Tuesday, August 30, 2016

Innovators Beware in India

Monsanto's many battles with the Indian government have typically been cast as clashes between poor Indian farmers and a giant multinational that's overcharging for its genetically modified seeds. And certainly, the U.S. agriculture giant isn't the most sympathetic of companies. Its seeds are indeed expensive and, in the case of cotton, no longer deliver the returns promised as resistance builds up. 
The latest confrontation, however, reflects other fights -- between domestic companies and foreign ones, as well as between users and creators of intellectual-property. And India is backing the wrong side.
Last week, Monsanto’s relationship with the Indian government hit a new low when the company announced it wouldn't be introducing a newer and more effective GM cotton strain into India. This followed upon a March threat in which the company said it would “reevaluate” its business in India because “arbitrary and innovation-stifling government interventions make it impossible to recoup research and development investments."
The government, which has been working hard to promote local substitutes for Monsanto's GM cotton, has made a show of not being intimidated. Earlier in the year, India’s junior agriculture minister said, “We’re not scared if Monsanto leaves the country."Activists -- including those associated with India’s right-wing ruling Bharatiya Janata Party -- cheered the comments.
Unfortunately, in its campaign to lessen farmers' reliance on Monsanto seeds, the government has chosen to use the bluntest of instruments: bullying and expropriation. For example, it’s decided to cap the royalty payments that Indian seed companies pay Monsanto for the use of its technology. “Trait value” payments from Monsanto’s 48 licensees in India are set to come down by 74 percent as a result.
Worse, in order to give itself the power to impose the cap, the government declared cotton seeds an “essential commodity." This brought into force the draconian provisions of a socialist-era price control law, including the power to arrest company executives for “hoarding.” Prime Minister Narendra Modi’s government has consistently sought to extend the law in question -- the Essential Commodities Act -- and to make it ever more stringent; an executive charged with a crime under the Act would no longer qualify automatically for bail, for example. In doing so, Modi has been following the recommendations of a committee of state chief ministers he himself headed in 2010, when he ran the cotton-growing state of Gujarat.
Worst of all, the government recently announced a new licensing framework that essentially ensures license fees for GM technology will decline by 10 percent every year, and allows the government to decide at any point that domestic seed companies no longer need to pay the intellectual property owner anything. The shift was first announced in May, but was temporarily suspended “for consultation.” With Modi due to travel to the U.S. in June, and the government may have wanted to forestall an embarrassing intellectual-property dispute.
None of this is likely to improve the lives of Indian farmers. Although Monsanto’s license fees have been slashed drastically, the seeds they buy aren't noticeably cheaper. Instead the policy benefits India’s politically powerful domestic seed companies, who are sick of paying Monsanto for its technology. Some of them, like the Blackstone Group-backed Nuziveedu Seeds, have actually been taken to court by Monsanto for refusing to pay license fees. It’s this long-running dispute that the government is trying to influence in favor of domestic firms.
The dangers of the government's strategy are obvious. For one, its actions run the risk of reversing India’s revolution in cotton production, which by some estimates has earned the country $55 billion in terms of trade and allowed its farmers to be paid for an additional 140 million bales of cotton.
Even more worryingly, a precedent has been set that threatens all biotechnology companies and other innovators. This goes beyond the “compulsory licensing” provisions that developing countries can use to expropriate intellectual property rights during an emergency. The Indian government appears intent on taking technology from a foreign company and passing it on to domestic firms, whether that company likes it or not. India's even violated one of the central provisions of its own proposed framework on intellectual property by denying the rights-holder an appeal.
Few tears will be shed if Monsanto makes good on its years of threats and leaves India. But that would be the wrong reaction. What's happened to Monsanto could happen to any foreign company and any innovator. Once that realization sinks in, India will pay the heavier price.

