Sep 202014
 
Alibaba-corporate_offices_china_hangzhou

Chinese e-commerce company Alibaba floated on the New York Stock Exchange and immediately rang up a 38% gain that values the company at $238 billion, behind only Microsoft, Apple and Google in tech stock valuations.

One of the major shareholders in Alibaba is Yahoo! who posted a 2.7% drop in value despite picking up a $5 billion windfall from the Chinese companies float.

For Alibaba’s founder Jack Ma, this float and the stock market’s reaction is a vindication of his business and of China’s place in the modern global economy, something we discussed with early Alibaba employee Porter Erisman last year.

Alibaba also shows that Chinese companies are now credible international businesses and companies like Haier, Lenovo and Hauwei need to be taken seriously as competitors and suppliers.

While Jack Ma and Alibaba celebrate, Marissa Mayer and Yahoo!’s management team are going to have to give some careful thought about how to use that extra five billion dollars. Time and investor patience is dwindling away for the once powerful internet giant.

It may be too soon to draw Alibaba’s success and the fall of Yahoo! as being the parallel of the rise of the Chinese economy and the decline of the US, but yesterday does give a strong signal about how the global economy is changing.

Image source: alibabagroup.com

Sep 172014
 
businesses paying bills and invoices

It didn’t take long for the competition in the payments market to heat  up after the announcement of Apple Pay last week as PayPal launched a campaign asking if you’d trust your financials to a business who can’t protect your selfies.

While PayPal  pokes fun at Apple, there are more serious competitive pressures developing as the companies start negotiating with credit card providers and banks to reduce their rates. This is something that will be an immediate benefit for businesses of all sizes who are prepared to renegotiate their contracts.

Most businesses, big and small, are poor at monitoring what they pay for a service; while they’ll shop around and negotiate when they’re looking for provider, they’ll let often these contracts go for years without reviewing them – something that utilities like banks, telcos and power companies take advantage of.

I was reminded of this earlier this week at a lunch with some senior Qantas accountants who were quite open about how every supplier’s contract was constantly reviewed and discounts were aggressively pursued. It’s a tough life for the airline’s subcontractors.

Times are tough for Qantas though, having sustained a 2.8 billion Aussie dollar loss last year along with constant declines in market share and stock prices. So it’s not surprising they have an aggressive cost cutting strategy in place.

Many other industries are now looking at the same problem as the global economy is now in a phase of at best anemic growth for the foreseeable future, which makes it essential for all businesses to start reviewing their costs.

With the banking sector now being disrupted by companies like PayPal and Apple, it might be time for all businesses to ask some hard questions of their banks and payment providers. The time is right to strike a deal.

Sep 062014
 
Seattle-engineers-planning-a-freeway

“It’s important to keep the engineers under control as they don’t understand costs,” a tech industry commentator said to me last week.

That was an interesting view and one that’s at odds with the core role of engineers – engineering is applied science where the job description is to create something within the sponsor’s scope, time and cost requirements.

It’s rare that a project doesn’t have cost constraints and it’s a very junior engineer who won’t be aware of those and how expenses are tracking against forecasts during the assignment. It’s a core role of the job.

Engineers as financial naifs

How this view of engineers being financial naïfs has developed is interesting in itself; there’s three factors that drove that commentator’s view.

The first factor is the financiers and accountants have hijacked project planning and management – sort of like how marketers have overrun the social media sector – so it is in their interest to portray their professions as being the only people who can be trusted to watch the books.

Giving the power of managing projects to the financiers has tragic results for many projects; invariably the money men misunderstand the costs required to meet a project’s scope resulting in a substandard result or, paradoxically, the project running massively over budget.

IT industry failures

The IT industry’s behaviour is a second factor which in itself can be split into two; the startup community’s model and the ‘rob the client’ mentality of the major outsourcing companies.

One of the greatest business failures of the last thirty years has been IT outsourcing where enterprises have essentially written blank cheques to the global outsourcing firms to save computing costs.

Because most of those projects have been run by moneymen with little understanding – despite their hubris – of either the business’ needs or the role of information technology in the organisation the results have often been catastrophic for shareholder or taxpayers, although very good for the salespeople and managers of the global outsourcing companies.

Usually a good indicator of project doomed to failure is when a CEO or minister announces the scheme with the justification it will save an improbably large amount of money for the organisation; tears usually follow.

The startup community’s attitude to project management has also twisted the engineer’s role. While there are some ventures that keep a very canny eye upon costs and deliverables – these are often the successful ones – many of the high profile, big funded companies take the attitude that engineers should focus on code while costs are a concern for founders and financiers.

In that view, the software engineers don’t have to worry about costs – it is none of their business.

Finally there’s a cultural element and it’s notable that the commentator speaking to me was Australian.

Australian mediocrity

One of the traits of modern Australian management is the culture of mediocrity and unaccountability that has crept into the nation’s business leadership from the early 1990s onwards. Tolerance of over budget or failed projects has become the cultural norm.

Probably the best example of this was the deeply troubled National Broadband Network currently struggling to stay alive in the face of a restructured management, government hostility and community indifference. Both the previous and current management have shown themselves to be particularly unsuited to meeting the engineering and contractual challenges of the project.

