Our Economic Future: Driving Innovation Through Better Public Policy

Melbourne skyline at night (2007)

The following are the notes I pulled together for the first panel in ADC‘s Future Summit on Monday September 28th.

The major opportunity for Australia is to find and exploit new production systems and consumption models that are cheaper, simpler and more “digital” than the highly entailed product-creating systems that are the legacy of the previous industrial era. We also need to see this as socially driven change, rather than a technologically driven change.

Two quick examples of this in action.

First: cars.

There’s a lot of talk at the moment around self driving and electric cars. Tesla has built an expensive but unprofitable electric car on the back of over USD 4 billion of government grants, while Mercedes, Google et al are out there with prototypes for self-driving cars that look like a technoutopian’s fevered dream.

In the case of Tesla, on the production side, the firm is better thought as the ultimate expression of an industry structure established roughly 100 years ago by Henry Ford; but it might not be an exemplar of how we will build cars in the future. A better example of where car manufacturing might go is iStream by Gordon Murray Design in the UK. iStream is a new production process, one based on established and well understood technology, but which removes 80% of the cost from the factory, slashing the cost of cars in the process. The production process Ford, Toyota et al are using needs 150k cars from a single model to be profitable, which means that Austrlia was lucky to have an old skool car industry for as long as we did. iStream is profitable on 12,000 cars, and would be commercial viable in Australia.

On the consumption side, viewing self-driving cars simply as autonomous versions of manually operated cars ignores changes in consumption patterns where consumers are preferring to consume many products as (value-added) services (think Spotify et al). The car equivalent is Flexicar or GoGet (car-by-the-hour).

If we put the two of these together it’s possible to imagine a new public transport model based on cheap and flexible, locally built and supported, autonomous cars. Some of the cars might be contributed by the government. Some by private operators (Flexicar et al). Some might be from individuals who are contributing their cars to the common pool when they don’t need them (during the week when they work, or when on holidays) via something like Uber.

Second, a local example: the transformation of the  building industry.

Building mid-rise buildings—office blocks, hotels, apartment buildings, &c.—is currently a craft-based process. Design a building, create holding company, buy land, put together consortium, get funding from bank(s), and then go onsite and incrementally add value to the land by hammering in nails, pouring cement, running wires etc. There’s a lot of talk about new technologies “disrupting” building, such as 3D printing. This is unlikely. Buildings are complex structures with many interwoven parts. You might be able to 3D print a wall, but you still need to integrate the services, render it &c. While these new technology might make elements of the process more efficient, they’re incremental improvement at best.

Enter Unitised Building (UB), based in Melbourne. UB have created a new production process that enables them to build a mid-rise building in a fraction of the time at less than half the cost. A good example is 3:East, built in 11 days. UB takes a complete 3D model of the building—including services &c.—and uses digital tools to split the building into a number of units (the model has been “unitised”). A second layer of digital tools takes that unit models and splits out the files required by CNC machines. The units are built in a factory and then transported to the site where they are lifted into place (one every 8 minutes) and snapped together. The only requirement is that you need a crane on-site, which, practically, means that the UB approach is dramatically faster and cheaper once you hit 3 floors (and need a crane regardless).

What UB have done is create a new process that moves the complexity of building from the physical world to the digital world. Indeed, their CNC requirements are quite light and they need few machines, so their factory (in Brooklyn, in Melbourne) has a very small footprint by manufacturing standards. They’re even exporting by finding contract manufacturing facilities overseas and transmitting the digital files to the CNC machines in the remote factory.

Creating these sorts of system changes has a couple of problems.

First, the old industry / sector structures we use to frame regulation and government support make no sense in this new world, as these new solutions span industry sector boundaries and have different requirements. (Supporting manufacturing, for example, has traditionally been a question of ensuring that the manufacturers have lots of land, but the new generation coming through don’t need much land, while they do need access to lots of network bandwidth.) This miss-match between the demands of the new and how government frames public policy makes it difficult for the two to engage.

