2015 | World Finance

Get ready: the cyber-criminals are coming, and they’re better than ever

Posted on May 6, 2015 by Ashton Wenborn

The prolific Sony hack late last year sparked attention and debate across the world. But it was just one of the latest in a string of malicious cyber attacks doing untold damage to the reputations and revenue bases of the globe’s largest corporations – including its biggest banks. The threat is on the increase; a study by Radware last year found that 19 percent of companies in the UK claimed they were under constant cyber attack – up three times from 2013 – as hacks become easier to carry out, quicker to spread, and harder to detect.

Meanwhile, a study by PwC found that 81 percent of large UK businesses had fallen victim to at least one security breach in 2014, resulting in losses of between £600,000 ($903,000) and £1m ($1.5m). It’s no wonder that more than 70 percent of banking and capital market CEOs believe cyber risks are threatening their potential growth (according to PwC).

Political statements
The motives for these attacks vary; from selling personal data for financial gain to ‘hacktivists’ making geopolitical statements – which 34.4 percent of targeted companies said they’d experienced (see Fig. 1). Those politically motivated attacks pose a significant danger to corporations and wider economies, targeting financial institutions in their masses as an assault on government revenue.

Worryingly, they’re expected to rise. “All our intelligence tells Radware it will see more geopolitical campaigns and everyone will be a target, especially the banks, because of what they symbolise rather than what they control”, said the cyber-security consultancy. Last year, protests in Hong Kong and news that Latvia would be leading the EU both drove a rise in the number of cyber attacks on the respective countries, and Ukraine’s Central Election Commission found itself the victim of an attack ahead of the elections in May.

Cyber attacks are growing every day in strength across the globe

State-owned banks are particularly vulnerable, according to Adrian Crawley, Radware’s UK and Ireland regional director – as are those whose reputation may have been tainted in the public’s eye. “If the bank happened to have just declared that there was tax avoidance at certain branches in certain countries, which may have happened recently, they would also be liable to be attacked”, says Crawley.

Under attack
The damage geopolitical cybercrime can cause was made all too clear when the Izz Ad-Din Al Qassam Cyber Fighters (QCF) launched its seven-month Operation Ababil in 2012, targeting some of the largest financial institutions in the US – including the New York Stock Exchange, Bank of America and JP Morgan Chase. The attack sent 15 bank sites down for a total of 249 hours – equivalent to an average of 2.7 hours a week for each institution. Its financial impact, including the consequences of the downtime, was huge; although the exact figures have never been revealed, Crawley estimates the campaign caused multi-million dollar losses.

That’s not the only prolonged attack the US has suffered over recent years; between 2005 and 2012, a number of American businesses, including Dow Jones, Visa Jordon, JC Penney and 7-Eleven, fell prey to a series of vicious attacks that saw over 800,000 bank accounts targeted and more than 160 million credit and debit card numbers stolen. Global Payment Systems suffered losses of almost $93m, and Heartland Payment Systems – one of the biggest credit and debit card-processing firms in the world – saw losses amounting to around $200m, after the numbers were used to create and sell counterfeit cards, according to federal prosecutors.

Target, eBay and Home Depot have all hit the headlines for prolific hacks, but it’s arguably the JP Morgan Chase attack in 2014 that has provoked the most concern. Hackers reached the accounts of 76 million customers and seven million small businesses, making it one of the largest bank hacks in history and prompting chairman and CEO Jamie Dimon to warn of the rising dangers in his yearly letter to stakeholders: “Cyber attacks are growing every day in strength across the globe”, he wrote, adding that the fight will be “continual and likely never-ending”.

As those hacks suggest, the financial implications for targeted corporations can be substantial; in 2008, McAfee surveyed 800 firms and found they’d racked up combined losses of $4.6bn in intellectual property, while incurring costs of around $600m in repairs.

And the potential losses are even greater for banks, where every minute of down time deals million-dollar blows to the revenue base through lost trade. It can also have serious implications on the retail side, with consumers unable to access accounts and thereby make necessary payments – which in turn may pose legal issues, according to Crawley. “The legal side of not being able to adhere to your policies is critical”, he says.

Holes in Obama’s plans
It’s little surprise, then, that governments are stepping up efforts to fight cybercrime. In February, Obama held a summit to detail plans to increase digital security; namely by encouraging the sharing of information between public and private tech companies via Information Sharing and Analysis Organisations (ISAOs). “We have to work together like never before”, he declared. Under the plans, a transatlantic ‘cyber cell’ is being created to bolster collaboration between the US and the UK, and cyber war games between the two nation’s banks are set to kick off later in 2015 as they test each other’s resilience. The UK is meanwhile dedicating £700m ($1.03bn) a year to step up the cybercrime fight.

But there’s only so much the government can do, and that’s limited further by the fact Obama has failed to get a number of the major Silicon Valley tech names on side – including Google, Facebook and Yahoo!, whose executives declined to attend the summit.

And there are counter-arguments to America’s plans. According to Lillian Ablon and Martin Libicki, cybercrime researchers at global policy thinktank RAND, Obama’s strategy could restrict WhiteHat security and see other all-important areas (such as vulnerability research) neglected. In a RAND testimony against the plans, Libicki also argued that ISAOs could mean excluding small- and medium-sized enterprises (SMEs) unable to afford the expensive ISAO fees – thereby dealing a blow to the very businesses already struggling to put adequate cyber-security measures in place.

Crawley is similarly sceptical of Obama’s plans: “Whatever is identified during this process will be very constructive, but the negative side is, attackers have already gone beyond that”, he says. “Whilst it’s great [on] one hand, I don’t believe it’s going to be the answer that everyone’s expecting.” He believes the power to prevent cyber attacks lies more with individual institutions – and specifically how they run and audit their security systems. Ian Whiting, CEO of cyber-security firm Titania, argues the planned collaboration is a positive move that could help identify “where weaknesses lie with our own country’s critical infrastructure”. But even he recognises its limits, arguing that it’s ultimately down to organisations to decide what level of risk they’re willing to take – and act accordingly.

Not so secure
It therefore seems clear a more comprehensive approach is needed to tackle threats from the cyber world. Libicki suggests governments should implement measures that cater for smaller as well as larger companies – such as helping them to seek out potential weak areas, and to analyse (and so learn from) past cyber attacks.

But the companies themselves must do more to tackle cyber threats if they’re to protect themselves and the wider economy. Although many are already taking action – major banks are collaborating, and 52 percent (see Fig. 2) surveyed by Radware said they were ramping up their cyber-security processes and protocols – some are falling behind.

A substantial number of companies aren’t being transparent enough; PwC found that 70 percent of them have kept their biggest breaches secret. That makes sharing information, and developing suitable systems and responses accordingly, somewhat of a challenge. And according to security company Venafi, over half of the Forbes Global 2,000 list have servers that aren’t fully protected against breaches. “[Some companies] feel maybe that they’re not so exposed”, says Crawley. “But what we’ve identified over the past five years with our emergency response team is that no-one is outside of the vulnerability here, everyone is at risk.”

That’s something the Bank of England is recognising, encouraging financial institutions to up their protection levels on the back of a growing threat from politically motivated attacks. Director Andrew Gracie said at a security conference that banks should reach “a level of resilience that goes beyond basic cyber hygiene”, and that firms should be “in a position to manage advanced persistent threats that are the hallmark of some state-sponsored attackers”. He added that protocols should seep through into the c-suite rather than resting solely with IT staff.

Shared responsibility
Relying on IT experts alone is indeed insufficient; according to a study by McAfee, misunderstandings and misinterpretation reside among a worryingly large number of security experts responsible for preventing advanced evasion attacks (AETs) – concealed attacks which bypass security controls. According to the report, 75 percent of those surveyed used vendors that didn’t include technology to prevent this form of security evasion. A further 39 percent of IT decision makers, meanwhile, admitted they didn’t have adequate measures in place to spot and track AETs.

According to nearly two thirds of the McAfee respondents, the biggest obstacle to preventing that form of attack was convincing the board AETs were a genuine danger; it’s thus clear that, as Gracie has argued, getting executives on board should be a priority. So long as cyber-security is considered the preserve of cyber-experts alone, the threat will remain. Training the entire workforce so as to avoid potential attacks is essential – and it’s a strategy that, unlike ISAOs, both SMEs and larger organisations can get involved with.

But RAND’s Ablon believes efforts should go yet further beyond workforce training to ensure that cyber-security is embedded from an early stage. She believes that teaching secure coding in school, and making it an obligation for those developing technology, should be priorities. “We currently only focus on the [functionality and convenience], and then ‘patch and pray’ that security will also happen”, she says, arguing that far more needs to be done if the very serious risks are to be, at least in part, mitigated.

Ablon certainly has a point. And as the Internet of Things takes on an increasingly important role, the potential damage cybercrime can cause is only going to grow – especially if it seeps into other areas, notably health. Crawley gives an example: “Your pacemaker could be linked to the internet, and if someone could hack into that system they could hack a device that’s protecting people.”

If not controlled properly, cybercrime could pose a very real and serious threat to both economies and the institutions and people in them. Although the digital revolution has made complete security impossible – as Crawley puts it, “the only way you’re going to be 100 percent secure is if you cut all links to online and you become an industry of the 1900s” – improving training, raising awareness through education and increasing transparency are actions that need to be taken urgently if we’re to halt the threat before it’s too late.

US President Barack Obama speaks at the White House Summit on Cybersecurity and Consumer Protection

China internalises, shifts, and grows long term

Posted on May 5, 2015 by World Finance

According to Moodys a slowdown is evident, as seen in the shrinking share of shadow banking in overall credit flows. World Finance speaks with Rhodri Preece from the CFA Institute on the impact will this will have on China’s economy.

Come back later for a full transcript of this video.

Forget price slumps. Oil’s days have always been numbered

Posted on May 5, 2015 by Ashton Wenborn

The dramatic collapse in the price of oil over the last 12 months has caused panic around a world so reliant on the fossil fuel. Oil has become the dominant resource of the world’s energy mix over the last century, meaning that the bigger consumers of it would likely welcome a rapid reduction in cost. However, what it has really done is bring into focus the prospect of a world where stocks of oil are scant and energy is provided by alternative sources.

While the end of oil has been long predicted, the last 12 months of increasing production – led largely by the Organisation of the Petroleum Exporting Countries’ (OPEC) Saudi Arabia – has shaken up the oil markets, closing many prospective wells elsewhere and leading to people starting to think again about newer sources of energy. The day when oil is no longer the go-to fuel might just be getting closer than many had imagined.

As discussed in the last issue of World Finance, there has been a concerted effort to phase out fossil fuel use in recent years, but it has so far failed to bring about a meaningful shift towards renewable energy. However, the falling price of oil and the subsequent closure of many unprofitable wells mean that there could now be a proper shift away from polluting energy sources in favour of cleaner sources.

US shale industry productivity

Oil barrels per day:

308,700

March 2011

372,757

March 2012

817,428

March 2013

1,004,803

March 2014

Natural gas, mn cubic feet per day:

360,497

March 2011

626,262

March 2012

876,497

March 2013

1,112,944

March 2014

Indeed, many people – including the World Bank’s Jim Yong Kim and the IMF’s Christine Lagarde – have called for nations collectively to wean the world off fossil fuels by cutting subsidies. The oil, gas and coal industries have all enjoyed extremely generous government subsidies around the world for many years. In 2009, a meeting of G20 leaders led to a commitment to axe many subsidies, but six years later little has happened. This has been in part because of the financial crisis, but also because of the sudden boom in shale oil and gas discoveries.

The shale revolution
The global energy landscape has changed considerably over the last few years thanks in large part to the shale revolution in the US. It has taken away the reliance on foreign oil and gas in the US and Canada, creating a booming North American industry in the process. It has led to panic among nations like Saudi Arabia that have enjoyed a huge amount of demand for their plentiful crude oil resources, as they no longer hold as much sway over energy markets.

However, the plunging price of oil has dealt a blow to the industry, with many projects relying on high prices to justify exploration and the relatively high cost of production has meant that a falling oil price has led to many projects no longer being deemed financially viable.

At the same time, the continued blocking of the long-proposed Keystone XL pipeline by President Obama has meant the oil industry won’t be able to tap into all the resources it had hoped for in the future. Despite this, some in the industry believe that the cost of drilling for shale oil and gas will continue to fall, meaning that many of the projects will be viable soon enough.

The fall in the price of oil, however, is likely to be long term. Regardless of the shale revolution, many commentators think that oil’s days have been numbered for some time, and the normal safety net of the past is no longer willing to sustain stable prices. OPEC, the group of countries that have held a sway over the global price of oil, has faced the most difficulty from the last year, yet is also largely responsible for the fall.

Dominated by Saudi Arabia, OPEC has traditionally prevented prices from dropping too low, maintaining a semblance of stability in an industry that so many are reliant upon. However, instead of propping prices that were falling as a result of increased supply from the US shale boom, Saudi Arabia has driven up production levels as a way of crushing this new competition.

The reasons for this ramping up of production have caused much debate, with many saying it is Saudi Arabia’s way of stopping the US shale revolution, while also applying further pressure to the struggling economies of its’ oil producing rivals Russia and Iran. However, it seems more likely that the country has realised that its vast deposits of oil may not be so in demand in the not too distant future.

In fact, some within the regime have predicted the decline of oil for many years. In 2000, former Saudi oil minister Sheikh Yamani told The Daily Telegraph that new technologies would mean far less demand by 2030. “Thirty years from now there will be a huge amount of oil – and no buyers. Oil will be left in the ground. The Stone Age came to an end, not because we had a lack of stones, and the oil age will come to an end not because we have a lack of oil.”

Yamani also correctly predicted that discoveries of oil would continue to remain high over the medium-term, but that eventually newer technologies would lead to oil’s downfall. “On the supply side it is easy to find oil and produce it, and on the demand side there are so many new technologies, especially when it comes to automobiles.”

He was also correct in predicting a major crash in the price of oil. “I have no illusion – I am positive there will be some time in the future a crash in the price of oil. I can tell you with a degree of confidence that after five years there will be a sharp drop in the price of oil.”

Fast-forward to last year, and the predicted crash finally began to materialise. Whereas in previous times of price instability Saudi Arabia has led OPEC towards slashing production, this time it refused. Because of its cheaper production costs compared to rivals Russia and the US, Saudi Arabia has been able to take a hit on profits that others could not justify.

According to a January article by Elias Hinckley for Energy Trends Insider, the Saudis might be looking at the long-term implications of a world no longer reliant on oil. “Saudi Arabia has embarked on an absolute quest for dominant market share in the global oil market. The near-term cost of grabbing that market share is immense, with the Saudis sacrificing potentially hundreds of billions of dollars if low prices persist.

“In a world of endless consumption, this risk would be hard to justify merely in exchange for a temporary expansion of global market share – the current lost revenue would take years to recover with a marginally higher share of global supply. But in a world where a producer sees the end of its market on the horizon, then every barrel sold at a profit is more valuable than a barrel that will never be sold.”

Saudi Arabia’s declining oil empire

Saudi Arabia, the world’s biggest crude exporter, shipped

5.7%

Less oil overseas in 2014 than it did in 2013

Shipments averaged

7.11m

barrels a day; down from an 11-year high of

7.54m

barrels a day in 2013

In December 2014 exports dropped

5%

from November to

6.9m

barrels a day

Sustainable alternatives
As oil sees a sharp decline, other technologies are finally beginning to show their potential. Many countries have long dodged climate change regulations, but there have been signs recently that countries are beginning to take the issue seriously. Both the US and China have signed up to relatively strict carbon emissions targets in recent months, while US companies increased their investment in clean energy technologies last year to $52bn. China followed suit, with an investment last year of $89bn in clean energy technologies, a huge increase of $19bn on 2013’s figure (see Fig. 1).

Although governments enthusiastically backed many renewable energy technologies with generous subsidies at the turn of the century, a number of leading companies failed to turn their clean energy operations into profitable businesses. These included solar panel maker Solyndra, which severely damaged the reputation of the industry when it was declared bankrupt in 2011, despite a series of government loans.

However, the solar energy industry has certainly bounced back from a number of setbacks a few years ago. Prices of solar panels have fallen sharply over the last five years, and a number of observers are predicting that the industry will surpass more polluting fuels over the course of the next decade.

