The Mech Touch

With the peace talks going apace, the relations between the Brighter and Vesian attaché improved markedly. While their easygoing conversations didn’t lead to any cross-border collaborations or business deals, they nonetheless added to the tentatively optimistic mood in Kester Hills.

"The peace talks are proceeding very productively, Ves." Professor Ventag said as he paid another rare visit to Ves. His expertise as a Senior Mech Designer took up most of his free time due to all the mech-related clauses being negotiated upon. "Normally, the treaties between the Bright Republic and the Vesia Kingdom are relatively barebones, but this time is different. With other concerns looming on the horizon, we desperately need to find some common ground and pool our strengths together."

That sounded practically alien to Ves. He frowned. Why did the professor bring this topic up with him of all people? "What kind of common ground are we talking about, professor?"

"The terms are still being discussed, so take it with a grain of salt, but I have received permission to fill you in on what we are working. First, let’s take a step back. Previously, we talked about the impending transition to the next mech generation. Are you still aiming to hit the ground running in the next generation?"

Ves nodded. "I am."

"Do you know how expensive that can get?"

"I know that the cheapest new component licenses are worth tens of billions of credits at least. As for the good stuff..."

"You can forget about licensing the good stuff." Ventag shook his head. "It is plainly unaffordable for you to acquire the rights to make use of the latest components that the MTA has prepared. In fact, even NORA Consolidated will have some issues if they pay full price for a complete set of component licenses."

"What does the treaty have to do with the new licenses?"

"I was getting to that. You see, the MTA maintains multiple layers of licensing systems. There is one for individual companies, one for states and government entities, and one for alliances and collectives. What the delegations are working on right now is a way to pool the financial resources of our states together to form the third kind."

Ves raised his eyebrows. "Are you saying the Bright Republic and the Vesia Kingdom are actually agreeing to work together on something? And it’s with component licenses of all things? No offense, but how can they possibly tolerate such a cooperative venture?"

"Your view on humanity is very cynical, Ves. Although the Bright Republic and the Vesia Kingdom will forever remain adversaries and rivals, that is only in the context of our little pool water. As the little fish, it’s fine if we compete against each other. However, what happens if a shark enters the pool? It would be stupid of us to keep fighting against each other. While an outright military alliance is a bridge too far for us, more modest means of cooperation is not out of the question."

"I see." Ves said. "Pooling the resources of our states together to give our mech designers a leg up makes sense."

"The alliance that is created when the peace treaty comes into effect is founded for the express purpose of acquiring a collection of expanded licenses from the MTA when the new mech generation commences. These expanded licenses grants the alliance organization the right to sublicense the component designs they acquired to every company and organization that takes part under strict conditions."

"Sublicensing is a thing with designs?"

"Of course! Mech and component are very expensive, Ves. Do you think that every mech company pays the full fees upfront all the time? The MTA allows for certain accommodations to ease a mech designer’s access for licenses, within stringent limits. For example, the expanded licenses vary their fees depending on how many times it can be sublicensed. The majority of the funding provided to the alliance are provided directly by our two states. They are essentially subsidizing the future development of their mech industries."

What a arrangement! Ves couldn’t help but be astounded by the ambition of setting up such a powerful alliance. This had the fingerprints of Senator Tovar and Prince Colchester all over it! In fact, he strongly suspected it might be the brainchild of Camden Tovar himself. It was the kind of diplomatic solution that a consummate diplomatic like himself would come up with to achieve some limited form of cooperation between the two rivalling states.

Ves picked up something very crucial. "You mention that expanded licenses can only be sublicenses for a certain amount of times. So it effectively amounts to a quota?"

"That is a good way to look at it." The professor nodded with a pleased smile. "Right now, we are contemplating on making the alliance acquire expanded licenses with the right to sublicense them for a total quota of five-hundred, or two-hundred-and-fifty per state. In case of the Bright Republic, it is a given that around a hundred of these sublicenses will be extended to the mech companies founded by our Seniors. Around fifty more will be sublicensed to various government, academic and nonprofit institutions."

"That leaves only a hundred for the rest." Ves already had an inkling of what Professor Ventag had in mind. "Are you saying that the LMC is eligible for the remaining quota?"

"I expect that there will be a lot of competition for the quota. When the Bright Republic’s mech industry hears about it, every mech designer will go crazy. However, with Senator Tovar and my support, you can skip this entire hurdle and be directly eligible for a coveted quota. I cannot emphasize the value of this quota. Good use of the new licenses may see your new mech designs be propelled beyond this star sector! Any Journeymen not automatically eligible will fight like sharks in a tank for a quota, but you get to enjoy a free pass if all goes well. We intend this to be a reward for all the services you have rendered and a favor for your continued dedication and service to us and the Bright Republic. Do you understand the value you are receiving?"

"I am very clear about the favor." Ves uttered with an astonished breath. "I am inordinately grateful to the senator and you for bestowing me this opportunity!"

