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What is Wrong With U.S. Manufacturing?
Gregory Tassey
Economic Analysis Office
National Institute of Standards and Technology
tassey@nist.gov http://www.nist.gov/director/planning/
October 2012
Need Institutionalized Process for Managing Science, Technology, Innovation, and Diffusion (STID) Policy:
(1) Demonstrate importance of the policy issue for economic growth
(2) Identify indicators of underperformance at the macroeconomic level Productivity growth Trade balances Corporate profits Employment and earnings
(3) Estimate underinvestment in technology as determinant of growth Specific R&D investment trends Investment by phase of the R&D cycle Technology diffusion rates Scale-up
(4) Identify causes of underinvestment using technology-based models Excessive technical and/or market risk Appropriability, information, expertise, capital market problems
(5) Develop/select policy responses and management mechanisms
Policy instruments matched with underinvestment phenomena
Metrics for policy management and impact assessment 2
3
Projected slow rate of economic growth is manifestation of inadequate long-term investments in productivity growth
For the last decade (2000-2010)
Average annual real GDP growth was 1.7 percent
U.S. private nonfarm employment declined 3.3 percent
Real disposable personal income grew 11.9 percent
Median household real income declined 7.0 percent
23.5 million people were unable to find full-time jobs, double the 12 million working in U.S. manufacturing (July 2012)
47 million Americans on food stamps (June 2012)
However, the current economic growth policy debate is focused on macrostabilization issues:
Government spending vs. deficit reduction
Monetary base expansion vs. potential inflation effects
(1) Importance of the Policy Problem – Inadequate Innovative Capacity
GDP
Long-Term Growth (smoothed pattern)
Time
Business Cycle (actual growth pattern)
Macrostabilization vs. Long-Term Growth Strategies
Gregory Tassey, “Beyond the Business Cycle: The Need for a Technology-Based Growth Strategy,” Science and Public Policy (forthcoming)
Western Economies
Asian Economies
The Great Recession
4
(1) Importance of the Policy Problem – Wrong Growth Policy Model
Economic importance of A National Strategy for Advanced Manufacturing:
As an independent economy, the value added produced by the U.S. manufacturing sector would rank 9th in the world
Important for diversification in a highly competitive global economy Contributes $1.7 trillion to GDP and employs 11 million workers High-tech service jobs are increasingly ‘‘tradeable’’ and 30 economies
have policies in place to promote service exports
Manufacturing accounts for 70% of US domestic industry-performed R&D 60% of U.S. domestic industry’s scientists/engineers 70% of patents issued to U.S. companies/residents
Loss of domestic manufacturing would erode U.S. R&D infrastructure
High-tech services must have close ties to its manufacturing base Large high-tech manufacturing firms are integrating forward into services
The majority of trade is in manufactured products—deficits for last 37 years
Yet, neoclassical economists are okay with offshoring all manufacturing
(1) Importance of the Policy Problem – Role of Domestic Manufacturing
5
The Bottom Line: The high-income economy must be the high-tech economy
1) Technology is the long-term driver of productivity growth and hence growth in real wages
2) Median wages in BLS “high-tech” occupations exceed median for all industries by 50-100 percent
3) But, the U.S. economy is in long-term decline relative to the global economy due to underinvestment in R&D, capital formation, and workforce training
4) This underinvestment is now being manifested in a range negative economic growth indicators (productivity, real income, trade, GDP)
5) High-tech sector is small part of the U.S. economy, giving it low political influence