Interestingly, the engineers get blamed for the management’s hapless inability to deliver the project on time, budget or within the project scope.

The perverse, and tragic, thing about the NBN is had managers listened to wise voices from the engineering and construction communities in the early days the scheme would have had a chance of succeeding despite the political incompetence and bastardry that surrounded it.

Squandered resources

As the western world and developed economies move into more constrained times squandering resources on poorly thought out or badly managed projects is becoming an unaffordable luxury.

Engineers need to make the case they are not just a bunch of technology obsessed geeks implementing unrealistic and uneconomic solutions. Getting projects built properly is too important to be left to the accountants.

Image from Seattle municipal archives image of Engineers planning a freeway through Flickr

 

Aug 312014
 
abandoned-car

One of the mantras of technologists like myself when challenged about where jobs will come from after existing industries are automated or become redundant is “we don’t know where they will come from, but they will.”

Assuming that is true and the jobs will come in industries we’ve barely begun to contemplate there remains the question of what happens to the families and communities that depended upon the displaced industries.

Two stories this week from opposite sides of the world show how how poorly we’re answering that question; in Tasmania the Idiot Tax describes what happens to a region with no economic value while in the UK the ongoing Rotherham sex abuse scandal portrays a community debilitated by unemployment.

In both regions local industries collapsed through the 1970s and 80s and the local working classes became the welfare classes, stuck on benefits with at best poorly paid casual work available.

As the Idiot Tax describes in Tasmania’s Burnie, retired older workers reaped the benefits of a life of full time employment that town’s youngsters will never know.

History has no shortage of examples of cities that disintegrated when their economic reason for existing became no more — a process we’re seeing in Detroit today.

Now we’re seeing almost every industry being changed with far greater potential for job losses and fractured communities.

That we’ve dealt so poorly with the process over the last fifty years means we have to start thinking about how we as a society manage this adjustment.

Jobs will come to replace the ones lost, just as through the Twentieth Century new roles developed to replace those displaced from as nations like the US, France and Australia evolved from largely agricultural economies into industrial and then service industries.

But the human cost is real and there are no shortage of shrunken or abandoned towns that were once thriving market or railway hubs at the beginning of the Twentieth Century.

For technologists, this is an issue that has to be faced as we enter a period of economic and technological change far greater than the one we saw in the 1970s and 80s.

Car wreck photo courtesy of CBR1000 through sxc.hu

Aug 292014
 
andriod_apps

One of the most important characteristics of the technology industry is  you have to be first or second in your market to guarantee profitability.

As more of the world become digitized this is becoming true in other sectors, as Tomi Ahonen’s survey of the app industry shows. This also demolishes the long tail theory of online economics.

The long tail idea was put out by writer Chris Anderson during the first dot com boom.

Anderson’s view was the long tail of older material would be a useful income source for creatives and businesses. For many, small payments on a ‘long tail’ of older work would add up to reasonable revenues.

I’ve always skeptical of that view as the internet tends reward the ‘one percenters’ — a tiny number with the most traffic or revenue make the money while the bulk of players fight over the few crumbs that drop from the table.

A sheer disaster industry

A good example of how digital markets favour a tiny group of leaders  is in Tomi Ahonen’s survey of the 2014 mobile apps market that shows the vast majority of developers struggle for pennies.

Ahonen pulls no punches, describing the apps industry as a “sheer disaster industry with only one sector making money” and goes on to describe just how dire the predicament is for most developers.

The first point is where the money is being made; the first answer is by Google and Apple who skim five billion of the industry’s $21 billion in revenues. Just that stat alone shows where the real money is in the sector.

Of the remaining $15 billion the top 1.3% of the industry — around 27,000 developers — take $11 billion, or 73% of the revenue and leave four billion to be shared among the other 98%.

Slaves and huddled masses

At the other end of the scale those who Ahonen calls the ‘slaves’ and the ‘huddled masses’ there’s only 400 million dollars to be shared around two million developers. Implying 87% of the industry barely make a few hundred dollars a year.

On Ahonene’s figures two out of five developer make nothing.

HUDDLED MASSES IN APPS ECONOMY 2013
Revenues left . . . . . . . . . .  0 million dollars
Bottom 39% developers . . 819,000 developers
Bottom 39% earn . . . . . . .  0 million dollars
Bottom 39% earn . . . . . . .  0% of all revenues
Bottom 39% earn . . . . . . .  0% of developer revenues
Average per dev . . . . . . . .  0 dollars
In above numbers:
Beggars failed to earn . . . . 400,000
Hobbyists don’t care . . . . . 250,000
Branded utility app devs . . 170,000
Source: TomiAhonen Consulting analysis on Vision Mobile survey Aug 2014

The Apps industry is a stark indicator of just how brutal the economics of digital distribution are. The long tail is real, it’s just that it describes a massive imbalance in income within markets.

For all of us trying to make a dollar in the digital world, we need to find the niche where we fit into the profitable part of the curve.

