Process Know-How through Licensing - Industrial & Engineering

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ENGINEERING, DESIGN, A N D PROCESS DEVELOPMENT Engineering. If the design and detailed engineering is handled by personnel familiar with pilot plant requirements and if close liaison is maintained between the process engineers, the designers, and the construction force, the cost should be 10 t o 15% of the total plant cost ( 8 ) . If this is not the case, the cost may far exceed these figures. Auxiliary Programs

The development program in addition to the pilot plant work itself, as mentioned previously, may include various other types of experimental work, which will involve equipment as well as operating expense. il few typical examples from the development of one particular process are: 1. Development of an analytical method for individual aromatic hydrocarbons in a catalytically reformed product 2 . Determination of heats of reaction under various conditions in a specially designed calorimeter 3. Studies t o establish stability of catalyst to high temperatures and steam 4. Tests to determine the performance of the product under actual conditions of use

Operating Costs

The operating cost of the pilot plant will be influenced by a number of factors. Certain basic service facilities are required; if the cost of these can be distributed over a number of operations, the share of the individual project will be less. Likewise, bcnefits will accrue in the form of an increased pool of trained manpower and perhaps some reduction in the cost of over-all supervision. Successful pilot plant operation calls for a nice blend of technical and practical skills-of the two, perhaps the latter is the more important. If the operating personnel have an adequate background of experience, productive operating time will be proportionately increased. For most process work, operation around the clock 7 days per week will be far more efficient than it would be on any other basis. Good design can contribute savings, both through mechanical dependability and by minimizing time required to reach equilibrium. As has been mentioned, accounting practices vary so greatly that one company’s figures may be quite different from those of another for a similar project. Recent surveys ( 2 ) have indicated that the average annual cost per research worker in the petroleum and chemical industries is about $9000. This is equivalent to approximately $4.50 per man-hour. Making due allowance for the fact that some of these workers are engaged in administrative, service, or other unallocated activities, it is probable that the realistic average figure will approach $6.00 per productive man-hour. An analysis of a considerable number of pilot plant development projects revealed the following approximate time distribution expressed in terms

of percentage of operating man-hours or a total of roughly one and one half man-hours per operating man-hour. Per Cent 86 29 27 7 4 4

Analvtical work Calcdation a n d correlation of data Maintenance a n d revisions Technical supervision Stenographic and miscellaneous Meetings and conferences

Thus, for a moderately complex pilot plant, the operating cost might run $750 to $1000 per day. The extent of the pilot plant program will, of course, depend on the particular process under development, but estimates of the number of runs necessary t o establish the required data tend to be optimistic. Also i t is not unusual for a considerable period of time to elapse before satisfactory operation of a new pilot plant is secured and even with most careful design, modifications of the equipment may have to be made before this goal is attained. Conclusion

The cost of acquiring process know-how in the pilot plant can easily reach a total expressed in six figures. For several processes with which the author is familiar, the development cost was well in excess of a million dollars before the first commercial plant was built. This points out very clearly the necessity for a thorough analysis of the problems a t the outset of the development program. By concentrating on these aspects of the process essential to the success of the large scale plant and disregarding those whose study cannot be justified on economic grounds, not only can the cost of the development program be reduced but also the time from laboratory to commercial production. Acknowledgment

The author wishes to acknowledge the contributions of R. J. Greenwell, Sample Brothers; 0. F. Longerbeam, the Darby Corp.; H. P. Orlebeke, Hills McCanna Co.; G. E. Shaffer, Jr., Milton Roy Co.; L. F. Wilson, Lapp Insulator Co., Inc.; and also the assistance of A. L. Coffman and P. N. Myers of the C. W. Nofsinger Co. in the preparation of this paper. Literature Cited

(1) Berg, C., IND.ENG.CHEM.,45, 1836-44 (1953). (2) Chern. Eng. News, 31, 566-70, 5080-2 (1953). (3) Conn, A. L., IND.ENQ.CHEX.,45, 1625-8 (1953). (4) Maerker, J. B., and Scholl, J. W., Zbid., 45, 1622-5-(1953). ( 5 ) Michel, L., Beattie, R. D., and Goodgame, T.,H., Chem. Eng. Progr., 50,332-5 (1954). (6) RiIoss, F. D., IND. ENG.CHEM.,45, 2133 (1953). (7) Payne, J. W., Zbid., 45, 1621-2 (1953). (8) Rearick, J. S., Mech. Eng., 73, 975--8 (1951). RECEIVED for review August 17, 1954.

