Archive for the 'Business' Category

Retail businesses are associated with low pay and high employee turnover–especially in the case of those retailers who offer low prices–and the same is largely true of customer-service call centers.  It has been generally assumed that low wages in these operations are a necessary concomitant of low prices for consumers, and that only businesses serving a premium-price customer base can afford to pay high wages.

Comes now Zeynep Ton, arguing that the low-wage strategy is not the only one available to retailers and other customer-service businesses that need to offer low prices, and that indeed often–usually–it is not the best strategy.  She draws connections between the pay and hiring strategy of a business and the operational basis on which it is managed.  To wit:

Low pay and high turnover implies minimal employee training, because you can’t afford extensive training for employees who are going to leave in a matter of months.  Minimal training implies less operational flexibility, because employees will not be cross-trained for other functions.  An environment of high turnover and not-well-trained employees implies that employee functions must be strictly proceduralized, often to the point of excessive rigidity.  And the lack of flexibility driven by minimal training and experience makes it harder to build in appropriate staffing “slack” to handle peak demand situations.  The lack of slack and flexibility leads to endless emergency rescheduling of personnel, reducing morale and further increasing turnover.  (She provides some vivid examples of what this endless and short-notice rescheduling can mean to the personal lives of employees.)

On the opposite site, higher pay can contribute to lower turnover, making more-extensive training economically viable.  Better-trained employees can more easily perform multiple functions, so that absences or staffing imbalances have a less-harmful effect.  Better-trained and more highly-motivated employees don’t need micromanagement, either by human managers or by systems and procedures.

Ho, hum, you say, what’s new?…people, especially consultants and professors, have been writing for years about why employees should be treated well and how it pays off to do so.  How is this book different from a million of others?

The Good Jobs Strategy is, in my view, something quite different from the typical “just treat ’em right” sort of soft, warm, and cuddly advice often found in books and LinkedIn posts.  The author ties the feasibility of the high-pay / high-expectations strategy to effective operational management, with the right systems, procedures, and incentives to enable such operational excellence.

An interesting example the author mentions is that of Home Depot. She credits much of the chain’s early success to its high-quality associates–“knowledgeable and helpful and willing to do whatever it took to help you, even if that meant explaining to you that you didn’t actually need what you came to buy.”  The associates tended to be former plumbers, electricians, etc–and they were employed full-time.  HD grew very rapidly–“customers were driving two hours to go to its stores and, once they experienced the service and great prices, they kept coming back”

But, with the growth came problems.  There was a lack of discipline in the stores, in how the stores communicated with headquarters, how the company selected its products, and how it communicated with suppliers.  “In 2000, bills and invoices were still processed by hand, and headquarters communicated to 1134 stores via fax because there was no companywide email.”  In 2008, two senior IT executives (newly hired from Walmart) concluded that Home Depot’s IT systems were about where Walmart’s had been in 1991.  In summary, HD had become “a classic example of a service company that did not fully appreciate the role of operations in making customers and investors happy…Operations are all those factory-like activities that a business has to carry out in order to provide whatever it is that it sells. ..In a retail store, for example, operations involves things like having the right product in the right place, having a fast checkout, and having a clean store.” Zeynep Ton says that internal measurement systems often don’t focus on such matters–at one retailer she worked with, “Twenty percent of the (store manager’s) score had to do with the store’s customer interactions.” In this chain, “mystery shoppers” would score the store on things like how the employees greeted customers and made eye contact.  But, she notes, “kindness or friendliness won’t make up for operational incompetence. ..It is hard for your dry cleaner to make you happy if you can’t wear your favorite suit to an important interview because they didn’t get it cleaned on time.”

When Robert Nardelli became HD’s CEO in 2000, the systems and procedures problems were rapidly addressed.  Gross margins and net profit margins increased substantially.

BUT, “the culture of cost-cutting was soon felt at the local level, where store employees, who were once at the center of Home Depot’s success and at the top of Home Depot’s inverted pyramid, became a cost to be minimized.”  The company started hiring part-timers, in the name of both staffing flexibility and cost…the knowledge level of the typical employee encountered by a customer fell noticeably.  By 2005, HD was ranked lower in customer satisfaction than was K-mart.  Same-store sales growth fell and even became negative.  Nardelli left the company in 2007.

Zeynep Ton summarizes:  Operational designs don’t execute themselves.  They depend on having the right people, and having those people motivated to do the right things.