How could he not be shocked by the depth of favor being bestowed upon him? This was practically giving him access to hundreds of billions or even trillion credits worth of new component licenses! Ves always knew that Senator Tovar never skimped on his rewards. This was just the latest example of the benefits he could accrue by remaining in his favor.

Of course, there were two sides to a coin. The professor explicitly said that the value of a quota to the sublicenses issued by the alliance exceeded his merits so far. Saving Senator Tovar from getting kidnapped and preventing Colonel Xelven and Count Reginald’s heads from being absconded gave him a huge amount of kudos, but it seemed as if it didn’t completely cover this humongous favor.

In other words, Ves became more intricately tied to Senator Tovar and Professor Ventag’s camps. Ves only received this quota by virtue of his connections to both of these eminent individuals. As long as he remained on their good side, he would continue to benefit from the sublicenses.

If he somehow pissed them off or cut ties with them, then Ves believed those sublicenses could easily be taken away from him without any warning.

After all, it was the alliance that managed the sublicenses, not the MTA itself. This alliance organization would come under the administration of the governments both the Bright Republic and the Vesia Kingdom, which effectively meant that their senior statesmen called all the shots.

"There is one important point to keep in mind. Do not presume this is a free service." The professor added. "Expanded licenses are extremely expensive, and the only reason the two states are even capable of acquiring them is because the MTA allows them to offset the costs with certain favors and allows them to repay their huge debts over a larger span of time instead of all at once. The ultimate goal of the alliance is to break even."

"So it is essentially a loan rather than a gift?"

"An enormous loan, yes. If the LMC receives a quota, it essentially gains the right to make use of the new generation’s component designs immediately while deferring the associated fees at a later date under generous conditions. This is a valuable service in itself because as long as you take advantage of the reduced competition and increased market demand for new generation designs, you will stand to make an incredible amount of profit."

"How will the LMC pay back the money owed?"

"Through a flat per-unit licensing fee. No upfront costs. Depending on how many sublicensed component designs you include in your new design, you’ll have to pay the alliance a million credits to tens of millions of credits for each new generation mech sold. This is standard business practice."

Ves smiled thinly. "If everything goes well, the alliance will be able to do more than break even. They’ll be able to run a profit."

Ves was familiar with the tradeoffs between licensing a design by paying a single lump sum at the start, by paying a small fee for each use of the license, or a combination of both.

The latter was most common in the mech industry, but not the most ideal.

In situations where a mech designer had complete faith in the success of their design, it was much more advantageous to pay a couple of billion credits for a good license upfront and be rid of any further obligations to pay more fees. When their mech models that made use of those licenses sold for thousands or tens of thousands of copies, the huge upfront licensing costs could quickly be earned back within a year or two.

Every mech sold after this period were no longer burdened with repaying the debt. They therefore offered higher product margins, which in turn entailed higher profits for the company.

On the other hand, if a mech designer was designing something risky or lacked confidence in their own products, then it was much more advantageous to license a design with a pay-per-use payment scheme.

For example, each mech sold meant the mech company paid 250,000 credits or something to the licensor.

The lack of upfront cost made life much easier for the smaller and struggling mech companies. They lacked the capital to produce mechs at scale and wouldn’t be able to afford expensive standard licenses.

However, this convenience came at the cost of lower product margins and therefore lower profits. It also made products burdened by on-going pay-per-use fees rather uncompetitive in the long-term.

When market conditions worsened, the first products to become uncompetitive and unprofitable would always be designs that made use of pay-per-use licenses.

Naturally, the licensor, which in this case would be the alliance, stood to rake in massive sums of continuous sublicensing fees with this payment scheme. It took advantage of the enormous financial strength bestowed by two states and turned it into a way to milk the best mech designers of their states of some of their earning power!

As a businessman, Ves understood the mercantile intentions of Senator Tovar and Prince Colchester very well. For the alliance to pay back the enormous investment the states put into it, they needed to hand over the quotas to the most successful and most business-savvy mech designers.

It was therefore already a given that the Senior Mech Designers of the two states would all be granted a quota. As for the remainder, leaving aside the governments and universities and such, the Journeymen would all be forced to fight over the scraps that remained.

In this, an important condition emerged. The professor adopted a serious expression. "While the Senator and I can give your mech company a backdoor into the alliance, your eligibility is not assured right now. Whether your mech company is granted a quota is highly dependent on whether you can advance to Journeyman by the time the new generation commences. As much as we can bend the rules for you, there is no possible justification that we can use to grant a quota to an Apprentice. I’m sorry for that, Ves."

Ves understood this message very well. Little kids should play in the sandbox while the adults did all the real work. He never felt more motivated to advance to Journeyman right now, and hopefully his upcoming design would give him the impetus to take that much-desired step!

"I will definitely advance to Journeyman within a year. You can count on it, professor."