Sunday, August 28, 2016

Japan puts its seniors to work

Japan is ahead of the global curve in when it comes to ageing. In 2015, nearly 27 per cent of the population was aged 65 or older, making it one of the greyest countries in the world and heightening concerns about an increasingly strained labour force.
But Japan is also ahead of the curve when it comes to putting seniors to work. As more employers are discovering, all that silver is a valuable resource that can be spun into business gold.  
One company that understands this well is cosmetics maker Pola, whose sales force includes a woman who recently turned 100. In June, sales staff gathered at a Pola shop in Tokyo’s Setagaya Ward to learn about the company’s latest products and its promotional campaigns.
“How is this cream different from the current one? When should our customers apply the product to get the best results — during the day or at night?” The shop’s owner, Miyoko Sugiyama, 83, peppered the representative from Pola headquarters with questions. “Unless I know the products well and can explain them in an easy-to-understand way, I will fail to fulfil my responsibility and my clients won’t trust me,” she said.
Retailers talk a lot about customer databases. Sugiyama’s is in her head. She knows the preferences, ages, health status and shopping habits of her 30-odd clients. When new products come out or her clients are about to use something for the first time, she visits them by bicycle or train. The octogenarian’s energy is astounding.
Nationwide, Pola has about 50,000 “beauty directors” like Sugiyama. They are independent business owners who sign consignment contracts and visit customers’ homes. They form close, long-term relationships with homemakers, who are among the company’s main customers.
When Pola began recruiting saleswomen in 1937, applications came flooding in. In those days, Japanese women had few opportunities to work outside the home. The company says there is no retirement age; its sales representatives can work as long as they want. Among its 50,000 beauty directors are some 5,500 people in their 70s, 2,500 in their 80s and 250 in their 90s.
Sugiyama began working for Pola more than four decades ago. She took up the work out of curiosity, she said, but quickly made her mark, becoming head saleswoman at a shop in three years. Now she leads a team of sales representatives and posts monthly sales of 2.3m yen ($22,963). In her career, she has sold around 180m yen’s worth of Pola cosmetics.
Some beauty directors go on to become “grand owners” in charge of two or more shops. Sayaka Honjo, 76, oversees more than 90 shops, racking up average monthly sales of 150m yen. Honjo, who has five grandchildren, is Pola’s top sales representative.
Some 95 per cent of the 100bn yen that Pola products bring in each year comes from beauty directors like Sugiyama. Finding regular customers is crucial for cosmetics makers, so the strong client networks built by Pola’s sales reps are a huge asset. “I won’t retire as long as my clients want me,” said Sugiyama.
Manufacturing drove Japan’s postwar economic boom and remains a pillar of the country’s stability. For manufacturers, survival means passing the skills of experienced workers on to younger hands.
Bearing maker Isoda Metal, founded in 1905, is adapting itself to Japan’s ageing society. About a decade ago, the Tokyo-based company began allowing skilled workers to stay on past the retirement age of 65.
Kenji Seto, 71, is taking advantage of the new rules. He has been at Isoda for 34 years. On the day the Nikkei Asian Review met him he was grinding bearings, measuring them with a micrometer. The process, which he said requires accuracy to within 100th of a millimetre, takes years of experience and intuition to learn. Seto is on his feet for hours, concentrating intently. But he has developed a rhythm and never considered his job tough, he said.
The skilled technician is also an instructor, advising colleagues in their 20s and 30s who eagerly seek his help. “I want to pass on to them every technique I’ve mastered,” Seto said.   
Today, Isoda supplies parts for ships and other watercraft, including Self Defence Force submarines and Japan Coast Guard patrol vessels. For the 111-year-old company, maintaining the quality of its craft is a top priority. Daisuke Hattori, Isoda’s president, said the company began offering post-retirement employment because letting skilled mechanics go was a business risk.
“Many experienced mechanics in the past thought younger workers should learn by watching their seniors, rather than being taught. Now we are asking veteran workers to share their techniques,” said Hattori.
The company signs one-year contracts with workers who are aged 65 or older. Now employees in their 60s to 80s make up a quarter of the workforce. Many of them double as instructors to junior workers.
Kato Mfg, a sheet metal manufacturer based in the central Japanese city of Nakatsugawa, offers another example. In 2001, the company introduced the unusual recruiting practice of hiring only people aged 60 or older. Elderly part-time employees work on weekends and holidays, allowing the company to run its production line 24/7 and streamline its operations.
Kato supplies components for Boeing’s 787 jetliner and main wing parts for Japan’s first homegrown jet, Mitsubishi’s MRJ. Many members of the team in charge of producing these components are in their 60s.

Saturday, August 27, 2016

Demography and Desire: The empty crib

ALTHOUGH he recently lost his job, T. R. Seshadri is a contented middle-aged man. He rides a Royal Enfield motorbike and plays badminton every day. Two years ago he acquired a small flat on the outskirts of Mumbai, which he plans to rent out. Most satisfying of all, Mr Sesadri and his wife have two children, a boy and a girl—“the perfect combination”, he says.
An only child does not learn to compromise, argues Mr Seshadri. A lone boy never has to wait for his sibling to leave the bathroom and never has to concede over which television programme to watch. But three children are too many in modern India. “If someone has a third child, people will think, what the hell is he doing?” he says. Some will scornfully ask: “Did you have two daughters first?” No—two is just right. 

