Category Archives: Society and the economy

How has technology development changed the nature of society and the economy?

The future of retail: The need for a new trust architecture

Deloitte ran a series of breakfasts recently for the retail community, and they kindly asked C4tE to participate. My contribution, which you can find at Scribd or embedded below, sprang out of our recent report The Future of Exchanging Value: Cryptocurrencies and the trust economy(FoEV) when, during a chance conversation, Robbie (the left-brained person who leads the Spatial team) pointed out that that we were arguing for a new trust architecture in retail.

The nutshell explanation of the idea is:

  • The current retail model is a constructed environment and shopping a learnt experience. This model is a response to the creation of mass market products and supply chains.
  • The model is build on there pillars: customers identifying a need, searching for a solution to the need, and then transacting with a merchant that they may not know or trust. Money – cash – facilitates this, as it enables us to transact with someone we don’t know and may never meet again.
  • However, a number of trends we saw in FoEV suggest that this model might be breaking down. The mid-market dies, consumers seized control of the customer-merchant relationship, peers replaced brands, value is now defined by the consumer rather than the producer, payments are moving away from the till, and shopping is becoming increasingly impulse driven.
  • What will retail look like in a world where need is never fully formed, search is irrelevant, and transactions are seen as distasteful? What is the new trust architecture?

See what you think of the presentation and feel free ping us if you have any thoughts.

The two reports mentioned in the presentation are:

Future of Retail – a New Trust Architecture by Peter Evans-Greenwood

Our Economic Future: Driving Innovation Through Better Public Policy

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

Redefining education

Our latest piece at the Centre for the Edge is out: Redefining education.1)Peter Evans-Greenwood, Peter Williams, Kitty O’Leary (2015) The paradigm shift: Redefining education, Deloitte Australia.

When we did an Australian version of the Shift Index2)The Shift Index in Slides @ PEG we saw that while Australia has a pretty good digital foundation and society seems to be adapting to the shift fairly well, we’re not realising as much value as it could be. Or put another way, while we’re using digital technology to create new knowledge flows, we’re not as proficient at realising their value.

With the Shift Index complete we turned our attention to education, as it seemed logical that education would be the most effective fulcrum to use to improve our performance.

We took the major trends from the Shift Index – the move from stocks to flows, and from push to pull – and, as a bit of a thought experiment, applied them to the education sector to see what we came up with. This resulted in a slide deck The Future of the Education Sector3)The Future of the Education Sector @ PEG and now this report.

The major finding in the report is that our relationship with knowledge is changing, and consequently our relationship with education is changing. The snappy version of this is “Why remember what you can google?”. The longer story has interesting implications for the education sector as by changing what it means to be educated has all sorts of potential knock-on effects for education and educators.

The report is our attempt move the current debate beyond pedagogy and edu-tech, funding and Australia’s ranking on international league tables to consider if our changing relationship to knowledge (the shift from knowledge stocks to knowledge flows, highlighted in the report) is changing the role and purpose of education and (by extension) the education sector.

The report is on Deloitte’s web site, and I’d love to year your throughs.

References   [ + ]

1. Peter Evans-Greenwood, Peter Williams, Kitty O’Leary (2015) The paradigm shift: Redefining education, Deloitte Australia.
2. The Shift Index in Slides @ PEG
3. The Future of the Education Sector @ PEG

The car you just bought is the last car you will ever own

How long until it doesn’t make any sense to own a car? What if you considered a car an accessory for your phone, rather the considering a phone something you plug into your car? With decent smart phone integration (via CarPlay from Apple, and Android Auto) and for-profit car clubs (from ZipCar, FlexCar through Daimler’s Car2Go and BMW’s DriveNow to Hertz on Demand and Avis On Location by Avis) allowing you to only pay for the hours you use, that time might not be too far away.

Cars are status symbols. They’re expensive, typically the single most expensive item that most folk will buy other after a house. Since the around the 1930s your car has also been something of a fashion statement.