The IEA released a report last year that suggested by 2050 the world’s electricity supply would be provided largely by solar power. According to the report, two solar technologies – solar photovoltaic (PV) systems and solar thermal electricity (STE) – could result in a 27 percent of the world’s energy supply, meaning it would be the dominant form of power generation. This would also result in the prevention of six billion tonnes of carbon dioxide emissions, which represents more than all of the US’ current energy-related carbon dioxide emissions.

The IEA’s Executive Director Maria van der Hoeven said, “The rapid cost decrease of photovoltaic modules and systems in the last few years has opened new perspectives for using solar energy as a major source of electricity in the coming years and decades.” Despite this potential, she added that upfront capital costs are still relatively high. “However, both technologies are very capital intensive: almost all expenditures are made upfront. Lowering the cost of capital is thus of primary importance for achieving the vision in these roadmaps.”

According to a study conducted by independent German think tank Agora Energiewende in February, solar power is emerging as the cheapest power source for many parts of the world. The study also suggests that this has happened far quicker than many had predicted.

Dr Patrick Graichen, Director of the Agora Energiewende, said in the report, “The study shows that solar energy has become cheaper much more quickly than most experts had predicted, and will continue to do so. Plans for future power supply systems should therefore be revised worldwide. Until now, most of them only anticipate a small share of solar power in the mix. In view of the extremely favourable costs, solar power will on the contrary play a prominent role, together with wind energy – also, and most importantly, as a cheap way of contributing to international climate protection.”

A changed perspective
Another report that followed in March by Deutsche Bank suggested that solar power will generate as much as $5trn worth of revenue by 2030. This would represent 10 times the figure of today, driven by the dramatically falling cost of building solar plans. The bank’s report represents a significant endorsement from a major financial institution more concerned with profit than environmental causes.

Whereas solar previously represented a costly technology propped up by government subsidies, it is now seen as a financial viable investment, says Deutsche Bank. “…we think solar has now become an investable sector and over the next five to 10 years, we expect new business models to generate a significant amount of economic and shareholder value. Looking back eight to 10 years ago, the solar industry was in the primitive stages and mostly dependant on government subsidies. Most companies that came to the public market were manufacturing businesses earning above-average returns due to unsustainable government subsidies.”

The report adds that the financial crisis may have been what really spurred on the growth of the industry. “The global financial crisis that resulted in the demise of several solar companies was really a blessing in disguise. The financial crisis really acted as a catalyst that resulted in reduction of solar hardware costs. Emergence of innovative financing models by companies such as SolarCity and NRG really acted as the second catalyst for further reduction in solar financing costs.”

Deutsche Bank analyst Vishal Shah added, “Over the next 20 years, we expect nearly 10 percent of global electricity production to come from solar. Bottom line: we believe the solar industry is going through fundamental change and the opportunity is bigger than it has ever been before.”

While solar has had a resurgence, there has also been a concerted effort to get tidal energy contributing more to the world’s power generation mix. The UK has been particularly keen to harness the oceans surrounding it, with a series of projects being developed off the coast of Wales, Scotland and northern England.

In March, a 70km-squared tidal lagoon off the coast of Cardiff was announced that would be able to generate up to 2,800MW and power every home in Wales. In Japan, the country’s New Energy and Industrial Technology Development Organisation unveiled a $501m tidal energy project.

The scheme, in partnership with Toshiba and IHI Corp, will look at ways in which Japan can find alternative sources of sustainable power in the aftermath of the Fukushima nuclear catastrophe of 2011. It is the nuclear power industry that took such a serious hit in 2011 because of the reactor leak in Japan. The German Government was quick to announce a phasing out of the technology in the aftermath, with no more nuclear power to be used in the country by 2022.

Belgium and Spain unveiled similar plans to axe nuclear power from its energy sources, while France – traditionally a big supporter of the tech – has said it will scale back some of its own power plants. However, with dwindling resources of oil, nuclear power is certain to play a prominent part in the makeup of the world’s energy mix in the future. China has begun heavily investing in nuclear power plants after four years of no development, while Russia and India have plans to invest in their own projects.

The shale revolution in the US – which many countries are themselves hoping to replicate – has delivered huge amounts of liquefied natural gas (LNG) to the market. LNG has become a hugely important part of the world’s energy mix. According to a report by Bloomberg, this year will see shale become the second most valuable commodity in the world after oil, with trade exceeding $120bn. By 2035 it is expected to be the second most used source of energy, according to Total, moving ahead of coal. The North American shale gas finds have proved a boon to the many providers there, while countries like Iran are eager to come in from the international wilderness and sell their huge deposits of LNG to the rest of the world.

Seize the day
The falling price of oil is not expected to be a freakish short-term blip for the market. Many observers expect oil prices to remain low for the foreseeable future, which could prove to be a problem for the global economy. With oil prices remaining low (see Fig. 2) and a rise not looking likely in the short-term, the prospects for the global economy seem quite stark.

ExxonMobil CEO Rex Tillerson told a conference in March that the price is unlikely to increase anytime soon, spelling bad news for the global economy. “People need to kind of settle in for a while. There’s a lot of supply out there. And I don’t see a particularly healthy world economy”, he said.

Some observers, however, feel that the decline in price of oil could be a huge opportunity for the world to embrace alternative methods of power. Ben Goldsmith, founder of leading European sustainable investment firm WHEB Group, told World Finance that the falling price of oil over the last 12 months has presented the world’s governments with an opportunity to invest in cleaner forms of energy production.

This, he says, can be achieved through slashing the generous subsidies that the oil industry has enjoyed for many decades, and instead diverting the money towards renewable technologies: “The recent sharp drop in the oil price presents governments around the world with a unique opportunity to cut back subsidies for both the production and consumption of oil. Such subsidies are unaffordable in many cases, unnecessary, and act as a drag on the development of clean, renewable alternatives. By cutting back the subsidies the playing field is levelled, and the clean energy revolution will move on even faster.”

Goldsmith says the attractiveness of clean energy is its stability compared to the highly volatile fossil fuels that have been traditionally used. “As we have seen, the prices of oil, gas, and coal move up and down like a yo-yo. Clean energy offers a completely non-volatile alternative to these unreliable, volatile and polluting forms of energy. This predictability is one of the key benefits of clean energy.” While the day when oil is no longer the dominant fuel has yet to come, the past 12 months could prove to be the turning point for how the world decides to power itself in the future.

Italy’s stale political system is what’s hampering its economy

Posted on May 5, 2015 by Ashton Wenborn

Italy’s Prime Minister, Matteo Renzi, is close to performing a minor miracle that will play a crucial role in helping the country make the constitutional and economic reforms that it so desperately needs. In January his government passed a measure that, if accepted by the senate, will limit the size and, therefore, power of the upper house to block laws. The upshot being that his government, which holds a majority in the Chamber of Deputies, will possess the power to implement the prime minister’s extensive reform agenda, which aims to boost living standards and strengthen the overall economy.

Italy’s political system is notorious for its inefficiency and corruption, characteristics that its prime minister says must be shed if the country has any hope of climbing out of the economic abyss it finds itself in. It is why he is also attempting to pass a new electoral law in the lower house, with the purpose of producing a clear winner in the next general election.

Overall, the reforms are good news for a country in desperate need of jobs, but Italy is going to need to do a lot more to revive
its economy

Traditionally, the country has suffered because its numerous political parties have each struggled to garner enough votes to secure a significant mandate to govern. The new proposal, however, states that, if no party can win a majority (more than 40 percent of the vote), a run-off between the top two parties will be staged to assure the newly elected government commands the necessary authority to ensure the political cogs can keep moving – something that is essential if Italy is to meet the challenges it faces with any sense of conviction.

Labour rules
So far, real progress has been limited due to political gridlock. Even so, Renzi has managed to approve the key parts to his overhaul of labour market rules, which aims to boost job creation in a country haunted by high unemployment, especially among its young people, with the youth unemployment, as of January 2015 sitting at 41.2 percent – the lowest it has been for over a year, but still far too high (see Fig. 1). The Jobs Act also intends to boost women’s participation in the workforce by improving policy on parental leave and providing quality child care for mothers looking to enter work.

The new labour market rules, having eased firing restrictions for large private sector companies, have helped reduce the use of temporary contracts. It is estimated that more than 200,000 people will see their employment status switch from temporary to a new type of permanent contract, which will offer minor compensation in the event of dismissal with that amount increasing with seniority in an effort to meet employees and private sector employers somewhere in the middle.

The new labour rules already appear to have made an impact, with car manufacturers Fiat and Chrysler echoing similar sentiments to those of Telecom Italia, who recently unveiled plans to hire 4,000 people.

“We are again recruiting, after seven years”, Chief Executive Officer of Telecom Italia Marco Patuano said. “We need to strengthen our workforce by introducing new professional skills into the company, with young technicians and graduates between 20 and 30 years of age. We will be recruiting up to 4,000 people over three to four years, using the new regulatory tools the government is developing.”

“[Our] new industrial plan envisages around €10bn [$10.62bn] of investment in Italy in the next three years, over €1bn [$1.06bn] more than in the previous plan. Thanks to this significant increase in innovative investments”, added Patuano. “By 2017 we will reach 75 percent of the population with optic fibre and over 95 percent of the population with the 4G mobile network, positioning us as the leader in the infrastructure development of the country and thus getting closer to the targets of the Digital Agenda for 2020.”

An unprecedented path
Despite its apparent short-term success, Renzi’s Job Act has been met with criticism from those inside his party, as well as heads of trade unions, who contend that the reforms dismantle basic workers’ rights.

Overall, the reforms are good news for a country in desperate need of jobs, but Italy is going to need to do a lot more to revive its economy if it hopes to make a significant dent in unemployment figures over the long term. At least that is the view held by the Secretary-General of the OECD, Ángel Gurría, who said that the over-arching message of the 2015 OECD Economic Survey of Italy is a straightforward one: a lot done, a lot more to do.

“Italy is progressing on an unprecedented path of reform, that will not only boost growth and employment, but that, being a core country, will also bring confidence at the systemic, European level”, said Gurría. “Strong political courage has been necessary to advance this agenda. The Italian government should continue with this determination to complete the work. The reforms will also enable more resources to be directed to vital areas such as education, a fairer social safety net, improved support for job seekers and key infrastructure investment.”

Challenges ahead
The truth is, Italy is in bad shape. The financial crisis has helped devastate economies across the eurozone, but even before it hit, Italy’s economy had begun to stagnate, with growth in real GDP per capita averaging just 0.7 percent between 2000 and 2007, compared to the OECD average of 1.7 percent over the same period. In fact, since 2011, the economy has been shrinking, and was flat in the fourth quarter of 2014.

Italy’s poor economic performance is underpinned by substandard levels of investment in education that are necessary to provide its citizens with the skills they require to find work in today’s economy. The country also ranks far behind other OECD members when it comes to many quality indicators such as jobs, earnings and housing.

Renzi’s reforms, however, can boost average annual per capita GDP growth by six percent over the next 10 years, which may not sound like much, but considering that the Italian economy has only grown four percent since the euro was first implemented 16 years ago, a figure worse than Greece, it is a massive step in the right direction.

While the changes that Renzi and his administration have begun to implement are positive, as always, the main threat to the country’s economic recovery is its political system and the members comprising it. Silvio Berlusconi, a man whose reputation precedes him, has been a thorn in Italy’s side for some time, and now it seems he wishes to cause his fellow countrymen yet more problems. Il Caimano (The Caiman), as he is affectionately, or perhaps not so affectionately known, is eager to challenge Renzi in the senate, asking for the support of his party (Forza Italia) to block the prime minister’s constitutional reforms. But for the sake of Italy’s future, many will be hoping The Caiman has lost his teeth.

Tech giants come to the rescue of the Luddite car industry

Posted on May 5, 2015May 6, 2015 by Ashton Wenborn

For a product so heavily relied upon the world over, technological innovation in the car industry has moved at an almost glacial pace over the last century. Car manufacturers have made small and superficial changes to the capabilities of their vehicles every few years, but ultimately the product has always been the same: a gas-guzzling, manually operated form of private transportation.

However, many observers think that the next decade could see it change beyond all recognition. New technology, changing user habits, and a swathe of new entrants could dramatically change the face of an industry that has been dominated by a small number of firms for around a century.

In 1914, Henry Ford revolutionised the car industry by creating an assembly line that dramatically reduced the cost of vehicle production, and the market became mainstream. Suddenly cars became an essential part of everyday life throughout the world, revolutionising mass-transport. However, since then there has been little in the way of innovation, save for a few superficial concessions to comfort and speed. At the same time, cars have continued to spew toxic fumes into the atmosphere. With the world slowly coming round to the idea of cleaning itself up, the car industry has been challenged to develop a more sustainable method of operating.

Unprecedented challenges
The slow reaction to innovation by the industry comes at a time of considerable breakthroughs in technology. Many feel that it is outside influences that will really shake up the auto industry, and that the next few years could see a dramatically different market to what exists now.

New entrants into the market are sure to make waves in the auto industry

A number of recent reports have predicted how the car industry will look in the not-too-distant future, and what challenges there are for the industry’s leading manufacturers. In a report by global accountancy firm PwC published last year, the company said that despite recent years of record growth – not least in China and the US – the automotive industry was facing “unprecedented challenges”.

“New technologies are dramatically changing vehicles, from the advent of the ‘connected car’ and enhanced driver support to better fuel efficiency and new or improved powertrains. Automotive manufacturers and suppliers are confronted with ever-greater complexity as a result of increasing numbers of products and options, shorter technology cycles, increasing pressure to innovate and global supply networks. And at the same time they need to balance the needs and demands of customers, investors, regulators, non-governmental organisations and even the general public.”

In October last year, management consultants McKinsey published a note on the future of the auto industry, explaining the various challenges that manufacturers will face in the coming years. Alongside predictions of further geographical shifts in production and demand towards China, the company suggests there will be a number of technological innovations that will radically change the industry.

Electric avenues
Cutting the emissions of the industry and slashing the cost of powering cars has been the leading concern for many manufacturers. While Toyota’s Prius range of hybrids have proven popular in some markets, other manufacturers have been slow to adopt sustainable technologies. However, many see fully electric cars that don’t rely on petrol as the future of the industry.

The leading proponent of electric car technology has been Tesla, the firm founded by US entrepreneur Elon Musk. Such has been his determination to see the technology take off that he has even offered his company’s patents to rivals for free in order to speed up adoption of electric cars.

Electric cars have been discussed for a number of years as being an extremely attractive, low carbon emitting form of personal transportation. But for a number of reasons the technology has taken longer to take off than many had expected, with existing car manufacturers not taking electric cars seriously. Musk lamented last year, “I was hoping other companies would engage more in serious electric car programmes.”

As a result, Musk announced in June last year that all of the company’s patents would be made freely available. In a statement, Musk said his ultimate goal was to speed up the adoption of sustainable transportation, rather than make a profit. “Tesla Motors was created to accelerate the advent of sustainable transport. If we clear a path to the creation of compelling electric vehicles, but then lay intellectual property landmines behind us to inhibit others, we are acting in a manner contrary to that goal. Tesla will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology.”

He added that while Tesla had initially created patents for its technology because they worried rival manufacturers would see the potential of the electric car; in reality few of the big carmakers had invested in developing their own versions. “We felt compelled to create patents out of concern that the big car companies would copy our technology and then use their massive manufacturing, sales and marketing power to overwhelm Tesla. We couldn’t have been more wrong. The unfortunate reality is the opposite: electric car programmes (or programmes for any vehicle that doesn’t burn hydrocarbons) at the major manufacturers are small to non-existent, constituting an average of far less than one percent of their total vehicle sales.”

The technology Musk has been particularly eager to see manufacturers adopt is his Supercharger system that powers the vehicles. The main criticism of electric cars is the necessity to charge them far more frequently than a traditional car would require refuelling. Musk hopes that as adoption of the technology increases, other manufacturers might be able to help develop better performance and a wider network of charging stations. A lack of infrastructure for the technology means that remote parts of the world would be off limits for electric cars that need to be charged regularly.

Power problems
Speaking to our sister publication The New Economy last year, John Gartner, Research Director for Smart Transportation at Navigant Research, said that the lack of a standard for charging was holding the electric car industry back. “The electric vehicle industry has thus far developed two competing fast direct current (DC) charging standards, through the Society of Automotive Engineers and the CHAdeMO standard originating from the Tokyo Electric Power Company (TEPCO). The Supercharger technology, while providing faster charging than has currently implemented by these standards, would have to be evaluated for its impact on the battery performance of competing electric vehicles, and this would take several years to determine if it is compatible.”