Urban India played a starring role in “The Population Bomb”, Paul Ehrlich’s bestseller of 1968. “The streets seemed alive with people,” Mr Ehrlich wrote, of a sweltering taxi ride through Delhi that convinced him the world was heading for a Malthusian catastrophe. “People, people, people, people.” Yet India’s birth rate has contracted astonishingly quickly, and with it Indians’ notions of the ideal family. On average, city-dwelling Indians now believe that 1.9 children is perfect (see chart 1).
Globescan, a consultancy, has polled 19 countries on behalf of The Economist. We began by asking people to specify their ideal family size. We asked how many children they had and how many more they expected to have. We then asked people to explain why they had (or were on track to have) fewer or more children than their ideal, and how their success or failure to hit the mark had affected them. These are universal human questions. But people answer them in startlingly different ways.
More like pandas than rabbits
Our poll shows that the ideal family in Asia’s three largest countries (China, India and Indonesia) is now smaller than the ideal family in Britain or America. We also find that access to birth control is seldom much of an issue. Few young people will have more children than they want because reliable contraception was not available to them. The poll also signals a global shift. Judging by the collective desires of parents and would-be parents, more suffering is caused by having too few babies than too many.
Of the 19 countries we polled, eight are overshooting—that is, the ideal family size is smaller than the number of children people expect to have. Nigerians have gone furthest awry: on average, they think the ideal family contains 5.4 children but are on course to have 7.7. Eleven countries are undershooting. A few barely miss the target, but others fall well short. Russians regard 2.3 children as ideal; Spaniards favour 2.4; Greeks think 2.6 best. In all three, people reckon that they will end up with 1.7 children on average. Because the replacement fertility rate is about 2.1, the difference between the ideal and expected number of children in these countries is the difference between healthy natural population growth and natural decline.
Greeks are painfully aware of the gap between desire and reality. Dafni Vitali, a curator in Athens with a young son, says she feels guilty about the prospect of raising a child without a sibling but might end up doing so. Greece’s long economic crisis has shaken her confidence in the future. Perhaps life will be just as difficult in 15 or 20 years’ time, she says; perhaps it will even be worse. A man who gives his name as Nikos, who once wanted four children but has only one, says the ailing economy has greatly raised the cost of raising a large family. Although he was educated in a state school, he now regards private education as essential. The state schools have deteriorated too much.
Having the “wrong” number of children has psychological consequences, though not always bad ones. In America 39% of people who reckon they will exceed their ideal number of children report that they are more satisfied with life as a result, whereas just 8% feel sorry for themselves (see chart 2). Indians and Pakistanis are even more cheerful about overshooting their ideal family size, as many do. (Admittedly, Indians and Pakistanis who have fewer than the ideal number of children are also pleased, suggesting they are just rather sanguine.)
In all but one of the Western countries we polled, though, undershooting is more often felt to be bad than good. In America 15% of those who have fewer than the ideal number of children think that their life is better as a result, whereas 21% say it is worse. Having no children at all is especially painful. A 34-year-old American woman, Angela Bergmann, who has been trying to get pregnant for a decade, moved to a bad neighbourhood to scrape together the money to pay for treatment. An ectopic pregnancy left her severely depressed. “It’s hugely draining on you as a couple,” says Emily Ansell, a 30-year-old university worker in Sheffield who has twice miscarried. Many couples suffer in silence: infertility still carries a stigma.
More than anything else, people blame financial pressures and the cost of housing for having fewer children than they think desirable. Greece is not the only country where economic turmoil has put people off having children. The fertility rate in America, Australia and most of Europe has dropped since 2009. In many countries the financial crisis has been especially hard on young people, delaying the independence that many think necessary for starting a family. José Luis Marin of porCausa, a journalism and research outfit in Madrid, points out that the average Spanish man now leaves home and sets up his own household at the age of 30.
Oddly, people who live in buoyant countries like China and Mexico are even more likely to cite financial pressure as the reason for their small families. In China 80% of our respondents say that two children is ideal—an admirably cussed consensus, when one considers the fierceness with which the state enforced a one-child policy until last year. Many will not manage two, says Feng Wang, a demographer at the University of California. China’s fertility rate has fallen to 1.6, which Mr Feng ascribes mostly to urbanisation, rising university attendance and the opportunity cost of having babies in a country that is quickly becoming richer. China’s economy has been like a rocket: it can be unwise to let go even for a year.
People who have more children than they think ideal usually say that their partners wanted more, that they reckoned they could afford it or simply that they love babies. Only 13% explain that they did not use birth control or that it was unavailable. And this seems to be a shrinking problem. Whereas 21% of people aged 55 or over blame their larger-than-ideal families on a lack of reliable contraception, only 6% of people under 35 do so.
In India roughly half of married women use birth control, and in much of Africa the rate is far lower. But many people who do not use contraceptives see no need for them. In some countries, such as Nepal and the Philippines, many husbands and wives live apart because one partner is working abroad. In others women of childbearing age are often trying to get pregnant, are actually pregnant or recently gave birth. The Guttmacher Institute in New York estimates that, although 85% of married women in Nigeria are not using birth control, the proportion who have an “unmet need” for it is just 16%.
“In our place they believe in many children,” explains Esther Okafur, a mother of nine who lives in Ajah, a slummy suburb of Lagos. In Nigeria’s rural districts, where children start working young, a large family means a more productive farm—“like you have a tractor on it”, says a driver from Mrs Okafur’s neighbourhood. As well as having a culture of large families, Nigeria is patriarchal and pious. Men say that babies are God’s will; women report that they have little say in the matter, at any rate.
But Nigerians are no more immune to the family-shrinking pressures of urbanisation and economic change than Europeans or Asians have been. Mrs Okafur followed her husband to Lagos two months ago to look for work. In the city her large brood is a burden. She says she would like to send her children to school but cannot afford it. Other urbanites increasingly desire smaller families, which helps explain why the ideal family size in Nigeria is two children smaller than people’s expectations. Especially in the mostly Christian south, wealthy Nigerians are marrying later, says Olayinka Akanle, a sociologist at the University of Ibadan. Bank advertisements targeting monied folk paint a picture of two-child domestic bliss.
Reliable contraception is important, and will become even more so in countries like Nigeria where couples increasingly seek smaller families. But the assumption that family planning should be all about birth control is a 1960s relic. In a growing number of countries, the problem of getting hold of contraception is giving way to the problem of getting pregnant. As Mr Feng puts it, unmet need is being replaced by unmet demand.
As our poll shows, people in wealthy countries consistently want bigger families than they get. Couples start having children late and find it increasingly difficult. A 30-year-old woman has a roughly 20% chance of getting pregnant each month, falling to about 5% by the age of 40. The resulting baby shortfall is painful for couples and alarming for governments, which worry about the long-term solvency of old-age-pension systems.
In poorer countries infertility is more often caused by infections—some of them sexually transmitted, others picked up following childbirth. It is often a social emergency, especially for wives—“You can be sent out of the house and buried in a different graveyard,” says Joe Leigh Simpson, head of the International Federation of Fertility Societies (IFFS). Gradually, though, poor-world infertility is changing from a kind of random crisis visited upon some people to a broad difficulty affecting many.

