the chance to go to my first Jimmy Buffett concert. And I was sitting there –

Speaker ?: Give a little event.

SPEAKER_01: Oh, it was. It was amazing. And I was wondering as I'm sitting there waiting for Jimmy to come on, like he's probably done these songs thousands and thousands of times. Yes. Is he just going to go through the motions or does he actually love his job and what he's doing? And the minute he walked on stage barefoot with his bathing suit and was just having like the best 90 minutes of his life, I'm like, man, I need to do something that I'm that passionate about or that I love doing day in and day out. And being part of a big company at that time wasn't it for me. So, yeah. So I decided, okay, it's good to stir things up. The economy is in the toilet. If we can do it now – this was back in February of 2009. And the business survives. Then maybe it's gut legs. Nice. So I left pretty much with no business plan or clients, just knowing what I knew how to do and was able to get a few local companies like Nanda Home and Zio and work with them and sort of do what I did. And then eventually bring on my partner, Herman Pang, who's the president of Dragon, as my Far East partner. And then he and I just grew it and grew it up to the 14 people we have now.

Dave Jones: So you just – you decided, right, I'm just going to leave and then start it from scratch? Or did you sort of do stuff on the weekends and at nights in the background first and then go, oh, look, there's some potential here?

SPEAKER_01: Yeah, it was mostly just finished up and started from scratch. Wow.

Dave Jones: That's pretty gutsy. Yeah, it was. Especially in the recession.

SPEAKER_01: It was the recession, married house, and new kids. So it was – Oh, wow. Ouch. In retrospect.

Chris Gammell: Really bad timing, but makes it more impressive, I say.

SPEAKER_01: Yeah, I'm amazed my wife let me do it. But it's – fingers crossed so far it's worked out pretty well. And it's – the joy that we have is there's just so many different clients doing so many different things that you're always on your toes. They're just really smart people asking you thought-provoking questions, and you've got to really be able to dig and, you know, come up with answers quickly. So, yeah, it's been a tremendous amount of fun.

Chris Gammell: You mentioned the differences. Could you elaborate on that a little bit more in terms of what you were doing, you know, when you were over there that was so fast-paced? I mean, you said you were in charge, so I can't imagine you were, you know, turning the screw on, you know, each device. But what is that fast-paced that, you know, that you missed?

SPEAKER_01: Right. So, I think a good example was when we were launching Scuba in 2005, which is right before we IPO'd. So that was one date that we just absolutely couldn't miss. And with Scuba, it's a very, very complex electromechanical system, but it's also dealing with water and air and all of this stuff in a very slimy environment. And there's just fundamental development that wasn't done. So we would basically – coming from a sailing background, we were thinking of running watches. We would run 12 days on, two days off for pretty much three or four months leading up to the launch. And we'd always get in there, have a huddle in the morning to figure out what would have to be done, divide up the work. And then we would always work usually until 10 at night. And if things were going really well, we'd stay later just because we wanted to harness that good luck and that good karma that was working with us. But the thing is with manufacturing, it's like being built right in front of your eyes and you have the ability to make these really important decisions without a lot of overhead on top of you telling you what you can and cannot do. And they have just a fundamental impact on the quality of the product, the cost, and the viability. Whereas when you're based over in the U.S., there's just so much lag in the system, it's difficult to have that sort of an influence.

Dave Jones: How much risk, what's the level of risk when you push that button for assembly and they're spitting those boards out at a couple of boards per minute? How much, you know, if you goof it up, if you put the wrong component reel in the wrong place in the machine or you've programmed it in backwards or something, what's the cost? How many units are you talking about before you realize that, oops, you know, we've screwed up?

SPEAKER_01: Right. So the cost, so that's a really interesting question, something that keeps us awake at night. The cost really comes down to when do you find out you made a mistake? So if you find out that day that you somehow the wrong reel was put in the machine and you don't have the right component, it's going to be irritating to rework it. But it's probably not a showstopper. If you find out, say, eight weeks later when your customers have been using it for three weeks, it took five weeks on the water, there's a problem. Then however many, we used to ship $40,000 a week back in the day, you know, $40,000 times that eight weeks times whatever Roomba costs, then that's very expensive.

Dave Jones: Well, that would be a company ending problem almost. You know, companies can go under if it's that, if the lag is that long.

SPEAKER_01: Right. It can ruin you. Absolutely. So that's why having done this for a while, the quality starts, like, really gets drilled into how important it is to both from a testing standpoint to be able to answer the question very quickly. Is this component good or not good before you build up the whole thing and have confidence that your net is tight enough to catch the important things but not so fine that you bog down the entire system? Yeah. So that's one thing. And in terms of the quality, there's all sorts of different ways to slice it. I mean, you can look at your design verification testing, in-process testing. You want to do abuse testing just to make sure that you've got some margin on it, transportation testing. So imagine building this in the summer in China and then putting it on a plane to Alaska and then trucking it to Florida. Just do you have a rainstorm inside the thing or what are the thermal changes and what impact do they have on the paint and the finish? You know, all those things most new entrepreneurs don't think about. And if you were to test the product in China, it probably would pass and it would be great. It's just when the customer gets it and all the paint is flaked off that you realize you have a problem. So how do you find that stuff out ahead of time? And the same thing, suppose you have a product that wants to live for 2,000 hours. It takes a long time to be able to go and fully test a significant quantity of those to 2,000 hours. So are there ways that you can accelerate that life testing to get some sort of an indication as to whether you're on track to meet your goals or not? Because you're probably going to have to make the ship not ship decision before you have complete information. And just getting a really strong quality team behind you to be able to think about those things and put the right tests in place are absolutely critical.

Chris Gammell: Yeah. You live and die by the Arrhenius equation, right? It's a stupid equation. I hate that thing. It's ruined my weekends.

Dave Jones: How much margin is there in this for a company like you? Is there some products that are, you know, oh, the client wants to churn this out for 50 cents. There's no point us even being involved, you know, because the margins would be that razor thin. Do you only deal with the higher value-added products, you know, the higher margin products? Yeah.