He added that an offer like Tesla’s could prove attractive to other car manufacturers that have yet to settle on a charging technology. “Automakers and electric vehicle charging companies would likely would be hesitant to support a third charging technology given the additional vehicle equipment cost, infrastructure cost in deploying more chargers, and potential for confusion in the marketplace for consumers from adding a third option for public electric vehicle charging. A single charging standard would be optimal to grow the electric vehicle market, but this will take many years given how fractured the market is today with hundreds of public DC chargers already in place.”

While Tesla has been leading the way in the electric car market, traditional manufacturers have finally started to look at the technology themselves. General Motors is the leading manufacturer of plug-in hybrid cars, with its Chevrolet Volt particularly popular in the US. Toyota continues to offer its popular Prius range, while Nissan is the biggest manufacturer of pure electric cars. Ford has also launched its own cross-over brands of electric and hybrid cars.

BMW launched its electric car range – BMWi – in 2011 and has gone on to offer a couple of vehicles. By the end of last year, the company had sold short of 18,000 models, with the US as the biggest market. However, critics have derided BMW’s electric car efforts, hailing them as the ugliest vehicles the company has ever made. While it has been the first major high-end car manufacturer to delve into the electric car market, other firms have also been looking to take the leap into using the technology.

Luxury car manufacturer Porsche – owned by Germany’s Volkswagen – was in March said to be developing its own form of sustainable, electric car. It’s thought to have targeted 2020 as the year in which it wants to debut a new model to its car line-up, and CEO Matthias Mueller has recently been effusive with his praise for Tesla, telling a conference in Stuttgart: “Tesla has built an exceptional car. They have a pragmatic approach and set the standard, where we have to follow up now.”

Connected cars
While relatively small firms like Tesla have carved out a niche for themselves in the auto industry, it is the potential for much bigger new entrants like Apple and Google that could turn electric cars into a mass-market proposition. Google has been experimenting with driverless cars for a number of years, and has been testing its technology on the streets of California recently.

Apple, however, is the company that many think could act as the biggest disruptor in the car industry. The extremely secretive tech giant has not made any official confirmation of its plans to make its own car, but rumours began to swirl in January when a number of mysterious cars fitted with cameras and sensors took to the streets of Cupertino, where Apple is based.

There then emerged reports that Apple had put together a team of more than 1,000 employees dedicated to its electric car project. These included a number of key figures poached from the likes of Mercedes and BMW. There were even rumours, in the last 12 months, that Apple executives had met with Elon Musk over a potential acquisition of Tesla.

Nobody quite knows what Apple plans to offer with its new car – whether it is a self-driving vehicle or just an electric car. However, a company with such financial clout is undoubtedly going to create waves in the industry.

It would not be Apple’s first foray into the auto-industry, although it would be the company’s first attempt at actually building a car. Apple currently offers its CarPlay service to manufactures that helps drivers connect their iPhones to their vehicles and enabling a wide range of services. Such innovations aren’t new, but are a step towards simplifying how cars are connected to the web and people’s other digital devices.

The BMWi at the North America Auto Show in Detroit

McKinsey says that soon cars will be far ‘smarter’ than currently. They will be aware of their surroundings, able to communicate with other cars, and able to seamlessly work with a users’ other digital devices. “The car of the future will be connected – able not only to monitor, in real time, its own working parts and the safety of conditions around it but also to communicate with other vehicles and with an increasingly intelligent roadway infrastructure. These features will be must-haves for all cars, which will become less like metal boxes and more like integrators of multiple technologies, productive data centres – and, ultimately, components of a larger mobility network.”

Another direction the industry will likely head is towards autonomous cars. Google has long been experimenting with self-driving cars, with the ultimate goal of removing the need for a user to drive the vehicle, freeing them up to use their time more productively. While this might prove attractive to people unable to currently drive or busy workers trying to cram in an extra bit of productivity to their day, persuading driving enthusiasts might be harder. And there will be substantial safety issues around the use of such cars.

It’s not just Google that has been researching the technology, however. Mobile taxi firm Uber recently announced it would be investing in a robotic research facility in Pittsburgh that would help it built its own self-driving cars. The company’s move into the area is an interesting proposition, particularly for people who believe the days when people owned their own cars are numbered.

According to some, people will likely rent vehicles or share them with other users in the future, instead of owning their own cars. McKinsey believe that so-called millennials have far less attachment to ownership of cars as services like Uber and Lyft increase in popularity.

Driving innovation
New entrants into the market are sure to make waves in the auto industry. Companies like Tesla, Apple and Google could seriously disrupt an industry that has for years been dominated by the same sprawling international companies, by innovating at a rate traditional manufacturers have seemed reluctant to match before. In order for these manufacturers to stay on top, they need to speed up their research and development into new technologies.

PwC says investing in future technologies is an essential strategy for all car manufacturers if they want to remain relevant. “To avoid being innovated out of relevance, all suppliers – even those currently leading their markets – need to continually look ahead to future developments. New powertrains, new materials, new vehicle concepts or architectures – all of these trends are already changing the structure of the supplier industry. That’s a big opportunity for suppliers – but a risk too. New market entrants could threaten growth. The innovation playing field in automotive has gotten bigger than ever – and suppliers need to find their place on it.”

However, while the likes of Apple and Google can certainly bring a fresh approach to a somewhat staid industry, traditional manufacturers are still better placed to hold onto their market share in the future. They already have the manufacturing infrastructure and capabilities required for the mass production of cars, while such an undertaking could prove incredibly difficult for a tech firm. Building and shipping cars on a mass scale is somewhat different to developing web services or selling smartphones.

What may prove the most likely course is one of collaboration between tech firms and car giants. Indeed, such a situation has been rumoured recently in Germany with reports that Apple and BMW were discussing partnering up to build a potential Apple Car to challenge Tesla and remodel the German firms unpopular i series of cars.

Some in the industry have even welcomed the entry of tech giants. Fiat-Chrysler’s CEO Sergio Marchionne told the BBC in March that both Apple and Google were “incredibly serious” with their car intentions, and that it would shake up the industry. He added that such a disruption should be welcomed. “I think their interest is exactly what this industry needed. We needed a disruptive interloper to shake things up.”

Marchionne added that despite the news of tech giants looking to enter the auto industry, traditional manufacturers are more than capable of remaining relevant. “Don’t underestimate carmakers’ ability to respond and adapt to new competitive challenges.”

Quantum money

Posted on May 5, 2015January 18, 2021 by Ashton Wenborn

It is often said that quantum physics is so weird that it is beyond our understanding. According to the great physicist Richard Feynman, “If you think you understand quantum mechanics, you don’t understand quantum mechanics.” John von Neumann said that “You don’t understand quantum mechanics, you just get used to it.” Niels Bohr described it as “fundamentally incomprehensible.”

As just one example of freakish quantum behaviour, light behaves in some respects as if it consists of waves – it can be made to produce interference patterns – but in other respects as if it is made of particles, known as photons. Neither the particle nor the wave description is complete by itself. Quantum physics is fundamentally dualistic.

But there is one area where some quantum insights might prove applicable to our everyday lives, and it’s a surprisingly common one: money

Fortunately, such effects only apply at very small scales, so we don’t need quantum physics for things like throwing a ball or driving a car, where the usual Newtonian principles of mass and momentum work perfectly well. Most people, outside of university physics departments and science laboratories, have therefore felt free to go about their lives without obtaining an in-depth knowledge of quantum entanglement or the Heisenberg uncertainty principle.

But there is one area where some quantum insights might prove applicable to our everyday lives, and it’s a surprisingly common one: money. Just as subatomic objects have a dual nature, so do the money objects that we use to make payments. The main difference is that these objects are things we have designed ourselves. They are our contribution to the quantum universe.

Heads or tails
The most fundamental attribute of money is that it is a way to attach numbers to the material world. This fusion between abstract number and physical reality is represented by the production of coins. The first coins were produced around the sixth century BC in Lydia, part of modern-day Turkey, and were made from a naturally occurring gold/silver alloy called electrum. The obverse or heads side was stamped with a symbol such as a lion, which certified their validity, and indicated their numerical value in units of shekels.

This heads side of the coin therefore specified the numerical value, while the unstamped tails side represented the material side of money. In general, all money objects share these two aspects. They have a fixed numerical value, which is an abstract mathematical concept, but at the same time they are things that can be physically possessed, and are linked to real markets.

As with the wave/particle duality of quantum physics, the two sides of a coin represent very different things. Numbers are exact, precise, and obey mathematical rules. Debts for example are represented by negative quantities, which don’t exist in the real world (you can be underwater on your mortgage, but you can’t have a negative house). Interest multiplies exponentially without limit, which real things tend not to.

In contrast, the physical side of money represents positive, material wealth – it is something you own and possess and has value in the real world. This is most obvious in the case of early coins, which were made from precious metal and could be melted down if desired and sold as bullion. This material value is inherently fuzzy and inexact, and depends on exact market conditions. The precise versus fuzzy duality of money therefore resembles the particle versus wave duality of matter. And it propagates through to markets, with the result that there is always a tension between the concepts of exact numerical price and fuzzy real-world value.

Virtual money
Of course, it might seem that an electronic transfer of virtual money over a phone has nothing to do with the minting of ancient coins. But even here there is a physical component. Cybercurrencies represent an electronic transfer, which involves physical electrons, and gain value through links to physical markets. Losing your Bitcoin wallet hurts as much as losing your regular wallet.

Again, the comparison with quantum physics is instructive. The electromagnetic force is mediated by ghostly virtual particles that flash into existence before being extinguished almost immediately; yet their ethereal presence is enough to transmit the electromagnetic force, which is what holds atoms (and the world) together. Virtual money transmits the money force in much the same way.

Money therefore binds the ideas of exact numerical value, and fuzzy real-world value, together into a single package. The fact that these two things are as inconsistent with one another as waves and particles is what gives money its powerful, and frequently counterintuitive, properties.

In the early 2000s, the cheap availability of credit in the US meant that even low-income people could afford their own homes. Some became rich by selling their houses at the top of the market, so for them the money had real, tangible effects. But after the credit crunch of 2007, most of the new money disappeared, as if it had never existed. Money seemed to be both real and unreal at the same time – a sensation familiar to anyone who has peered into the quantum universe.

No one is proposing an economics version of quantum mechanics, but some insights from that field could be genuinely useful in understanding the economy. Mainstream economics has traditionally conflated the separate properties of numerical price, and real world value. Adam Smith argued that the invisible hand would restore prices to reflect “intrinsic” value. Later, Eugene Fama’s Efficient Market Hypothesis said much the same thing for markets. In this view, the two sides of money are compressed to a single point – just as Newtonian physics treats entities such as electrons as something like inert billiard balls.

However, if money is seen as just an inert medium of exchange, which is otherwise like any other commodity, then the economy looks much like a barter system – which is why many economic models don’t include money at all. As Martin Wolf from the Financial Times noted, students of economics are left thinking that we operate in a “barter system where money acts as a veil”. In this view, money is a distraction that can safely be ignored.

Money asserts itself in the gap between number and value – and our inability to understand its complex properties has been demonstrated by financial crises, and also by difficulties with the euro. Before concluding that money is also fundamentally incomprehensible, we might try taking a page from physics, and replace our Newtonian approach to the economy with a theory that puts the confounding properties of money at its core.

Billion-dollar regulations challenge the shipping industry

Posted on May 5, 2015 by Ashton Wenborn

The global shipping industry, which moves about 90 percent of world trade on some 60,000 merchant ships, continues to face very difficult markets. This is primarily due to chronic overcapacity. There are far too many ships chasing after not enough cargoes, as far too many new vessels were ordered in the halcyon days before the 2008 economic crisis. But the shipping industry faces another major challenge: the estimated cost of compliance by the global industry with new environmental regulations is expected to amount to over $500bn over the next decade.

Therefore, while the shipping industry may be just about to turn a corner following a major downturn that has lasted more than six years, there is real concern that the need to comply with an avalanche of new rules could inhibit a sustainable recovery just as soon as it gets started. The industry’s global regulator, the UN International Maritime Organization (IMO), has adopted these new regulations. These IMO rules will be strictly enforced worldwide, with the industry committed to full implementation. But the fact remains that these very large additional costs are about to impact at more or less the same time.

Reducing harmful emissions
Expensive new rules on sulphur emissions that will dramatically increase fuel costs to ships will be included, and mandatory measures to reduce C02. Shipping is actually the only industrial sector already to have a global C02 regime in place via the IMO, with the goal of reducing emissions of 20 percent by 2020, and further reductions going forward. Ships will also shortly have to comply with new requirements to install very expensive equipment to treat millions of gallons of ballast water, intended to address concerns about the threat to local ecosystems that can be caused by ships transporting species.

Sulphur content of fuel permitted outside emission control areas (EU and US)

4.5%

2005

3.5%

2012

0.5%

2020-2025

Source: IMO

A new IMO Convention is expected in 2016 that will require most of the existing ships – if they wish to continue to trade – to be retrofitted with treatment equipment costing up to $5m per vessel. A ship is normally built with a life expectancy of at least 25 years. But many owners of 15-year-old ships may be thinking very carefully about whether to cut their losses now and scrap the ship instead.

The $50bn total cost is in fact probably a very conservative estimate given the uncertainty of the costs of fuel, or the longer-term intentions of governments with respect to things such as carbon charging. But the most dramatic new costs will arise from the requirements to reduce the sulphur content of less than marine fuel. Since 1 January this year, to address concerns about health impacts, ships must now use fuel with sulphur content less than 0.1 percent in emission control areas established in Europe and North America. In 2020, however, it has been agreed that a global sulphur cap of 0.5 percent will apply compared to 3.5 percent that is currently permitted in the middle of the ocean.

Fuelling the costs
This change is very important because fuel is the ship operator’s most expensive cost – even allowing for the recent dramatic fall in oil prices. In 2005 the cost of fuel, when averaged over a ships’ typical 25-year life, was roughly a third of the capital cost involved in constructing a ship and servicing the debt. Today this relationship is the other way around, with fuel being almost double the capital costs.

A small dry bulk carrier (carrying iron ore) might typically use about 25 tonnes of fuel a day. A very large crude oil carrier (a ‘super tanker’) might typically burn about 80 tonnes. However, one of the new generation’s of very large container ships carrying over 10,000 20ft containers might burn as much as 250 tonnes a day.

Residual fuel oil, which most ships currently burn, typically costs about $600 a tonne. Assuming a ship is working for 200 days a year, this translates into annual fuel costs of roughly $3m for a bulk carrier, $10m for large tanker and for a large containership some $25m a year. Many ships are therefore now operating at much slower speeds.

In the future, however, to comply with the sulphur rules, ships will increasingly have to use distillate (diesel) fuel that is almost twice as expensive as the residual fuel that most ships currently burn. The increased demand for diesel grade fuel from shipping may also have an impact on the land based industry too. Although the impact of the sulphur rules has been mitigated by the recent fall in the price of oil, these lower prices are unlikely be permanent. The brave new world of low sulphur fuel is therefore a very serious challenge for international shipping.

When the going gets tough, the brands get going

Posted on May 5, 2015 by Ashton Wenborn

Apple

Last November, Apple reached a valuation of $700bn; the biggest in corporate history. The tech giant now has a cash pile of $178bn, a predicted revenue that could top Hong Kong’s total GDP this year, and a staggeringly high sales history – in the last quarter of 2014, it sold 34,000 iPhones an hour.

34,000

iPhones sold an hour in Q4 2014

It’s hard to believe that less than two decades ago, the same company looked like it was on death row. The computer firm was haemorrhaging money and verging on bankruptcy in the face of fierce competition from cheaper, Windows-running PCs; namely Microsoft. Apple had a mere four percent market share to its name, had suffered the departures of three CEOs in the space of 10 years and was witnessing yearly losses of over $1bn. Board members had failed to find a buyer when they resorted to the idea of a sell-out in a final attempt at reviving the brand. Tech magnate Michael Dell summed up its state when he reportedly declared in a symposium that if it were up to him, he would “shut (Apple) down and give the money back to shareholders”.

Apple’s early years were not all quite so fraught as this; in the late 1970s the company was growing quickly, focusing on the Apple II, an 8-bit computer which had become one of the most popular in the market at the time. But by 1997 its fortunes had taken a U-turn, with shares priced at just over $4 and a market cap of $3bn – somewhat measly in comparison to its current status. That year, founder Steve Jobs returned to the company after resigning in 1985, stepping up to the helm as an interim CEO to save the company haphazardly balancing on its last legs.