6) Existing underinvestment phenomena must be addressed by appropriate policy instruments—requires a STID economic growth model
7) Applying such a framework demands a STID policy analysis infrastructure—hardly exists in the United States 6
(2) Underperformance – The High-Tech Economy
10,000
11,000
12,000
13,000
14,000
15,000
16,000
17,000
18,000
19,000
20,000
1960 1964 1968 1972 1976 1980 1984 1988 1992 1996 2000 2004 2008
US Manufacturing Employment: 1960–2011
Source: Bureau of Labor Statistics
No. of Workers (thousands)
7
(2) Underperformance – Manufacturing
50
70
90
110
130
150
170
190
210
230
250
1987 1990 1993 1996 1999 2002 2005 2008
Policy Focus: Multifactor Productivity Trends in Productivity and Income: U.S. Manufacturing Sector, 1987-2010
Source: Bureau of Labor Statistics
Labor Productivity
Real Hourly Compensation
Multifactor Productivity
Index
8
(2) Underperformance – U. S. Economy
-2%
0%
2%
4%
6%
8%
10%
12%
1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35
Non-Farm Employment Growth in Post World-War-II Business Recoveries:
Percent Change from Recession Trough
Source: G. Tassey, The Technology Imperative (updated); BLS for employment data; NBER for recession trough dates
Months
from
Trough
Average of First Seven Post-
World War II Recoveries
1990-91 Recovery
2001 Recovery2009 Recovery
9
(2) Underperformance – U.S. Economy
-$99B
-$637B
-700
-600
-500
-400
-300
-200
-100
0
100
1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
All Manufactured
Products
Advanced Technology Products
$ billions
Source: Census Bureau, Foreign Trade Division (“Trade in Goods with Advanced Technology Products” and “U.S. Trade in Goods and Services (FT900), Exhibit 15” for the manufacturing trade balance)
U.S. Trade Balances for High-Tech vs. All Manufactured Products, 1988-2011
Cumulative drain on GDP over this period is $8.25 trillion (2011 dollars)
10
(2) Underperformance – Manufacturing
0
20
40
60
80
100
120
140
0 5 10 15 20 25
Rate of Innovation vs. R&D Intensity: Percent of Companies in an Industry Reporting Product and/or Process Innovations, 2003-2007
Index
R&D Intensity
Source: Gregory Tassey, “Beyond the Business Cycle: The Need for a Technology-Based Growth Strategy,” forthcoming. Index = sum of percent of companies in an industry reporting product innovations and percent reporting process innovations. R&D intensity data from Science and Engineering Indicators 2010 , Appendix Table 4-14 (industry and other non-federal funds for R&D); innovation data from Mark Boroush, “NSF Releases New Statistics on Business Innovation,” NSF InfoBrief, October 2010
Minimum for R&D-Intensive Industries
11
(2) Underperformance – R&D Intensity and Innovative Output
Relationship Between R&D Intensity & Real Output Growth in Manufacturing
Industry (NAICS Code)Ave. R&D Intensity,
1999-2007Percent Change in
Real Output, 2000-07Percent Change in
Real Output, 2000-09
R&D Intensive:
Pharmaceuticals (3254) 10.5 17.9 4.9
Semiconductors (3344) 10.1 17.0 1.1
Medical Equipment (3391) 7.5 34.6 39.5
Computers (3341) 6.1 109.9 147.0
Communications Equip (3342) 13.0 -40.0 -59.7
Group Ave: 9.5 Group Ave: 27.9 Group Ave: 26.6
Non-R&D Intensive:
Basic Chemicals (3251) 2.2 25.6 -7.8
Machinery (333) 3.8 2.3 -22.4
Electrical Equipment (335) 2.5 -13.4 -33.4
Plastics & Rubber (326) 2.3 -5.2 -28.0
Fabricated Metals (332) 1.4 2.6 -23.6
Group Ave: 2.5 Group Ave: 2.4 Group Ave: -23.1
Sources: NSF for R&D intensity and BLS for real output. 12
(2) Underperformance – R&D Intensity and Economic Growth
13
High-tech offshoring is a multi-step process, driven by (1) increasingly attractive skilled labor, (2) R&D and capital subsidies, and (3) supply-chain synergies
1) Originally, offshoring of manufacturing was for local-market opportunities
2) Increasingly, motivation is to access cheaper but also skilled labor
Required small amount of supporting R&D Host country frequently subsidizes plant and equipment
3) Host country gains R&D experience at “entry” tier in high-tech supply chain
