economy | Paul Wallbank - Communications Professional

Google expands its campus program

Google expands its Campus program to new cities

One of the reasons for the success of London’s Silicon Roundabout neighbourhood was the Google Campus that provided a drop in centre and community venue for the growing tech hub.

It turns out the success of London’s Google Campus can be replicated, as shown by the Tel Aviv outpost having similar results.

As a consequence Google are now opening new campuses in Warsaw, São Paulo, Seoul and Madrid.

Whether these cities will have the same success as London and Tel Aviv, both had a thriving tech start up community before their Google Campuses opened, remains to be soon.

One thing is for sure, we’ll see other cities’ governments and tech communities lobbying Google to base a Campus in their tech neighbourhood. It may be worthwhile they have a look at the London one to see what works and how they can set their own local hub.

Conglomerates fall out of fashion

It’s worth remembering that conglomerates come in and out of fashion in the business world, right now seems to be a bad time.

After the announcement earlier this week that HP will split into two, now Bloomberg reports Symantec is considering splitting, this comes after the news that PayPal is being carved off eBay and that Yum foods is looking at divesting some of its Chinese assets.

It looks like we’re moving into a period where conglomorates are out of fashion; that’s good news for lawyers and consultants advising the companies however it will be worth watching to see what this means for customers, employees and shareholders.

That HP is reportedly shedding 55,000 jobs says some of these conglomerates were chronically overstaffed so it might be good news for the stockholders of the split companies.

Either way, it’s always worth remembering that conglomerates come in and out of fashion in the business world.

Riding China’s business pivot

Lenovo, AliBaba and Hauwei are showing how the Chinese economy is moving up the global production chain.

Three weeks ago Chinese e-commerce giant Alibaba triumphantly listed on the US NASDAQ stock market with a valuation of over two hundred billion dollars. It was a strong announcement to the world that Chinese companies have arrived as global competitors.

A week later telecommunications vendor Huawei announced it was buying British internet of things darling Neul for £25 million as part of its proposed £1.3 billion investment the UK technology sector.

Quietly last week Another NASDAQ listed Chinese company, computer manufacturer Lenovo completed its purchase of IBM’s mid market server business.

Lenovo’s deal follows its purchase of IBMs PC division in 2005 that saw the iconic Thinkpad laptops become Lenovo products. Both deals tell us much about where the two companies see their respective futures.

China’s great economic pivot

These three big announcements by Chinese companies show how the economy of the Peoples’ Republic of China is pivoting just as other East Asian countries have over the past fifty years.

Leading the example of the East Asian pivot is Japan who pioneered the model of starting as a cheap manufacturing labor source then steadily ground its way up the global value chain to being the leader in many fields.

That model was copied by Taiwan, South Korea, Singapore and Hong Kong. It hasn’t worked everywhere as countries like Thailand, Malaysia and the Philippines have been caught in the ‘middle income trap’ that has seen their economies not move into the higher brackets.

Racing up the development curve

China’s mission with over a billion mouths to feed and keep politically content is to avoid the middle income trap and move into the higher brackets. With an aging population it has to do this far quicker than its successful neighbours.

While Huawei along with car manufacturer Great Wall and white goods vendor Haier are following that established Japanese model, albeit rapidly accellerated, Lenovo and Alibaba are following radically different paths.

Alibaba has the benefit of catering to a billion strong domestic market that’s leapfrogging the west in technology adoption. This gives the company a firm foundation for its global operations.

With Lenovo, the sweeping up of the US technology sector’s crumbs is a strategy that sees them buy immediate market share and develop a global position that would take it another generation to do so under the Japanese model of organic expansion which companies like Honda, Toyota and Sony pioneered.

The task ahead for the Chinese economy in moving up the economic value chain is immense and not without huge political, business and social risks. However as the economy ages, it’s a journey the country’s business and political leaders have to make.

Recently China watcher Patrick Chovanec spoke on the Chinese pivot and warned that the changes will have major ramifications for the world economy, particularly for the commodity exporters — notably Brazil, Australia and China — who provided the raw material for the country’s early economic expansion.

Lenovo, Alibaba and Huawei are leading the change in the Chinese economy and how their strategies work will define business in the mid 21st Century.

Google Fiber and the Kansas City digital divide

There is a digital divide developing in internet access and this is not good for the economy.

Google Fiber’s stated aim is to improve access to high broadband internet connections for the communities it’s being rolled out in.

The Wall Street Journal reports that this isn’t going so well with take ups of the fiber service in the poor parts of Kansas City being a quarter of those in middle class areas.

It’s not surprising an expensive service like fiber internet isn’t taken up by folk who don’t have money, but the discrepancy between the haves and the have nots should be a concern as access to today’s communication tools is key to economic progress.

During the rollouts of the railways, telegraph and motor car it was giving working people access to the new technologies that drove growth. If internet access becomes only available to the few then today’s technological developments deliver on their promise.

Alibaba and the rise of chinese companies

The rise of Alibaba shows Chinese companies are now major global players.

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

Time to strike deals

It’s time to strike deals as banks and other big businesses start to feel the effects of global competition

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.

Making the case for engineers

Engineers need to start arguing the case for their profession

“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

Managing the job shock

We’ve barely begun to contemplate there remains the question of what happens to the communities that depended upon old industries.

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

Don’t be at the wrong end of the long tail

The state of the apps market shows how the long tail theory doesn’t work for businesses in digital markets

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.

Cargo cults and Chinese casinos

China’s economy could be affecting casinos, which is bad news for Macau and Australia

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.

Understanding the China narrative

The world needs to prepare for a very different Chinese economy warns Patrick Chovanec

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.

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.

Reaching Peak Tablet as iPad and android sales begin to plateau

An electrical retailer’s financial results might mark turning points in two different economies.

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.