Jobs made his strategy clear from the start, stating: “If we want to move forward and see Apple healthy and prospering again, we have to let go of a few things”, Bloomberg reported. He went on to declare that it was time to stop obsessively competing against major competitor Microsoft – which he announced was pumping $150m of investment into Apple – and start focusing more on its own strategy.

With the financial backing from Bill Gates, Jobs invested heavily in advertising – producing the Think Different campaign, which featured old clips of Einstein, Martin Luther King and other iconic figures – and made Apple’s R&D budget leaner, focusing on new Mac products rather than out-there technologies unlikely to take off. He built the iMac, using the operating system produced by NeXT (the company he’d founded) and the new, brightly coloured computer proved a hit.

Jobs took a fierce, forward and at times ruthless approach, attempting to shape the media’s portrayal of Apple and shrouding much of the business in a form of secrecy that helped compound its air of exclusivity. He focused on innovation and simplified everything; from the mouse (which he made characteristically minimalist with just one button) to the floppy disk drive (which he scrapped). Design and, in Jobs’ words, “emotional experiences”, were at the heart of the new Apple branding and it succeeded; by 2000 he’d already made several leaps along the road to turnaround.

When the iPod, and iTunes, came along a year later, a whole new consumer base was introduced to Apple and in turn drawn into its unique concept stores – with its quirky Genius Bars – which innovative retail guru Ron Johnson had set about creating. “With Apple you get to immerse yourself in the experience”, says Dwight Hill, retail analyst at McMillan Doolittle – and that experiential approach proved an essential cog in the creation of Apple’s reputation for stylishness, forward thinking, and exclusivity.

Jobs, despite being diagnosed with pancreatic cancer in 2003, continued to haul Apple into new heights for several years on, bringing out the first iPhone in 2007 and declaring: “Every once in a while a revolutionary product comes along that changes everything”, a prophecy that would gradually become all too true. By 2009, Apple’s share of the smartphone market had grown to 10.8 percent, and a number of other products, including the iPad, saw the empire grow yet further, with total revenues in 2011 almost doubling those of the previous year at $108.6bn.

When Jobs stepped down in 2011 after his health had deteriorated, he left an empire that he’d built up from an almost bankrupt firm in the space of just 15 years, and which has become the pièce de resistance of the tech world. But he also left a wider legacy, redefining the industry, changing people’s perceptions of what a brand is and creating an empire that verges on a religion – through a unique, creative concept that it appears other companies, both in tech and beyond, will forever idolise.

Lego

Danish toy mega-brand Lego recently replaced Ferrari as the world’s most powerful brand in a ranking by Brand Finance, beating global superstars to the top spot including Rolex, Coca-Cola and Disney. The company saw sales exceed those of Barbie-maker Mattel (the largest toy manufacturer on the planet) in the first half of 2014, and it posted a net profit of $1.07bn over the year – continuing a trend of consistent growth that by 2013 had seen the company quadruple its revenue in less than a decade.

7 Lego sets sold every second

The picture hasn’t always been quite so rosy; in 2003 Lego fell from its 90s grace with a bang, suffering a 35 percent plunge in sales in the US (and 29 percent globally) – which led to losses of £217m (over $329m) in 2004. The company was knee-deep in debt – so high it was almost equivalent to its annual sales – and bankruptcy seemed to be waiting to greet the ailing firm with open arms.

Then in 2004, family-run Lego sent outsider and former McKinsey consultant Jørgen Vig Knudstorp, (who’d been with the firm since 2001), to the CEO throne in an attempt to bring the toy-maker back from the brink. “To survive, the company needed to halt a sales decline, reduce debt, and focus on cash flow”, Knudstorp later told Harvard Business Review. “It was a classic turnaround, and it required tight fiscal control and top-down management.” The new CEO embarked on a cost-cutting mission, slashing staff numbers in their thousands and outsourcing certain sectors to other countries.

Over the next few years, Knudstorp succeeded; by 2008, Lego had achieved net profits of £163m (more than $247m), reporting a 51 percent increase in sales in Britain, while other toy makers suffered from the recession and the rise of digital phenomena vying for children’s time.

Knudstorp had moved the focus back to Lego’s core business, which had been overlooked as the company spread its wings a little too far and wide with theme parks, clothes, watches and video games all under its belt. Knudstorp sold off non-essential areas of the business – such as the four Lego theme parks, the firm’s videogames sector and a number of its buildings in Australia, the US and South Korea – and cut the amount of Lego pieces by more than half. He also emphasised the importance of becoming more results-driven and financially focused, speeding up Lego’s production processes and implementing performance-related pay to motivate employees.

And, crucially, he created Lego’s Future Lab, investing heavily in consumer research to see how children play. The firm reacted accordingly, developing experiences around its products to bring the now 83-year-old firm into the modern age – a move that saw Fast Company dub it the “Apple of Toys”. Licensing agreements with major Hollywood names including the Harry Potter and Star Wars franchises, and a strategically planned string of Lego movies, helped to further compound the company’s success.

At a time when the digital arena is playing an increasingly large role in the toy industry – with a number of modern toys now getting in on the ‘internet of things’ game – Lego has retained an element of tradition, continuing to promote its classic plastic, buildable pieces. And it’s working, with seven Lego sets sold every second across the globe. But the brand has managed to successfully fuse that with elements of digital play; this year it’s trialling ‘Ultra Agents’, whereby Lego blocks interact with touchscreens, and last summer it test-launched a line of hybrid physical and digital Lego toys.

Knudstorp has applied forward-thinking innovation to the toy world with a unique strategy. It’s one the likes of Mattel – which has experienced three straight years of falling sales, culminating in a 16 percent plunge last year – would do well to follow, if it’s to bring toys into the 21st century while still retaining those all-important elements of tradition, nostalgia and heritage.

IBM

In 1993 IBM, now one of the world’s biggest technology companies, reported what was then one of the largest quarterly losses seen in US corporate history – $8bn. The company was in crisis, about to become bankrupt and widely regarded as having come to its end – until Louis Gerstner, former American Express veteran, entered the scene. “When I arrived at IBM in 1993, there was no inheritable or even extendable platform”, Gerstner later said in an interview with McKinsey Quarterly. “The company was dying.”

$189m

Louis Gerstner’s severance package

Gerstner became IBM’s first outsider to be named CEO, sought out by former Johnson & Johnson executive Jim Burke. What he found upon his arrival was a business consumed by crippling costs and bureaucracy, a company culture in tatters and dissatisfied customers suffering from late deliveries of poor-performing machinery. IBM was facing competition from faster and less expensive technologies. Its workforce was crumbling, with internal conflict maiming its operations.

During his first couple of years on the job, Gerstner set about making tens of thousands of job cuts, closing down a number of plants across the world and selling a variety of assets in order to slash the company’s budget by billions and raise much-needed cash.

He did away with plans to split up the business into different segments, in order to unify its hardware, services and software operations – “the most important decision (he) ever made”, according to his book Who Says Elephants Can’t Dance – and focused on improving collaboration within the firm to mend its damaged, competitive culture. With that aim in mind he also scrapped tie-and-shirt dress codes and overhauled the rewards system, basing pay levels on the business’s overall performance rather than the results of its individual sectors. He set “personal business commitments” for employees and measured performance against those targets.

The new CEO also got rid of the multiple ad agencies being used in order to unify its branding, shifted focus away from hardware and onto integrated IT services, and made the company’s software compatible with any hardware, not just its own. He overhauled the traditional model by shifting to a ‘services-heavy’ one and threw the IBM rule-book out the window, bringing an outside perspective that allowed him to disrupt established practices and pump fresh energy into a worn-out company.

The drastic measures gradually paid off; in 1995, IBM sales had hit nearly $72bn, marking an increase of 12 percent from the year before, and earnings per share had soared a substantial 44 percent. In 1999 the company posted a revenue of $87.5bn – despite the threat of the Y2K bug – and its market value had grown by $170bn in the space of seven years. When Gerstner retired in 2002, his impressive turnaround was rewarded with a $189m severance package – one of the 10 largest of the decade.

Gerstner’s strategy throughout centred around a willingness to embrace change and move with the times. “The leadership that really counts is the leadership that keeps a company changing in an incremental, continuous fashion”, he told McKinsey Quarterly. Gerstner, now widely regarded as one of the most important turnaround masters of the century, certainly counted.

Although IBM revenue has been falling recently, the company still has a market cap of around $160bn and ranks among the biggest tech companies in the world. If IBM is to continue growing, current CEO Virginia Rometty might do well to take a leaf out of Gerstner’s book.

Ford

In 2006, American car-maker Ford reported a loss of $12.7bn – the worst annual loss seen since its founding over a century before – as more than 10 years of struggle came to a dramatic climax. In the fourth quarter alone it lost a staggering $5.7bn (with North America particularly badly hit) as the firm felt the effects of shifting consumer trends, tough competition, problems over quality and a damaged, non-collaborative culture. Roll on a few years and Ford has brought out a number of hit products, witnessed the recovery of its stock and posted six straight years of profit, with a predicted $8.5-$9.5bn now set for this year.

$7.2bn

Annual profit in 2013

The man behind what became one of the biggest turnarounds ever was then-CEO Alan Mulally. New to the industry, he’d rescued Boeing from the dismal state into which it had been plunged post-9/11 and was in a position to breathe fresh air into the ailing auto firm.

He and the rest of the team set the ball rolling for the ‘One Ford’ programme, raising an impressive $23.6bn by mortgaging the majority of its assets in order to fund the ambitious turnaround plans. The aerospace veteran overhauled the company from the inside out. He believed the key to building a successful business lay in supporting staff, encouraging optimism and helping them envisage the firm’s overall goals. “Positive leadership – conveying the idea that there is always a way forward – is so important, because that is what you are here for, to figure out how to move the organisation forward”, he later told McKinsey. “Critical to doing that is reinforcing the idea that everyone is included… when people feel accountable and included, it is more fun.”

Senior employees had been accused of denying accountability; Mulally set about organising weekly meetings where executives would answer his questions and get more involved with the company as a whole. Quality of the vehicles was suffering; he accelerated product development and aligned them more with consumer needs. Ford’s finances had taken a battering; he oversaw restructuring plans and (eventually) brought the firm back into the black.

The strategy didn’t pay off immediately; in 2008 Ford posted losses of $14.6bn, topping its 2006 low, after being dealt an almighty blow by the financial crisis. But in 2009 the car-maker achieved its first annual profit in four years ($2.7bn), while the likes of Chrysler and GM struggled to stay afloat. In 2010 that more than doubled to $6.6bn – its highest in a decade – before growing further to $7.2bn in 2013. Mulally had worked his magic.

For him, honesty and integrity were at the heart of the turnaround. “A big part of leadership is being authentic to who you are”, he told McKinsey. He demonstrated the importance of internal cohesiveness, positive company culture and a can-do attitude, setting an inspiring precedent for businesses both within the car industry and beyond.

Qantas

Last August, Australian flag-carrier Qantas reported its biggest ever loss – $2.8bn for the 2014 financial year – following a devastating period in which it announced it was making 5,000 job cuts as part of a $2bn cost-cutting programme set for completion in 2017. The airline was dying a painful death on the back of fierce competition and sky-high fuel prices, and had been refused a bailout by the Australian government. “We are facing some of the toughest conditions Qantas has ever seen”, CEO Alan Joyce declared at the time.

$206m

After tax profits H2 2014

Then this February, just a year after it first declared the drastic plans, Qantas announced it had achieved after-tax profits totalling $206m (with an underlying pre-tax profit of $367m) for the second half of 2014.

Joyce had hauled the company up from the red in the space of just one year, achieving profitability in every operating sector for the period – including its international segment, which was in the black for the first time since the financial crisis struck. Joyce put the success down to the company’s four-year Qantas transformation programme – whose impact had started to show substantially more quickly than most had anticipated.

Under the programme, the company set about making the planned layoffs, pledged to freeze the pay packets of its employees for 18 months, and cut Joyce’s pay by 40 percent. The strategy started to bear fruit, with Qantas achieving savings of $374m in the first half of 2014 alone.

Where the company goes from here remains to be seen, but ‘The Flying Kangaroo’ appears to have turned a corner at a time when other national carriers are struggling to stay afloat as they battle with budget carriers and other pressures – as most notably demonstrated by the recent collapse of Cyprus Airways.

Alibaba set to take over the world

Posted on May 5, 2015 by Ashton Wenborn

The three main websites of Alibaba are Taobao, Tmall and Alibaba.com, and they dominate the online shopping market in China with an 80 percent share, collectively handling more business than any other e-commerce firm. But it doesn’t stop there for the Hong Kong-based firm, as the ambitious founder, Jack Ma, would have the business stretching far further afield.

Alibaba’s rapid expansion over a relatively short period has been a phenomenal success and a testament to Ma’s perseverance. There have been occasional setbacks along the way, some significant, but this has not stopped the group’s expansion; with the-sky’s-the-limit aspirations, a tactical strategy and growing diversification, the world appears to be Alibaba’s oyster.

David vs. Goliath
Ma’s pioneering plans to bring the internet revolution to his home nation began in 1995 with the country’s first internet firm, China Pages. At the time it was still too early to get the government and public on board with an internet company, and so the project was destined to fail. While working in the government’s e-commerce division, Ma gave the dream another go. In 1999, the online business marketplace Alibaba.com was launched from his apartment with the help of 17 friends.

The dynamic entrepreneur set off on domestic tours to persuade businesses to use the internet – this time around the environment was a little more open to what he had to offer. By October of that year, Ma had successfully raised $20m in funding from SoftBank and $5m from Goldman Sachs. “In the early 1990s, there were no markets to efficiently match both sides [buyers and sellers], other than annual trade shows. Alibaba’s online platform appeared at the right time and filled the void”, says Dr Chiang Jeongwen, Professor at China Europe International Business School.

Alibaba in numbers: Annual active buyers 2013-14, Millions

231 December

255 March

279 June

307 September

333 December

Source: Reuters

After five turbulent years Alibaba officially began earning revenue, but then came the biggest battle in the group’s history to date – defeating eBay, which at the time ruled the industry in China with an 85 percent share of the market. Alibaba launched its consumer-to-consumer sales site, Taobao, and Ma declared war, announcing that sellers could list their goods for free for three years and even had his team don army gear in an orchestrated stunt for free publicity.

“eBay is a shark in the ocean. We are a crocodile in the Yangtze River. If we fight in the ocean, we will lose. But if we fight in the river, we will win”, Ma famously said at the time. Although Alibaba was the underdog in terms of resources, Ma knew the market far better than his US counterpart. The website was made more appealing to Chinese users and a softer approach was implemented in order to gain consumer trust.

It worked, and by 2005, Alibaba and eBay had equal market shares. “Alibaba cultivated Chinese consumers’ online purchasing habits. Before the emerging of Taobao, Chinese consumers seldom shopped online”, says Ivy Jiang, China-based Research Analyst at Mintel. In an indication of his epic aspirations, overtaking the biggest competitor was simply not enough; Ma announced another three-year period for free services, forcing eBay to exit the market completely.

Supporting growth
Years later, Ma’s ambitions have magnified. In 2014, Alibaba.com partnered with the San Francisco-based peer-to-peer financing company Lending Club, to provide an e-credit line that allows buyers in the US to apply for funding of $5,000 to $300,000. In line with Ma’s global ambitions, the service is also due to expand to other markets. As well as capital, the e-credit line provides trade assurance, which allows refunds for purchases that are received late or are different from the online description.

This is an important feature that was implemented as a result of criticism for facilitating the sale of counterfeit products. “Recent fake product issues have caused its stock price [to drop] like a rock, which angered shareholders and promoted multiple lawsuits”, says Dr Jeongwen. In another concerted effort to clamp down on the issue and squash rumours of its dealings with counterfeit traders, last year Alibaba purged around 90 million suspicious listings from its sites.

With the intention of augmenting its already commanding domestic presence, Alibaba is also bolstering its logistical framework in China, particularly in small villages and isolated areas. In order to achieve this operational feat, last year Alibaba formed a partnership with China Post, the world’s largest postal network.

New storage facilities, processing centres and delivery outputs will be established for mutual use, while the two colossal organisations are also collaborating on business ventures, e-commerce, finance and information security.