4) Host country begins to integrate forward into design or backward into components
China—backward to components (from assembly) Taiwan—forward to electronic circuits (from components) Korea—forward to electronic products (from components)
4) Economic policy point: Co-location synergies are being lost in U.S. and captured in Asia Between 2011 and 2013, 81 new semiconductor fabs will begin
operations globally—six of them in the United States (SEMI)
(2) Underperformance – Maintaining Domestic Supply Chains
14
Poor Technology Life-Cycle Management: The United States has been the “first mover” and then lost virtually all market share in a wide range of materials and product technologies, including
• oxide ceramics
• semiconductor memory devices
• semiconductor production equipment such as steppers
• lithium-ion batteries
• flat panel displays
• robotics
• solar cells
• advanced lighting (e.g. OLED)
(2) Underperformance – Manufacturing
15
Trends in Manufacturing R&D Needing Policy Attention 37 consecutive years of trade deficits
Manufacturing sector’s average R&D intensity (3.7 percent) has remained flat since the mid-1980s
has not been helped by offshoring of low R&D-intensive industries
pales compared to truly “R&D-intensive” industries, whose ratios range from 5 to 22 percent
Need for effective policy response is great
most of the global economy’s $1.4 trillion annual R&D spending targets manufacturing technologies
Technology life cycles are being compressed
U.S. manufacturing firms are increasing offshore R&D at three times the rate of domestic R&D spending
Government funding of manufacturing R&D increases the sector’s R&D performance intensity from 3.7 to 4.1 percent
(2) Underperformance – Manufacturing
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
3.5%
1953 1957 1961 1965 1969 1973 1977 1981 1985 1989 1993 1997 2001 2005
U.S. R&D Intensity: Constant for 45 Years
Funding as a Share of GDP, 1953-2008
Total R&D/GDP
Federal R&D/GDP
Industry R&D/GDP
Gregory Tassey, “Rationales and Mechanisms for Revitalizing U.S. Manufacturing R&D Strategies,” Journal of Technology Transfer 35 (2010):
283-333. Data from the National Science Foundation. 16
(3) Underinvestment – Amount of R&D
4.46
3.92
3.61 3.56
3.36
3.103.00 2.94 2.90
2.822.72
2.402.27 2.26
1.99 1.92 1.851.70
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
Source: OECD, Main Science and Technology Indicators, 2010.
National R&D Intensities, 2009 Gross R&D Expenditures as a Percentage of GDP
17
(3) Underinvestment – Amount of R&D
198.2%
99.1%
73.5% 70.9%
50.2%
28.8%24.0%
15.5%
0%
50%
100%
150%
200%
250%
China Singapore Finland Taiwan South Korea Germany Japan United States
Changes in National R&D Intensity, 1995-2009
Gregory Tassey, “Beyond the Business Cycle: The Need for a Technology-Based Growth Strategy,” Science and Public Policy (forthcoming). Data from OECD, Main Science and Technology Indicators, 2010/1. 18
(3) Underinvestment – Amount of R&D
26%
32%
41% 42%
49%
52%
58%
0%
10%
20%
30%
40%
50%
60%
70%
Australia Canada United Kingdom United States Japan Korea Germany
Source: OECD STAN Indicators 2009, "Value-added shares relative to manufacturing," Percent of manufacturing sector with 3% or greater R&D intensity, http://stats.oecd.org/index.aspx?r=228903
Shares of Domestic Manufacturing Value Added from Moderate and High R&D-Intensive Industries
19
(3) Underinvestment – Technology Intensity
-40
-30
-20
-10
0
10
20
30
40
50
60
70
1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
Long-Term (“Technology Platform Research”)
Short-Term (“Current Life-Cycle Applications”)
The “Valley of Death” (New Technology Platforms) is Getting Wider Trends in Short-Term vs. Long-Term US Industry R&D, 1993-2011
Gregory Tassey, “Beyond the Business Cycle: The Need for a Technology-Based Growth Strategy,” Science and Public Policy (forthcoming). Compiled from the Industrial Research Institute’s annual surveys of member companies.