The book discusses the actual complexity that exists in many seemingly-simple businesses, and the fact that individual employee decisions do make a difference. “If you are a supermarket employee shelving a case of toothpaste and all but two of the tubes fit on the shelf, should you take the two extras back to storage or would it be better to squeeze them onto the the shelf, even if it doesn’t look so good?  If a tomato looks just a little soft, should you take it to the back room now or wait until it looks worse?  Maybe it will be just fine for a customer who wants to make tomato sauce…it is hard, if not impossible, to make such work so simple and simple and standardized that anyone can do it without exercising judgment.  Things happen in real time at retail stores, and employees have to learn to react.”

(It is incredibly refreshing to see a B-school professor thinking and writing at this level of detail and specificity)

One interesting company discussed in the book is QuikTrip, a large chain of convenience stores combined with gas stations.  The company is very selective in its hiring….the author compares getting hired there with the difficulty of getting into an Ivy League college.  In the Atlanta area, 90% of applicants don’t even quality for an interview, and of those who do, only one out of five is selected.  Turnover rate among QuikTrip employees is only 13%, far lower than the industry as a whole.  The chain emphasizes speed and flexibility…”QuikTrip’s fast checkout is a site to behold.  One thing that makes it so fast is that any employee can use any register at any time without making the customer wait.  If you regularly shop at a supermarket, you know it’s no fun waiting for the cashier do a changeover.  The other thing that makes QuikTrip so fast is that employees have been trained to ring up three customer per minute.”  She says that the employees can even calculate change in their heads!

Other examples discussed include Costco, Trader Joe’s, In-N-Out Burger, and the Spanish supermarket chain Mercadona.

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For the life of me, I cannot recall who first observed that environmentalists now make the most perfectly hissable villains, because they almost invariably make matters worse in the long run. Absolute certainty in their own mind that their dictates are the one and only true way, combined with reluctance to consider any other method, and of late, just about all their prescriptions have had lamentable results … yes, there is a perfect villain. Smug, certain … and wrong. Catastrophically, earth-shatteringly, human-damaging, and economically-harmful wrong.
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In December, I announced an upcoming discussion of the future of the auto industry and, in particular, of the role and impact of electric cars.  In that post, I included a number of links to worthwhile reading on the subject.  Let’s do the discussion this week, in comments to this post.  I have a few thoughts to get things going:

–It is true, as Vitaliy Katsenslson points out in his essay, that electric cars are much simpler than conventional cars…but I would qualify this statement as mechanically simpler than conventional  cars.  They are significantly more complex electrically and especially in terms of the electrochemistry of the battery…a hidden kind of complexity, but important nonetheless. From what I have read, there seems to be considerable uncertainty about the expected lifespan of new lithium-ion battery models..which lifespan, of course, has a major impact on the overall economics of electric cars.

EVs are expected to have lower maintenance costs and requirements than conventional vehicles, based on their relative mechanical simplicity.  This is probably true, in general, although a lot of the problems with cars these days seem to be with systems other than the engine and drivetrain..airbag sensors, seat actuator motors, various sensors, etc.

–Range limitations and “range anxiety” have been significant inhibitors to EV sales.  Vitaliy K makes the excellent point that it is much easier to set up an electric-vehicle charging station than a conventional gas station, with its underground tanks and consequent regulatory complexities, and he believes we will see tremendous growth in the number of such charging stations and consequent reductions in EV range anxiety.

It takes about 45 minutes to an hour to fully charge an EV (using Tesla as a model and assuming a high-power charger such as Tesla’s “Supercharger’), which implies that people are going to need something else to do while their vehicles are charging, away from home or the office.  Restaurants and shopping centers become obvious venues for charging; however, this leads to another issue, that the driver may wind up being away from the car for a couple of hours or more, tying up the charger for that whole interval: this issue would need to be reflected in the pricing of the charging facility.

Also, while it is true that setting up EV charging is simpler than opening a gas station, it is not necessarily trivial if one is setting up multiple high-capacity chargers.  A Tesla supercharger draws 150KW, so putting 30 of them in a parking lot would result in an incremental peak demand of up to 4.5 megawatts.  I doubt if the electrical systems feeding many restaurants, or even shopping centers, could accommodate 4.5MW of additional demand without some work by the utility supplying the power.