That change can be seen in the Mumbai suburb of Thane, in the Cocoon fertility clinic run by Anagha Karkhanis. Some of the patients Dr Karkhanis sees would be unfamiliar to European or American fertility specialists. Couples who have been married little more than a year visit to ask about IVF (almost invariably, they assume the problem lies with the wife rather than the husband) with a mother-in-law or another close relative in tow. Some of the women are as young as 24. Couples frequently ask whether she can help them to have a boy. Sex selection is illegal in India but common, and is usually done by aborting female fetuses.

But Dr Karkhanis also sees the kind of people who fill waiting rooms in Western fertility clinics—couples who got going on family life rather late, having devoted years to their careers, and are now finding it hard to conceive. Some are handicapped by diseases of affluence: they drink too much alcohol, smoke, or are obese. She tries to dissuade women over the age of 50 from IVF treatment, although other clinics do not. The IFFS estimates that India now has 1,000 fertility clinics—more than any other country. Good clinics are appearing in African cities too, according to Mr Simpson.
The people who fretted about an exploding population half a century ago made two mistakes. They failed to imagine that agriculture could become far more productive. They also failed to predict that birth rates would fall so sharply. That is to their discredit, but it is understandable. Almost nobody could have believed that a country like India would end up suffering a shortage of children.

World Gone Backwards

Globalization on Its Head

If we had to describe the last 50 years of economic history in one word, globalizationwould be high on the list. Thousands of small, independent economies around the world fused into one nearly seamless whole. The things we use every day – food, clothing, vehicles, furniture, electronic devices, even the materials that compose our homes – now come from far and wide. We don’t even notice. International trade over vast distances is now so normal that we forget it wasn’t always so.
Here’s how far globalization has gone: In cities and towns all over the United States, weekend farmers markets have sprung up, selling fruits and vegetables whose main attraction is that they are local. Eating food grown in your own region is now exotic and unusual. Our global diet served up at conventional grocery stores means our bodies and brains have been globalized, too.
Globalization ramped up slowly for a century or so before entering a new phase in the 1960s. I was born in 1964, so the explosion of the global economy roughly spans my lifetime. Mine is the first globalized generation. But if I reach 100, I suspect I will see children of a de-globalized generation.
That’s my theory: We are going full circle.
Humanity spent the last 50 years globalizing. Now, thanks to certain technologies, that whole process is going in reverse. I think historians will mark the 2008 financial crisis as the turning point:  Peak Globalization.
 I don’t say this because I want a de-globalized world. What any of us want or don’t want is irrelevant. I believe the transition will happen whether any of us want it or not.
It will not happen in a linear fashion, though. The process that brought us to this point had starts, stops, and slowdowns. Reverse globalization will have ups and downs, too, but a new set of technologies will keep pushing it forward.
I’ll tell you about those technologies in a minute. First, let’s review what brought us to this point.

Low-Tech Boxes

Behold, the box that changed the world. Blessed are those who purchase its contents.
Thousands of steel shipping containers like this one cross the seas daily, carrying the merchandise you see in Walmart and Home Depot. They are the red blood cells of the globalized consumer economy. It would not long survive without them.
Back in the ancient Pre-Container Era, loading and unloading cargo ships was a time-consuming, labor-intensive process. Swarms of dockworkers labored around the clock carrying man-sized loads on and off ships. At the destination seaport, they would disperse goods to railroad boxcars and perhaps later onto trucks before those goods reached end users. The process was slow and inefficient, though it had the advantage of providing many jobs.
Those jobs started disappearing in the 1960s, thanks largely to Malcom McLean.
McLean, owner of a North Carolina trucking firm, had the idea of separating a truck’s cargo space from the wheels and chassis, then loading the boxes onto ships. He converted two World War II tanker ships for this purpose and in 1956 took his first containerized cargo from Newark to Houston.
The idea itself wasn’t new. The U.S. Army had shipped supplies for the Korea conflict in similar containers, but McLean saw containers’ civilian potential. In 1960 he renamed his company Sea-Land Service Inc. and began refitting docks with the specialized cranes we now see in every port. Dockworker unions were not pleased, to say the least, but they couldn’t slow down progress.
Seeing the value of standardization, McLean licensed his patents royalty-free to competitors worldwide. By the end of the 1960s container ships were crossing every ocean. Sea-Land had a thriving business taking military supplies from the US to Vietnam.
Would world trade have grown as it did without containers and container ships? Certainly not. Reduced shipping time and labor savings gave emerging-market countries a chance to compete in high-volume, low-margin products. These low-tech boxes really did change the world economy. Globalization would look quite different without them.