The car we buy is an extension of our personality. Agreeable individuals seem to prefer brands like Toyota or Nissan while Peugeot owners are extroverts and Volvo is associated with safety.1)Press release (2013), What Your Car Says About Your Personality, Veryday. Black is the colour of luxury and status, while the owner of a silver or grey car driver doesn’t want to stand out; owner of blue cars want stability, truthfulness and serenity; a brown-car buyer wants value and a long life in their purchase, and doesn’t care about trends or fads; while yellow car owners exude joy and a positive attitude.2)Lora Shinn (2014), What Your Car Color Says About You, Fox Business.

If a car is a status and fashion symbol then why don’t we change our cars when we change our moods? The zippy little commuter (or perhaps the impressive black executive conveyance) for the commute to the office, something fun and red for the weekend, or reliable blue people-mover for ferrying the kids to weekend sport.

The main problem for many folk is that we can only afford to own one (or perhaps two). Having a car for every occasion is just not financially viable. For-profit car clubs are changing that though. At the moment you can pay by the hour for something reliable but boring to get you from point A to point B and back again. What’s to stop the same services from offering something more exiting, or something with a little more room?

Then there’s the problem of carrying your preferences – the selection of radio stations, GPS settings, seat hight and so on that we’re dialled in – from car-to-car. If, however, we think of cars as smartphone (or even smartwatch) accessories, rather than the other way around, then it’s not hard to imagine hopping into the car club car you’ve just picked up and dropping your phone into the dock, only to find the seat hight adjusted, radio stations tuned and a route to your mother’s house out in the suburbs plotted by the time you mange to get the car started.

At this point the only thing tying you to owning a car is the golf clubs that you store in the boot (trunk), and the strange iconic role that buying your first car has in your formative years.

While the baby boomers have a strong attachment to owning a car, this is not true for Gen Y, who are ambivalent about car ownership. Studies have shown that fewer young adults have driver’s licenses, that they hate the traditional car-buying process, and that they prefer urban living and socialising online and consequentially have less need for cars.

Why invest a large chunk of your personal wealth in a single asset that is worth nothing when you finally sell it, when you can access cars on on-demand, picking the car that fits your mood and needs at that particular time, and have the car magically become “yours” when you drop your smartphone into the dock?

This creates an interesting dilemma for the car manufacturers. On one side that have younger cohorts coming through who don’t automatically assume that they need to own a car, and who are consequentially harder to market to. On another side they have the emergence of fractional car ownership: what’s happened to private jets3)NetJets has provided a fractional ownership service for private jets since 1986. and handbags4)You can fractionally own, or rent, depending on your point of view, a designer handbag from services such as Bag Borrow or Steal. is now happening to automobiles. And finally, on the last side, they have new approaches to manufacturing such as iStream5)iStream is a new approach to car manufacturing that reducing the cost of tooling by around 80%, enabling new car models to be profitable in much shorter production runs. that slash the investment required to design and manufacture a car, potentially making all your expensive factories irrelevant overnight.

It’s not hard to imaging a time in the near future where you can have the car you want, when you want, without owning it. While it’s not an option at the moment, it doesn’t look like it’s to far in the future. The car you just bought could well be the last car you ever own.

Image source: Alden Jewell

References   [ + ]

1. Press release (2013), What Your Car Says About Your Personality, Veryday.
2. Lora Shinn (2014), What Your Car Color Says About You, Fox Business.
3. NetJets has provided a fractional ownership service for private jets since 1986.
4. You can fractionally own, or rent, depending on your point of view, a designer handbag from services such as Bag Borrow or Steal.
5. iStream is a new approach to car manufacturing that reducing the cost of tooling by around 80%, enabling new car models to be profitable in much shorter production runs.

90% of sales are in bricks-n-mortar stores, but many are dying anyway

The stats are in and the rush to declare bricks-n-mortar retail dead appear to be a bit premature. While online commerce appears to be growing at a fairly impressive rate (of somewhere around 15% to 20%1)NAB Online Retail Sales Index, depending on where you are) that growth rate is on a very low base. This means that somewhere are 90% of retail sales still occur in a bricks-n-mortar store, and that figure floats up to 95% if you include bricks-n-mortar stores with an online presence.2)Chris Lund (April 2014), “Reports of bricks and mortar’s demise have been greatly exaggerated”, Strategy.