–Efficiency:  It is true that the conversion of stored energy into motion is much more efficient in an EV than an internal-combustion-engine vehicle; this is mainly a matter of the engine thermodynamics.  BUT, if the charging electricity comes from a natural gas plant of a coal plant, you are looking at best at a 60% fuel-to-electricity conversion efficiency, and there will also be losses in power transmission and distribution.  If the electricity comes from solar or wind, then..depending on the time of day and weather conditions of the charging..you may be faced with a double battery storage situation, where energy is stored in a utility or home battery until needed for charging, and then stored again in the vehicle’s battery.  That double-storage situation carries both efficiency losses and, more significantly, additional capital costs.

EVs do have the ability to capture much of the energy that would otherwise be lost in braking, and this is especially valuable in start-stop driving situations, as with local delivery operations, and probably extends the lifetime of the mechanical brakes.

–Performance…EVs have excellent acceleration capability (when adequately powered) due to the torque characteristics of electric motors.  They may be able to achieve very good handling if battery installation provides for a very low center of gravity.

–Climate…not speaking here about ‘climate change’, but about climate in its ordinary meaning.  In a conventional car, heating is basically free, using rejected heat from the engine (ignoring the energy used to power the fan, but that’s a small part of the picture), whereas in an electric car, heat must be generated using electricity from the battery, which of course has a negative impact on range.  Also, the battery itself will have lesser performance in cold weather.  (And the regenerative braking feature is also limited in very cold weather.)

–Relative Costs…a high % of EVs today are either sold with subsidies by national/local governments, are built and sold in response to government edicts, or are bought in significant part for status purposes by individuals and organizations. Can EVs compete on cost head-to-head with IC vehicles on a nonsubsidized, free-choice basis?  This would seem to be largely a matter of how successfully battery costs are further driven down and how long battery lifespans turn out to be in actual service.

It should be noted that electric vehicle sales in China have cooled rapidly…down 44%…since the government reduced most subsidies at the end of June.  What would be the ‘true’ demand in the US without consumer incentives and mix requirement on the manufacturers?

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Free speech…free expression generally…is under attack in America and throughout the Western world to a degree not seen in a long time. I think there are some specific phenomena and (partially-overlapping) categories of people which are largely driving this attack–I’ve written about this subject previously, here, but the situation has gotten even more serious since that post, and some of the important factors were underemphasized.  Here are the current fronts, as I see it, in the war (not too strong a word, I’m afraid) on free speech.

The Thugs. As I pointed out in my post The United States of Weimar?, illegal actions against political opponents, ranging from theft of newspapers to direct assault and battery, have in recent decades become increasingly common on university campuses, and now are well on track to being normalized as aspects of American politics. Incidents of political thuggery are reported almost daily: just the other day, pro-Trump women at an upscale DC hotel were verbally attacked and apparently physically assaulted by members of a wedding party that was heavy on Democrat attendees; including, reportedly, some top officials from the DNC. A pro-free-speech film was reportedly interrupted by two men wearing masks. Interruption of movies they didn’t like was a tactic used by the Nazis prior to their obtaining official censorship powers. The film “All Quiet on the Western Front” was plagued by Nazi disruptions when released in Germany in 1930. And attempts to shut down dissident speakers on college campuses, such as this, have become so common as to now be almost the default expectation.

The Assassins. These individuals go beyond the level of violence practiced by the Thugs, and make credible death threats they attempt to carry out against those whose actions or believe they view as unacceptable. The majority of threats and attacks falling in this category have certainly been the doing of radical Muslims; however, some of the more extreme ‘environmentalist’ and ‘animal rights’ groups have also demonstrated Assassin tendencies. At present, however, it is those Assassins who are radical Muslims who have been most successful in inhibiting free expression. Four years in hiding for an American cartoonist. But see also Ecofascism: The Climate Debate Turns Violent, how long until this justification and practice of violence reaches the level of justifying and carrying out actual murders?

The Enclosure of the Speech Commons. Whereas the Internet and especially the blogosphere offered the prospect of political expression and discussion unfiltered by the traditional media, the primary social-media providers have taken various levels of controlling attitudes toward free speech; Twitter, in my opinion, is especially bad. Partly this is ideological; partly, it probably reflects their ideas about protecting their brands. Yes, there are plenty of ways to communicate online outside of the social media platforms, but their growth has been so rapid that a large proportion of the potential audience is not easily reached outside their domains. Note also that conversations that one would have been private friends talking at home, or over the telephone are now semi-public and sometimes made fully public. Plus, they become part of an individual’s Permanent Record, to use the phrase with which school officials once threatened students.