In addition, China Post is due to open around 100,000 service points, which will provide delivery and pick up services for both buyers and sellers. “People there have less pressure from high housing prices and tight work schedules compared with those who live in mega-cities in China, so the consumption power in lower-tier cites cannot be underestimated”, said Ma at the signing ceremony.

By reaching all corners of a population boasting 1.35 billion potential customers, there is still room for unprecedented growth. Last December, the group invested $240m in a Haier Electronics subsidiary that has an extensive network of warehouses and distribution sites in 2,800 counties, as well as over 17,000 service points. “China will see the emergence of online platforms that can handle transactions of more than 10 trillion yuan ($1.6trn) a year. We need to make sure that the development of a logistics system in China can support the surging development of e-commerce”, Ma said during his speech.

Threat to the West
As the eBay vs. Alibaba battle illustrated, the home advantage often wins; as such, an in-depth knowledge of the market and consumer behaviour is invaluable, particularly as trends continue to evolve. “The success of Alibaba is attributed to its understanding of the local market and consumer needs, as Alibaba is associated with the attribute, ‘relevant to me’ by Chinese consumers”, says Jiang.

Mobile active users 2013-14, Millions

136 December

163 March

188 June

217 September

265 December

Source: Reuters

The online market therefore seems impenetrable to Western firms attempting to weigh in on the growing action (see Fig. 1). Furthermore, China’s push for greater internet balkanisation, in which the internet is splintered into smaller closed nation networks, could be the final nail in the coffin for Western tech companies looking to expand in the East.

Ma is also boosting the group’s presence in Western markets, with a particular focus on the US market. When Alibaba was listed on the New York Stock Exchange late last year, the announcement captivated Wall Street – at $25bn, it was the largest tech IPO of all time.

Investors saw this as an opportunity not merely to invest in the biggest online marketplace in the world, but to invest in Jack Ma – the man who made it happen against all odds. The group offers the US market something unique; a chance to reach out to every trader in China, no matter the size. The variety of products on sale, as well as their competitive prices, makes Alibaba an enviable platform.

The group is also broadening its portfolio and enhancing its overseas business with investments in US companies, such as the messaging and free-calling app, Tango, and the mobile-app transportation network, Lyft. “Alibaba can invest or buy companies just like Apple or Google. In that sense, they compete against each other for those companies wanted by all of them”, says Dr Jeongwen.

In this respect, the size and therefore level of manoeuvrability that the group is capable of is astounding. If this pattern continues, Western tech companies may soon find themselves overshadowed by Alibaba’s global network.

Potential pitfalls
It is important to note that Alibaba’s previous endeavour to go public in 2007 was unsuccessful; Alibaba.com lasted on the Hong Kong Stock Exchange for just five years before the company bought back its shares. This setback highlights the vulnerability of the firm to slowing growth, and its fallibility despite its size.

In addition, even those who dominate the market face competition, and this is also true for Alibaba. Namely, domestic rival JD.com has recently gained traction in the market and is also targeting lower-city penetration, having teamed up with more than 10,000 convenience stores across western and central China.

There are various other challenges that also exist for Alibaba, particularly in terms of its plans to expand further into new markets and industries. “They can duplicate this model only in developing countries like Indonesia or India. They would not have a chance in the developed countries like US where law and order is much [more] strict”, says Dr Jeongwen. The regulations for business in China compared with the West are markedly different, making China-based companies vulnerable to inconsistencies that are not relevant in the domestic market.

For this reason it is vital for the group to ‘over-disclose’ everything – complete transparency will keep it from pitfalls and misunderstandings – and so is key when operating in foreign markets. The business recently suffered such a setback, when in March Taiwanese authorities announced that Alibaba had to exit the market after discovering that the firm was listed as a Singaporean company. Although this is currently a small market for the group, the move is a slippery slope within the international arena.

Competitors may very well look for opportunities to force the corporation out of various markets. Having the right staff on board can eliminate such risks; internal auditors, accounting personnel and an apt risk management team can help to avoid major errors, which are bound to happen given the company’s rate of growth.

There still exists an unprecedented scope for expansion for Alibaba Group. Indications of continued growth are rife, from recent investments into new industries, to creating the infrastructure for full market penetration in China, and opening revenue outlets in untapped markets. Tactical approaches and dubious manoeuvres have been used before, thereby illustrating a Machiavellian approach to business, which could be used to reach even greater heights for the company.

Considering the group’s history so far, it’s clear that Ma’s ambitions are not to be underestimated. Alibaba’s astonishing success shows the potential for Chinese entrepreneurship; Western firms do indeed have reason to fear the group’s continued expansion and, as such, better suit up for battle.

Energy poverty stifles sub-Saharan Africa’s economic development

Posted on May 3, 2015April 27, 2015 by Ashton Wenborn

‘#PowerAlert’ featured prominently on Eskom’s Twitter feed on February 25, as South Africa’s number one utility reminded the Twitterverse that a planned power cut was scheduled for later that night.

Beginning in March 2014, the country has struggled to keep its lights on at all hours, leaving state-run Eskom with no option but to resort to ‘load shedding’: a process whereby the company must impose a programme of power cuts to preserve frankly inadequate supplies. “We’ll keep you updated with regard to any changes. Please continue to use electricity sparingly”, read the firm’s Twitter feed.

The situation, wherein persistent power outages are blighting an already beleaguered economy, bears a certain likeness with that of late 2007-early 2008, when stagnant supplies, coupled with heightened demand, inflicted billions of dollars in lost business on the country. And with the question of when the blackouts might end still very much up in the air, implicated parties are growing increasingly concerned that this same uncertain forecast could drag on for months, if not years yet.

Expansive action
Speaking to Eskom, the company is quick to flaunt its capacity expansion programme, “to ensure the secure and reliable supply of electricity”, and long-term plans to deliver an additional 11,126MW of extra capacity before 2020, “which will help to address the current constraints on the power system”, according to a company spokesperson. Also taking into account that the Medupi and Kusile plants are scheduled to begin commercial operations in the second half of 2015 and 2016 respectively, alongside a Department of Energy commitment to phase in independent renewables producers, and it’s clear that Eskom is not standing idly by.

Eskom: #PowerAlert tweets

#PowerAlert: We regret to announce that stage 2 #load_shedding will be implemented from 10:00 to 22:00 today
The probability of #load_shedding is medium to high today dependent on the performance of the power plant
We urge SA to become part of the solution by making a concerted effort to reduce their energy usage thus limit the severity of load shedding

Millions are forced to live without electricity for as much as 12 hours at a time, meaning that retail, tourism and – most serious of all – SMEs are struggling, and mounting pressure on the rand and a series of downward revisions have done little to lift the mood. Across the country, traffic has piled up, restaurants have stopped taking bookings, and larger companies are complaining that the disruption to their assembly lines could cost them precious business abroad.

Nowhere else has this pressure been more keenly felt than at Eskom, and considering it is responsible for some 95 percent of the nation’s electricity, any setback for the utility is a setback for the population at large. Ageing power stations are ill-equipped to feed the power-hungry population, and a backlog of maintenance works is restraining an already-stretched supply. Whatever the company is doing now to keep the lights on, it’s not enough.

Still, the electricity crisis in South Africa represents only one part of a much broader problem, namely that too many sub-Saharan African nations are without the capacity to support energy demand. And in choosing to focus on exports and immediate GDP growth ahead of economic development in the long-term, host nations are effectively condemning large swathes of the population to poverty.

The provision of modern energy services – defined as household access to electricity and clean cooking facilities – is seen by many as the bedrock on which an acceptable standard of living is built. Without it, affected communities could well find it difficult to access either health or education, and, ultimately, free themselves from the shackles of poverty. In recent times, the spotlight in the energy sector has fallen on climate change, and though curbing emissions is of inestimable importance for the global economy, the focus has detracted somewhat from the larger issue of energy poverty.

“Energy is fundamental to poverty reduction and [a] critical enabler of development”, writes Kandeh Yumkella, CEO of the Sustainable Energy For All initiative in the 2014 edition of the Poor People’s Energy Outlook. “It supports people as they seek a whole range of development benefits; from cleaner, safer homes; lives of greater dignity and less drudgery; to better livelihoods and better quality health and education.”

Studies show that over 1.3 billion people have no access to electricity, whereas more than three billion depend on harmful fuels for cooking. Worse still is that progress on this point will be muted, should policymakers resort to anything short of decisive and game-changing action. One scenario set out by the IEA projects that while 1.7 billion more will gain access to electricity from now until 2030, almost one billion people will still be without it, and 2.5 billion people without access to clean cooking facilities.

Sub-Saharan Africa
Of the areas hardest hit by energy poverty, developing Asia and sub-Saharan Africa are way out in front, and collectively play host to 95 percent of the total population living without electricity. This is despite a healthy contribution to the planet’s crude oil and natural gas production, and an abundance of natural resources to their name, which in itself raises all sorts of questions with regards to management, integration and investment.

“Energy poverty matters for the same reason that poverty matters – we have a duty to ensure that those less well-off then ourselves have access to a good standard of living and equal opportunities”, says Richard Bridle, an energy analyst with the IISD’s Global Subsidies Initiative. “Energy plays a big role in this: from mass communications to the refrigeration of vaccines. We don’t usually talk about how the global economy will benefit because that isn’t the key motivation, though economic growth will certainly benefit if we enhance health, education, clean water, sanitation, heating, transport, cooking and communication services.”

Focusing only on sub-Saharan Africa, where the issue of energy poverty is most pronounced, there is a clear divide between the extent of indigenous resources and the electrification rate. Nigeria, for example, is endowed with a plentiful supply of natural resources, not least crude oil (see Fig. 1), natural gas and coal, yet millions of households do not have reliable access to electricity.

The Demographic and Health Survey, published last year by the National Population Commission showed that 56 percent of Nigerian households had safe access to electricity in 2013, only marginally more than the much-criticised 50 percent rate in 2008.

Looking also at the lack of access in rural and urban areas, 66 and 16 percent respectively, what’s clear is that large segments of society are not benefiting from the nation’s rich reserves. However, Nigeria is by no means the exception to the rule, and the twin issues of mismanagement and lack of investment are very much the norm for so many more nations in the region.

In Tanzania, drought has severely handicapped the country’s hydropower capacity and left its population wanting, and according to a recent Solar Aid report, a colossal 85 percent of households are without access to electricity, whereas 77 percent rely on kerosene to light their homes. The same can be said for Mozambique, where a mining boom has brought little in the way of meaningful reductions to poverty.

“Energy poverty has certainly contributed to the slow development progress witnessed in many sub-Saharan African countries”, says Bridle. “There is the cost of traditional biomass fuels: they are time-consuming to collect, taking up time that children and women could put to better use, and the cause of serious respiratory diseases. Then there is the opportunity cost of not having access to modern energy: electricity opens up opportunities for education, entrepreneurship, food and healthcare that can lead to tremendous improvements in standard of living.”

Obstacles to traditional power
The main issues that are preventing the continent’s lower earners from accessing electricity are similar in nature to those inhibiting development at large – with conservative estimates placing the loss at two-to-five percent of GDP per year. While a focus on exports might bring GDP growth in the immediate term, doing so means neglecting the underlying social and economic issues at hand. “A better functioning energy sector is vital to ensuring that the citizens of sub-Saharan Africa can fulfil their aspirations”, says the IEA Executive Director, Maria van der Hoeven, in the Africa Energy Outlook. “The energy sector is acting as a brake on development, but this can be overcome and the benefits of success are huge.”

Whereas 99 percent of North African households have access to electricity, two of every three sub-Saharan African households – that’s 585 million people – do not (see Fig. 2). With 30 percent of all schools and health centres also lacking reliable access to electricity, the energy deficiencies mean more than lost business opportunities, and go so far as to actively handicap social development. True, GDP growth is far and above that in Europe or the US, but an unwillingness to pass resource-derived revenues onto the wider population or reinvest them in infrastructure will do little to lift millions out of poverty.

“A lack of infrastructure is certainly a factor in energy poverty”, says Bridle. “For example, a lack of access to electricity grids can lock-in communities to higher cost energy sources such as kerosene lighting and diesel generators. But why is there insufficient investment in infrastructure? Because infrastructure can only be deployed and operated in a financially sustainable electricity sector that can recover costs, make investments, provide reliable electricity and meet social and environmental obligations. So, really, it is the lack of a viable electricity sector that is the key gap.”

The IEA estimates that in order to provide universal access to electricity by 2030, an additional $602bn in funding is needed, or $30bn per year. Of the total, 64 percent must come from sub-Saharan Africa, which goes some way towards better understanding the scale of the task at hand. And inasmuch as the vast majority of the shortage lies in rural and often-remote locations, connecting these same underserved communities to the grid can prove costly.

For this reason, the focus has fallen less on the grid and more on standalone sustainable solutions, of which sub-Saharan Africa has in abundance. “It is increasingly clear that in some areas distributed renewable energy generation may offer a lower-cost model than infrastructure-heavy conventional energy generation. Many policy-makers are struggling to catch up with this reality and develop new structures for driving investment into decentralised energy”, says Bridle.

For those seeking a new energy frontier, sub-Saharan Africa is still a peripheral candidate, yet investors are slowly beginning to recognise the region’s rich potential. One World Bank report from 2008 showed that sub-Saharan Africa could tack another 170GW of additional capacity – twice what it was then – onto its total, merely by pursuing 3,200 low-carbon energy projects.

Endowed with widespread solar, wind and hydro potential, investors need only take a chance on the region, and, according to the IEA, an additional $450bn investment in renewables could halve blackouts and satisfy 45 percent of sub-Saharan Africa’s energy demands. For example, only 0.3 percent of the sunlight that falls on the Sahara could supply all of Europe’s energy needs, and this is without the geopolitical risks that accompany rival resources such as oil and gas.

Although the progress made so far on this front is modest, there are a number of notable instances that prove momentum is building, albeit slowly. Africa’s first privately funded and developed geothermal plant in Naivasha, Kenya is scheduled to come online in the near future, whereas a giant 155MW PV power plant will increase Ghana’s generating capacity by six percent when it enters into operation later this year. Add to that the DRC’s 40,000MW Grand Inga dam and Ethiopia’s 120MW Ashegoda wind farm, and it’s evident that efforts to boost Africa’s renewable infrastructure are both ambitious and varied in scope.

It’s important that policymakers do not cling onto renewables as their sole saving grace, however, and reduced emissions, while important, should be seen as secondary only to the goal of universal access. The focus so far has fallen largely on converting natural resource-derived revenues into GDP growth, though in order for the region to realise its economic potential, governments must distribute these gains more evenly and, in doing so, eradicate the corrosive issue that is energy poverty.

A worker at the Camden Power Station in Ermelo, Mpumalanga

The quest for status

Posted on May 1, 2015May 6, 2015 by Ashton Wenborn

“Over 99 percent of all the new income generated goes to the top one percent.” This is how Bernie Sanders, an independent senator from Vermont, began his assault on the issue of income inequality during a speech he delivered at the Brooking’s Institute earlier this year. He continued his tirade, providing examples designed to communicate the severity and scale of the rich-poor divide. He explained how the top 25 hedge managers made more than $24bn in 2013 and that this figure is equivalent to the full salaries of over 425,000 public school teachers, posing the question: “Is that really what our country should be about?”

Some political commentators will contend that Sanders is only using such powerful rhetoric because he knows that it resonates with voters, with many people thinking and hoping that the senator will throw his hat in the ring for the 2016 presidential race. But regardless of his intentions, the man from Vermont still puts forward some ideas worth pondering – mainly, if it is morally, socially and economically justifiable to continue to live in such an unequal world.

Justifying inequality
In the 1960s, the late Peter Drucker warned that CEO-to-worker pay should not exceed a ratio larger than 20:1, as it would increase employee resentment and lead to a decrease in overall morale among ordinary workers. The French economist, Thomas Piketty, in his book Capital in the Twenty-First Century, coined the term ‘meritocratic extremism’, which he used to describe the doctrine that extravagant pay – which now far exceeds what Drucker advised – is justified by the merit of performance.

Imagine if everyone in every office across the land was aware of what other people in his or her role were being paid

But in Will Hutton’s book, How Good We Can Be, the British political economist contends that the huge salaries afforded to CEOs, “have almost nothing to do with carefully calibrated performance and everything to do with the attempts of CEOs and boards to keep up with each other in a status race substantially influenced by social and psychological rather than economic concerns”.