The problem with this point of view is that it ignores that fact that while the future might be here, it’s still unevenly distributed.

At a whole of economy level retail might be growing, and most purchases still occur in a bricks-n-mortar store, but when you dig into the details a different story emerges.3)Winners and losers in retail @ PEG What we’re witnessing is the incremental destruction of small (and some not-so-small) areas of the retail market as consumer behaviour changes and makes them irrelevant.

The first wave of online retail – Web 1.0 as it’s called these days – was moving catalogues online. This enabled consumers, for the first time, to search for what they wanted from the comfort of their own home, rather than need to head out on a shopping mission. This created a distinct change in what consumers purchased, as they could now use the power of Google to find the best product at the best price, or the cheapest product at the lowest price, and make their purchase directly with the retailer (local or online) who offered precisely what they wanted.

This had two interesting effects. The first was the destruction of mid-market brands.

Historically consumers were forced to compromise, their choice limited to what the merchant around the corner chose to stock. Confronted with three options – a cheap option, a middle quality option, and a good option – the consumer was forced to compromise. They would pick the best that they could afford or the cheapest that the merchant chose to offer. Web 1.0 meant that if they they could find something better, possibly at a lower price in another country, then they could would avoid the middle quality option and go directly to the best. Many mid-market brands collapsed as a result.

The second effect was the destruction of many local retailers. Most of these local retailers – the small clothing shop on the high street, or the department store in town – were little more than the end point of someone else’s supply chain. Their value lay in the fact that they were convenient, being close to home. Web 1.0 enabled consumers to reach around these local retailers and source the products themselves. Unable to compete on price, quality or convenience, many local retailers collapsed (or are collapsing).

So while retail might be growing overall, some roles in the retail market are no longer sustainable. Typically this means firms that trade in easily transportable, durable goods, such as books, CDs, video games, clothing, jewellery and the like and offered little more than convenience shopping.

More recently the emergence of social media and smart phones (the information comes to us, rather than us going to the information) means that we no longer rely on brands or firms for the information that drives a buying decision. The tangible effect of this is a dramatic decrease in brand loyalty. Fast food chains have already seen this effect, as everyone from travellers to teens started using recommendation services (Urbanspoon, Yelp, etc.) rather than trusting the brand, and were heading to local bistros rather than the outline of some national or global chain.

This effect is causing consumer facing parts of the market to fragment. This is a second knife in the back for many retailers – such as department stores – as their “sell to everyone” model doesn’t work in a market that’s fragmenting into a range of niches. The firms that are successful in this space are those that use a range of media (face-to-face stores, pop-up stores, social media, mobile apps, web sites…) to build a relationship with the consumer, and/or which are focusing on niches. The balance of power has tipping into the hands of firms that are agile enough to address these niches, “sell to niche” rather than “sell to all”.

So, taking all that together, we can see that 90% of purchases are through physical stores is not surprising. The problem is that:

  1. retail sectors that are moving online will be seeing more the 10% of transaction leaving bricks-n-mortar (let’s assume 20%), which is enough to drive many firms out of business
  2. spend in many sectors is moving to the cheapest and the best, eliminating many local businesses and mid market brands
  3. mobile and social means that many niche firms are now successfully competing with larger firms, causing significant problems for the larger firms

While the top line number might seem quite benign, the terror for many firms is in the details.

Image source: Chris Talbot

References   [ + ]

The Shift Index in Slides

AU Shift Index External Overview (2014, C4tE)

I’ve taken the time to create a summary of the Shift Index as a handful of slides, and dropped the slides into SlideShare.

