Apr 152014

Today has been a big day for Australian navel-gazing with a range of reports released on the country’s prospects on in the Twenty-First Century.

One of the reports was the Joined Up Innovation survey commissioned by Microsoft and written by PwC, I wrote a story for Business Spectator on the results.

While the Microsoft report focused on the small business sector, Startup Aus released their Crossroads report that warns Australia is falling behind the rest of the world. Smart Company’s Rose Powell has a more detailed summary of the report.

Alan Noble, head of Google’s Australian Engineering operations warns, “we still lag behind many other nations, with one of the lowest rates of startup formation in the world, and one of the lowest rates of venture capital investment.”

“If we fail to address this, we risk forfeiting over $100 billion in economic benefits from emerging tech companies, and an irreversible decline in Australia’s competitiveness.”

Looking in from the outside

Particularly notable from the two surveys is that the discussion about Australia’s tech competitiveness is the debate is being led by two local employees of US Multinationals.

For a local perspective, the Macrobusiness blog joins the day’s chorus with a long examination of the risks to Australia’s living standards by being too far down the global value chain.

In the Business Spectator piece, I compared some of PwC’s recommendations with the efforts of the UK and Singapore to rebuild their manufacturing industries.

Australia’s collective decision

For Australia, it’s probably way too late to worry about most of the manufacturing industry as in the 1980s the country made a collective – and almost unanimous – decision to shift the economy to being resources and high value added services.

The high value added services haven’t eventuated; mainly because the internet has shifted the global dynamics towards lower cost centres and partly because Australian business leaders decided it was easier to exploit their domestic market power rather than compete globally.

Mining proved to be a better bet, more by the accident of China’s turn of the century boom rather than any deliberate policy, however the industry employs less than ten percent of the workforce and the vast majority of Australians living in the South East corner of the country have little contact with the resources industry.

A consumerist utopia

For most Australians, employment and prosperity relies upon a growing population driving city GDP growth with domestic wealth supported by buoyant property prices. Australia truly is the consumerist utopia.

As a result of a booming, seemingly unstoppable, housing market and an expending resources sector, Australia’s exchange rate has soared while the nation’s productivity has slumped.

Making matters worse is that outside of mining and a few agricultural markets most of Australia’s industry is grossly expensive by global standards and suffering from chronic under-investment.

An unsustainable economic model

That model is not sustainable, it will take one shock to Australia’s housing market to see the good burghers of Brisbane, Sydney and Melbourne impoverished so the nation’s continued prosperity requires something to drive the economy beyond low interest rates and Chinese commodity purchases.

Whether Australia’s business and political leadership are capable of hearing and reacting to these reports remains to be seen, but they will have no excuse to say they weren’t warned.

Apr 132014

“You’re not wanted here” is the message from San Francisco residents protesting against tech workers and tycoon moving into the city.

Over the last year the protests against the ‘Google Buses’ that ferry tech company workers from San Francisco to Silicon Valley has steadily ratched up with protests against high profile individuals, people vomiting on the buses and Google Glass wearers getting their devices smashed.

Around the world, from London and Berlin to Auckland and Hong Kong, cities are worrying about the diversity of their cities as the global asset bubble inflates property prices beyond the reach of ordinary citizens.

In many respects San Francisco is probably unique in its relationship to Silicon Valley and its restricted geography, but it’s hard not to think if the current technology stock falls on the US stock markets became a Tech Wreck style bust then the city’s problems might solve themselves.

The challenge for all major cities around the world is to manage the current boom in property prices that threaten to drive out lower paid workers essential to vibrant economies – although ultimately anything that can’t be sustained won’t be sustained and it’s hard to see how housing can run too far ahead of wages before a reversal happens.

In the meantime though we can expect to see many cities struggle with the same issues that face San Francisco.

Apr 122014
steam train and inefficient business
A strange piece by author Jeremy Rivkin in The Guardian argues the internet of things will facilitate an economic shift from markets to collaborative commons which threatens capitalism as marginal costs fall to zero.

Rivkin argues that the rise of the ‘prosumer’, who contributes content and adds economic value for free, is undermining the basic tenants of capitalism.

A telling blow to capitalism in Rivkin’s eyes is the abundant data generated by the Internet of Things;

Siemens, IBM, Cisco and General Electric are among the firms erecting an internet-of-things infrastructure, connecting the world in a global neural network.

There are now 11 billion sensors connecting devices to the internet of things. By 2030, 100 trillion sensors will be attached to natural resources, production lines, warehouses, transportation networks, the electricity grid and recycling flows, and be implanted in homes, offices, stores, and vehicles – continually sending big data to the communications, energy and logistics internets.

Anyone will be able to access the internet of things and use big data and analytics to develop predictive algorithms that can speed efficiency, dramatically increase productivity and lower the marginal cost of producing and distributing physical things, including energy, products and services, to near zero, just as we now do with information goods.

That Rivkin mentions large corporations like Cisco, Siemens, IBM and General Electric illustrates the flaw in his idea — these companies are profiting from the Internet of Things and the data it’s generating.

Rather than being killed, capitalism is evolving to the new marketplaces.

Nowhere is this truer than in the sharing economy where the new lords of the digital manor are  profiting from the work and free content generated by unpaid ‘prosumers’.