Hutton’s theory is supported by a letter the American business magnate Warren Buffett sent to shareholders back in 2005 in an attempt to explain to them how the compensation process really works: “Huge severance payments, lavish perks and outsized payments for ho-hum performance often occur because comp committees have become slaves to comparative data. The drill is simple: three or so directors – not chosen by chance – are bombarded for a few hours before a board meeting with pay statistics that perpetually ratchet upwards.

“Additionally, the committee is told about new perks that other managers are receiving. In this manner, outlandish ‘goodies’ are showered upon CEOs simply because of a corporate version of the argument many have used with children: ‘But, Mom, all the other kids have one.’ When comp committees follow this ‘logic,’ yesterday’s most egregious excess becomes today’s baseline.”

The letter exemplifies that the disparity in income between the rich and poor is not determined by purely economic factors. Instead, it suggests that income inequality, and inequality more generally, has much more to do with man’s quest for status, than any economic imperative.

Interestingly, another factor pushing the pay packets of CEOs continually skyward is the constant media reports like this one about c-suite remuneration. “Rather than suppressing the executive perks”, says the behavioural psychologist Dan Ariely, “the publicity [has] CEOs in America comparing their pay with that of everyone else”.

Imagine if everyone in every office across the land was aware of what other people in his or her role were being paid. Employees would be in and out of the HR office asking for raise on a daily basis. This is effectively the impact that the media has on executive pay, with every story published about the extortionate bonus dished out to one executive or lavish perk bestowed on another all adding up to make each example of excess ‘today’s baseline’.

Closing the gap
Looking at how executive super-salaries are calculated, it seems difficult to justify the massive disparity that is CEO-to-worker pay. But even without this information, most people tend to agree that c-suite executives are paid too much, according to research carried out by Soropop Kiatpongsan and Michael Norton.

In their report, How Much (More) Should CEOs Make? A Universal Desire for More Equal Pay, it shows that ideal pay gaps between skilled and unskilled workers are significantly smaller than estimated pay gaps, and that there is a strong consensus among those surveyed regardless of their nationality, socioeconomic status, or political beliefs.

Bernie Sanders, an independent US senator, is against pay inequality

“Moreover, data from 16 countries reveals that people dramatically underestimate actual pay inequality”, write the authors of the report. “In the US – where underestimation was particularly pronounced – the actual pay ratio of CEOs to unskilled workers – 354:1 – far exceeded the estimated ratio – 30:1 – which in turn far exceeded the ideal ratio of 7:1.”

According to the data, an ordinary worker in the US would take home $1,838,975 if pay were adjusted to the ideal. This figure is obviously too high for an average worker’s salary. But if it is possible to acknowledge that this rate of pay is extortionate, even when it is the result of what citizens deem ideal (7:1), then naturally, it must be acknowledged that the actual (354:1), which sees CEOs take home $12,259,894 as equally exorbitant.

The disparity in CEO-to-worker pay in the US is clearly out of kilter with what ordinary Americans deem acceptable. But what is arguably worse is that these huge severance packages are a huge waste of company money. In his book, Economyths, the Canadian writer and mathematician David Orrell explains that while having a good CEO at the helm contributes to the success of a company, it is less critical than their salaries suggest: “The success of a company is best seen as the emergent result of factors such as the state of the market, the contributions of all employees, the internal company culture, and so on.

“A summary of the empirical evidence from the International Labour Organisation concluded that CEO compensation has ‘only very moderate, if any, effects’ […] Moreover, large country variations exist, with some countries displaying virtually no relation between performance-pay and company profits.”

In countries like Japan, where the actual CEO-to-worker pay is much less (67:1) than in the US, the lower disparity appears to have no impact on how well companies in Japan operate. In fact, the smaller gap in pay may even be a benefit for the company. For example, when Japan Airlines (JAL) fell on hard times back in 2009, its then CEO, Haruka Nishimatsu, cut all of his corporate perks and slashed his income to around $90,000 (less than the average take home pay of one of the airlines pilots), so that he could avoid downsizing employees or cutting into their pay packets – a concept that many Americans would say is inconceivable back home.

Politicians and businessmen like to say that ‘we are all in this together’, but that can seem hard to believe for the ordinary worker who is underpaid and overworked, especially when all the while their bosses already extortionate severance packets rise year-on-year. Drucker warned that exceeding a 20:1 pay gap had the potential to increase employee resentment and lead to a decrease in overall morale among ordinary workers. If he was right, imagine the damage a gap of 354:1 is doing to worker morale now. But an ever-widening gap between the top and the bottom is not just harmful for morale within companies. The wage growth has declined in recent years (see Fig. 1), and more unequal pay across the board can, and is, having a profound effect on how people feel within wider society.

Dealing with inadequacy
According to a report by the World Health Organisation, “there is overwhelming evidence that inequality is a key cause of stress, and also exacerbates the stress of coping with material deprivation. The adverse impact of stress is greater in societies where greater inequality exists and where some people feel worse off than others. We will have to face up to the fact that individual and collective mental health and wellbeing will depend on reducing the gap between rich and poor.”

There are many different definitions of poverty. Absolute poverty is defined by a deprivation in basic human needs, characterised by a lack of access to safe drinking water, food, sanitation facilities, and shelter. Relative poverty, however, is defined by the level of income or resources an individual has in relation to the average in a specific society. It is concerned with the absence of the material needs to participate fully in accepted daily life.

Many, like writer Tim Worstall, have argued that the majority of Americans do not fall under the definition of absolute poverty. Instead, those who consider themselves poor tend to fall under the European definition of relative poverty, which looks at the wider issues and impact of social isolation, which arises as people get further and further from the median.

In their book The Spirit Level, Richard Wilkinson and Kate Pickett discuss how inequality is correlated to wider issues such as mental and physical health problems, drug addiction, crime rates, poor performance in school, rates of teenage pregnancy, as well as a host of others.

Jane Hetherington, a UKCP registered psychotherapist, has worked with individuals on both sides of the rich-poor divide and believes that rising rates of inequality, along with western societies’ obsession with consumerism, creates a huge stress for many people.

Warren Buffett, who supports Hutton’s theory of compensation

“Only last night I saw someone who is employed and takes home an income within the national average (£26,500), but she regarded herself as poor because her children […] want this, they want that, but she cannot afford it”, says Hetherington. “As far as she is concerned she is in relative poverty, and that puts a huge psychological pressure on parents when they are unable to meet these expectations.”

Hetherington argues that as a result of what people see on television or view online, it all adds to help create a particular lifestyle expectation that revolves heavily around possessions. This worldview, along with the widening gap between the haves and the have less is leaving many on both sides of the rich-poor divide feeling empty.

“A while back I used to have a small private practice situated in Harley Street, so I saw people at totally the opposite end of the spectrum then”, says Hetherington. “I saw investment bankers and the like, and the feelings that they expressed were all very similar to those at the bottom. There seems to be a deep dissatisfaction with life, a void that the individual appears unable to fill. In the past there was a level of spiritual fulfillment coupled with lower expectations, but now, many appear to be suffering from existential crisis.”

Perhaps then, this deep satisfaction may not be completely down to rising inequality. There are those, like the billionaire Jeff Greene, who argue that the fault lies with people’s unrealistic expectations of life. “America’s lifestyle expectations are far too high and need to be adjusted so we have less things and a smaller, better existence”, Greene said in an interview at the World Economic Forum in Davos, Switzerland. While he may have a point, his sentiments on how the middle and working class should redefine their living standards are a bit rich considering he flew into the event in a private jet.

Superior status
For Greene to feel comfortable telling struggling American families to tighten their belts while he sips champagne highlights the core cause of income inequality – a crisis of morality, not economics. People are happy to draw a line in the sand for what is an acceptable level of poverty, but no such line exists to define when enough is enough. Greene is right about Americans needing to redefine their priorities, but he is forgetting to factor himself into the equation.

“It’s obviously a characteristic of human beings that we like to feel superior to others”, writes the playwright and actor, Wallace Shawn in his book Essays. “But our problem is that we’re not superior.” In the chapter titled ‘The Quest for Superiority’, Shawn ponders why it is that when dining in an expensive restaurant he and the other guests prefer waiters to refrain from engaging in conversation.

“We like the sensation of being served by others and feeling superior to them, but if we’re forced to get to know the people who serve us, we quickly see that they’re in fact just like us […] then we become uncomfortable – uncomfortable and scared, because if we can see that we’re just the same, well, they might too, and if they did, they might become terribly, terribly angry, because why should they be serving us?”

A little inequality never hurt anyone. Many economists agree that it is essential in order to create wealth and provide incentive, but there are also those who warn that too much can threaten the stability of not just the economic system, but society at large. Nobody really wants a revolution. If it were allowed to happen there would be no rich-poor divide, only chaos. It is clear that income inequality is not an economic imperative, but rather a quest for status – one that, if pursued to the extreme, has the power to divide and destroy from within.

The UK chews over landing spot for airport developments

Posted on May 1, 2015 by Ashton Wenborn

This year will prove pivotal for the UK’s long-term economic prospects. After May’s General Election, a highly anticipated – and delayed – report into Britain’s airport capacity will be published. Depending on the supposedly binding outcome, London and the south-east of Britain will finally make headway in an area that has been neglected by subsequent governments for generations.

In the report, put together by economist and former Financial Services Authority Chairman Sir Howard Davies, a decision will be made on expanding the airport capacity of the UK. It comes at a time when air travel has reached breaking point in London’s numerous airports, with severe delays and overcrowding hitting Heathrow and Gatwick repeatedly over the last few years.

Airport capacity in the south-east of Britain has been at breaking point for a number of years now

However, the choice on offer to the British government is between two distinctly different types of airport. One, an expansion of Heathrow, would represent an embracing of the hub airport model that has been favoured by many cities and countries over the last two decades, allowing international travellers easy and quick transfers within a single airport. The second option, expanding Gatwick, would be an approach that favoured a number of smaller regional airports, encouraging transferring passengers to pass through London on the way.

Breaking point
Airport capacity in the south-east of Britain has been verging on an ultimatum for a number of years now. London has long served as the gateway between the US and Europe, as well as destinations into Asia. Heathrow Airport, London’s biggest, is the busiest airport in Europe, with around 73 million passengers passing through its terminals each year (see Fig. 1). And yet, Heathrow has been woefully overcrowded and operating at near full capacity for a decade, while Gatwick has also faced challenges in handling the number of passengers arriving. Other regional airports like Stansted and Luton may be popular with short-haul, budget airlines, but are not capable of serving the lucrative Asian and American markets.

The issue of a hub airport in the south-east of England has been debated for many years. A decision had previously been made to build a third runway at Heathrow by the last Labour government. However, this was ultimately scrapped by the coalition government in 2010 after years of vociferous campaigning by local residents determined not to have even more planes flying above them, creating even more noise.

Passengers queue at the busy check-in desks at Heathrow

In a report published in 2009, the British Chambers of Commerce laid out its arguments for such an airport. Then director general David Frost said in the report that air travel was vital for the UK economy. “As an island nation, the ability to move people and goods effectively and quickly to and from these shores is of vital importance to British business. As a trading nation we rely on our ability to connect with the rest of the world. Many of the industries in which we are globally competitive, such as electronics, pharmaceuticals, biotechnology, insurance and telecommunications, are dependent on aviation. No other form of transport can match aviation in its speed, efficiency and global reach. Airports are gateways to the world, vital for business activity, family and leisure travel.”

Hub hubbub
Hub airports have risen to prominence over the last few decades because of the way they cut back on the amount of unnecessary and costly flights between smaller destinations. Instead of airlines offering services to a series of small airports, a main hub airport is used as a central point at which all flights travel to. It is predominately advantageous to airlines that want to keep costs down and remain profitable, but this can often be passed on to a passenger through more frequent services to the hub, rather than occasional flights between smaller airports.

Hub airports also allow for more flights to more destinations, offering travellers a wider breadth of potential trips. It also allows the economy where that hub airport is based to benefit from increased global access, not just in business but also through airfreight. While some travellers might not even leave the airport, passing through the departure lounges and buying goods will also bring money into the local economy.

The increasing competition between airports has meant them offering attractive incentives to airlines to base their operations at a particular destination. In Europe, British Airways mostly flies from Heathrow, Lufthansa from Frankfurt, and KLM from Schiphol in Amsterdam. Other regions have similar arrangements, such as Emirates basing its operations at Dubai and Malaysia Airlines at Kuala Lumpur International Airport.

Hub airports have proven popular across Europe and Asia, with many large new airports being constructed over the last few decades and others gaining considerable expansion. In Europe, Heathrow is starting to see its position as the busiest airport challenged by some of its continental rivals.

Charles de Gaulle Airport in Paris is the second busiest in Europe, with just over 63 million passengers last year. With four runways, it has plenty of capacity and is able to receive flights 24 hours a day. Germany’s Frankfurt Airport is the third busiest in Europe with 58 million passengers in 2014.

One of the newest airports in Europe to seize a huge amount of air traffic is Amsterdam’s Schiphol. It is the fifth busiest airport in terms of passengers in Europe, but is set to capture more business thanks to its six runways and ideal location. It is seen as London’s biggest challenger as a hub destination, offering good connections between the US, the rest of Europe and Asia. With KLM based there and Delta Air Lines using it as its European hub, it is emerging as one of the most important destinations on the continent. As with Charles de Gaulle and Frankfurt, it is capable of receiving flights all day and night.

On the other hand, one city that used to be the focal point for most air travel in Europe has seen it decline as a destination because of its lack of investment in a hub airport. Before the Second World War, Berlin acted as the main European hub airport, offering more flights to destinations than any other. These included long-haul services, and it turned Berlin into one of the most important cities in the world. After the war and with the city split in two, its status dramatically declined.

As the British Chambers of Commerce pointed out in its report, Berlin has fallen behind other German rivals because of its lack of a hub airport, despite its history as a central European destination for air travel: “With the reunification of Germany in 1989, Berlin was expected once again to become a leading world city. However, it was in the unusual position of having three airports. Lufthansa resumed services to Berlin, operating up to 74 flights daily to European destinations, as well as long-haul routes, such as New York and Tokyo. But the fractured nature of services across three airports meant that transfers often required a cross-city journey, so passenger numbers on major routes were lower than expected. Major carriers pulled out, including Lufthansa who chose Munich and Frankfurt as their hubs, over the capital.”

The consequence of the lack of a single hub has been that rival cities have taken over as the main connecting destination for long-haul flights, while Berlin has had largely cheaper short-haul services. This has led to the city falling behind rivals in its economic growth. “With a lack of major network carriers Berlin has become a key centre for low cost airlines which provide short-haul services with little interlining. In the 20 years since reunification Berlin has not become the world city that many expected and its place on the world aviation network has been fairly peripheral. Academic research has suggested a key reason for this has been the lack of large hub airport for city”, reads the British Chambers of Commerce report.

The city did finally start building a new airport – the Berlin Brandenburg Airport – after decades of delays. However, it has been beset with funding problems and, despite originally being scheduled to open in 2010, is said to still be two years away from completion.

Regional rivals
While there are clear advantages to hub airports – mostly for airlines – there is debate over how much impact they have on domestic economies. While people passing through a terminal on their way to a connecting flight elsewhere may spend some money, it is negligible compared to what they would spend were they to spend some time in the city before travelling on.

Construction underway on the delayed Berlin Brandenburg Airport

For all the trumpeting of the economic benefits of a hub airport, the cost and upheaval to communities of actually building one may outweigh any financial advantages. Those against argue for smaller, regional airports that are connected by surface transport links.

Proponents of a more regional approach to airport expansion point to the benefits it would have for the cities the smaller airports surround. By forcing connecting travellers to pass through the city, it encourages them to spend some time and therefore paying more into the economy.

In the UK, Gatwick is one of the larger airports, yet it only has a single runway. Were it to be granted an additional runway, it would match Heathrow’s two runways. Some supporters of expanding Gatwick say it should be connected to Heathrow by a high-speed rail link, creating a hub airport without favouring one over the other. Other smaller airports, like Stansted and Luton, have so far failed to attract demand at the same level as their larger counterparts, but new rail links built connecting them all may prove more attractive.

In the US, some states have adopted a more regional approach. New York has three main airports that serve a range of destinations. John F Kennedy primarily serves international flights, while LaGuardia is more for domestic services. Newark International, in neighbouring New Jersey, combines both domestic and international. This means New York often acts as the focal point for people passing through the eastern coast of America and onto destinations in Europe and beyond.