The Online Mobs. The concerns of the social media providers about providing online “safe spaces” does not seem to have in the least inhibited the formation of online mobs which can quickly make life unpleasant for their targeted individuals, and even destroy the careers of those individuals. Decades ago, Marshall McLuhan referred to the technology-enabled Global Village; unfortunately, it turns out that this virtual village, especially as mediated through the social media platforms, has some of the most toxic characteristics of the real, traditional village. See my post Freedom, the Village, and the Internet.

And the mobs do not limit themselves to attacks on the target individual: they frequently attack other individuals who fail to participate in the shunning of that target person. As an example:

A few weeks ago, shortly after I left my magazine gig, I had breakfast with a well-known Toronto man of letters. He told me his week had been rough, in part because it had been discovered that he was still connected on social media with a colleague who’d fallen into disfavour with Stupid Twitter-Land. “You know that we all can see that you are still friends with him,” read one of the emails my friend had received. “So. What are you going to do about that?”

“So I folded,” he told me with a sad, defeated air. “I know I’m supposed to stick to my principles. That’s what we tell ourselves. Free association and all that. It’s part of the romance of our profession. But I can’t afford to actually do that. These people control who gets jobs. I’m broke. So now I just go numb and say whatever they need me to say.”

Increasingly, it’s not just a matter of limiting what a person can say, it’s also a matter of edicting what they must say.

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We’ve talked before here about the point that most fiction seems to be about people who are lawyers, policemen, criminals, soldiers, spies, students, politicians, and noble but struggling writers. But there are indeed some works of fiction, and some vivid personal memoirs, in which business plays a central role without being portrayed simplistically or as stereotypically evil. Here are some that I like…please add your own favorites in the comments.  (I posted this at Ricochet, in slightly different form, about a week ago)

The Current War, a recent movie about the late-1800s power struggle to determine which technology…AC or DC…will dominate America’s electrical distribution system. Edison, Westinghouse, and Tesla are the key characters, played by Benedict Cumberbatch, Michael Shannon, and Nicholas Hoult respectively. My review is here.

The Big Short, a 2015 film about the 2007-2008 financial crisis, based on Michael Lewis’s book. A hedge fund manager concludes that the subprime-loan market is not sustainable, and makes a billion-dollar bet against the relevant mortgage-backed securities. Based on real events. I thought it was very well done.

God is an Englishman, R F Delderfield. Following his return to England from the Crimean War, Adam Swann identifies a business opportunity: although railroads are being built throughout the country, there will always be sources and destinations of freight which are not on the tracks. Hence, the potential for a nationwide gap-filling road haulage business based on the systematic use of horse-drawn wagons. (This is the first book of a three-book series called the Swann Family Saga.)  Reviewed here.

Oil for the Lamps of China, Alice Tisdale Hobart. This 1933 novel is about a young American working as a sales rep in China, focused on selling oil for his employer (unnamed, but clearly based on Standard Oil) and increasing volumes by promoting the kerosene lamp as a better alternative to traditional lighting methods. The book was the basis for a 1935 movie of the same name…the film has its moments, but overall is not worthy of the book.

Father, Son, and Company, by Thomas Watson Jr. This is the best business autobiography I’ve read. It’s about Watson Jr (the long-time CEO of IBM), his difficult relationship with his father, the company they built, and the emergence of the computing industry. It is an emotional, reflective, and self-critical book, without the kind of “here’s how brilliant I was” tone that afflicts too many executive autobiographies. I reviewed it here.

A Man in Full, by Tom Wolfe. The central character of this 1988 novel is Charlie Croker, an Atlanta real-estate developer who has gotten himself into way too much debt. Other characters include Charlie’s current and former wives, the Black mayor of Atlanta, the bankers who must deal with the debt problem, and a warehouse worker at one of the Croker enterprises. The book also casts a not-very-complimentary light on the Atlanta society/arts scene.

Trial by Fire, Stephen Buck. The adventures of a Honeywell field engineer in the early days of process-control computing. The book’s title reflects the point that the industrial processes being controlled frequently involved combustion, sometimes in scary circumstances. Much of the author’s work took place outside the US, in countries ranging from Poland to Brazil.