“Sea Change” Index
20
(3) Underinvestment – Composition of R&D
108.8%
84.9%
107.8%
167.7%
14.6%
26.5%
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
1960-70 1970-80 1980-90 1990-00 2000-10 2009-2011
Fixed Private Investment in Hardware & Software (growth by decade in 2005 dollars)
Source: Gregory Tassey, “Beyond the Business Cycle: The Need for a Technology-Based Growth Strategy,” (Science and Public Policy, forthcoming). Data from Bureau of Economic Analysis, NIPA Table 5.3.5 (includes both equipment and software) and Table 5.3.4 (price indexes for fixed private investment) 21
(3) Underinvestment – Capital Formation
Science Base
Strategic
PlanningProduction
Market
Development
Value
Added
Entrepreneurial
Activity
“Black Box” Model of a Technology-Based Industry
Proprietary
Technology
Value
Added
Private Good Public Good
Basic Research
Applied Research
22 Gregory Tassey, The Technology Imperative, 2007; and, “The Disaggregated Technology Production Function: A New Model of Corporate and University Research”, Research Policy, 2005.
(4) Causes of Underinvestment – Conventional Wisdom
23
Neoclassical economics ignores market failure
rationales for government support of STID policies:
Excessive risk (increase costs)
Knowledge spillovers (reduce benefits)
Long development time (reduce benefits)
Economies of scope (reduce benefits)
Prices spillovers (reduce benefits)
Information asymmetries (increase costs)
Coordination inefficiencies (increase costs)
(4) Causes of Underinvestment – Market Failure
24
R&D
Cycle
Commercial Products
Technology Platforms: Overcoming the Early-Phase R&D Risk Spike
Risk
Basic
Research
Technology Platform
Research
Applied Research
and Development
6 years10 years Commercialization
R0
Science Base
Source: Gregory Tassey, “Underinvestment in Public Good Technologies”, Journal of Technology Transfer 30: 1/2 (January, 2005); and,
“Modeling and Measuring the Economic Roles of Technology Infrastructure,” Economics of Innovation and New Technology 17 (October, 2008)
Measurement &
Standards Infrastructure
“Valley of Death”
Risk
Spike
(4) Causes of Underinvestment – Composition of R&D
Safety
Seller Buyer
Quality
Environment
Privacy
SecurityInteroperability
Reliability
Performance
Infratechnologies for Efficient Transactions in High-Tech Markets
Market Interface
25 G. Tassey, The Technology Imperative, Edward Elgar, 2007
(4) Causes of Underinvestment – Composition of R&D
26
Federal R&D Portfolio is not Optimized for Economic Growth
Historical focus has and continues to be on “mission” R&D programs (national objectives such as defense, health, energy, space, environmental)—90 percent of federal R&D
National defense and health account for 81 percent of the federal R&D budget
Using NAICS codes to track federally funded R&D performed by industry,
75 percent of federal R&D allocated to the manufacturing sector goes to two NAICS 4-digit industries: aerospace and instruments
These two industries account for 15 percent of company-funded R&D and about 10 percent of high-tech value added
Policy Implication: While economic activity is stimulated by this skewed funding strategy, the federal portfolio is not close to being optimized for economic growth
Example: “technology platform” (proof-of-concept) research
Defense (DARPA): $3.1 billion
Energy (ARPA-e): $400 million
General economic growth (NIST’s ATP/TIP): $60 million Sources: National Science Foundation: Federal R&D Funding by Budget Function, FY 2008-10, Table 2; Science and Engineering Indicators 2010, Appendix Table 4-13; Bureau of Economic Analysis R&D Satellite Account
(4) Causes of Underinvestment – Composition of R&D
gProduction
Market
Development
EntrepreneurialActivity
Proprietary
Technologies
Proprietary
Technologies
Science Base
Technology-Element Model
Value
Added
Gregory Tassey, The Technology Imperative, 2007; and, “The Disaggregated Technology Production Function: A New Model of
Corporate and University Research,” Research Policy, 2005.