SPEAKER_01: Most of ours are higher margin. So we, you know, we love startups. Those are our people. We do have a few larger companies, but we love really knowing our clients well. And that typically means a startup. And most startups do that we work with are in the consumer electronics, some home health, some toys. Or, you know, we love consumer robotics as well since we're robot people. But we find that it's a – I should also explain our sort of our business model. And that's that we work typically on a retainer basis so that for our clients we're available over the course of a month or multiple months for whatever they need us to do for the same fixed price. Right. The reason this is different as opposed to adding a, say, a surplus on the cost of goods so that if they had enough volume, even though the piece price might be low, the math still may work out. Yeah. But I think in general most of our clients, their products cost anywhere from usually $15 to $50 to $100. And usually in China you want to look at $5,000 or more units. So, yeah, somebody making the Happy Meal promotional items. Yeah. It probably – A, they probably don't require the technology that – That's right. Yeah. The depth that we can bring. It don't require your expertise. Right. So we wouldn't be as good of a fit for that. Yeah. And we find also the – so there's always a lot of sketchy things in China. And one of the areas that many companies are structured are structured in a manner of middlemen. So, for example, a client would go to the middleman and say, hey, I want you to provide 5,000 units of this product at this price on this date. And then the middleman would scurry to their network of factories to go and get the thing built and deliver it to the client. And on face value, that model should work okay. But the problem comes in a fewfold. One is the client never knows which factory they're actually having it built at. So they don't know if the workers are treated ethically, what the capability is, if it's built in competing product. Or if they have a falling out with the middleman, how to even get access to that. Because the middleman is not going to want to let them know. They don't want to get end run. And then the other problem is from a cash flow standpoint that clearly the client's paying the middleman something. And that costing is probably anything but transparent. But the problem may be that the factory is also paying the middleman. And so the problem comes not for goods that are bad or goods that are good, because the middleman would do the right thing, but for goods that are marginal. So that of marginal quality. If the middleman accepts them, then he's going to irritate the client because he is giving him goods that aren't as good as they should be. And if he rejects them, he's going to irritate the factory because they're, in a sense, paying him. So we find that all gets very confusing. So we really focus, first of all, because of the potential sketchiness of China, of being very transparent. So going out of our way to take our clients over to China and introduce them to every factory that's bidding on the job. So they can look with their own two eyes and see what the working conditions are. They'll have all the contact info for the factory so they're never held hostage. And also it's important for the factory bosses to look at them and see the spark and the passion in their eyes. Because with these factories, most of the startups represent a very small slice of the revenue. So you could almost think of the factories like VCs, that they have limited resources in terms of their manufacturing and engineering staff. And they want to invest that time and effort into very high growth potential factories or clients.

Dave Jones: Clients, yeah.

SPEAKER_01: Right. So being able to look at the meet the entrepreneurs and see the spark and listen to the pitch is, we feel, really important. And it also is critical for the transparency so that the client can see all steps of the process and there's no mysteries in there.

Chris Gammell: So you mentioned the difficulties of – you said shady – I think you said shadiness or something like that. Sketchy, yes. Sketchy, sorry. Sketchy. My bad. But that is a lot of the stories that we hear. Personally, I've never been over to China or anything. And getting a third hand is kind of rough. But what are some of the difficulties from a high-level perspective of working with the government, working with the – I mean, you mentioned the factories is tough. But maybe the regulatory aspects and the doing business over there because it seems like that could be a pretty big hurdle.

SPEAKER_01: Right. The biggest challenge we find is trust. And how do you develop that? So a lot of people nowadays will look on either global sources or Alibaba and find some – in fact, we just had this happen with one of our clients. They found some component they wanted to order. The vendor had sent over a few samples that looked good. And now they are faced with the challenge of writing a substantial – they're doing a substantial wire transfer to somebody they'd never met before. And they just would have no recourse if it wasn't – if the guy took the money and ran. But how do you build up that trust? And you can – the factory might have been very above board and a great factory or they may not have been. But it's just very difficult to tell unless you have feet on the ground or you have them in your network where somebody says, yeah, I've done business with them before. They do a great job. Or you have orages. You want to avoid them. So I think that's probably the biggest challenge because you – until you go forward with that wire transfer, you really – it's very difficult to know unless you have feet in the ground. And the results of what happens can be devastating for particularly small companies. So that's one in – certainly built in the Chinese culture, which is a – we really love – we've got a lot of very close colleagues and friends in China. It's just a wonderful culture. The whole aspect of trust and relationship building is ingrained in that. So just working to understand how that works and that it is important to go out to dinner and drink a few beers with the factory bosses and spend the time doing that. Whereas I think in the U.S., if we're going and having a circuit board built, we probably don't tend to do that as much. But it's something that's absolutely critical in China. So I think that's probably the – in my opinion, one of the biggest challenges of getting working is figuring out who you can actually trust.

Dave Jones: Is that because you're not one of them? You're a Westerner? Is that – like you said, like it's easy in the U.S., right? You would sort of more intrinsically trust someone in the U.S. Whereas if you're Chinese, would you more – and based in China, would you more intrinsically trust the Chinese? And you wouldn't have to do that sort of thing. You wouldn't have to go out with a beer with them. You could just intrinsically trust them. Or is it – how does that work?

SPEAKER_01: No, I think even in China, if it's two Chinese teams working together from different companies, that building of the relationship is still extremely important. I know our China team is always going out and just really getting to know the factories. And that's important too because most of the time we're representing small clients in these big factories. And there's a limited supply of – be it SMT machines or workers or –

Dave Jones: A limited supply of workers in China? Hang on.

Speaker ?: Yeah.

Dave Jones: Believe it or not.

SPEAKER_01: Yeah, I mean, and just looking at the weight – Really? Sure. There's been pretty significant worker shortages over the last couple of years.

Chris Gammell: Why is that? Is it a quality aspect of it or is it some – is it actual just hard numbers because of poverty and people are going over there?

SPEAKER_01: Just hard – you know, in China, it's the biggest migrant workforce in the world that many will come down from the north to the south to work. And my – this is something I'm certainly not an expert in, but my understanding was that they had changed the tax laws for farming such that it was more advantageous to stay up north and that created a shortage. And that may be one of many factors. You can also see it represented in the wages of labor going up year on year if you look at supply and demand. And another sort of empirical way we see it is in the past there's been – typically the workers are women. And we've seen more and more male workers come on the line, which is maybe one indication. I'm not sure why it's tied together, but it does seem when there's a worker shortage, you'll see more and more male workers come up.

Dave Jones: Interesting. Very interesting. Now, one of the greatest fears I guess Westerners have in dealing with China is the counterfeit components. You know, your fear is, oh, you know, they're going to screw – I've specced in this part from a reputable manufacturer, and they're just going to, you know, substitute in the cheapest one-hung-low brand, you know, clone of that chip that they can find. How much of a problem is that?

SPEAKER_01: Yeah. So we see that the tendency for that to happen on a fairly regular basis. What you'd want to do to get around that is create an approved vendor list. So for some things, potentially capacitors, resistors, you don't really care as long as it's within spec. For other things, you probably care. For a small handful of components, you probably care a tremendous amount. And for that, you'd want to give an approved vendor list of what you'll accept.

Dave Jones: But that's also – but that's the fear, though, is that you give them the approved vendor list, but they will go behind your back and, no, buy it cheaper because then they can make a bit more margin on that. So even knowingly or unknowingly, like they buy it from their broker and their broker assured them that, you know, this is the genuine part, but their brokers screwed them over, so to speak. Right.

SPEAKER_01: Right. Well, this is one area where having feet on the ground certainly helps combat that in that you can do incoming quality inspections. But there are quite a few counterfeits out there. You know, some as bad as just a chunk of metal with a package and silkscreen. Yeah. You know, and then some – the other ones are often potentially defects that came off the real line but are defective chips or even potentially gray market that were run on a ghost shift.

Dave Jones: Or they're a respect product or something like that. Yeah.

Chris Gammell: I had a vendor friend who told me about a part he had pulled back in that, you know, he was a vendor for this company and someone gave him a call about complaining about it. And he's like, well, if you look at this date, the date code says it should have been manufactured on the 17th month of 2073. So we think it might be fake.