Big Ole Jet Airliner

Engineers envisioned jet engines in the 1920s, but working models didn’t appear until the tail end of World War II. The world’s first production commercial jetliner, the de Havilland Comet, took off in 1949. Pan American World Airways began regular Boeing 707 service in 1956 – the same year McLean’s first container ships sailed.
Jet planes didn’t just fly faster; their higher cruising altitude made them more fuel-efficient and longer-range. Prior to the 707, you could not fly nonstop from the US to Japan, or from Europe to the US West Coast.
Think how valuable nonstop transcontinental flight is to business travelers – like John Mauldin, for instance. He can board a plane in Dallas, deliver a speech in London or Hong Kong, and be back home within three days. Such trips are tiring and stressful, but possible. They were impossible fifty years ago.
Now, multiply by millions of businesspeople traveling the globe to build alliances, make growth plans, and develop new products. Yes, they did all these things before jetliners existed, but they did them much faster afterward. The first wide-bodied 747 flights in 1970 brought travel costs down even further, opening the door for mass international tourism.
Just as important, the mere knowledge that they could reach the other side of the world so easily changed people’s thinking. They saw new possibilities and dreamed bigger dreams. Those dreams evolved into the millions of transoceanic trading relationships we now call globalization. Would it have happened in a propeller-driven world? Maybe – but it would look different.
Another key technology helped people see the other side of the world even if they couldn’t fly there. Communications satellites let broadcasters beam live television signals around the globe. The satellites emerged at about the same time as shipping containers and jetliners.
The Soviet Union launched Sputnik 1, the first artificial satellite, in 1957. All it did was emit pinging sounds, but progress followed quickly. In 1958 a US satellite called Project SCORE carried tape-recorded Christmas greetings from President Eisenhower to people around the world. Another US satellite, Syncom 3, was the first to achieve geostationary orbit and retransmit live signals. It enabled broadcast of the 1964 Tokyo Olympics to television viewers in the United States.
In one sense, this was nothing new. Americans had seen images from abroad before. Hollywood studios routinely filmed features in exotic locations. Newsreels had brought World War II to the home front. But the old reels conveyed events weeks or months in the past. Seeing events “live” was a quantum leap.
Just five years after Syncom 3 was launched, people around the world watched Neil Armstrong set foot on the moon. It was a seminal moment – and not only because humans had walked on the moon. For the first time, humanity watched history unfoldtogether. This brought to people everywhere a profound change in perspective. “The world is watching” had been a figure of speech until then. Suddenly it was actually possible. If we could see globally, then it was reasonable to think we could live, work, play, and trade globally, too.
Doing all those things, whether globally or locally, costs money. A financial technology helped distribute capital around the world: the mutual fund. It didn’t go well at first. Problems in the Great Depression led to the Investment Company Act of 1940. The industry had better luck in the 1950s bull market, but was still relatively small.
In the 1960s Bernard Cornfeld popularized mutual funds via his ill-fated Investors Overseas Services, Ltd. The company would later collapse, but not before his thousands of door-to-door salespeople taught small investors how to participate in financial markets. By 1970 the US had almost 400 mutual funds with $48 billion in combined assets. John Bogle launched the Vanguard Group and the first index funds in 1976.
Mutual funds grew even faster after 1978, when Congress added an obscure “section 401(k)” to the Internal Revenue Code. Benefits consultant Ted Benna saw that the provision allowed for a tax-advantaged retirement savings plan. Mutual funds were a natural fit with his 401(k) plan. Even better, they gave CFOs everywhere a way to get defined-benefit plan liabilities off the corporate balance sheet. They eagerly seized it.
Much of the cash flowing into mutual funds during this era found its way into multinational companies, who used it to develop new products for international distribution. It was more wind in the sails of globalization. The giant 1980s–1990s bull market both demonstrated and reinforced the worldwide economic growth wave.
What would our economy look like today if not for shipping containers, jetliners, satellites, and mutual funds? Would globalization have happened anyway? Probably, but it would not have looked the same.
When I say these innovations were critical, I don’t claim they were sufficient. All kinds of other events contributed, too: trade agreements, central bank actions, tax and regulatory policies, and more. They all went into the historical blender and gave us what we have now. Omit one key ingredient and the result might have been quite different.