Strategic
Planning
Risk Reduction
System
Integration
Technology
PlatformsPrivate Good
Public Good
Quasi-Public
Good
27
(5) Policy Response – Technology-Element Growth Model
28 Gregory Tassey, The Technology Imperative, Edward Elgar, 2007
(5) Policy Response – Technology-Element Growth Model
Application of the Technology-Element Model: Nanotechnology Platforms
Science Base
Infratechnologies
Technology Platforms Product Process
Commercial Products
carbon-based nanomaterials
cellulosic nanomaterials
magnetic nanostructures
molecular nanoelectronic materials
quantum dots optical
metamaterials solid-state
quantum-effect nanostructures
functionalized fluorescent nanocrystals
quantum-confined structures
biological detection and analysis tools
in silico modeling & simulation tools
in-line measurement techniques to enable closed-loop process control
sub-nanometer microscopy
high-resolution nanoparticle detection
thermally stable nanocatalysts for high-temperature reactions
carbon nanotubes dendrimers hybrid nanoelectronic
devices ultra-low-power
devices self-powered
nanowire devices nanoparticle
fluorescent labels for cell cultures and diagnostics
metal nanoparticles & conductive polymers for soldering/bonding
nanoparticle sensors
epitaxy nanoimprint
lithography nanoparticle
manufacture rapid curing
techniques self-assembling &
self-organizing processes
scalable deposition method for polymer-fullerene photovoltaics
inkjet processes for printable electronics
purification of fluids with nanomaterials
roll-to-roll processing
hardened nanomaterials for machining/drilling
flame-retardant nanocoatings
sporting goods solar cells sunscreen/cosmetics targeted delivery of
anticancer therapies biodegradable and
lipid-based drug delivery systems
self-repairing & long-life wood composites
anti-microbial coatings for medical devices
nanoscale motion microscopes
Mixed Technology Goods Public
Technology Goods
Private
Technology Goods
29
Policy Imperative: Increase Investment in Science, Technology, Innovation, and Diffusion (STID)
New roles for governments
Compete as much as private companies
Future roles will be more complex rather than larger
Must manage the entire technology life cycle
Major real asset categories determining competitiveness:
Technology (intellectual capital)
Skilled labor (human capital)
Hardware and software (non-human capital)
Technical infrastructure (public capital)
Industry structure & behavior (organizational capital)
(5) Policy Response – R&D Intensity and Innovative Output
Needed: Total-Technology-Life-Cycle Growth Strategy
Germany has a trade surplus in manufacturing, even though compared to the United States, it has a
Approximately same R&D intensity (2.82 percent vs. 2.90 percent for U.S.)
26 percent higher average hourly manufacturing labor compensation
Reason: Germany has more comprehensive/intensively managed STID policy
Coordinated government R&D programs
Strongly integrated R&D and manufacturing
Highly skilled labor force across all technology occupations
Optimized industry structure (support for both large firms and SMEs)
Highest % of manufacturing value added from R&D-intensive industries
Other nations using similar growth strategies
U.S. projected to fall behind EU27/AP regions in nanotech products (Lux Research)
(5) Policy Response – Technology-Element Growth Model
30
New Global
Life Cycles
Old Domestic
Life Cycles
Performance/
Price Ratio
TimeA C B
Compression of Technology Life Cycles
Raises Technical and Market Risk
31 G. Tassey, The Technology Imperative, Edward Elgar, 2007
(4) Causes of Underinvestment – Life-Cycle Mismanagement
Time
Performance/Price Ratio
Life-Cycle Acceleration: Technology Platform Development
B
C′•
•
Current
Technology
New Technology
A
•
•
D
C•
Gregory Tassey, “Rationales and Mechanisms for Revitalizing U.S. Manufacturing R&D Strategies,” Journal of Technology Transfer 35 (2010): 283-333. 32
(5) Policy Response – Technology Platforms
•A
B
New
Technology
Performance/Price Ratio
Time
••
Life Cycle Market Failure: Infratechnology
Current
Technology
CC′
•C′′
•
Source: Gregory Tassey, The Technology Imperative, Edward Elgar, 2007 33
(5) Policy Response – Infratechnologies
e.g., semiconductor industry
has ~1600 standards
Production
Gregory Tassey, “Rationales and Mechanisms for Revitalizing U.S. Manufacturing R&D Strategies,” Journal of Technology Transfer 35 (2010): 283-333.