Dave Jones: Yeah.

Chris Gammell: What can you do to alleviate all this? I mean, we can't even do anything over here, Dave. I mean, right? Yeah. Like, yeah, fake parts are fake parts. It's just a –

SPEAKER_01: Yeah, we haven't hit that. It's going to happen. Yeah, we haven't hit that problem yet in our – I mean, I think it's probably inevitable that we'll bump into it. Yeah. One thing that we always say is the most important thing you can do is pick a factory you trust as your foundation. And hopefully they have a very – hopefully they have a lot on the line based on their clients and a strong reputation to uphold and then also a trusted network. So for any of our factories, they have so many big clients that if one of them – one of the clients lost their IP or there was lead in the paint or any of this, it would be devastating to their entire business. And as such, they're extremely paranoid and would do everything possible to make sure that the right stuff goes into the product.

Chris Gammell: Could you give us a sense of how many factories there even are in like the areas that you operate in? I mean – Wow. You hear a lot, right? Yeah. You see videos. But I mean like how many – it's a lot. How many do you guys deal with in terms of how many you'd go visit and actually provide to your client base of startups versus how many are available overall?

SPEAKER_01: Yeah. So overall would be an insane – it's just wall-to-wall factories when you're driving down the highways for miles and miles and miles. It's just like a carpet of factories. It's unbelievable.

Chris Gammell: I got to see that sometime. I got to get over there. Yeah.

Dave Jones: It's madness. It's crazy. And they're just the ones you see from the outside, let alone – Right. Right. You know, when you go into the parks and things and, you know, the corporate parks or, you know, technology parks or whatever the name is over there. And they're just – yeah. They're just stacked everywhere.

SPEAKER_01: Yeah. We've got in our network about 100 or so factories. And kind of the way we look at it is because we only accept compensation from the U.S. side, we're agnostic in terms of which factories we work with. So of that 100, we probably have 15 or 20 that we've worked with for a long time and trust inside and out and are very efficient. They know us. We know them. And then the other ones we've done, you know, if you think of it as a bell curve on the longer ends of it, some work but not as extensive. But if a client has a new factory they've heard of and would like to include in, say, an RFQ, we love to go out and vet them and understand them as well because it doesn't – as long as they're capable, it makes no difference to us. So we find that our database of 100 or so factories probably grows maybe 5% or 10% every year. Okay.

Chris Gammell: There's some churn in there too. You get rid of some, put some new ones on.

SPEAKER_01: Well, that's it. You know, you've got some factories that were fantastic, very capable factories and then something changes and they become less capable. I've had a good friend of mine, a UK guy who's been based in Hong Kong for 20 years and taught me a lot of what I know, just extremely seasoned. Had one factory that he'd been working with for a long time, changed in management at the top. And the new guy that ran it ended up stealing his IP and basically causing him to shut down his company. So these things can come and bite you. And again, this guy, it wasn't his first rodeo. He'd made a living working in China for 20 years. So, you know, the point you bring up is really critical that factories, they do change over time. And you have to maintain that relationship, go out for dinner, drink some beer and understand sort of where their head is, what are their clients, how is their business, who's running it. Oh, yeah. Who's running it? It's huge, right?

Chris Gammell: I mean, you look at like HP these days and what they're doing, you know, compare that to 50 years ago. And it's like, holy moly. There's a big difference, right? It's like...

Dave Jones: How big a deal is IP, though? I mean, especially if you're into some niche product where it's almost pointless for anyone to steal your IP, especially if it's like open source hardware, for example.

SPEAKER_01: Right. So, yeah, IP is certainly on a lot of radar screens in terms of how to protect it. And a lot of it depends on the client, whether it's open source or something they want to guard. And then a lot also depends on the product. So, you know, if you think of...

Dave Jones: Are some companies too paranoid? They think that it's super important, but like it wouldn't be worthwhile anyone in China copying it because you're such a niche market where your name is everything. Like, are some companies overly concerned with IP when they really shouldn't be?

SPEAKER_01: You know, I would probably say the only reason that being overly concerned about it would be a problem is if it slowed them down or prohibited them from doing something. So, in general, I'm always extremely concerned about IP. And a lot of it is our business. Same thing with the factories. If, God forbid, we have one client that loses the IP, that will be devastating for us. So, we always are, you know, really hyper-conservative and unprotected to save our lives. But as long for a client, you know, as long as they can still get their product built, I think it pays to be paranoid. When we look at it, so there's three systems. You've got electrical, you've got mechanical, and you've got software. Mechanical is probably the easiest thing in the world to rip off, for the most part. You put it in a laser scanner. You try to figure out what the materials are. And there it is. Electrical, you can work at a little harder. You can figure out what the components are. You can reverse engineer it. You can x-ray the bomb. Which brings us to software, which I think is both the easiest to protect and also the hardest to protect. It's the easiest to lose, would you say it another way? So, once it's gone, it's gone. But if you want to protect it, what we often recommend is our clients use a bootloader and then have that bootloader encryption programmed at a secure facility where there's no internet, there's no pockets, all the workers are scanned. And by tucking it in the IC, then they can consign the IC to the factory. And this gives them not only the level of protection of the software and allows them to send encrypted versions over email instead of dealing with delivery of disks, but it also lets them really control the supply chain. So, if your IC is critical to the product functioning and you know you gave the factory, say, 1,000 ICs, you know that they can't run a ghost shift having a product come out the back door. So, that's…

Dave Jones: Can you explain what a ghost shift is to our audience who don't know that term?

SPEAKER_01: Sure. Like Chris. Oh, absolutely. Here we go. This is fascinating. So, yeah. Ghost shift. If you had a factory that was sketchy and a product that there was high demand, what they might do is – or let's say you gave them an order for 1,000 units. They may buy materials without telling you for 1,500 units and run an extra shift and then the extra 500 overage they would just sell through their own channel. Oh. So, you wouldn't have control over how many they actually made. Whereas, if you can sign the IC to them and do that through a third party, then I know I gave them 1,000 units. There's no way they can build another 500 and send it out the back door.

Dave Jones: So, those Rolex watches you think are fake when you go to the markets, they may not necessarily be fake. Well, Rolex is probably a bad example. Right. Or fashion. Fashion is a good example. That iPhone or that something else, right? It may not necessarily be – it may actually be a legitimate item from the actual real factory, but it was done during one of those ghost shifts. Yeah.

SPEAKER_01: It absolutely could have been or it might have been slightly – it might have been one of the defects. But it wasn't – That's right. Defect enough such that they could still sell it. So, yeah, protecting IP, we love to have our clients use a bootloader. And then the other thing these days is there's so many connected devices that if each device has a unique serial number, which is programmed in – you know, at the time they're squirting in the bootloader. So, yeah. Then if the software on the web is smart enough, it can just make sure that there's not one serial number that shows up a thousand times. Yeah. So, you can police it that way. And it gives – assuming the device is not useful unless it has the software attached to it, that's another way to protect it. But, for example, and fortunately we have had none of our clients knocked off at this stage. But I know when we did the Roomba there, let's say tooling takes eight weeks as one of the gating items. We had a knockoff on the market after six weeks. Wow. So, you know, something – That is impressive. Something at least. Fortunately with that, the material choice was critical for things like the tires and so on. So, the thing didn't work at all. But, yeah, I think it really pays to be paranoid. And have good IP hygiene. So, you know, everything's –

Dave Jones: IP hygiene. Yeah.