The question we asked ourselves when pulling the Shift Index together:

The world is changing faster than ever. However, we can only respond to and manage a change if we can measure and understand it. If we want to respond as a community, then we need to find a way to quantify the change. We need to ask ourselves whether the perceived change is real, and if it is, how we can capitalise on it.

is fairly straightforward, but the index is a sprawling beast.

The slides break this down into a few points:

  • Business is more intense.
  • The balance of power is changing
  • Adapt or die

and ties this back to the evidence from the Shift Index.

Setting aside the burdens of the past

The first report from the Australian Centre for the Edge on the Australian Shift Index, Setting aside the burdens of the past: The possibilities of technology-driven change in Australia, has just been published. (Press release here.)

We’ve worked hard on this over the last six months or so and I’m very happy with this report as an introduction to what we’ve done. If you’re interested in how technology is driving change both in business and in society in general, then I highly recommend that you head over and grab yourself a copy. (And if we’re in something like the same neighbourhood I’d love to catch up for a coffee to discuss. Or feel free to leave a comment below.)

The Shift Index was created as a tool to help us understand if the rapid pace and increasing uncertainty we feel in the business and social spheres is real, or if it is just an illusion created by the always-on environment we live. (This is a bit like how nationalised news brings us stories of shootings in other regions leading us to think that crime has increased, when in actual fact crime has been decreasing.)

As we say in the report:

The world is changing faster than ever. However, we can only respond to and manage a change if we can measure and understand it. If we want to respond as a community, then we need to find a way to quantify the change. We need to ask ourselves whether the perceived change is real, and if it is, how we can capitalise on it.

The short answer is that the world is definitely changing and that Australia, Australians and Australian businesses are successfully adapting to the changes. We can’t, however, rest on our laurels as the drivers of change are still present and it doesn’t look like they will dissipate for some time.

The concept behind the Shift Index is that developments in digital infrastructure (computing, storage and networks) is driving increases in information flows, and that these information flows are reconfiguring society by tipping the balance of power from the merchant to the consumer.

The framework we used as our starting point was developed by the US Center for the Edge, founded by John Hagel and John Seely Brown. The US Shift Index was developed in 2009 and has been updated each year since then.

Our goal with the Australian Shift Index was to take the US framework and build a comparable index for Australia, allowing us to take the lessons learned from the US index and translate them to our local context. At the same time, we tailored the index – tweaking or changing some of the metrics used – to create a version that is uniquely Australian and which can provide us with insight into the particular challenges we face here.

The methodology defines three groups of metrics:

  • The Foundation Index measures the price-performance of computing, storage and network technologies, the penetration of these technologies into society, and change in regulation to support the adoption of these technologies. This is the lead indicator in the Shift Index.
  • The Flow Index measures the resulting increase in information flows in terms of virtual flows (mobile phone and internet usage), physical follows (attendance at conferences, business travel, and money transfers) and flow amplifiers (social media and the like).
  • The Impact Index measures the impact of these changes across the Australian market (competitive intensity, labour productivity and stock price volatility), firms (asset profitability and the like) and people (consumer power, brand disloyally, returns to talent, and increased in executive turnover). This is the lag indicator for the Shift Index.

The result is three high-level metrics that quantify the the drivers for the change, the change itself, and it’s impact.

AU2012shiftindex

Image source: Centre for the Edge

There’s ten major findings in the report:

  • Fast adopters: Australians have a good track record for adopting new technology. Our challenge is to continue adapting, and to find opportunities to leverage these technologies within our institutions.
  • Tech-driven change: The permeation of cheap, powerful computing, communications and storage technologies is driving change and will continue to do so into the foreseeable future.
  • Knowledge flows: New technology has resulted in new flows of information at unprecedented volumes.
  • Higher competition: The Australian market has become more competitive as a result of new technology and knowledge flows.
  • Capital over labour: Australia’s focus has shifted away from labour and towards investment in new technologies for more efficient workflows.
  • Knowledge economy: Australia has shifted from an industrial and agricultural economy to a creative, service-based economy.
  • Unrealised potential: There is a big gap between our technological capabilities and the way we currently use technology to solve problems.
  • Economic strength: Australia’s economy is strong and demonstrates better asset profitability than the US.
  • Recession-proof: The global downturn in 2008 was only a pause in our progress and has not halted Australia’s transformation.
  • Future success: Our continued prosperity depends on how well our knowledge workers can find new ways of using technology to solve problems.