$CCEPTED

February 25, 1955.

GUSTAV EGLOFF Universal Oil Products Co., Des Plaines, 111.

P

ROCESS know-how is vital to industry; it can determine whether a company can maintain its competitive position. The price that can be paid to obtain know-how must be carefully evaluated for specific cases, since the returns must be sufficient at least to defray the cost. Time is also a major concern and may be the determining factor in deciding how best t o acquire the know-how.

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Frequently the only method of obt,aining process know-how is by licensing. However, the acquisition of know-how by licensing is relatively foolproof. The process is tested and proved, and the cost is determined in advance and established by contract. Furthermore, the process know-how i,q available at the time it is needed, instead of at some indeterminate time in the future.

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K N0 W-H 0W ECONOMICS Because a licensed process is developed for the use of a number of companies rather than for a single one, the cost to the individual licensee is usually only a fraction of the cost of the research and development work that was necessary to create the process know-how on which it was based. The advantage of licensing under certain circumstances is evidenced by the fact that many large companies that have research departments of their own, also take advantage of licensing for certain processes. There are examples in the petroleum industry of companies that have developed their own processes, and may have built and operated units for the processes, and found later that another process available under license would give them better products with the kind of charging stock they were using. They accordingly have shut down their own process and licensed the other process instead. I n other words, the products from the licensed process had a value sufficiently higher in today’s market to make the royalties a relatively insignificant economic factor. Also, by operating under such a license, they were able to draw on the fund of specialized knowledge and technical skill of the staff of the licensing company in addition to their own. Further advantages of licensing can be illustrated by citing the policies that guide the licensing company in its business conduct

find few takers. A royalty rate is usually not geared exactly to some variable, such as market price of products, but is often a flat rate or a composite of a flat rate and a percentage of the product price. The rate is not inflexible and may be changed when economic conditions warrant. For example, the royalty for the Dubbs thermal cracking process was 15 cents per barrel of charging stock from 1919 to 1934. It was then reduced to 10 cents a barrel; in 1938 it was further reduced to 5 cents and in 1944 to 3 cents a barrel. A small refining company may be cited as an example of the economic value of the thermal cracking process. This company had been operating mostly in the red for several years and then licensed the thermal cracking process in the late thirties. Under the license the company received detailed designs for revamping existing equipment and installing some new equipment. The licensor’s engineers supervised the change-over and instructed the refinery personnel in operation of the process. Thereafter, experienced men made regular inspections of the equipment, with special reference to safety and efficiency of operation; the inspections often extended to equipment previously on hand and not covered by the license. In addition. the licensor’s men were (‘on call” between inspections to solve special problems, either on the spot or in its laboratories.

Process know-how through licensing is one of the most riskproof procedures available, especially for small companies. The licensee company knows what it is getting, thus eliminating the risk inherent in research, and can obtain the know-how when and for as long as it is needed. The license usually includes service to keep the process running at maximum efficiency, safety inspection, access to improvements, and protection against litigation. Cost of a license varies and is determined by different formulas depending on the specific conditions.