SPEAKER_01: Everything's on a need-to-know basis. Don't leave your computer unlocked.

Dave Jones: You could use multiple factories, right? That is one of the things. You don't get all your eggs – put all your eggs in one factory as well.

SPEAKER_01: Yep. For example. Yep. And if you're a larger company, I think that makes a lot of sense. Or you could build modules and then assemble it in the US. Modules, yep. The challenge with that is just the overhead of dealing with multiple vendors and getting them doing an RFQ, getting them excited, signing the term sheet. It requires a much bigger team and it gets very costly.

Chris Gammell: So, you mentioned getting excited a couple times now, like in terms of – especially with lower volume stuff. How many times are you turned down? Is it pretty regular that it's like, no, no, we don't want that? It's –

SPEAKER_01: We're not turned – so, fortunately with Dragon, we've got a pretty good track record. Yeah. Of finding really interesting, exciting clients. The ways – we'll get turned down for the following reasons. One is that a factory is just at capacity. And we know them well enough and have a long-term business relationship that it's much better for them to say, hey, we're full. We're not going to waste your time or our time doing that. So, that's one way. Another way would be some factories – and most of ours don't have this, but a few do – have revenue targets. So, they want to see a million dollars the first year and then three million after that. And this is on the top line. So, if you multiply the cost of goods sold times the volume, that should equal a million. And some clients just don't hit that. Now, they will at times make an exception, but that would be another way. And then the third is for whatever reason, they may not have the capability, but that's a lot more rare.

Dave Jones: Are there factories that like who actually promote that they specialize in like there's no minimum order quantity? Look, we'll run your 100 items through and stuff like that and charge you considerably more? Or do you find that's common?

SPEAKER_01: No. You know, we almost never find that model. So, the factories often will charge very low NRE or non-reoccurring engineering. And they really want to make their money on the volume. So, they want to look for something that's going to last over multiple years. And they can invest their engineering up front. And, of course, that's all factored into the margin. And then have this thing, you know, run for 10 years and be able to enjoy the increased margin on the out years. Right.

Chris Gammell: Optimizing and such. Yeah.

SPEAKER_01: It's very rare that you can, at least in our experience, you can get a factory that will be excited to build 100 units without the follow-on. And usually, when we say 5,000 units, in China, to buy China parts, there's the concept of an MLQ or a minimum order quantity. So, to get the Chinese pricing for whatever your component is, you'll often have to buy it in a batch or a lot, which is usually 4,000 to 5,000 units if you think of a reel or a tray. So, if you only wanted to build 2,000 units, you can't go less than the MLQ. Yeah.

Dave Jones: You have to eat the rest into your cost.

SPEAKER_01: Right. So, that pretty much – that quickly will erode any cost savings you got from going to China. So, there's that. And just – there are a few cases where, you know, the cost of goods might be $200 or $300 that a factory might run $500 to $1,000 a year. But it would have to be the right factory. And that's definitely more the exception than the rule.

Chris Gammell: So, you mentioned with the right factory, the – you know, and the capabilities of that factory. Could you give us a picture of just the comparison? I mean, I've heard stories of some shops over in China that are doing things that are absolutely not possible in the U.S., either in terms of speed or actually even capability of equipment because of just the new – you know, they have access to newer equipment over there, lower-cost equipment. Have you seen that at all? Are there technologies that are possible over in China that aren't possible in the U.S. currently?

SPEAKER_01: Let's see. So, certainly from an SMT standpoint, they have some pretty amazing stuff in terms of 0201 and 00501, stuff they can put down just to make cell phones and so on. And what we found in our experience is that for cutting-edge technology, it's actually a lot better and easier to do it in the U.S. So, we were working on one project that involved a laser welder, which is a totally awesome piece of equipment. It's as big as multiple foam booths and has freaking lasers. Of course.

Dave Jones: It's got a freaking laser. Yeah. A freaking laser. Right, yeah.

SPEAKER_01: So, how can you not love the thing? And I think when we were looking at it, we were trying to make a tank. You know, the engineers got really excited about it with the freaking laser and we just had to have this. So – Did you say a tank? Yes. So, this was – Like a boom-kaboom tank? Oh, no. This is a – A toy tank. A fluid tank. Like a hollow vessel. Oh, okay. Yeah, we wanted to –

Chris Gammell: Like holding fishies kind of tank?

SPEAKER_01: In this case, it was a tank for dirty mop water. That is so much less interesting, but still. Yeah, I know. Sorry.

Chris Gammell: You should have asked, Chris.

SPEAKER_01: Use lasers to make mop buckets. Yes. Although, it did – it was a robotic mop bucket. It was for scuba and it – Oh, that's pretty cool. Oh, cool. And it did have the best sensor in the world, the WTF sensor, which stood for waste tank full instead of waste. What one might think. Yeah.

Dave Jones: But, yeah, for this – This is the only show in the world where we get excited over waste tank sensors.

SPEAKER_01: Yeah, the WTF sensor. That was definitely a favorite. Yeah. But for this, we – You know, laser welding is very common in the U.S. It wasn't common where we were in China. So, we ended up building it in the U.S., sending this machine to China. And it ended up being a giant nightmare in that there's nobody to maintain it. You needed all the spare parts. And then if the thing went down, the whole line ground to a stop. It was down hard. So, our advice is, you know, if you pick a factory that has in-house the capability that you need and then roll with that as opposed to trying to bring new manufacturing technology over there.

Chris Gammell: And what about cost comparisons then? I mean, like if it's that specialized, is there any advantage to going over there?

SPEAKER_01: In this case, for the welding, there wouldn't be. But looking at the whole product, there is a significant labor component. And, you know, looking –

Speaker ?: Oh, okay.

SPEAKER_01: Okay. Then labor used to be $1 to $2 an hour. Here we're seeing it sort of $4 to $6 an hour today. And it does depend on the factory. And there's quite a bit of range and also the location. But if you – so the rough rule of thumb we use – and this is, you know, a very rough rule. But if you've got a retail price of $100, the cost of goods better be no more than $25 because everybody that touches it doubles the price. So the cost of goods is $25. Sell it to the retail channel for $50. They sell it to me for $100. So if you have, you know, a couple hours of labor at $2 an hour and then multiply it by four going up, that's very different than a couple hours of labor at $20 an hour just because of the cost sensitivity for consumer products. So in the case of the robots we were building at the time, you know, the labor – they had an insane amount of labor involved. You know, at times we had 2,000 to 3,000 workers focusing on that. So it would have been very difficult. With trends today though, and, you know, we love U.S. manufacturing and would love to see it become more competitive for consumer electronics. I think the way around it is to fully automate it. So get rid of the labor component. And there's certainly been a lot of articles around this. But, you know, the newest manufacturing engineers are going to have their PhDs from MIT and be running the robots that build the product. But in China, you're basically buying fingers or you're renting 10 fingers for an hour.