These ten findings are only the tip of the iceberg though. While the report answers some interesting questions, or raises even more questions, questions that we intend to delve into further.

Image source: macinate.

It’s time to make the hard decision

Toyota, as you’ve probably heard, is shutting down operations in Australia. This has triggered the expected wave of commentary claiming that this is the end of manufacturing in Australia and that unless the government does something about this industrial relations problem then the entire car manufacturing supply chain (i.e. everything from final assembly back) will collapse with disastrous consequences for the Australian economy.

This point of view is both disingenuous and unhelpful as it ignores the fact that the viability of car manufacturing in Australia is strongly influenced by both economic trends outside our borders and by systemic challenges within the car industry itself. Australia might be an island, but that does not mean that events outside our borders will not affect us. Industrial relations might be part of the challenge, but it’s not the whole story.

Pouring more money into the domestic car manufacturing supply chain may provide short term relief, but it does not address the root cause of the problem.

We need to make the hard decision.

If car manufacturing is to be part of our industrial mix in the longer term then we need to transform the domestic industry, creating a new operating model that enables a stable manufacturing industry in Australia within the global context.

If we cannot create a sustainable car manufacturing industry in Australia, then we should immediately start to transition the resources (people and assets) to new industries that do have a future here.

Simply propping up an industry who time has come will only ever be a short term solution, and one which is a disservice to the generation just entering the workforce.

Capital has won over labour

The global car industry is in trouble. There’s too many factories and not enough people buying cars.

Similar situations are not uncommon in other capital intensive industries. Decades spent automating and streamlining processes has transferred costs from labour to capital. This has been great for customers as it lowers the unit cost of the goods manufactured. The manufacturers, on the other hand, find that their business, or even their entire industry, can all too easily be pushed into a never ending cycle of boom-and-bust. We only need to look to containerisation and the development of the global container network to see these forces in action.

Containerisation transformed the old, manual, approach to shipping into a highly automated and efficient global logistics network. Goods were packed into large metal containers and craned onto and off ships, rather than relying on stevedores to manhandle individual barrels. This resulted in a dramatic reduction in shipping costs and time (somewhere between 60% and 80%), since the majority of the work was in the manual loading and unloading.

However, building a container network required a huge investment. New ships were commissioned, larger ships with complex racks to hold the containers. Fleets of containers were required to carry the goods. Docks also need to be changed from the fingers sticking out of a bank that was suitable for manual loading, to the large container terminals that host huge cranes.

These investments allow shipping companies to slash the cost of shipping. It also made these businesses very inflexible. Previously shipping companies could trim costs when demand dropped off, parking ships and laying off their crews. Now, with huge investments in container infrastructure, the shipping companies were forced to keep the boats moving during the down turn, as the revenue was needed to service loans or pay dividends to investors.

Times were good when demand was high, with the low shipping rates helping to drive volume up. When times were bad when demand was low, as the boats needed to keep moving even if it meant that they were losing money.

Car Manufacturing in Australia

Australia finds itself wanting to protect its traditional car manufacturing industry when the dynamics of the global car industry and economy conspire against us.

Car manufacturers need to improve factory utilisation if they are to remain profitable. Shutting factories down for a few weeks is not enough, nor is trimming labour rates, as the majority of their costs are in the plant and equipment contained within these factories, and not in the labour required to operate and management.

With too many (expensive) factories and not enough people buying cars, car companies are looking to consolidate their operations. Ideally the final resting place for these factories will be adjacent to major markets in a comparatively low cost geography. (Despite the balance of costs being in equipment, moving from a high to a low cost geography can still shave 10% off the total cost of manufacturing.)