Strategic
Planning
Market
Development
Entrepreneurial
Activity
Risk
Reduction
Proprietary
Technologies
Science Base
Joint Industry-
Government
Planning
Market Targeting
Assistance and
Procurement
Incentives
Acceptance
Test
Standards
and National
Test Facilities
(NIST)
Interface Standards
(consortia,
standards groups)
Technology
Transfer/Diffusion (MEP)
National Labs
(NIST),
Consortia
Intellectual Property
Rights (DoC)
National Labs
Direct Funding of Firms
& Universities (DARPA,
ARPA-E, NRI, AMTech)
Tax Incentives
Incubators (states)
Managing the Entire Technology Life Cycle:
Science, Technology, Innovation, Diffusion (STID) Policy Roles
Value
Added
Scale-Up
Incentives
System
Integration
Technology
Platforms
34
(5) Policy Response – Technology-Element Growth Model
35
Summary: Complexity of Modern Manufacturing Technologies Leads to Three Targets of R&D Policy
Amount of R&D Create financial incentives for private companies to increase investments in R&D and
increase the R&D intensity of the manufacturing sector Increase Federal investment in research aimed at broad sector growth objectives in
addition to those related to agency missions
Composition of R&D Create incentives for private-sector investment in early phases of R&D cycle Create public-private partnerships to meet industry’s long-term research needs and
IP management requirements through support for technology clusters Fund research aimed at manufacturability to overcome scaling issues Target the “other” 90% of manufacturing value added (outside NAICS 3345 and 3364) Eliminate barriers to private investment in new firms (high technical risk,
appropriability, skilled labor acquisition, and process-capability barriers)
Efficiency of R&D Improve timing and content of R&D through road mapping and portfolio
management techniques Increase rates of return and shorten the R&D cycle through technology clusters Build in technology transfer through cluster design and co-located supply chain
(5) Policy Response – Technology-Element Growth Model
Summary: Major Targets of Technology-Based Growth Policy
1) Increase industry’s aggregate investment in R&D and thereby leverage the Nation’s R&D intensity
2) Increase technology platform and infratechnology R&D support in early phases of R&D cycle
3) Deliver this support through more efficient policy mechanisms
4) Foster technology infrastructures that enable market entry by SMEs and adjust over technology life cycle
5) Update and expand the educational infrastructure
6) Increase the speed and breadth of the diffusion of new technologies
7) Enable rapid scale-up to commercially efficient volumes of production
8) Improve policy management techniques through planning & evaluation
36
(5) Policy Response – Technology-Element Growth Model
Advanced Manufacturing Policy Targets and Implementation Mechanisms
Policy Target Policy Action Required Specific Targets Economic Impact
Increase aggregate
investment in R&D
• Switch to a single flat 10
percent credit
• Increase government funding
• 5 percent average R&D intensity for
manufacturing sector
• Reverse 50-year decline in Federal R&D intensity
• Recognizes complementary
roles for industry and
government
Increase amount and
efficiency of proof-of-
concept research that
results in new
technology platforms
Increase efficiency of
entire R&D cycle
• Promote joint industry-
government funding of proof-
of-concept research targeted
at broad sector growth
• Promote partnering for proof-
of-concept technology
research
• Fund infratechnology research
• Expand funding through government-wide
portfolio management mechanism
• Establish regional technology-based clusters
involving universities, government, and industry
• Government laboratories
• Removes suboptimal
portfolio structure resulting
from existing set of
individual agency portfolios
• Facilitates strategic planning,
complementary asset
sourcing, risk pooling, and
rapid diffusion of technical
knowledge
Foster effective
industry structures
and supporting
technical
infrastructures
• Ensure research consortia
within clusters include SMEs
• Improve infrastructure that
supports start-ups
• Provide interface standards early in R&D cycle
• Focus financial and technical infrastructure
support on young high-tech startups
• Provide university entrepreneur training and
incubators/accelerators
• Provide infrastructure support for distribution
• Promotes market entry by
firms of all sizes, thereby
enabling maximum product
diversity and efficient system
integration
Modernize and
expand educational
infrastructure
• Adjust college curricula
• Change roles of high schools
and community colleges
• Increased STEM support through scholarships
and career promotion
• Vocational training, apprenticeships through
clusters
• Broadens and deepens
skilled labor pool
Enable rapid scale-up
to commercially
efficient production
volumes and diversity
• Expand manufacturing process
technology infrastructure
• Accelerate capital formation &
market penetration
• Support process demonstration and actual
shared production facilities
• Provide procurement specifications through
clearing house
• Investment tax credit
• Accelerates
commercialization and
market share growth,
counteracting incentives
from Asian nations 37
(5) Policy Response – Technology-Element Growth Model
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