Dave Jones: In China, there's really little price differences there between – you know, you can put all the effort into the world in optimizing your product for machine assembly to eliminate that labor cost. But it's probably just as cheap to, well, solder all the things through hole, right, and do wiring everywhere and all that sort of stuff. You don't have to worry about it too much if you're going to China. You don't have to spend an extra three months refining the design of your product to eliminate some wiring, for example.

SPEAKER_01: Right. Yeah. You know, given the – Is that – You know, the humans are so capable. It's amazing what we can do for our hands if you look at what it would take for a robot to do that. So, yeah, rather than spending all that NRE to take a design, which is probably not that mature to start with, and then add on automation on top of that, you're right. You can just go to China and solder the wire harness. The challenge there is just maintaining quality. So, in China, the temperature of the soldering irons drifts all over the place. So, you need a process procedure to go in and make sure that those are calibrated and the workers are trained. You know, certainly the more you can automate, in general, you'll have a substantial improvement on your quality. So, it's a balance of getting the right mix of those. So, it's a lot quicker to change, to retrain a worker, to put together something differently than it is to retrain a robot at this stage. But, you know, maybe that will change in the near future, which would be terribly exciting.

Chris Gammell: What about the costs of the, you know, you said labor is about $4 to $6 an hour right now. What about the cost of shipping? And, like, there must be some balance point there. I mean, I know shipping in bulk these days is something like $300 a container or something ridiculously low. But there are other costs in there. So, where is that balance point? Say robots were never in the equation. Is there a point where you think that, you know, if China labor got up to $12 or $15 an hour, would that start to balance with the U.S. then? Yeah.

SPEAKER_01: Or Australia or anywhere? Sure. You know, I think that would be one point to consider. So, you know, when we look at China, there's a few things that concern us. One is the – and this will get to your question on the balance point – one is the ever-increasing rate of the cost of labor. The second is the currency. Right now, although it's floated against a basket of currencies and it's been stable, there's a lot of pressure for that to move, which would be unfavorable for manufacturing. The cost of shipping, you know, you just – which is in another way of saying the cost of oil, which it takes to move it across. And also the time. So if you've got eight weeks – or let's say it takes five weeks on the water to go from Yentian to clearing customs and SeaTac, you know, that's – if you could take that five weeks both from a cash flow standpoint and also from just being responsive to your customers or for late-stage customization if they wanted to do a – for inventory balancing, if you had a red one and a green one. You don't need to guess what the split of that is ahead of time if you can manufacture them almost to order, which is a lot easier to do in the U.S. than it is to do in China. You've got that. You've got political tensions. Who knows what's going to happen between the U.S. and China. And then sort of the X factor. So God forbid there's another SARS or bird flu or any sort of natural disaster like a tsunami or an earthquake. You know, if you've got – the factories are – the workers are packed in there pretty tight. And if one person gets sick, there's a pretty good chance that could spread. If you've put all your eggs in that factory basket, then you're in a whole world of pain. That's a real risk. It is. That is, you know.

Dave Jones: It may not happen very often, but when and if it does happen, you're screwed.

SPEAKER_01: You're totally screwed. And you've – you know, we love entrepreneurs and how much effort they put in and, you know, in blood, sweat, and tears. And yeah, that happens. You're done. Whereas in the U.S., I think that's a lot less likely to happen. So we always emphasize to our clients, like, they should – and we can help them go through the process of determining where it is best to build. And the answer very well could be the U.S. And I think over time, you know, as so many people are focusing on U.S. manufacturing, maybe we can get some of that back over here.

Dave Jones: Now, this touches on your corporate policy. And I'll quote, Dragon Innovation will not accept any job that involves transferring existing in-house manufacturing from the U.S. to China. End quote. Yet you happily promote China as the best place to take your new product development. Is that a very fine line there in terms of your company philosophy? You don't want to take jobs away from the U.S., but for new products, you're happy to kind of thing? Let's see.

SPEAKER_01: Can you explain that corporate policy? Sure. So the thing we'll never do is – suppose we imagine a pump manufacturer up in New Hampshire where people have been building the pump housings for generations. So we're absolutely not going to help those. And we won't make a judgment call on it, but we won't be the company that will help take that from the U.S. and build it more cost effectively in China. Just because fortunately we have enough other business we don't even need to worry, and we just don't think that's the right – for us, it's certainly not the right thing to do. The challenge we see is for consumer electronics, which is where we focus, we have yet to find a solution for manufacturing in the U.S. that can produce high volume at cost of prices. And to enable the entrepreneurs to succeed, we could either try to do it in the U.S., but they'd never get a price point that would allow them to sell the product and they go out of business.

Dave Jones: And is it always about price though?

SPEAKER_01: Consumer electronics usually. I mean that –

Dave Jones: Oh, you can see – okay, yeah, I can see.

SPEAKER_01: If you're looking at capital equipment or other things, it's a very different equation. But we're always looking at the iron triangle of cost, quality, and schedule. And yeah, for where we are, the cost is absolutely critical. You know, there's – we have found that some products that fly off the shelf at, say, $199 won't move at $229. So finding a capable factory that can hit those price points and hit the quality as well is critical to success for the entrepreneurs. And, you know, if there's any – if anybody's heard of U.S. factories that can do that in high volumes, so $5,000 to $50,000 to $100,000 a year, you know, we'd love to work with them. And we're actively – in fact, our team, our senior team has a road trip out to Rochester, New York end of this month to go look at a molding house. Nice.

Chris Gammell: Excellent.

SPEAKER_01: Yeah, they look –

Chris Gammell: Hit up garbage plates while you're there. That's the most disgusting and delicious food you'll ever have in your life.

SPEAKER_01: My brother-in-law told me about that. It sounds awesome.

Dave Jones: So any clients really who are in sort of a more much higher margin niche product area essentially don't really need you anyway. Is that correct? Because your specialty is dealing with everything that has to do with dealing with China, so to speak. So they wouldn't get as much value out of you if they were getting manufactured in the U.S. They could probably do it themselves. Is that –

SPEAKER_01: Well, they – so basically if you think of the continuum of Dragon, we've got the front-end work and we can go before the 80%. You know, we have very strong mechanical engineering and very strong quality planning. So we've seen a lot of velocity in clients looking for the – what we call the pre-RFQ or the manufacturing preparation area. Yeah. Which would not matter if you build in the U.S., you build in Mexico, you build in China. It's all the same principle. And then after that, it would fork out. So if you did need feet on the ground in the U.S., which is – or we have a lot of volume providing feet on the ground in China, we'd be less effective at feet on the ground in the U.S. But hopefully we could have trained and coached and guided our clients so that when they get to that stage, they're set up to succeed. So, you know, maybe they're the guys on the ground and we fly in on a periodic basis. But I think on the front end of the business, there's very much room for that because the principles are the same. On the back end, it's something we're trying to figure out how to offer those services. The real – the great thing, as we were talking about, at least for our business, is that China is very concentrated in the Shenzhen, Dongguang, Guangzhou area where we have all of our teams. So we can be at any factory within an hour or two. The challenge for our business is the U.S. is huge. So if we need to have a dragon person in Ohio versus in Rochester versus in Alabama, that's a lot more challenging for us because we can't spend – we can't put somebody on site there. So, you know, we're actively – as we grow the team, we're actively trying to figure out how do we support U.S. manufacturing and, you know, maybe even take some of the knowledge we've gained building in China because so much of the U.S. manufacturing is left and bring that back to help share that with the U.S. guys. And then how do we expand our business in that area? And we haven't found a good answer yet, but it's something we're, you know, actively thinking about.