Similarly, reducing the time from final assembly to delivery to the customer by placing the factory as close as practical to the customer, helps to reduce costs by reducing the time it takes for product to flow through the supply chain. This cuts the amount of working capital required as well as cutting the time required to push product updates through the supply chain.

Ideally, given current manufacturing technology, one of these manufacturing centres will be right in the middle of South-East Asia, enabling quick and convenient access to the the fastest growing car markets in the world. Thailand looks good. Another would be somewhere in the centre of the Americas, allowing it to service both North and South America. Perhaps Mexico or the southern states of the US? Eastern Europe might get a look in for a third manufacturing hub, but then it might just be easier to service Europe out of S.E. Asia or the Americas. (Note that niche plays such as BMW are the exception to this rule, as they are not selling into the mass market.)

So what does this mean for car manufacturing in Australia? Australia fairs rather badly on both the dimensions we just considered.

As a high cost country we can expect cars manufactured domestically to cost roughly 10% more than those manufactured in a low-cost hub. Unfortunately wage bargaining will be little help unless we’re willing to slash wages to the same levels as Mexico and Thailand, which is something that the Australian public is unlikely to find palatable.

Our position below S.E. Asia and a long way from the US and Europe also puts us at a disadvantage. While shipping a car from Australia to S.E. Asia, the Americas or Europe will not significantly affect the final price, the delay pushes up working capital requirements while the longer supply chain is more challenging to manage.

We can’t expect our domestic car industry to export its way out of this problem. Nor is the domestic market large enough to sustain it when cheaper imports are flowing in from overseas manufacturing hubs. The car industry is, after all, a global industry.

Pouring money into the industry might support it in the short term, but at what cost? If it cannot complete globally then it will eventually succumb to the pressure. And given the perilous state of the global and domestic car industries, that time will probably be sooner than later.

In the mean time we’re encouraging a generation of eager and talented young adults to build their lives around a career and an industry that we know will no be able to support them. They deserve better.

Can technology save us?

One solution to our dilemma is to find a model for the industry that can work for Australia.

Consider, for a moment, the replicator from Star Trek. Or, if you’re less inclined to science fiction, the recent explosion of 3D printing and the maker movement.

If we can slash the investment required to manufacture cars by slashing the investment required to build a factory, then the decision on where to locate that factory might tip in our favour. If a rather large 3D printer costing AU$10,000 could print a car, then every dealer would have one. Why ship a finished car from one of the manufacturing hubs when you can pick the model and options you want, have it printed, and pick it up in a day or two.

3D printing might be some way off, but there are people out there looking at this problem. iStream, for example, is the result of looking at the manufacturing process to see if there is a better, faster and cheaper way to manufacture cars. The result is a manufacturing plant that is 20% the size of a conventional factory, and which reduces the typical capital investment by up to 80%.

If we can use technology such as iStream, or one of its descendants, to reduce the factory footprint then we might be able to arrive a solution that can be sustained by our domestic market.

Taking this path would require an investment at the national level. The major car manufacturers are struggling with their older, more capital intensive, operating model and have no interest in a new approach. If we are to take this route then we cannot rely on the existing brands.

Should we cut out losses?

If technology cannot save us, if the consensus is that it is not possible to build a sustainable, mass market, car industry in Australia, then we need to consider our options.

Should we copy a page from Germany’s playbook, and invest in building a high-value, niche industry? An Australian equivalent to BMW or Mercedes?

Or are there other manufacturing industries that can absorb the work force? Should we, for example, invest in becoming the leading manufacture of pre-build housing? (We already have some form in this area.) What industries can we excel in? As others have pointed out, ending car production is not the end of the world.

It’s time to make the hard decision

Pointing out the key role the car industry has historically played in our economy, and focusing on how we might keep the industry alive, is ignoring that fact that the domestic troubles are part of a larger global trend, a trend that we can do little about.

Regardless of the path we each, as individuals, prefer, the debate we need to having is on how will we choose between the the options available too us.