How long the free business models can survive is open to question, in many respects the age of the digital sharecropper is a transition phase that isn’t sustainable and it’s more likely we’re seeing a move to an economy where information is far more abundant than it was previously.

Such a change is not unprecedented, far more basic human needs are food and energy. In Western economies, we have been living in a time of unimagined abundance of both for the last century.

In subsistence economies, food and the energy to grow or hunt it is scarce and its why living standards are low and life expectancies are short. Agricultural society start to solve the food scarcity problem and industrial societies automate farming and increase living standards through abundant energy.

During the pre-industrial era, the basic unit of energy was the horse – hence the term horsepower – and it was rare to have more than four horses driving a coach or piece of machinery.

Today, we have locomotive engines that provide 6,000 horsepower, a basic farm tractor delivers around 100 HP  and a typical family car around 200. We live in an age of abundant energy and our living standards reflect it.

We’re moving into an era of abundant information that will change our societies in a similar way to the age of abundant power has changed economies over the past 300 years.

Open source, the sharing economy and the internet of things will all change aspects of our economies and society but people will still be making a living one way or another so they can buy a meal and pay their rent.

The age of abundant information means massive change to the way we work, but it no more means the end of capitalism than the steam engine did.

Mar 132014

Yesterday I posted piece on Business Spectator about Australia’s new privacy regulations, little did I know that the European Union Parliament was about to release its own.

The EU regulations look interesting and certainly seem on  first look to be far more comprehensive than Australia’s effort that I describe as a toothless, box ticking exercise.

A notable aspect of the EU’s announcement of the new rules is its claim that the updated regulations are expected to generate €2.3 billion in economic benefits each year.

Whether the EU’s rules prove to be an economic cost – as Australia’s effort will almost certainly turn out to be – or a competitive advantage remains to be seen, however the European Parliament is certainly making a case for data security and privacy protection as being an important selling point in a highly competitive digital world.

The competitive advantages between countries and continents in the 21st Century will be vary different to those that determined the economic winners of the previous two centuries.

Mar 022014

Retirement age is vexed problem in the developed world; while life expectancy has increased over the last Century, the age where one becomes eligible for the pension has barely changed.

Harvard University professor Martin Feldstein illustrates this in a post on Project Syndicate, Saving Retirement, where he has a number of suggestions of moving the pension age to ease the pressures on public finances.

Obviously, retirees deserve advance notice before benefits are reduced. That is why it is important for the US – and for many countries around the world – to act now to make the changes needed to stabilize future pension finances.
Those pressures are going to become more real in the decade as the baby boomers join the ranks of the retired, the cry “I’ve paid my taxes, where’s my benefits?” is going to get louder.
Unfortunately for them, the kitty’s going to turn out to be bare – there simply aren’t enough Generation X and Y workers in the developed economies to pay for millions of boomers collecting pensions for the next thirty years.
Governments around the world have ignored this obvious, and predictable, problem for fifty years and now it’s time to address it. Unfortunately few leaders have the courage to tell their electorates the truth of the challenge ahead.
Jan 282014

During the recession much was made about the ‘lipstick effect’ – the idea some businesses and products would survive because they’re little luxuries that cash strapped consumers will spend on while scrimping and saving in other areas.

Some of those areas are ladies’ cosmetics (lipstick), chocolate, movies and coffee shops. All of them offering small pleasures for a few dollars.

It’s a theory I’ve always been sceptical of and an episode of the BBC’s World Of Business where Peter Day travels to Cork to see how Ireland’s second city is recovering from the great recession illustrates the reality is a lot more complex than the theory suggests.

“We really struggled to keep alive,” Claire Nash of Nash 19 restaurant says in her interview with Day on her business experience during the recession.

“My turnover just absolutely took a spiralling tumble and it wasn’t that the customer weren’t coming in – those that had lost their jobs weren’t coming in – but those that hadn’t lost their jobs were really hurting and they were very careful with their spend.

“So they started using us as a treat, which was a model I never wanted to enter into but we weathered the storm.”

It can be argued that Claire survived because of the lipstick effect – she kept enough customers to survive – but it was tough and had she taken out the loans offered to her during the boom it’s unlikely her restaurant would have survived.

The key point though is the lipstick effect turned out to be a very different, and much less lucrative business, for Claire and other businesses in Cork.

So assuming a business will remained unscathed because of the assumption the lipstick effect is a big risk, if that’s the plan then Sequoia Capital’s infamous Powerpoint of Doom comes to mind.

While the presentation was aimed at tech companies and investors, it’s a good overview of how the Global Financial Crisis happened and Slide 49 – Survival of the Quickest – is probably the best lesson for any business: Act fast to adapt.

The lipstick theory is a nice way to justify unsustainable business models, particularly those that rely on consumer spending, in the face of a recession but the assumption spending will remain the same as customers will seek little luxuries is deeply flawed.

A business that doesn’t respond quickly to changed circumstances and reduced spending is one that might not survive a downturn.

Peter Day’s Cork story is a good listen on how Ireland and Cork have weathered the global financial crisis, the main question from the piece is how much have the Irish and the rest of the world learned from the mistakes of the boom years at the start of the 21st Century.