Dave Jones: That's an interesting aspect that the U.S. is big. It's like the same width as Australia, really. So east and west coast is almost like a different – you know, they're totally different time zones. You know, it takes you, what, six hours to fly from one side to the other or something?

Chris Gammell: Depends which direction the wind's going, but yeah.

Dave Jones: Right, yeah.

Chris Gammell: But yeah, east and west is about six-hour flight.

SPEAKER_01: Yeah. So, yeah, I mean, we'll figure it out. So, you know, we're passionate about – I think there's a lot of great reasons to have a revival of U.S. manufacturing and in particular for consumer electronics goods. And we'd love to find a way to play a role in that. We just haven't cracked that nut yet.

Chris Gammell: Yeah.

Dave Jones: Now, we've got some viewer – listener questions. Listener, yes. Kasbah has an interesting one. The crowdfunding route seems to be a bit of a loophole when it comes to safety and EMC testing. Are you concerned about the repercussions it may have with the latest doodad from Kickstarter that, you know, suddenly, you know, kills every, you know, mobile phone or every pacemaker within 100 meters?

Chris Gammell: Right.

SPEAKER_01: So –

Dave Jones: Is that a concern?

Chris Gammell: Yeah. And does that even matter for your business? I guess that's probably the bigger question is does that matter for, you know, someone – because you're mostly a service-based industry, right?

Dave Jones: Or is that the client's problem? Like do you handle that sort of stuff as well? Do you advise them on that or is it sort of, well, you know –

SPEAKER_01: We do.

Dave Jones: Please go talk to someone else.

SPEAKER_01: No, we have a very broad base of knowledge in that. And fortunately, because we deal pretty much exclusively with consumer electronics, we have gone down the path to figure out most of the answers. So our team, both in the U.S. and China, will work very carefully with our clients, whether they've been funded by traditional VC or Kickstarter, friends and family, whatever, but to make sure that they meet all the compliance criteria. In terms of clients that are funded on Kickstarter and don't work with Dragon, you know, I guess that would be a concern. I hadn't really thought about it in great detail. But certainly anybody that works with us, we're going to make sure that they meet their compliance goals because usually by the time they get to Dragon, they want to grow their – it's not just providing the Kickstarter products, but they want to grow their company as well as the product. And to sell into any major retail channel, although the compliances are often voluntary, you still need to have them from a liability standpoint. So we'll make sure that they're covered. If we do get something that's beyond our expertise, then there's a lot of great service providers out there that we can certainly refer our clients to to make sure they're covered.

Chris Gammell: So you mentioned the VC aspect as well and just how people are funded. I'm curious, how are people finding you these days? Is it mostly like looking at other companies that you've helped before and kind of just talking to them and see, oh, how are you doing high volume? Or is it more like VCs that are pushing companies your way and saying, you know, if you're going to go big time, you got to talk to Dragon or something like that?

Dave Jones: Or as somebody has won – somebody accidentally being successful on – they've listed their little project on Kickstarter and gone, holy crap, now I've got to ship, you know, 50,000 of these widgets. Jeez. And they panic. Yes.

SPEAKER_01: You know, that describes our sort of incoming. We see all three of those. It means – so we've got a great network of clients that typically are surrounded by an ecosystem of friends and acquaintances like them, and they typically will drive a lot of business towards us. For the VCs, we work – we have a lot of, for example, Brad Feld and the Foundry Group's clients under our – that we're helping out. And we're always thrilled to see a referral come in through a VC. You know, at the end of the day, they're the ones paying the bill, and it just means a lot to us that they would want to, you know, refer additional potential clients to us. And then, like you said, there's a Kickstarter where – and it'd be fun to talk more about the Kickstarter funding, but where they've been a lot more successful than they thought they would be. And then realize, like, holy cow, now what do we do? Right. And we've had a lot of great shout-outs, both from our friends over at Pebble and then some other folks that have blogged on Kickstarter and gotten the dragon name out there.

Chris Gammell: Yeah, that's great. Got it. And you've been around since 2009, that's right?

SPEAKER_01: Yeah, February 9th, 2009.

Dave Jones: Which is a long time in this industry, right? That's true, yeah.

SPEAKER_01: Yeah, it's been a great ride. But, yeah, in terms of Kickstarter, we're really excited to see what crowdfunding has done. You know, if somebody had proposed the idea of Kickstarter to us a year or two ago, we would have thought they were smoking something. There's just no way that's going to work.

Dave Jones: Yeah, yeah.

SPEAKER_01: But it's incredible to see it take off. But we also see huge challenges and sort of pitfalls with it as well in that you can have entrepreneurs. There's a couple – well, there's a few different failure modes. But the most common is the entrepreneurs have gotten to the 80% point, get funded way beyond their goals, and then have no clue what to do beyond that.

Chris Gammell: And they dump it in your lap, right?

SPEAKER_01: And they say, help me. Right. And we get some clients or potential clients that have been successful, but they just didn't understand the cost of goods and the overhead manufacturing costs from tools, NRE, and they just haven't raised enough money.

Dave Jones: Oh, so like a pricing problem, huh? Right, so they've screwed themselves because they didn't understand the – They're totally screwed. So they might end up making nothing. Like they might get the half million bucks from their campaign, but then they realize, geez, I'm not actually going to make anything out of this because I didn't leave enough margin. Is that common?

SPEAKER_01: That's exactly it. Ouch. We see that all the time. We see some that have gotten the money. They spent some of it trying to get there before they realize there's a problem. So they have a lot less. And, you know, what basically Kickstarter says, if you can't deliver, you should give the money back. But at that stage, they've spent the money and it's very difficult to give it back. So it seems like there's – well, if you look at Kickstarter, it's focused on dance projects and video projects and music projects. And then the consumer electronics have kind of taken off, especially with the success of Pebble. But there's just no guardrails or no upfront mentoring. So you see a lot of great ideas that are just going to fall by the wayside. And the problem is – I don't know if you've looked at the poor guy that did the lock picks. He raised something like $86,000 a few years ago and has just not delivered. And the poor guy has been in the hospital with some challenges and so on. And the challenge with Kickstarter is people hate the person. They don't hate the project. There's not that separation. So if you don't raise enough money, you're really in a whole world of pain because it's such a public forum and people want their stuff.

Chris Gammell: Just vitriol all over the place, right?