Manufacturing is not returning to the West

There’s many claims over the last year or so that “manufacturing is returning to the West” and “China’s days as the world’s factory are numbered”{{1}}. These claims are misguided.

[[1]]Vivek Wadhwa (23 July 2012), The End of Chinese Manufacturing and Rebirth of U.S. Industry, Forbes[[1]]

We’ve just reached a time where manual and skilled labour is no longer a major manufacturing cost, causing final assembly to slowly drifting toward the customer base it serves. This shift reduces the length of the supply chain from assembly to your front door resulting in a reduction in turn-around time which, in turn, reduces working capital requirements and allows manufacturers to push product updates through the supply chain faster.

Manufacturing isn’t leaving China and other low cost manufacturing centres. What has changed is that it now makes good sense to manufacture some high value but low volume and bulky products in other major markets, such as the U.S.

The problem with thinking that manufacturing is returning to the first world is the implicit assumption that this also means that the old manufacturing jobs will return. They won’t. They no longer exist. It also ignores that fact that the huge scale of manufacturing in China will help it to grab the lions share of the world manufacturing market for some time to come.

Manufacturing as a manual process

Consider Henry Ford’s assembly line from 1913: a complex, labour intensive process that created a large number of good, blue collar jobs.

566px-Ford_assembly_line_-_1913Source: Public Domain

When we think of manufacturing this is the image we usually have in head. It’s a bit like those train crossing signs that have a caricature of a steam engine on them. It might not be the current reality, but it’s the image we use to understand what’s going on around us.

As transport costs dropped, work moved to lower cost countries

Back in Henry Ford’s day transportation was expensive. Factories were often located close to the markets they served to minimise transport costs, with management struggling to ensure that enough raw materials arrived at the factory to keep it busy. However, the development of railroads, steam ships, and the shipping container network incrementally cut the cost of transport until it cost roughly the same to move a box across the world as it did to move it across the country.

As Marc Levinson points out in his book, The Box{{2}}:

[[2]]Marc Levinson, The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger. iBooks.[[2]]

As transportation costs decline relative to other costs, manufacturers can relocate first domestically, and then internationally, to reduce other costs, which come to loom larger. Globalization, the diffusion of economic activity without regard for national boundaries, is the logical end point of this process. As transport costs fall to extremely low levels, producers move from high-wage to low-wage countries, eventually causing wage levels in all countries to converge. These geographic shifts can occur quickly and suddenly, leaving long-standing industrial infrastructure underutilized or abandoned as economic activity moves on.

This is the shift we’re thinking of when we consider off-shore manufacturing: China as the source of cheap (and fairly unskilled labour).

Today, manufacturing is not a manual process

Apple released an interesting video the other day{{3}}. It shows the manufacturing process for the new Mac Pro.

[[3]]Greg Koenig (22 October 2013), How Apple makes the Mac ProAtomic Delights[[3]]

SourceApple

What’s interesting about this process is how few people are involved.

Manufacturing has changed a lot in the last few decades. What was once dominated by manual labour is now an automated and highly efficient process. Machines have replaced people. We can see this in many of the factories that are returning to the West: they’re all highly efficient, highly automated, capital intensive operations that require very little manual or skilled labour.

7395855880_053e6daede_cSource: Steve Jurvetson

Machines, however, have yet to replace engineers

While capital has won over manual and skilled labour, that same is not true for engineers: knowledge workers.

As Roger Martin found in his research for a recent HBR article{{4}}:

[[4]]Roger L. Martin (October 2013), Rethinking the Decision Factory, Harvard Business Review[[4]]

I vividly remember working with the CEO of one of North America’s largest bread manufacturers in 1990–1991. He had just replaced a labor-intensive and antiquated plant with the most advanced bread bakery on the continent. He proudly told me that the new computerized ovens and packaging machinery had reduced direct labor costs by 60%. But meanwhile, a throng of new and expensive knowledge workers had been added at both the head office and the plant—engineers, computer technicians, and managers—to take care of the sophisticated computer systems and state-of-the-art equipment. The new plant wasn’t quite the unalloyed good that it appeared at first sight. Variable costs of manual labor fell, but the fixed cost of knowledge workers rose, making it critical to keep capacity utilization high—which was possible in some years but not in others.