with licensees. Universal Oil Products Co. occupies a somewhat unique position in that it does n o t carry out any commercial operations in the field of petroleum refining, which is the area of its research and development activities. It has many years’ experience in developing new processes and making them work. The company’s know-how extends from the laboratory experimental work, through the pilot plant and the designing and construction of commercial plants, to operating the process. The staff includes scientists with the vision t o see what is needed in the way of products and the skill to develop processes to that end, the engineers to design the plants, and the “trouble shooters” to keep the processes operating efficiently. Field men make regular inspections of licensees’ facilities and are always on call for emergencies. The company has built and installed processes for its licensees all over the U. S. and in many other countries. A company like UOP, which develops new processes but does not use them itself, must of course obtain some financial return from them in order to stay in business. I t does this by licensing the processes to refining or manufacturing companies. From the standpoint of the licensee, this method of obtaining process knowhow also has many operational advantages. The licensor’s stafi of experts sees that the process is properly installed and that it performs according to specifications. Another important point is that information about improvements is passed on to the licensees. Furthermore, the licensee has a t his call the breadth of experience, not only of the men who developed the process but also of the field service men who have worked in refineries of all sizes and with a wide variety of local problems. The cost of process know-how to the licensee is, of course, the royalty rate. Royalty rates are generally related to the economic advantage of the process. However, this value is impossible to determine exactly, especially in a process that results in products formerly available only in small quantities. I n practice, the rate must be low enough to make the process attractive to its potential users. If it exceeds a reasonable “market value,” the process will May 1955

As a result of licensing the thermal cracking process, the refiner was not only enabled to stay in business but also was able to make savings on acquired tangible benefits which, after deducting all capital expenses, royalties, and out-of-pocket expenses paid the licensor, amounted t o a net profit of $1,500,000. Approaching the value of the thermal cracking license to this refinery from another angle, the cost to the company of setting up a research and development laboratory which would perform a very small part of the services rendered by the licensor has been estimated. Based on the 1937 dollar, such a laboratory, staffed with 13 scientists and engineers and 13 supporting personnel, would have cost a t least $150,000 to $200,000 a year. This laboratory staff would have tried to solve the refinery’s problems and would have had to develop new processes in order to do this. The new processes would, of course, have had to be sufficiently different from any existing ones to avoid patent infringement. Furthermore, neither inspection service nor protection from litigation would have been provided. During the war, the processes of fluid catalytic cracking and Hydroforming, which were developed by UOP and a number of oil companies, came to fruition and were ready for commercial application. These processes were licensed to the industry under all applicable patents of the developing group. The royalty rate for the fluid catalytic cracking was set a t 5 cents per barrel of fresh stock charge plus 5 cents per barrel of aviation product and 3% of the f.0.b. refinery bulk price of other special liquid products produced. The rate for Hydroforming was 5l/, cents per barrel of fresh stock charge, with the same product royalties as above. In both cases, the product royalties were waived during the war. From the point of view of cost of process know-how, these were bargain rates. With the total royalty in effect, it represented only about 3 per cent of the market value of the products. Recently, the Petroleum Administration for Defense (3) pointed out that the country’s smaller refiners are assuming an increasingly important roll in the refiqing field. PAD’S figures

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ENGINEERING, DESIGN, AND PROCESS DEVELOPMENT indicate a significant increase in the relative importance of small refiners (those processing under 20,000 barrels daily of crude), estimating that by 1955 they will increase their share of the total catalytic reforming capacity from 1.90 to 9.25% and that intermediate refiners (those processing between 20,000 and 50,000 barrels daily of crude) will increase their share of the catalytic reforming capacity from 0 to 13.28%. As a result of the acquisition of a larger share of total catalytic reforming capacity by the smaller and intermediate refiners, the percentage of capacity accounted for by the largest refiners will drop from 98.10 to 77.47% in catalytic reforming Of considerable significance, according to Deputy Petroleum Administrator Joseph A LaFortune, is the adoption by the smaller refiners of modern and more efficient processes a8 shown by the indicated increase in their catalytic reforming capacity. These modern and more efficient catalytic reforming processes were made available to the small and intermediate refiners (and, of course, the larger refiners as well) under licensing arrangements a t reasonable royalty rates. Certainly the smaller refiner with his limited resources would not have been able t o acquire this process technique and know-how by any means other than a reasonable licensing arrangement. A process of considerable interest today is that for producing polyethylene, developed by Imperial Chemical Industries of Great Britain. The licensing agreement offered by IC1 includes immunity from suit, technical know-how and design data for a plant, and instruction for operating personnel. The royalty rate has been set at a $500,000 lump sum payment plus 2% of the selling price of polyethylene produced in the next 15 years. The July 1954 market price was about 45 cents a pound. Construction cost of a 17,000,000-pound-a-year plant is estimated to be about $11,000,000. At least eight companies are expected to be in the polyethylene field by 1956, producing over 500,000,000 pounds a year. Until last year, two large companies, both with extensive research departments, were the only producers in this