Regulation control
Conditions for smaller airports have got harder over the last few years as airlines shift their operations to larger hubs. Whereas smaller airports had enjoyed a wave of business thanks to the advent of budget air travel, they are now facing a challenge from hub airports and traditional mainstream carriers. In Europe, airlines like Lufthansa and British Airways have sought to recapture much of the business they lost over the last two decades by slashing costs and offering cheaper flights. This has meant that their traditional bases – Europe’s larger hub airports – are proving more attractive to travellers than their cheaper, smaller rivals. In order to match these cheaper flights, budget airlines like Ryanair and Easyjet have started to move their operations to the easy access hubs.

London Mayor Boris Johnson, who has appealed for a new UK hub airport

Speaking to Reuters last year, Tanja Wielgoss, a partner at analysts AT Kearney, said that the shift represented a considerable challenge for smaller airports. “At first, people were prepared to travel (to smaller, often remote airports) because fares were so much cheaper, but now the cost of flying from large airports has come down. It’s always been hard for smaller airports, but now it’s even harder.”

With many of these smaller airports propped up by state financing, pressure is mounting on governments to discard their holdings in order to save money. Last year, the European Commission announced that it would cease to allow state aid to EU airports that serve more than five million passengers each year. Aid for smaller airports would also be phased out over a 10-year period.

The impact of this ruling could be that many smaller airports are forced to close. Albeit, this is not necessarily what customers want, says Doerte Nordbeck, an analyst at research company GfK. He told Reuters, “If you take out Frankfurt and Dusseldorf, then around 60 percent of holiday traffic in Germany goes via smaller airports. There is a trend to move flights to larger airports but that’s driven by the airlines rather than by what customers want.”

On the horizon
For the UK, the advantages of a hub airport have been touted by many businessmen and politicians, but the decision over where to put it continues to be hugely contentious. London’s Mayor, Boris Johnson, has long campaigned for a new hub airport. However, instead of expanding the existing hub at Heathrow, Johnson has been passionate about his desire for a new four-runway airport in the Thames Estuary, off the coast of east London. Completely altering the location of the UK’s largest airport would take a huge amount of work – and money – and has therefore been rejected by the Davies Commission as being impractical. Johnson has continued to push for it to be considered regardless, and has maintained his staunch opposition to a third runway at Heathrow.

Writing in an article in The Daily Telegraph in October, Johnson said: “Studies by the Greater London Authority and Transport for London have concluded that a new hub in the east would have a sensational and beneficial effect on the UK economy – creating 222,000 jobs for Londoners in the Thames Gateway, and supporting 336,000 jobs across the country as a whole.

“By 2050 the airport would be contributing £92.1bn [$136.5bn] per year to the UK economy – far more than Heathrow; a point the Davies Commission has already acknowledged. You would have a four-runway, 24-hour service and at last Britain would be able to stop our rivals eating our lunch. Finally we could re-connect London, by air, with other cities around the UK who have been seeing a steady reduction in services.”

An aerial view of the proposed hub airport in the Thames Estuary, London

Certainly London needs to expand its airport capacity if it is to compete with the likes of Schiphol and Paris, but air travel trends could be changing towards more regional approaches. It will inevitably come down to what passengers want and which countries want to entice them into spending more time in their stop-over cities and contributing more to the economy.

The rise and rise of Jorge Paulo Lemann

Posted on May 1, 2015February 23, 2017 by Ashton Wenborn

Born in Rio de Janeiro to a Swiss father, Jorge Paulo Lemann grew up to become a business class hero in Brazil and to have a career that spans the dreams of multiple lifetimes. Lemann’s $26.3bn net worth is self-made, and it seems there is more to come. His growing fortune has recently overtaken that of oil tycoon Eike Batista in the rich list by Forbes Brasil, while his long-term business partners, Marcel Herrmann Telles and Carlos Alberto Sicupira, are also climbing their way up the rankings. The formidable trio, known as ‘The Three Musketeers’ in Brazil, have transformed the face of business culture in the country.

Despite efforts by the media-shy and notoriously secretive Lemann, his investment firm, 3G Capital, is now receiving greater attention in the western hemisphere due to its recent high-profile acquisitions. Yet he is still under the radar, relatively speaking. Outside of the financial world, how many people know that Lemann owns household-names Budweiser and Burger King? Or that he owns Heinz in a joint venture with the world-renowned entrepreneur Warren Buffett? At 75, Lemann is not slowing his global aspirations, with many speculating that corporations such as Kraft, Campbell’s Soup or even PepsiCo could join his remarkable investment portfolio.

Born to be great
Signs of greatness were evident even from Lemann’s early days; he was accepted to Harvard in 1958 to study economics, a rare feat for a young Brazilian at the time. According to the book Dream Big, which tells the story behind the success of The Three Musketeers, because Lemann didn’t enjoy his Harvard days, he successfully completed the course in three years instead of the Ivy League college’s intended four. Lemann’s fearlessness in business stems from his time at Harvard, but surprisingly he learned a lifelong lesson when surfing in a dangerous storm while back home on vacation, as opposed to in the classroom studying.

Brazil’s rich list

1. Jorge Paulo Lemann
Net worth: $25bn
Industry: Various

2. Joseph Safra
Net worth: 17.3bn
Industry: Banking

3. Marcel Herrmann Telles
Net worth: 13bn
Industry: Various

4. Carlos Alberto Sicupira
Net worth: $11.3bn
Industry: Various

5. João Roberto Marinho
Net worth: $8.2bn
Industry: Media

During a rare speech in 2011 at an event organised by Lemann’s scholarship organisation, Fundação Estudar, Lehmann spoke of this metamorphic experience to a group of dazzled Brazilian students: “I took the wave and felt the blood go to my feet. It was a lot faster than I was used to, and a lot taller, but I went for it, and I managed to get out before it crashed. My adrenaline was at the maximum. I thought back to that wave I surfed in Copacabana far more than I thought about the things I learned in college. It gave me a certain self-confidence when it came to taking risks.” This boldness and risk-taking would be the backdrop to Lemann’s subsequent success.

Lemann’s passion for sports has remained an important part of his life. But, more than just a mere spectator, the billionaire was once an avid tennis player and even ventured into a professional career. In his youth, he became five-time national champion and via his dual citizenship, represented both Brazil and Switzerland in the Davis Cup. It was after competing at Wimbledon that Lemann stopped pursuing his tennis ambitions. In another decision that speaks volumes for his levels of determination, he moved onto another career path in which he could become the best in the world.

Following his brief tennis fame, Lemann stepped into a world that he would one day dominate: finance. Another impressive entry to his varied curriculum vitae was Lemann’s foray as a business journalist for one of Brazil’s oldest newspapers, Jornal do Brasil, while training at Credit Suisse. After a series of short-term roles came a critical point in Lemann’s astounding career when he founded Banco Garantia in 1971. It is commonly known in Brazil that Lemann envisaged the bank to be the country’s answer to Goldman Sachs, and took many lessons from its business ethics and operating systems.

Throughout its duration of almost three decades, Garantia became one of the largest investment firms in Brazil, and gained a legendary reputation. Lemann and his two partners, Telles and Sicupira, completely transformed the business and banking world in Brazil. “What they did is equivalent to a modern Industrial Revolution, and I call it an Entrepreneurial Revolution!” says Vandyck Silveira, CEO, of the FT | IE Corporate Learning Alliance. “In Brazil we can talk about banking in two great eras, BL [Before Lemann] and AL [After Lemann], this is the impact they had and continue having – even after Garantia went bankrupt and was sold.”

Leader of a revolution
Lemann had pioneered a new culture based on meritocracy that was revolutionary in Brazil at the time. Open-plan offices, a ban on collectibles in the workplace, cutting company perks and slashing big pay cheques served to bring the old pillars of hierarchy and elitism crashing down. Rather than giving shares as annual bonuses, Lemann offered the best performers the opportunity to purchase shares with their bonus. “Lemann is a genius because he brought to Brazil a very powerful management model and style that is 100 percent focused on meritocracy and on talent”, says Silveira.

And it wasn’t the senior staff members that were awarded with bonuses, but the top achievers. Beyond that, this new business style also cut costs in a way that was unprecedented, “The culture that he put in all his companies is an obsession to increase the profit margin… that was new in Brazil, because in Latin America, very often [the] labour cost is not that high, so the search for efficiency comes from cheap labour costs. There was no focus on productivity until he installed this tremendous focus on [it]”, says Professor Lourdes Casanova, Senior Lecturer of management at Cornell University.

As explained in Dream Big, winning the opportunity to work at Garantia was a feat in itself and an unenviable task for ambitious young Brazilian men. Candidates were interviewed by an intimidating panel of eight to 10 partners who would ask inappropriate questions to catch candidates off guard. Lemann chose to hire those whom he believed could become partners and fulfilled an interesting criteria: “Back in Garantia, people used to say that Jorge Paulo looked for PSDs – Poor, Smart, Deep desire to get rich people. Until these days he and his partners get involved in that. Recruiting is not a HR task in their companies – it’s something that all the leadership has to get involved with”, Dream Big’s author, Cristiane Correa, tells World Finance. Sicupira was the best example of a ‘PSD’ candidate, joining the bank at 17.

The idea of imitating well-established business models was a signature style of Lemann and his partners. His former associate Luiz Cezar Fernandes was sent to undertake an internship at Goldman Sachs in order to learn more about how the investment bank worked from the inside. The learning curve didn’t stop there. Following the acquisition of ailing retail chain Lojas Americanas, Sicupira sent letters to the CEOs of the world’s best companies – asking to pay a visit. After a personal invitation from none other than Sam Walton, Lemann and Sicupira travelled to Oklahoma – the home of Walmart. The lessons they learnt from the world’s biggest retailer were then used to revive Lojas Americanas.

Despite its incredible success, things at Garantia started to turn sour following the Asian financial crisis; the investment firm was subsequently sold to Credit Suisse in 1998 for $675m. It was a huge blow for Lemann to lose the firm that he had built from the ground up. “The failure [had] much more to do [with] unbridled ambition and a certain lack of control. ‘It was said – the kid is making money and is talented, and this led to some abuses and a certain arrogance’.

“However, Lemann and his partners understood this and have corrected the route at other companies such as Imbev, GP Partners, Heinz, and Burger King”, says Silveira. The period was a trying time for Lemann. In 1999, an attempt was made to kidnap his children on their route to school. What is telling about the incident is Lemann’s cool collectiveness and unfazed focus; his children still attended school that day and Lemann was only a little late to the office. The potential abduction did, however, prompt the family to move to Switzerland; now Lemann splits his time between the two countries, as well as the US.

Investment strategy
It was also in 1999 that The Three Musketeers created AmBev, a conglomerate of the breweries they had collected so far, which had started with Brahma in 1989. AmBev was a pivotal point in Lemann’s career, not only because it was a precursor of future acquisitions, but also because this is where he firmly established his roots in the investment world and his innovative leadership style in Brazil. “There is a business magazine, Exame, [which] looked at 60 years of history in Brazil, [and] Brazilians voted for AmBev as the company that they admired the most. The company changed – not only the beer industry – but changed the business culture in Brazil”, says Casanova.

For example, instead of repeating annual budgets, each year managers would have to start at zero and make the case once again for all of their expenditure. In 2004, AmBev amalgamated with Belgian counterpart, InterBrew, for $11bn to become Ambev IB. Another noteworthy merger with Anheuser-Busch turned the firm into Anheuser-Busch InBev, making it the largest brewery company in the world. With a quarter of the world’s market share, the company owns global brands such as Budweiser, Corona, Stella Artois, Beck’s, Hoegaarden and Leffe, as well as a series of leading local brands.

Again in 1999, 3G Capital was created. What makes 3G different from other venture capitalist firms is the way in which it raises funding for large buy-outs. Whereas other organisations tend to acquire investment from multiple parties, Lemann keeps to a close-knit circle of super-rich families. By approaching the wealthy elite in the US, Europe and Latin America, Lemann is in better stead to keep upcoming deals under wraps. Besides, despite being relatively unknown in the wider world, Lemann is renowned among the financial elite for his innate ability to make money.

Investors in 3G include the Santo Domingo family of Colombia and the Reimann family of Germany. Fellow tennis fanatic and world champion Roger Federer, and fund manager William Ackman, are also part of Lemann’s international dream team. The company’s buy-and-hold approach is different to competitors in the industry, but gives greater scope for the profit-boosting that Lemann has become known for.

After Lemann and Buffett met on the Gillette board, 3G and Berkshire Hathaway joined forces in 2013 to buy Heinz in the fourth-biggest food and beverage acquisition of all time. Buffett speaks very highly of his business associate; such is his trust in Lemann that 3G solely runs Heinz, despite Buffett owning the majority share. “I’ve always liked him, and the more we do together, the more I like him”, Buffett told The Wall Street Journal.

The recent example of Burger King, which 3G bought for $3.3bn in 2010, further exemplifies the success of the ‘Lemann touch’. Trusted colleague Bernando Hees was put in charge, but Hees’ move from railways to burgers was no concern – it’s the style that works. The new CEO wasted no time in axing 600 office employees and replacing 11 senior roles with Burger King’s top performing staff. Again, in Garantia fashion, the office walls were demolished to create an open-plan working environment in order to promote better communication, while also sticking to the cost-cutting ethos – even colour photocopies were banned.

Furthermore, by re-establishing the franchise model, 3G was able to shift 28,000 employees from Burger King’s balance books. This meant that the costly refurbishment of branches was passed onto the franchisee, but with incentivising loans for them to do so.

The right model
Although there is less fat to trim from Heinz than there was from Burger King, faith in Lemann’s ability appears to be unwavering. “I think Lemann’s recipe can work in any company or any size or any nationality, I would bet he pulls this though at Heinz”, says Silveira. Lemann’s approach seems to work with any type of business, while trial – and some error – through the years has seen it improve with age.

With his focus now spreading throughout the globe, particularly in the US, Lemann does not appear to be slowing down – quite the opposite. This can be attributed not only to his entrepreneurship, but also due to the current economic climate in Brazil, which has seen the devaluation of investments due to a depreciation of the real. “Brazil right now is in a difficult moment”, says Casanova. “Of course the US is coming out of the crisis quite strong, with a much more favoured currency and a path for growth. My opinion is that Lemann is trying to diversify his risk and looking at investments in the US as well.” It seems that as Lemann makes bigger waves outside of his native Brazil, he is slowly becoming a more recognisable figure in finance.

Home furnishings industry suffers as millenials move in with mum and dad

Posted on May 1, 2015April 27, 2015 by Ashton Wenborn

Home improvement, decorating and DIY were once all the rage in the US and beyond. The mid-20th century brought with it a craze for wacky wallpaper and do-it-yourself shelf jobs, as American baby-boomers capitalised on new, affordable housing, leaping onto the property ladder without looking down.

Then in the early noughties the home furnishings industry grew yet further, with US retailers witnessing consistent sales growth year after year, according to Euromonitor. But when the financial crisis hit in 2007 the industry was dealt a blow, with consumers cutting back on big purchases and house moves coming to a near halt – meaning fewer people looking to do up their homes. “Home furnishings has been one of the most affected sectors on the back of the housing market and people’s discretionary spend”, says Matthew Walton, home and DIY analyst at UK-based consultancy Verdict Retail.

In the UK some of the biggest names went under – including TJ Hughes, Woolworths, Homeform group and Focus DIY – while in the US the number of retailers in the sector tumbled 21 percent between 2007 and 2012, according to Business Wire. The industry there also shrunk from $315.3bn to $273.5bn in the space of two years, and sales plummeted 15 percent.

Ikea’s success has stemmed from its focus on stores in China, where the home furnishings industry has boomed over recent years on the back of a surge in the number of homeowners

Housing slump
Given the fact the housing market was one of the recession’s biggest victims, it’s little surprise home retailers have found themselves struggling. “People weren’t really moving house, which is such a big stimulus in the market”, says Walton. “Discretionary spend was under pressure so people were prioritising things like clothing, food and so on.”

Now that the housing market is recovering, many predict a revival for the furnishings industry. But the figures suggest a variety of obstacles are still holding it back. In the UK it grew just 0.7 percent in 2013, according to the Home Furnishings 2014 report, despite house purchases being bolstered that year after the UK Government introduced its Help to Buy scheme. In the US sales grew eight percent between 2009 and 2012, according to Euromonitor, but the industry is still struggling to reach its pre-recession highs. In France, meanwhile, sales from the home improvement market fell in the third quarter of 2014 by around three percent, according to Banc de France, with Brico Depot, Castorama and Kingfisher sales all taking a hit.