SPEAKER_01: Yeah, and it's – I mean if we look – so you have to set some reasonable delivery date before you – to get anybody to back your product. You can't say it's actually going to take a year or two. You have to say I'll give it to you in three months. And if you think of taking a small group of entrepreneurs that have probably never built anything in volume in their lives, giving them an insanely short schedule, giving them direct access to their customers in something that's effectively pre-sales, and not giving them enough of a budget or in any education, like under the current model, it's just set up to – it's set up to fail. And this is another one of the Dragon initiatives we're looking at really closely in terms of how can we help solve this problem. But –

Chris Gammell: Maybe like classes through Kickstarter or something like before your project gets listed, you have to talk to Scott's team or something. Yeah, just some –

Dave Jones: Well, that's an interesting idea. You know, you could actually – you know, is it worthwhile for the entrepreneur to write, you know, look, I'm going to pay $500, and I'm going to go take a, you know, a couple of days course and figure out what, you know, issues there are manufacturing in China and all that sort of jazz if I am successful.

SPEAKER_01: Yeah, it's just so critical to understand that upfront stuff and how do you – from an entrepreneur's standpoint, how do you actually get accurate cost of goods sold information if you don't have access to the networks in China to know what the things should cost or how do you understand the shipping costs or what do tools cost or how long does it take? Oh, God, tooling, yeah.

Dave Jones: The way I do it is that I base everything on DigiKey mouse-up pricing and I base everything on local manufacturing and then I add my typical, you know, times to half times three.

Chris Gammell: Yeah, but Dave, you're like the 0.1% if you were on Kickstarter, right? I mean, like if you're – Okay. I don't think most people would be like that.

Dave Jones: They wouldn't have the experience to do that. But, well, hey, I'm telling them now. I'm offering free advice. You know, base your product on those sort of prices. You know, base your margin based on those prices. Everyone knows about, you know, the times three or times four margin, something like that. If you base it on local assembly costs, which you can get and DigiKey pricing, you're fairly safe.

Chris Gammell: Yeah.

Dave Jones: I think.

Chris Gammell: Maybe you could – I mean, Scott, so the one thing we didn't bring up yet is the fact that you're also an educator. And how the heck do you fit that in?

SPEAKER_01: Yes. Oh, so, yeah, for the last – I'm not teaching this year, but for the last two years, I've taught at Olin College for their – both the machine design course and then also the design for manufacture and assembly course. And, yeah, it was definitely – things are always busy at Dragon. But what I really loved about that is that being connected with the students that didn't know they couldn't do something just came up with the, you know, sometimes completely crazy and unrealistic ideas. But more often than not, something that they actually could pull off. Whereas if they had been in industry for X number of years, they would have been so hardened and lost their spark.

Chris Gammell: The graybeard factor. Yeah.

SPEAKER_01: Exactly. So that in itself was just invigorating. And the thing – so I got out of college in 92, you know, well before the internet and all that. And with these students at Olin, which is just a phenomenal college, I'll be teaching, you know, gear design or something like that. And they'll have their computers, you know, 23 to 30 of them. And as I'm going through my lecture, which we try to make dynamic and interesting, you know, they'll be pushing back on certain points or asking these great questions just because of the flow of knowledge. So it's a much more dynamic, interactive experience than I ever had in college that it was really for me invigorating for the soul. And it also made you really have to know the stuff because, you know, they were a very smart –

Dave Jones: These guys can check on Google in an instant, you know.

SPEAKER_01: They would hold me to task. They were tough.

Chris Gammell: Are you sure that was in 2001, not 2002, like you said, Professor Miller?

SPEAKER_01: Oh, yes.

Dave Jones: The communications revolution has a lot to answer for. Yes.

SPEAKER_01: It's a great form of – I really like what Olin's done with the education. So good.

Dave Jones: Now, one of your clients who we probably won't talk about, MakerBot, what's your opinion on the Tangibot? Did you see that? On Kickstarter where they just took the MakerBot and he wanted half a million dollars funding to take it to China?

SPEAKER_01: Oh, interesting. I'll have to look at that. I haven't seen that yet.

Speaker ?: Oh, yeah.

Dave Jones: You haven't seen that. The Tangibot. Yeah, it made a huge – there was a huge uproar in the open source hardware community because this guy didn't –

Chris Gammell: Not huge in the grand scheme of things.

Dave Jones: Didn't add any value. He didn't modify the design, improve it in any way. All he said was, I want half a million dollars and I'm going to take the MakerBot to China as is and I'm going to call it the Tangibot. And, you know, I am allowed to do this because it's open source hardware. And he got a really – and he didn't meet his funding, Tiger, by the way. Yeah. The community. He was asking for half a million dollars.

Chris Gammell: Well, perhaps a better question is just, you know, what is – you know, we've seen these hardware startups become a bigger thing. And I think that's a really exciting trend these days and I'm sure you do as well. But what is your exposure aside from MakerBot to the open source hardware community? And, you know, are you seeing that as a bigger trend or is it more of a, you know, little here, little there kind of thing?

SPEAKER_01: Let's see. So, in our business, I think MakerBot is the only client that I know of that's open hardware. And, yeah, I haven't bumped into it too much. But it's something that I'd say is getting a little brighter on the radar screen. But a lot of what we do is driven by what walks in the door. And we never know what's going to come. So, if we see more and more clients in that space, it's something I think we'll kind of ramp up on more.

Dave Jones: Is that because possibly the open source hardware model really only works at the smaller scale of things? I mean, you guys are really dealing with sort of the higher end or the medium scale of things, right? The medium scale consumer things. Do you see open source hardware as having a viable future in that sort of area? Or is it sort of just destined to forever be the model of choice at the low end side of things?

SPEAKER_01: Yeah.

Dave Jones: The low volume.

SPEAKER_01: So, I'm in no means an expert in it. But I think the way it might struggle in the medium volume is that typically to get into this space, you need anywhere from, you know, two to probably more like 10 million of funding. Which usually will come through a VC or group of VCs. And I think they would probably be concerned how do they protect their IP and make money on this. Of course. If it's all open. So, the trick is just that how do you get funding for something that's substantial? Because hardware costs money on like, you know, software, which is a lot more scalable. So, I guess I see that tension as kind of being a challenge.

Dave Jones: Hmm. I think there's probably, it's, you know, one of those chicken and egg things. You know, you can't really get that sort of money. And unless, you know, you protect your IP, which is what the venture people will expect. Exactly. So, what do you do?

SPEAKER_01: I think that would be the challenge.

Dave Jones: Hmm. Unless you go, you know, gangbusters like the Pebble Watch or something like that. You got, what, 10, 11 million dollars or something on Kickstarter?

SPEAKER_01: Yeah, I think it's something like 10.23. Yeah, that was, that was unbelievable.

Dave Jones: And that could have been open source hardware. There's no reason why that couldn't have been.

Chris Gammell: Well, it's an interesting thought experiment too is because before funding was over, you could have had someone in China basically, you know, make one and output one if it was truly open hardware.