Energy Untanked

Fifty years from now, what new technologies will have proven to be as critical as the ones we just reviewed? Which of today’s nascent innovations will be revolutionary?
We can only speculate – and John will do plenty of that in his forthcoming book. Meanwhile, I have four candidates to consider. The first one is renewable energy.
Solar, wind, and other non-fossil-fuel sources have become political footballs. They appear in debates about climate change, government subsidies, environmental regulation, and other touchy subjects. That’s unfortunate, because they aren’t inherently political. They are technologies we should judge on their own terms. Economically speaking, are they better alternatives or not?
“Better” is relative. Fossil fuels are the lowest-cost option in most of the US, in part because we’ve made a huge investment in their infrastructure. We have supertankers, port facilities, pipeline networks, railroads, storage farms, power lines, gasoline pumps, and so on. All of them serve one purpose: moving fuel from the place where it is produced to the place where it is consumed.
This apparatus works surprisingly well, considering that it hasn’t advanced a great deal in recent decades. It also points to the great weakness of fossil fuels: We must move them in order to use them. Transporting fuel to wherever it is needed (and keeping adequate amounts available at all times) is expensive and inefficient.
Now, think for a minute about the solar alternative. Today’s technology lets you to put solar panels on your roof and power your home. You can install storage batteries to keep the lights and air conditioning on at night. Your solar panels can recharge the electric vehicle you drive to work and back.
All that is possible right now. If you care to spend the money, you can probably go completely off the grid without changing your lifestyle very much. That is especially true in the sunny southwestern states, Florida, and Hawaii. Few people quit the grid entirely because to do so is still expensive. That won’t always be the case. Prices have been falling fast.
The equation is quite different in emerging-market nations near the equator. Decentralized, renewable energy sources are more cost-effective than fossil fuels right now in countries that don’t already have a well-developed energy infrastructure. Much of Africa will never have an electric grid like ours because it will never need one.
A world economy in which we don’t have to transport fossil fuels back and forth will look different. See all the red boxes and arrows on this Houston/Galveston map, via MarineTraffic.com? Those are oil, gas, and chemical tankers. The diamond-shaped ones are anchored, waiting their turn to load or unload. The map depicts globalization in action.
Get rid of fossil fuels and none of these ships will have to go anywhere. They won’t consume fuel just to move fuel; they won’t sink and make a mess; and they won’t be terrorist targets. Our navy will not need to guard choke points like the Strait of Hormuz. OPEC will be irrelevant for most people.
That world is possible already, and it is getting increasingly practical. I believe a shift to renewables will happen even without government subsidies. In fact, I would like to see subsidies eliminated now. They do more to hold up progress than to encourage it.
Fossil fuels won’t go away completely. They’ll remain necessary in niche markets and applications. Nevertheless, I think the economic benefit of harvesting energy near the end user will grow more apparent every year. In time, energy will cease to be an international concern and become a purely local matter. That facet of globalization will just fade away. Cheap, abundant energy will be as normal as the corner gas station is now.

Plastic Doodads

As John noted in last week’s letter, “The Trouble with Trade,” until recently there were two categories of imported goods. Some were expensive, high-quality luxury products: sports cars, wine, fine cheeses, and chocolates. Others were cheap, low-quality products made mostly in developing countries. Japanese cars weren’t a US status symbol in the 1960s or 1970s.
What do Americans think about imported goods now? We rarely think about them at all, even though we buy them every day. Globalization both raised the quality of foreign-made products and made them unremarkable.
Globalized manufacturing also had a dark side. Manufacturing jobs left the United States as companies moved production offshore. On the other end, gaining those jobs was a mixed blessing for developing countries. Millions of people emerged from deep poverty, but their cultures changed, and rampant, unregulated growth damaged the environment.
More importantly, all these new goods had to find their way from the factory to the buyer. Now, entire shiploads of containers stuffed with shrink-wrapped plastic doodads arrive in US ports every day. They have to be unloaded, sorted, and moved by truck or train to their destination. The logistics chains that do this are organizational miracles, but they consume valuable resources and time.
We wouldn’t need this massive apparatus if it were cost-effective to produce finished goods in small quantities near the final buyer. 3-D printing technology is doing exactly that. Commercial-scale “additive manufacturing” uses a wide variety of materials to make both simple and complex objects.
Additive manufacturing’s key advantage is its flexibility. The same equipment can make completely different products with just a software update and minor retooling. This capacity opens up a world of possibilities. Instead of specialized factories producing mass quantities of the same thing, local manufacturing centers can make only the quantity needed in the local area, as products or parts are needed.
Moreover, local manufacturing will enable much greater customization to fit local needs. Freed from a global process that forces them to sell monotonous, widely marketed goods, retail stores could use local manufacturers to produce exactly what local buyers want.
Will local manufacturing completely replace global supply chains? No, but it can still make a huge difference by reducing freight traffic. Consumers will have higher-quality goods at the same or lower prices, and the environment will stay cleaner.
Today’s just-in-time logistics systems have already reduced inventory levels and contributed to broad deflationary trends. Localized manufacturing should accelerate this shift even further. Instead of holding finished products in inventory, manufacturers will store raw materials: plastics, metals, minerals, wood, etc. Trade in finished goods will occur locally, in proximity to end users.