In the case of UB, two of their challenges have been getting the banks to fund buildings when the current building risk model (based on incremental value creation on-site and quantity surveying) doesn’t match their building process, and the challenge of accessing government support when they don’t fit in any particular sector/industry (Are they a builder? Or a manufacturer?). These new firms span sectors / industries, deliver products as services, and do a bunch of other things that don’t fit with the old industry models. If we’re to frame policy and regulation for the future then we need to set aside the old industry/sector-based view of the world. Fundamentally, we need to stop muddling through as incrementalism won’t fix this problem. There are signs of change though, such as UB winning this year’s “Victorian Large Manufacturer of the Year” award.

Second, we need to acknowledge the these innovations are not the result of light-bulb moments or heroic individuals—they’re the product of trial-and-error and collaboration. By definition, they’re a social process. There’s a tendency—particularly among the technology crowd—to frame the debate in terms of technological determinism. Or, put another way, futurism has a technological blindspot. Just because we invented nuclear reactors doesn’t mean that we’ll have one in every home, or every car. No technology has ever survive contact with society intact.

We need to acknowledge that while the shape of society will change in response to technology (just look at what the modern smart phone is doing to our sense of identity!), society will, in turn, shape the technology it adopts (note that many people now find phone calls rude as they interrupt the recipient, whereas messaging is async).

The current obsession with disruption is a case in point. (And first we must acknowledge that Clayton Christensen’s “disruption theory” is looking less like a theory and more like an interesting idea.) There’s cries that we should let these disruptors usher in the brave new world by allowing them to skirt existing regulation. This assumes that all regulation is bad, or the more nuanced version, that techniques such crowd sourced recommendations are superior to regulation in many instances (why have certification when you can have ratings?) This point of view ignores the fact that regulations are one of the tools we use to encode what we see as the socially acceptable uses of technology. Nuclear power is a really cool technology, but do we want people driving around with small nuclear reactors under their bonnets?

With regard to Uber, and the taxi industry, it’s worthwhile considering the following:

  • allowing taxi licenses to be transferable and limiting their number was probably a mistake, however
  • we provide taxi vouchers to pensioners, partly to to encourage them not to drive, and partly to help them stay mobile and engaged with society: should we compel (i.e. regulate) Uber et al to accept taxi vouchers, or will we allow the death of the taxi industry to disenfranchise these pensioners?
  • Uber separates the payment from the provision of the service, and some parents are using this as an opportunity to give their under 18 (even under 13) kids Uber accounts so that they can get themselves home from school &c. rather than need mum or dad to pick them up: does this mean than we need to compel (i.e. regulate) all Uber drivers to have Working with Children checks?

It’s best to think about three types of policy:

  • Enablers, what do we need to put in place to enable the society we want. One of the biggest boosts to start-ups in Silicon Valley, for example, was Obama Care, as it means that individuals in startups could now access affordable health care. We undervalue policies such as Medicare and HECS as tools to enable as many people in society as possible to engage in the trial-and-error innovation process.
  • Drivers, how can we encourage new developments / ideas that create new value, given that government has a poor record of picking winners? This comes down to how do we use policy support the demand-side to help society to pull in the technology it wants in the way it wants. Admitting that we will regulate driver services, and we will require these services to accept taxi vouchers, and their drivers to have working with children checks, are good examples, as is the policy in Tasmania to provide interest free loans to individuals who want to by bespoke products from makers. Germany’s high feed-in tariffs for solar are another example.
  • Barriers, where do we draw the line? Do we want nuclear reactors in cars? Do we want full-timeAustralian for-hire drivers earning under the minimum wage?

There is a lot of opportunity out there for everyone and Australia, as one of the most voracious adopters or technology in the world, is in a position to capitalise on these opportunities. However, we need to accept that we’re seeing with “digital disruption” is the leading edge of a massive social change, rather than a technological change. The future will not be determined by the disruptors. It will determined by how we, as a society, choose to engage with this change.

Image: Steve Gibson

Posted under: Centre for the Edge

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