Dave Jones: Well, that's if you released the designs before you manufactured it. You'd probably be foolish to do that. But there's nothing in the open source hardware community that says you have to do that. You can call it open hardware and then once you're manufacturing and got it on sale, then you can release the design files, I guess. So, there's not necessarily a rule that says you must release it when you just get the idea. Woo-hoo! And, you know, as I'm doing with some of my projects. I'm coming up with the idea and doing a video on it. Here it is. It's open, you know, before I've even started.

SPEAKER_01: I mean, in our business, it would make us, you know, very nervous just because we're paid to keep our mouths shut and protect IP. So, the idea of having it all out there, just... Right. Very honest of you. That's good. Yeah. We would leave that to the clients to figure out what they wanted to disclose.

Dave Jones: It's an interesting subject, that's for sure.

Chris Gammell: Yeah. It was one last thing. We're kind of running out of time here. Oh, we are? Yeah. By a bit, as we usually do. But, you know, we mentioned before the show the fact that you guys are involved in two hardware accelerators. And I'm just wondering, you know, kind of your thoughts on the accelerator side versus the venture side and just, you know, where you see all that stuff going.

SPEAKER_01: Right. So, yeah, we're extremely excited about the hardware accelerators. We think there is a giant gap out there and are thrilled to be in that space. The challenges we see is most of the accelerators today have focused on software. And there's a tremendous amount of infrastructure and knowledge around that. But hardware is just hard. And there didn't seem like there's as big of a network of people that you could go to to be able to take a concept and sort of walk you through all the stages of going and building it. So, the accelerators will do that by not only providing funding in a space, but in some cases a machine shop with a dedicated staff that will really work closely with the entrepreneurs to let them realize their idea. And from a VC standpoint or an investment standpoint, it makes a lot of sense that rather than looking at a pitch and having to decide in a week or two whether you want to commit significant funds to this, you have the course of three months or six months to really get to know the entrepreneurs, see how they function as a team, see how they handle stress. How do they overcome obstacles? How do they pivot? So that when you get to the demo day at the end of it, you really have a very deep knowledge of what the team is capable and also the evolution of the product.

Chris Gammell: It's like having an intern that you get to see over six months versus just going to an interview and interviewing someone from a job, right?

SPEAKER_01: Yep. That's exactly what it is. And hopefully by bringing the Dragon Magic to it, we can help them understand and anticipate the high volume manufacturing challenges and requirements ahead of time. Yeah, you can give that class. Exactly.

Dave Jones: Make $500 class. Is it only for the high volume? What if somebody wants to design some really high-tech niche gadget?

SPEAKER_01: Most of them are really targeted for Hexcelerator and Bull on the high volume is what we're looking for. You know, Hexcelerator is a much broader spectrum of projects where Bull is targeting the connected devices or, as Ben says, software wrapped in plastic. Ooh, I like that.

Dave Jones: Oh, no, please don't use the Internet of Things buzzword. Oh, shit.

Chris Gammell: No, no, no.

Dave Jones: Oh, damn it.

Chris Gammell: I like software wrapped in plastic. That's fine. Rank word, bingo. I think silicon in plastic would be a better way to say it, but yeah, that's good. And so Bolt is the newer – you guys are still accepting, right? I think I saw that on the website that they're still looking for people. So we'll put a link in our show notes to – if there's anyone out there listening who's like, oh, maybe I want to do an accelerator and –

Dave Jones: Is there room with these accelerators to maybe have like a US-only accelerator? We're going to do everything here. This is a homegrown accelerator. None of this China rubbish. Is there room for a program like that? It's kind of close-minded. Or is that just a fool's errand?

SPEAKER_01: It's just – Well, the trick is how do you deliver it? Like we're – if anybody knows of great high-volume US manufacturers for consumer electronics goods that can handle complex assemblies and hit the right price points, I think that would make a lot of sense. But the trick is you need the manufacturing engine to be able to replicate the idea. And my concern would be without China or Mexico or some other place that it would be hard to hit the volumes that would be required. And all of these accelerators are really looking at truly accelerating a team to a point where they'll be fundable. And thinking about what the VCs want to fund. They want to, in most cases, fund high volume or to get to that $100 million business. So, yeah, I'm – I'll be thrilled when the answer is a no-brainer that, of course, these are a whole list of US manufacturers that can do it. But I'm not sure we're there. I don't think we're there yet.

Chris Gammell: Got it. So, Scott, where can people find out more about Dragon Innovation, especially if they are desperately trying to find someone after their Kickstarter has been funded? Oh, they've got a bunch of design files I want to dump in someone's lap. Somebody is panicking right now. Yeah, exactly.

SPEAKER_01: Yeah. We love talking with people and learning more about their projects and manufacturing strategy. So, we're at dragoninnovation.com. And then anybody is welcome to email me, scottwith2ts at dragoninnovation.com.

Dave Jones: And they can just essentially buy you as a retainer type thing. Like they can buy just a month of your services, essentially.

SPEAKER_01: They can.

Dave Jones: Is that a bunch of your, you know, buy, oh, can I buy a couple of weeks of your knowledge and expertise?

SPEAKER_01: Yeah, usually we do it by the month. But every client is different and we'll customize it. And what we really like about the retainer is that once we set the price, they have access to the keys to the kingdom.

Dave Jones: They can hassle you as much as they like.

SPEAKER_01: As much as they want.

Dave Jones: They've got your personal mobile phone number and they'll ring you at 2 a.m. in the morning.

SPEAKER_01: They have that. Fortunately, we run 24-7 having the Far East team. And what we find, too, is they often don't know what they want when they start. So, with this, we may start on costing and then they realize, oh, geez, quality is really important. And we can, you know, help them on that without having, like, we just want to focus on having them succeed. And that gives us really good alignment. Got it.

Dave Jones: Are you on Twitter?

SPEAKER_01: We are. Yeah. Dragon Innovate.

Dave Jones: Who do you personally?

SPEAKER_01: Just through the Dragon Innovate. Ah, right. Come on.

Chris Gammell: Get on there personally. He is the voice of Dragon Innovation.

Dave Jones: Oh, okay. Well, do you personally send tweets or do you have a – do you have somebody who sends your tweets for you?

SPEAKER_01: So, Beth McDonald, who is our VP of Business Development, she and I both work on that.

Chris Gammell: That's good. Sweet.

Dave Jones: Thank you very much, Scott. This has been the most interesting insight into China, which we're always talking about on here, fortunately or unfortunately. For our listeners. That's awesome.

Chris Gammell: It's good to have a voice of reason and, you know, actual accountability versus our rambling. Somebody knows what they're talking about. Yeah, exactly. It's a nice change.

Dave Jones: Us just bitching and moaning about everything we're going to China. Yeah. Now we know why and how.

SPEAKER_01: Cool. It was awesome to talk with you guys and I hope we have some material here that will work for you. And I really had a blast and look forward to staying in touch.

Chris Gammell: Yeah, definitely. Thank you very much, Scott. We expect to see many more great things from you guys.

SPEAKER_01: Cool. Well, we will do our best. Great. Catch you later. All right. See you guys. Bye.

Speaker ?: Outro Music