Virtual Airports

Communications technology was supposed to reduce the need for travel. Yet even with videoconferencing now widely available, globalized business professionals fly more than ever. Why?
One reason is that communications technology is still primitive. We can sit in front of a monitor across from another person in front of their monitor. We can see each other, hear each other, and view documents together. All this is wonderful, but it’s still a far cry from face-to-face interaction.
Virtual reality and augmented reality technology promises to fill this gap. Right now, we can wear special devices and enter startlingly realistic fantasy worlds. The potential for entertainment and gaming is obvious. The suddenly and immensely popular Pokémon Go game is a form of augmented reality. People love it, but the more common VR/AR use may turn out to be routine business meetings.
Walk through any airport and the “road warriors” are easy to spot. They’re veteran travelers like John, who jet between major world cities so they can… walk into a room and talk to people. They may spend more time going to and from meetings than they spend actually meeting. This is woefully inefficient.
With advanced VR/AR technology, people in different countries will be able to “meet” in a virtual conference room with the full sense of being physically together. Having access to subtle cues – facial expressions, tones of voice, sideways glances – will make these meetings seem almost real.
Something like the fabled Star Trek “holodeck” is decades away, but many road warriors would be happy to get 90% of the way there. Eliminating wasted travel time might easily double or triple their productivity.
VR/AR will let businesses operate efficiently without physical proximity to each other. The vast air transportation infrastructure, and all the energy and resources that go into it, will become less critical and will ultimately shrink. Meanwhile, workers and businesses will become more “present” to their local communities simply by virtue of spending more time at home.

Alaskan Bananas

Few sectors were more changed by globalization than agriculture. The US depends on low-wage, labor-intensive overseas farms for many important foods. Meanwhile, exports from our hyper-efficient grain producers feed millions of people in other countries.
As a result, consumers can now enjoy all kinds of non-native foods no matter where they live. If you are in Alaska and you like bananas, you can have them. The agricultural supply chain will grow them in Central America and bring them to your local store, for a price.
Bananas in Alaska are an extreme example, but the same process feeds practically all of us. Buy a hamburger anywhere in the United States and the lettuce on it likely comes from California. Why is this? Because areas of California have soil and weather perfectly suited to growing leafy vegetables. Bananas come from Central America for the same reason.
If we could re-create Central America indoors, Alaskans actually could grow their own bananas. To do this, they would need to regulate moisture levels, soil quality, temperature, and lighting at a cost that was competitive with bringing in foreign bananas.
The newest LED lighting technology brings this idea closer to reality. Scientists are learning how to deliver light at the intensity, frequency, and duration that optimizes growth. LED lights dramatically reduce the electricity required to do this. Paired with solar, wind, and other renewable energy sources, indoor banana farms are no longer hard to imagine – even in Alaska.
Carry that thought process a little further, and we can conceive of entire cities becoming self-sufficient for much of their fresh food. Produced locally in converted warehouses and vertical farms, the food would be truly fresh, too. Fruits and vegetables wouldn’t spend days or weeks in transit between farm and city, nor would they need chemical pesticides and preservatives.
This won’t work for everything we eat. Centralized production may still make sense for grains, meats, and some other foodstuffs. Regional production on land around cities will continue to increase, too. Nonetheless, when this technology reaches maturity, we won’t move nearly as much food around the world. It will grow near the people who eat it. This change will likely be good for our health, but the economic consequences may be even greater.

Early in the Game

 We’ve seen here that technology trends will nudge the world economy away from global integration and back toward local production and investment. Without container ships, jetliners, satellites, and mutual funds, globalization would have unfolded quite differently – and possibly not at all. Now, alternative energy sources, additive manufacturing, virtual and augmented reality communications, and sophisticated local food-production systems will take us back in the direction of regionalization and localization – and hopefully help to level the economic playing field for people worldwide.
Technology isn’t the only factor, though. Much depends on central bank decisions, international trade agreements, electoral politics, and geopolitical factors.
That said, technological change is implacable. Useful innovations rarely disappear once they’re invented. They can be suppressed or delayed but not eliminated. The globalized economy based on shipping stuff back and forth will make less and less sense as the technologies I’ve described continue to mature.
The political debate over manufacturing jobs is missing the point. Manufacturing is already coming back to the US, as are manufacturing jobs – but not in the numbers that once existed. Additive and robotic manufacturing technology will raise productivity far faster than humans can manage to do, and humans will be displaced.
Last week John quoted General Electric CEO Jeff Immelt saying that “wage arbitrage” is over. Robots do not care where you install them. They cost about the same and work at equal speed no matter where they are. Robotics will greatly reduce the incentive to make goods far from the end user simply to save on labor costs. The new incentive will be to produce in proximity to your customer. This will let you deliver faster and offer greater customization.
Technology is changing the foundational principles of globalization. That which loses its foundation eventually disappears – though its demise can take a long time. We are still very early in this megatrend.  