country. The fact that these companies, both leaders in developing their own processes, licensed the process, is strong evidence that licensing is a t times the most economical way to acquire process know-how. I n conclusion, the acquisition of process know-how, necessary for profitable enterprise, requires the expenditure of large sums of money. I n the development of process know-how by individual operating companies, either on their own or through independent laboratories, there is the inherent risk that no financial return will be obtained because of failure to work out a satisfactory process or because another company anticipates the development. I n contrast, obtaining a process through licensing is relatively foolproof for the licensee, with the licensor assuming the risks. The licensee’s expenditures and probable financial returns can be closely estimated in advance, The licensee’s expenditure for the process know-how usually does not begin until after the process is in operation and he is deriving income from it. Dynamic advances have recently been made in the field of process industry technology. The search for improved processes proceeds a t an ever-increasing pace. The acquisition of process technique and know-how through licensing is often highly desirable for large Companies; for small and intermediate companies it is by far the most economical method of acquiring process know-how and very often constitutes the only practical means by which they may keep abreast in a highly competitive field.

References (1) U. S. Department of Labor, Washington 25, D. C., Bureau of Labor Statistics-in Cooperation with U. S. Department of

Defense, Bull. 1148, “Scientific Research and Development in American Industry-A Study of Manpower and Costs.” (2) Fortune, p. 115 (October 1950). (3) Oil Gas J.,51, 53 (Nov. 23, 1953). RECEIVED for review August 9, 1954.

ACCEPTED

February 10,1955.

Costs in Developing Marketing Know-How RALPH L. ERICSSON, Sumner Chemical Co., New York, N. Y.

LESTER

E.

JOHNSON, Mafhieson Chemical Corp., New York, N. Y.

Costs in developing marketing know-how vary widely among different chemica I companies. The large company with an established line of products will spend only a small fraction of its total sales expense in developing marketing know-how on a new product whereas a small company, fighting to establish itself with a line of newer chemicals, may have to spend the major part of its selling budget, especially in the initial stages, in learning how to market its products. This part of the symposium hypothecates the cost of developing (or maintaining) the three major aspects of marketing know-how-market research, market development, and selling itself.

W

I T H the exception of this article, this symposium is concerned entirely with costs in developing technical know-how. It is useful, however, that a discussion on the costs of developing marketing know-how be included since marketing costs are a significant portion of the structure bridging the gap between raw material and consumer item. I n an article in the Journal of Marketing for January 1953, entitled “Increasing Distribution Efficiency by Better Organized Research,,’ Charles W. Smith points out “that the manufacturer receives on the average only about 50 cents of every consumer dollar-the balance being absorbed by distribution costa-has now been so well established by

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economists that the importance of increasing our national distribution efficiency is generally recognized by the business community.’, This observation concerns industry as a whole and not the chemical industry specifically and the whole distributive coat rather than just the cost of sales, yet the cost of sales as a part of the distributive effort is well recognized by our industry and is the subject of continuous effort toward reduction. The title assigned to this paper is a broad title and the term ‘[know-how” is a very broad term. Know-how includes information of markets and the technique of applying this information. It could conceivably comprise the individual training of

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