While the West has been worried about losing it manufacturing capability, many of the off-shore manufacturing destinations have been investing in education. China, for example, now has a huge engineering workforce that companies can draw own to sort out their manufacturing problems.

It’s this incredible ability to mobilise huge workforces that is keeping many manufactures in China. An article in the New York Times from last year has an Apple anecdote that shows this in action{{5}}.

[[5]]Charles Dugigg & Keith Bradsher (21January2012), How the U.S. Lost Out on iPhone Work, The New York Times[[5]]

Another critical advantage for Apple was that China provided engineers at a scale the United States could not match. Apple’s executives had estimated that about 8,700 industrial engineers were needed to oversee and guide the 200,000 assembly-line workers eventually involved in manufacturing iPhones. The company’s analysts had forecast it would take as long as nine months to find that many qualified engineers in the United States.

Moving closer to the customer

The rapid pace of change in today’s market is driving companies to reduce the time between final assembly and when the product drops into the customer’s waiting hands.

Zara is the poster child for this shift, with a supply chain can create a new product and then have it in the stores in around two weeks. Zara has used this ability to disrupt the traditional annual, seasonal fashion cycle, resulting Zara becoming one of the largest retailers in the world.

Apple’s recent decision to make the Mac Pro in the U.S. is part of a trend to move the manufacturing of high value but low volume and bulky products closer to the customer. Elon Musk’s Tesla is also part of this trend.

Manufacturing automation technology has reached the point that it makes more sense to locate the manufacturing of these products closer to the customer, allowing transport costs and delivery times to be minimised.

We shouldn’t assume, however, that this trend will end with manufacturing returning to the West.

It’s easy to forget the more people live in Asia than in the entire rest of the world combined. If manufacturing is moving to be closer to the customer, then we need to remember that there are more customers in Asia than in the rest of the world. China’s position as a manufacturing powerhouse appears safe for the time being.

CK6aONG

Source: valeriepieris

What we mean by “export” is changing

So just where will this trend take us? (And, by extension, will our old export industries return, bringing their jobs back with them?)

The future of manufacturing and export seems – like to many industries – connected to the knowledge economy.

Those old manufacturing jobs are never coming back. They no longer exist. Similarly, thinking in terms of operating a factory and then exporting to another country is also looking somewhat antiquated.

Today (or perhaps, tomorrow) a manufacturer is a simply company that is run from one country and, from there, manages the sale of products in another.

Kogan{{6}} is a great example of this. The business is run from South Melbourne, Australia, which is where the products are designed. The products themselves are made in China and (in many cases) shipped directly to the United Kingdom where they are sold via the company’s UK web site (which is also managed from Port Melbourne, but hosted somewhere “in the cloud”).

[[6]]Kogan @ PEG[[6]]

An even more interesting example is another local business which sells safety barriers that are placed around robots in factories to ensure that workers aren’t accidentally injured. They recently started exporting to Europe. They did this by setting up a small, automated factory in Germany to service the European market. The barriers are designed in Australia and the designs are beamed directly to the machines in Germany, machines that consume resources from all over the globe.

So manufacturing – as we’ve traditionally understood it – is not returning to the West. The blue collar jobs that went overseas are not coming home to give our rather lacklustre economies a boost.

We can also expect China to remain an manufacturing powerhouse for the foreseeable future. The huge scale of operations over there, and the ability to rapidly redeploy these resources, will allow China to grab more than it’s fair share of the world manufacturing market.

Manufacturing, like so many industries{{7}}, is changing, and changing rapidly. What’s most interesting though, is how a new generation of companies are emerging that are finding ways to exploit this situation to “export”, and create new, knowledge intensive jobs at home in the process.

[[7]]The destruction of traditional retail @ PEG[[7]]

Source: Steve Jurvetson