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.

Aug 112014
 
Apple launches a new smaller iPad

Today Australian electronics retailer JB Hi Fi released its annual results. They confirm what’s been becoming apparent over the last year that tablet computer sales seem to have peaked.

A plateauing of tablet sales is bad news for retailers like JB whose stock price fell by 8% on the news.

It’s not surprising that tablet computer sales have peaked as the growth had been spectacular and, unlike PCs of a decade ago, there isn’t an obvious five year replacement cycle.

That the old PC industry business model doesn’t apply to tablets is why Apple is focusing on other revenue sources like the App Store and internet of things plays such as HomeKit and HealthKit.

Once again, the industry leaders are finding they have to pivot to stay up with a rapidly evolving market.

The other notable point from JB’s management was that Australian consumer confidence is tanking, which might indicate the economy is entering its first recession in twenty years.

If it is true that the Aussie economy is entering a recession, then it might be time for the adults to take charge in a very immature government. Some of the Liberal Party’s pampered princelings may have to start earning their salaries soon.

Aug 012014
 
alleyNYC-New-York-City-incubator

One of the recurring topics this site keeps returning to is how cities like San Francisco and London have seen an explosion of tech startups in recent years.

Probably the spectacular of all the cities that have shot to prominence is New York;  a decade ago tech startups in the city were a rare thing, today there are thousands.

Today I had the opportunity to visit AlleyNYC, one of New York’s biggest tech accelerators. It’s impressive how a venture two years old can be so successful.

A question I asked was ‘what has driven the change in New York?’ The consensus was the combination of the Great Depression and the success of high profile companies like Facebook.

The success of high profile startups has validated the business model in the eyes of both investors and founders, people who would have been reluctant to leave their jobs and start a business now see the opportunities while investors can see there are returns to be made.

What’s notable about cities like New York, London and San Francisco is the depth of industry expertise, capital, networks, education institutions and diversity. These are key factors in attracting tech startups.

For other cities aspiring to be ‘the next Silicon Valley’, it would be worthwhile considering where their strengths lie compared to these giants.

It’s not a given that any of today’s global leaders will be the future centres of industry, but other cities and regions will need to have a very strong reason for businesses to choose them over the incumbents.

Jul 202014
 
cheap robots cleaning computers

Last Friday the Global Innovation Index was released rating nations on their ability to adapt and compete in today’s global economy, the authors though believe the measure is more than just economics.

The Global Innovation Index is a joint venture between Cornell University, INSEAD, and the World Intellectual Property Organization which measures 81 economic factors that across 143 countries.

Its release in Sydney last week was part of the B20 conference – the business offshoot of the G20 Heads of Government meeting taking place in Cairns later this year.

European countries top the list with Switzerland, the United Kingdom, Finland and the Netherlands making up the leading five. The US and Singapore break the European monopoly at the sixth and seventh positions.

As the results indicate, rich countries have a natural advantage in the index with index scores tracking national GDP – the highest ranked middle income country is China at 29th and the leading low income nation is Kenya at 85.

Innovation index versus GDP

Innovation index versus GDP

Kenya, and Sub Sahara Africa in general, is one of the highlights of this year’s report with with countries in the regions being nominated as ‘innovation learners’ with them performing above their expected level of GDP.

“What we find in Africa is growth rates are stabilising,” says Francis Gurry, the Director General of WIPO in discussing the report. “That creates the space for better policy and investments.”

Smaller is better

A key finding in the report is that smaller countries tend to perform better; “there’s a slight bias in the index,” says Gurry “as there’s more evenness across the economy.”

This works against larger countries like the United States while favouring countries such as Switzerland and Singapore.

Being affected by the 2008 financial crisis doesn’t help economies either; “the countries you see on top like Switzerland and the Nordic countries have been less affected than countries like Spain and Greece” says Bruno Lanvin, the Executive Director of the ISEAD Global Index.

Europe’s growing divergence

“Yet Europe remains a land of innovation,” continues Lanvin. “Europe has no choice, it is an aging economy and it has to innovate its way out.”

“A divide has been recreated within Europe, the whole European edifice has been a terrific machine for convergence. This has disappeared with the crisis where we see a new divergence.”

“We see countries like Spain and Italy, not to mention Greece, where the proportion of research and development has been decreasing which has not been compensated by private investment.”

This lack of private investment is a concern that constantly came up in the B20 discussions; despite the world being awash with capital, little is finding its way into infrastructure funding and business lending.

Falling R&D spending

Another area causing concern for the index compliers is the falling rates of research and development spending, noting that support for R&D efforts seems to have lost momentum in some countries with most growth in this area over the near future expected to take place mostly in China, the Republic of Korea, and India.

Innovation by Region
Rank in Region GII 2013 Overall Rank Country Name
Central and Southern Asia
1 76 India
2 79 Kazakhstan
3 86 Bhutan
Sub-Saharan Africa
1 40 Mauritius
2 51 Seychelles
3 53 South Africa
Southeast Asia and Oceania
1 7 Singapore
2 10 Hong Kong (China)
3 16 Korea, Rep.
Latin America and the Caribbean
1 41 Barbados
2 46 Chile
3 52 Panama
Northern Africa and Western Asia
1 15 Israel
2 30 Cyprus
3 36 United Arab Emirates
Europe
1 1 Switzerland
2 2 United Kingdom
3 3 Sweden
Northern America
1 6 United States of America
2 12 Canada

While the index was notable for its stability among the top ranking countries, there were stand out performers with the United Kingdom charging from tenth in 2011 to third in 2013 and second this year.

Much of the UK’s success has been around policy reform, something discussed on this blog previously, and the social diversity of London and South East England.

The value of diversity

Along with ethnic diversity, the advantages of having deep, varied economies and societies is emphasised by the report.

“When you’re measuring all of these, you’re measuring the ability of a country to compete;” says Gurry. “The intensity of competition will only increase between countries in respect to both regulatory regimes but also between enterprises.”

For all the talk about the importance of innovation Lanvin sees limits to what governments can do; “innovation is not a matter that can be decreed or implemented by governments alone, government can give the right signals and create an environment.”

Creating a mindset

“In the end it is the dynamics between business, government, academia and civil society that create the right mindset for a country to become an innovator,” continues Lanvin.

Lanvin also observes that innovation is about more than technology, “clearly technological innovation will remain a critical component, but you should expect to see social innovation and political innovation.”

“When we need to address the major challenges of this planet like the environment you need more than technological innovation; you need creativity, new mindset and new attitudes.”

“That’s part of the innovation mindset.”