Mining companies sweat the big and small stuff

As big as houses and capable of carrying more than 200 tonnes of ore, giant haul trucks are the workhorses of vast mines from Mongolia to Chile. Chief executives have found a new use for the yellow monsters made by Caterpillar and Komatsu: as proof of the narrow focus and limited horizons of today’s global mining industry.

The captains of a sector that was ablaze with dealmaking at the height of the commodities boom, from 2006 to 2012, have firmly turned away from grandiose ambitions. In today’s depressed commodities environment, with persistent doubts over the direction of prices, mining companies’ leaders are determined to show they can sweat the small stuff — or in the case of haul trucks, the large stuff.
From BHP Billiton down, the largest mining groups are on a quest for productivity improvements. And in doing so, they are making a virtue of their willingness to grapple with seemingly mundane issues such as the amount of operating time they get from their vehicles. BHP, Rio Tinto and Anglo American have all highlighted increases in truck efficiency in presenting their latest financial results in the past month.
This exercise has been likened by Andrew Mackenzie, BHP’s chief executive, to the tiny improvements that have cut pit stop times for Formula One motor racing teams — albeit that the mining companies’ vehicles are much larger, and much slower.
“Our truck hours in coal are up 7.5 per cent in a year … that is an additional month of operations per truck per year, with more to come,” said Mr Mackenzie, as BHP last Tuesday reported a record net loss of $6.4bn for 2015-16, mainly because of asset writedowns.
Mr Mackenzie’s talk of higher productivity lacks the excitement generated by his predecessor-but-one’s call to arms a decade ago. Chip Goodyear suggested the mining industry should get ready for a once in a lifetime increase in demand for commodities, as a consequence of China’s integration into the global economy.
But the investment that mining groups subsequently unleashed in response to that natural resources supercycle often missed the mark. Practically every large company has had to write down billions of dollars worth of assets that were bought or built during the past decade.
Today’s hair-shirted drive for improved productivity therefore lays bare how mining groups let standards slip when they were awash in profits just a few years ago.
The rush to invest, with little heed for efficiency, made the industry significantly more flabby and expensive. For example, salaries for truck drivers in remote Australian mines rose into the hundreds of thousands of dollars.
When commodity prices went into sharp reverse, cutting costs became the mantra for the new cohort of executives at the top of the mining groups — with strong backing from investors.
“The mandate from shareholders is that ambition is a bad thing,” says Ben Davis, analyst at Liberum. “They are wanting miners to do little other than take down debt and costs.”
First to go was capital spending on new projects, with annual budgets at the likes of BHP now at just a quarter of peak levels.
Job numbers have been cut. Rio has reduced its staff numbers from 66,000 in 2013 to 55,000 last year, while Anglo’s numbers have fallen from 105,000 in 2012 to 91,000 last year.
Payments with suppliers have also been cut. Iván Arriagada, chief executive ofAntofagasta, says the Chilean miner has revised its maintenance contracts with equipment suppliers at its large Pelambres mine, triggering 15 per cent cost reductions.
“The instinctive cost-cutting reactions [by the mining companies] from two to three years ago were fairly straightforward,” says Thomas Vogt, associate director at Boston Consulting Group. “Over time these opportunities get exhausted.”
That means more focus on increased efficiency that goes beyond simply reducing expenses.
Jean-Sébastien Jacques, who inherited three years of cost-cutting from his predecessor Sam Walsh when he became Rio Tinto’s chief executive in July, says improving productivity “is not only about costs but it about the top line as well. It is really about ‘How can we extract more cash flow from our existing assets?’”
Hence the focus on trucks — and the amount of time they are working rather than parked up or in the maintenance shed. Anglo is getting on average 5,200 hours out of a truck each year. Mark Cutifani, chief executive, says: “We need to be getting better than 6,000 hours … We still have a lot of potential to improve the utilisation of the assets on the ground, and it remains a great opportunity for us to improve.”
Rio’s best mines are getting 30 per cent more use out of their trucks than the worst performers, according to Mr Jacques.
Mr Vogt says lots of mining groups’ productivity improvements come from “smoother baton changes” — at shift handovers, or when equipment is brought in and out of maintenance, for example. Interim results give executives chance to highlight progress on deleveraging plans
Some innovations are less intuitive. Anglo, which spends $900m each year on fuel, says it can cut 3 per cent from its diesel bill, and prolong component life by 25 per cent, by filtering out impurities.
The search for productivity gains has extended right across companies’ operations. Rio says improved scheduling cut waiting times for ships in its Australian iron ore ports by 41 per cent last year compared to 2014, and saved more than $20m in fees to shipping lines.
Another example Mr Jacques uses is Rio’s US copper smelter — which was operating below capacity, fed only by the company’s own output. Now, Rio has started to process competitors’ production.
Across several years, the mining groups’ hope is that the productivity gains will add up to a step change in performance.
Mr Mackenzie says BHP has made $10bn of these improvements since 2012 and halved its unit costs over that period, reversing a decade of industry inflation. “I am still not satisfied,” he adds. “I still see utilisation rates [for equipment] far short from what I think we should ideally get to … we can go a lot further.”