Being on the wrong end of the long tail is a recipe for poverty.

Aug 212014
 
crown-melcro-macau

A few days ago this site covered Patrick Chovanec’s views on the changes the world faces as China moves from an export focused economy to one that relies more on domestic consumption.

Chovanec highlighted that some industries will be winners — retailers for instance — while others such as property developers and exporting manufacturers will be losers.

It seems we can add casinos to that list of losers; the big gamblers aren’t spending money as their property collateral falls and the government tightens up on corruption.

As Quartz reports, Macau’s casinos have encountered their second consecutive quarter of revenue falls and gambling stocks are falling.

That’s bad news for Macau’s economy but it’s also not good for those who’ve hitched their fortunes to Chinese gamblers — Steve Wynn and James Packer are two people immediately spring to mind.

In the case of James Packer this is also bad news for the Australian economy as Packer’s Aussie casinos are increasingly focused on attracting Chinese ‘whales’.

For Sydney and the state of New South Wales, this is particularly bad news as the government gifted a prime site of land to build a new casino that was going to be the mainstay of the city’s tourism industry.

Not that Sydney is alone in its cargo cult like hope that building a casino will attract Chinese. In Northern Queensland, the struggling city of Cairns is pinning the future of its tourism industry on a massive complex in a flood mangrove swamp.

Should that project collapse it will be another example of the folly in believing Australia could ride on the back of a booming China for decades and staking everything on that belief.

In the 21st Century, business is more than just building a shiny object and hoping rich Chinese will come.

Aug 192014
 
patrick-chovanec-china-economy

The problem facing commentators on the Chinese economy is a lack of clear narrative and the rest of the world needs to understand the story believes economist Patrick Chovanec.

Chovanec was speaking at Sydney University’s China Studies Centre last night on how the Chinese economy is shifting from being export lead to relying on domestic consumption, a process that isn’t without challenges.

“There’s a kind of schizophrenia about the Chinese economy,” says Chovanec who describes how the news swings from extremes of all good news to dire warnings. This, he believes, is because of a lack of understanding of the processes underpinning the country’s changing position.

Comparisons with Japan

China’s growth has been underpinned by export lead growth model which is a very good way for a poor country to become rich quickly but reaches limits when the exporters’ markets become saturated and the buyer countries can no longer buy.

This was the dilemma Japan hit in the 1990s and Chovanec sees similarities which happened at an earlier stage of China’s economic development because of its far greater size.

In another respect is the cost of labour which sees the country in the same position as Japan in the 1960s where where manufacturing started moving to Taiwan, South Korea and Hong Kong due to high Japanese wages.

The problem of soaring labour rates is covered by Peter Cai in today’s China Spectator which includes this chart showing how selected emerging economies wages compare.

eui_graph_of_east_asia_labor_costs

Cai points out manufacturing is already shifting out of China with Vietnam being a favourite destination.

This has already had an impact on companies’ decisions to manufacture items in China. In 2000, China made 40 per cent of all Nike shoes, while Vietnam made 13 per cent. Fast-forward to 2013, and China’s production share was 30 per cent, Vietnam’s increased to 42 per cent.

Vietnam however has its own problems and Cai sees China having advantages in having superior infrastructure, integrated supply chains, and a better educated workforce that will slow relocations.

Building productivity

Chovanec is more optimistic about the Chinese economy seeing bringing sectors like agriculture and medicine up to Western standards of productivity as potential growth areas for China.

“Having worked in China for many years, I see a lot of productivity gains across the Chinese economy.”

Many of the earlier productivity gains were low hanging fruit – labour was cheap making it easy to improve productivity. As workers become higher paid, that low hanging fruit is gone with reforms harder to implement along with many more affluent interests who would be losers in a rebalanced economy.

Among the losers in the transition from today’s economy would be property developers and export focused manufacturers while winners would be retailers and service industries.

The switch to consumption

In his view, China is capable of making the transition: “The most precious global commodity is domestic demand,” Chovanec says. “China has that cushion to invest in the face of fall in consumption, that doesn’t have to mean a fall in Chinese living standards.”

For the rest of the world the question Chovanec believes has to be asked is what will that consumption led Chinese economy look like and what does it mean for those with a stake in China?

“Other countries are going to be winners and losers from China’s rebalancing. You have to think about what you want to be.”

Australia has a particularly difficult problem in the face of a rebalanced China, Chovanec believes.

“The problem for Australia is that the country has been the supplier to China’s investment boom. If China’s investment boom comes to an end then Australia no longer has no market.”

Optimistism and the future

Despite the challenges Chovanec is optimistic about China. “My experience in going to China in 1986 is that the Chinese government and Communist Party deserve a lot of credit for getting out of the way.”

The success of China’s economy over the last thirty years has been driven from the grass roots; “this was a bottom up process, not a top down model.” Chovanec says.

Unlike many of the populist writers on China, not to mention more hysterical politicians and commentators, Chovanec provides a nuanced view on the underlying dynamics and the evolution of the Chineses economy.

That we need to consider a world where the Chinese economy is very different is an important message and one that policy makers and business people need to think very carefully about.