Keynote projected growth of just 1.9 percent between 2014 and 2018 for the UK, as the market is forecast to continue feeling the strain of economic circumstances, a decline in popularity of certain home goods and, importantly, an increase in the number of people renting. “The number of UK consumers that are renting accommodation remains extremely high, which is not conducive to a healthy home furnishings market”, wrote the research firm.

Indeed the number of renters soared by around 6.2 million in the US between 2007 and 2013, according to Zillow – while the number of homeowners rose by a comparatively measly 208,000, as house prices and unemployment soared. More people renting means lower demand for expensive furniture and decorating products, with clauses usually ruling out overhauling the interior design, as Walton recognises. “There’s a restriction as to how much people renting can actually do”, he says. With so much renting going on, it’s little wonder retailers have been suffering.

Deep-rooted culture shift
It’s not just the surge in renting that’s dealing a blow to home improvement retailers; as widely noted, millennials, nicknamed the ‘boomerang’ crowd, are, on average, living with their parents for longer than previous generations. In the UK last year, one in four 22- to 30-year-olds said they were still living at home, while in the US the figure was even higher at 31 percent (up from 27 percent before the crisis), according to a report by Warren Shoulberg, Editorial Director of Home and Textiles Today.

As with renting, house prices and lack of money are partly behind the trend; according to data by the Federal Reserve Bank, student debt is one of the key reasons millennials aren’t purchasing as many homes, cars and other big products as their predecessors, and Managing Editor of Interest.com Mike Sante agrees: “Millennials, in particular, are struggling to overcome their student loans and save enough money for a down payment”, he said in a statement.

Like renting, that limits the need for furniture shopping and DIY jobs – and it’s happening on a huge scale, with 2.3 million fewer new households in the US than there would have been if millennials had followed the buying trends of former generations, according to Shoulberg. Walton agrees it’s having a notable effect: “I think [this trend] is definitely impacting home furnishings because people aren’t looking to buy if they aren’t moving house.”

If this trend were solely a result of economic influences holding Generation Y back from jumping on the property ladder, home furnishings and DIY retailers would likely make a full recovery (in line with that of the housing market). But the figures, at least in the UK, have already suggested that this is not the case. What’s arguably even more powerful than the financial driver, therefore, is an apparent cultural shift – a fundamental change in attitude that’s driving what Jason Dorsey of Generational Kinetics calls “delayed adulthood” – and which might prove harder to overcome. “[Millennials] are entering into many adult decisions later than ever before”, Dorsey told Yahoo! Finance.

Indeed, Generation Y are starting families later than their parents did (for a woman in the UK the average age is 30, up from 26 in the 1970s). That’s little surprise given that more people are going to university and so joining the career ladder at a later date. “There used to be an order in life: finish your education, go find a job, buy a house”, Sandy Thompson of Young and Rubicam advertising agency told Faw. “This generation really mixes it up.” Taking longer to grow up and settle down, means feeling ready to buy a house at a later stage than previous generations. Industries relying on that move are likely to feel the effects for some time.

It’s not just home furnishings being affected; millennial lifestyle changes are dealing an even bigger blow to the DIY industry, according to Walton, who says it’s been the slowest sector to recover from the recession. “As a lot of people are staying at home they’re not getting the skills of being able to put up shelves, redecorate and so on”, he says.

He adds that consumers are therefore shifting towards buying DIY services rather than products, and DIY stores are suffering as a result. First-half profits in 2014 for UK retailer Homebase, for example, were below forecasts, and a quarter of its stores are being closed over the next few years to help turn the retailer’s fortune around. A number of other retailers are considering similar steps in reaction to the decline, including rival B&Q.

Adapting for survival
Not all retailers in the sector are struggling; Ikea posted its highest profits to date in the financial year 2013, at £2.7bn ($4.06bn). By offering contemporary products at a reasonable price, the Swedish flat-pack retailer is catering to a growing hunger in the retail industry for good value, and it seems to be working.

Ikea’s success has stemmed from its focus on stores in China, where the home furnishings industry has boomed over recent years on the back of a surge in the number of homeowners. It seems then that if home retailers are to succeed, they would do well to follow in Ikea’s footsteps, capitalising on opportunities in emerging markets, focusing on value for money, and undergoing a fundamental shift to cater to new consumer tastes, demands and trends.

Shoulberg doesn’t believe the millennial change will be a lasting one and argues that the home industry could make a full recovery if Generation Y behaviour doesn’t line up with predictions: “As a Baby Boomer, I remember all the reports about how my generation was going to be different and not get caught up in conspicuous consumption and not adapting the attributes of our parents”, he says. “We turned out to be the most all-consuming generation in the history of mankind. Let’s see what happens to the millennials.”

But this trend towards “delayed adulthood” seems to be the result of fundamental, deeply rooted lifestyle changes, including an apparent preference for flexibility – hence renting over buying, smaller commitments over lifetime ones – that might not be so easily overcome. That cultural change could deal a more permanent blow to the home, DIY and other related industries than the more temporary, recession-induced austerity. Retailers will have to find new ways of capturing those consumers if they are to protect themselves from the unfortunate fate to which a significant number in the industry have already fallen prey.

US unemployment figures could be misleading us all

Posted on May 1, 2015 by Ashton Wenborn

In February, the Bureau of Labour Statistics (BLS) revealed that the unemployment rate in the US had fallen to 5.5 percent, its lowest level since 2008 (see Fig. 1). This is the latest figure in a promising pattern that has been welcomed by the current administration, following seven years of economic slowdown. Although fiscal growth is still sluggish elsewhere around the globe, there has been an upward shift in the US, with positive indications for the coming year.

As noteworthy as this decline in the unemployment rate is, it is hardly telling of the whole story; there are still nine million Americans out of work and the number of discouraged workers is on the rise. Of men aged between 25 and 64, one sixth are currently unemployed, with youth employment a particular problem for the world’s biggest economy. Overall, the labour participation rate remains low, making the improved unemployment figures somewhat misleading.

As is expected, profits are the focus of business – but in a period of slow growth that philosophy comes at the cost of losing talented workers, which in turns leads to greater frictional and long-term unemployment, while also harming the wider economy.

Job creation
With an average of 222,000 jobs added to the payroll each month, 2014 was the best year for job creation in the US since 1999. This year was also off to a good start with 257,000 jobs added in January, rising to 295,000 in February, despite the period typically being the worst for the labour market. One of the main reasons behind the recent easing in the unemployment rate is the retirement of the ‘baby boomers’, which has created a large opening of job vacancies. “There’s a huge generation that delayed their retirements, some of them as a result of the financial crisis, but in the last three years they have been retiring in great numbers”, says Gad Levanon, Managing Director of Economic Outlook and Labour Markets at The Conference Board.

59.3%

US employment population ratio

222,000

US jobs created each month on average in 2014

Yet not all the reasons behind greater job creation are positive; a notable example is labour productivity, which remains unusually slow. According to the BLS, from around two to three percent a decade ago, it is now growing by less than one percent. As the US’ GDP has begun to grow at an accelerated pace, employers are hiring more staff in order to increase production and meet rising demand. “The low-hanging fruit of replacing workers with technology and equipment already took place 10, 15 years ago, and now moving forward, it’s harder to do more of that very fast”, says Levanon. This is further reinforced by less dynamism in the US economy, illustrated by the fall in the number of start-up companies; together with a disappointing level of investment in technology and equipment, innovation and productivity have suffered as a result.

Moreover, the majority of the newly created posts are for low paying roles in the services industries, particularly in restaurants and drinking establishments, as well as retail. Therefore, the large majority rely on tips, along with a meagre pay of $2.13 per hour – hardly a fitting wage for workers in the world’s largest economy. On a social level, low paying wages seldom provide sufficient means for individuals to cover their basic living costs. Part-time employment also contributes to the rate of employment, but again, these hours are inadequate to support everyday expenses. “Not all jobs are created equal. Not all of them are full time. Not all of them are well paid. There is likely a lot of underemployment in our labour market that these numbers do not reflect”, says Veronique de Rugy, Senior Research Fellow at George Mason University. It is also worth noting that the BLS is less reliable than the payroll, with a purported error margin of 100,000.

Ignoring the figures that count
Discouraged workers are also excluded from the new and improved unemployment rate; this figure is approximately 770,000 and is on the rise. It is commonly known that the longer individuals are out of work, the more difficult it is to find employment. This is due to the job search naturally being less fervent as time goes on and the increased likelihood that employed candidates will be selected ahead of the unemployed. It’s a vicious cycle, and one that has encouraged those stuck in this loop to exit the workforce altogether. When taking these statistics into consideration, the U6 unemployment figure, which remains at an elevated level of 11.5 percent, gives a more holistic view of the labour market, but is rarely used for obvious reasons.

Another figure that has barely moved is the long-term unemployment rate, (referring to those without work for periods of 27 weeks or more), which remained at around 2.7 million in February (see Fig. 2). This figure is often overlooked, yet accounts for almost a third of the total number of unemployed people in the US. Paying undue attention to this section of the population is dangerous in terms of its potential for further lowering the labour participation rate, because the longer individuals stay in this pool, the more likely it becomes that they will leave the labour market.

According to the Federal Reserve, the underutilisation of labour resources is gradually abating, having declined by 1.1 million. But the labour participation rate is still a disappointing 62.8 percent (see Fig. 3). The employment-population ratio was unchanged at 59.3 percent in February, but is up by 0.5 percent over the year. “Under-employment is one challenge. The other one is the decline in the labour force participation. It wouldn’t be a problem if the reason it was declining is that people are retiring or going to college. However, there is a sense that this decline is due to incentives to stop working to collect benefits such as disability insurance”, says de Rugy. Many economists expected those who had left the labour force to return, but this has not yet been the case. It would seem that there is still a need to encourage people not to leave the workforce in the first place, namely by reducing long-term unemployment.

Then there is frictional unemployment, which has become more complex in recent years and now leads to longer periods of unemployment for individuals in between jobs. Jobs are becoming increasingly niche and competition grows fiercer by the year, thereby making it more difficult for employers and prospective employees to find the right fit. Development in human resources has led to a far more rigorous process for hiring; once again intense competition comes into play. Subsequently, higher paid workers, who are the first to go when a company seeks to boost its profits, face the looming threat of this trap, marking another instance in which viewing figures and not people, continues to exacerbate the issue.

Sluggish wages
Job creation is only one side of the coin; wage growth is also a necessity, yet the former seems to overshadow the latter. Raising the minimum age and encouraging unionisation are mechanisms that can be used to increase wages, yet they are rarely employed. Implementing fairer wage distribution within an organisation is another taboo area, as Aaran Fronda explains in his article Income inequality is a moral, not economic, conundrum.

An unemployed man holds up a sign seeking a job on a street in Washington

In a bid to raise wages in the US, President Obama recently announced a strategy to boost training and employment in high technology, as IT roles pay approximately 50 percent higher than other jobs in the private sector. A statement released by the White House revealed over 500,000 available vacancies and that local governments will be given assistance to train high technology workers in industries such as software development and cyber-security. “Helping more Americans train and connect to these jobs is a key element of the president’s middle-class economics agenda”, White House Deputy Press Secretary, Jennifer Friedman, told Associated Press. Obama’s policy to increase training and hiring for well-paid, high technology jobs is certainly good for the sector, yet this is a very niche market requiring educated employees, and so by no means is it an inclusive field.

If greater support were shown also for low and medium technology industries, such newly created jobs could reach more levels of society. Additionally, more individuals in high-technology roles could result in greater frictional unemployment. Yet the holistic approach does exist and should be employed to a greater degree, such as Obama urging businesses to sell more goods and services to the rest of the world, as exporters tend to pay their workers higher wages. Despite its slow pace, Levanon believes that the labour market is beginning to tighten, “If you look by ages, one of the reasons why wages were held back is because you had this very large pool of young workers who had very high unemployment rates and were willing to work for very low salaries – but we are seeing a recovery.”

In a significant move by the world’s largest retailer and the US’ biggest employer, Walmart announced that it would raise its minimum wage in 2016 to at least $9 per hour, which is around $1.75 above the federal minimum wage. This is a huge step for the organisation in terms of raising the living conditions of its mammoth labour force. This seems to be part of a wider trend by several state governments and private enterprises, such as Gap, Starbucks and TJX. As Matt Timms discusses on page 120, this decision should not have been left to the employer or local authorities to make; the move could have been legislated by the federal government years ago. Yet, again, the sanctity of a business’ profits comes before the good of its greatest asset – despite the economic benefits.

Profits over talent
Even with the decline in the unemployment rate, ruthless job cuts continue. “I suspect the economy is still not very strong while the uncertainty due to the large regulations which are in the works [Obamacare and Dodd Frank, among others] give an incentive to firms to prepare for rougher days ahead”, says de Rugy. In January, American Express announced 4,000 job cuts from its labour force, eBay revealed plans to reduce its workforce by seven percent, equating to 2,400 roles, and Dreamworks will also axe 15 percent of its personnel – to name just a few. These cuts can be attributed to revenue not climbing fast enough for shareholders, despite all three firms experiencing rising profits in Q4 2014. Skilled workers have become a commodity, a go-to means of cutting costs and boosting profit margins, and while this focus on profits instead of people may appease shareholders, it is damaging for the labour market and the wider economy. Highly experienced and skilled workers have to resort either to unemployment or badly paid jobs, which in turn reduces the pace of the nation’s technological advancement.

Furthermore, drastic job losses are expected within the oil sector as a result of the downward trend in oil prices. Until the price drop, the sector was experiencing significant job growth; according to the BLS, the oil and gas industry accounted for 201,000 new jobs in November 2014, a 21.9 percent increase from 156,900 in the same month five years prior. The cuts have already begun in great numbers; Harburton axed 6,500 jobs, Schlumberger announced plans to let go of 9,000 staff members and Baker Hughes has cut 7,000 jobs from its payroll. BHP Billiton will be reducing its domestic rig operations by about 40 percent this year, while Shell also plans to sever its planned capital investment over the next three years by $15bn; giving more reason for insecurity within the industry.

Resumes placed in a basket at a ‘Job Hunter’s Boot Camp’ in California

According to a report carried out by Challenger, Gray & Christmas, 103,620 job cuts were announced within the energy sector through January and February – an increase of 19 percent from the same period last year. “Oil exploration and extraction companies, as well as the companies that supply them, are definitely feeling the impact of the lowest oil prices since 2009. These companies, while reluctant to completely shutter operations, are being forced to trim payrolls to contain costs”, CEO John Challenger said in the report.

Again, this highlights a tendency to prioritise profits over retaining talent. When the shale boom first started, there was a demand for skilled personnel, scientists, engineers, analysts and so on. But they were the first to go when profits began to dip, to the possible detriment of future growth within the sector. Of course, oil companies can just hire more staff, but there could be a scenario one day in which the brimming pool of skilled workers may no longer exist – either because such individuals have left the labour force or newcomers have decided not to choose such a precarious field to work in.

Real growth
Job growth has largely been driven by SMEs, therefore government-backed initiatives for supporting such businesses are vital for promoting sustainable growth in the labour market. Large corporations, on the other hand, will always have to answer to the beck and call of shareholders, and, in this respect, are handicapped by the profit margin demon. A company’s talent is the core of its business in any sector, but when this is sacrificed for short term gains, the long-term effects on the industry, and the economy as a whole, are immeasurable.

Far more focus is required by the current administration to reduce the levels of youth unemployment. To neglect the chances for future generations to earn a decent wage, or even one at all, is to neglect the future of the economy. Young entrepreneurs in the US are responsible for some of the largest organisations and most innovative breakthroughs in recent years, which illustrates just how much can be achieved by a young person with a good education. Take Mark Zuckerberg, founder of Facebook, Evan Spiegel, founder of Snapchat, and Drew Houston, founder of Dropbox; all attended Ivy League schools.

There needs to be a revolution in what truly drives the labour participation rate up and the unemployment figures down – not just improving the figures that look good on paper, but the whole scenario. If this were to happen, although it may be costly to businesses in the short term, it will bring other economic drivers such as productivity and innovation, which can promote growth in the long term – to an unprecedented degree. Obama’s middle income economy strategy can be achieved, but it asks that the whole population participate. Looking at all the figures would be an excellent place to start – when this is the case, the focus can fall on the problem areas and not only on improving figures that are misleading in the first place.