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**An upcoming Chicago Boyz group discussion**

There is much media and analyst discussion lately concerning possible sea changes in the auto industry..which would, of course, likely have major impacts throughout the economy and on society as a whole.  Some of the driving factors worth considering include:

–The government incentives put in place in many countries…in some cases not just incentives but absolute requirements…in favor of electric cars

–The emergence and growth of ride-sharing services such as Uber and Lyft

–The development of partial ‘autopilot’ functions for cars, and the anticipated development of full automatic driving at some future point

–The apparent reduction of interest among young adults and older children in driving and automobile ownership

–Technological factors, including the continued improvements in battery energy storage capacity–but still very limited in comparison to liquid fuels…the continued incremental improvements in internal-combustion engines…and the emergence of new manufacturing technologies, including 3-D printing aka ‘additive manufacturing’.

I’d like to have a group discussion of the possible future direction and shape of the industry…let’s do this sometime next week.  If you’re interested in participating, here are some links that are worthwhile thought-starters.

Vitaliy Katsenslson is a fund manager; his blog is Contrarian Edge–I generally like the way he thinks.  Concerning electric cars in general and Tesla in particular, he says:

His ownership experience, and the thoughts triggered by the “activated new senses”, are captured in an 11-part series of posts.  You can get it emailed to you by signing up here.

https://contrarianedge.com/signup-for-tesla-article/

Concerning self-driving cars, here are three articles reflecting various degrees of enthusiasm versus caution:  from Forbes, from Investor’s Business Daily, and from Road/Show.  Also this Financial Times article, which is about the difficulties involved in the interaction of automated systems with humans in other cars or with human pedestrians.

An interesting general discussion of AI misinformation and hype…not primarily focused on driverless cars although it does touch on that subject.

Concerning battery technology, here’s a link on the trends in $/kWh and the future possibilities.  See also my 2017 post on battery materials constraints.

Homework:  Please take a look at the above articles, at least the ones that aren’t behind paywalls..  I’ll put up a post as a place for discussion sometime next week.

Why are short-line railroads able to survive, and sometimes thrive, in an industry dominated by a few giant companies?  An article at Railway Age suggests some answers. These points are relevant, I believe, in other industries as well.  To excerpt summarize the points in the article:

–Short lines are formed with a much lower manpower cost structure that includes more-flexible work rules.

—Short lines are very effective at negotiating service and shared capital project business deals with their face-to-face local customers. That was always a hurdle when the corporate headquarters of a railroad like Conrail was hundreds of miles away in Philadelphia compared to sites like Cairo, Ill., or Kewaunee, Wisc. 

–Short lines are focused directly upon industrial development along their limited geography service tracks. They are not distracted by competitive locations that want their location to be the next job creation site.

–Short lines have a simple way to calculate customer profitability as a guide for managing their service responsiveness.

–There is an ease of doing business with short lines. The difficulty of transacting business has long been an internally acknowledged Class I issue. Local small railroads have successfully addressed this with local managers dealing one-on-one with local customers.

–The short line railroads have worked to grab growth opportunities. They developed local community and state railroad DOT programs that gave them access to development and rehabilitation capital.

Most of these advantages could, in principal, be achieved by the large railroads through improved organization design and better internal measurements/incentives. And similarly in other industries…but it rarely seems to actually work out that way.  Re the profitability-measurements point, the article notes that Class I’s have tried for decades to calculate and then share with their remote train crews information about branch line financials. The Class I’s even tried to create regional cluster profit centers that would better focus attention on local branch line customers and new business development.  The results were at best a mixed success.

and hence

Selling off or otherwise leasing “troubled lines” to a smaller company typically became the favored big railroad divestiture business process.

Any thoughts on similar factors at work in other industries?

(Another of my long-ago archive posts, from 2005 – the California that once was, and that I remember when I think of growing up there.)

When JP and Pip and Sander and I were all growing up, the contiguous suburb of Sunland and Tujunga, untouched by the 210 Freeway was a terribly blue-collar, gloriously low-rent sort of rural suburb. It was if anything, an extension of the San Fernando Valley, and not the wealthier part of it either. It was particularly unscathed by any sort of higher cultural offerings, and the main drag of Foothill Boulevard was attended on either side by a straggle of small storefront businesses, a drive-in theater, a discouraged local grocery store, a used car lot, the usual fast food burger or pizza places, a place with an enormous concrete chicken in front which advertised something called “broast” chicken, Laundromats, and a great variety of very drab little bars. There were no bookstores, unless you counted the little Christian bookstore across from the library and fire station.
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At Boeing.

Those fearing imminent mass unemployment driven by robots and AI should be following stories like this.  They also should be looking at the actual productivity numbers.

See also the details of work and the realities of automation.

This movie is focused on the interaction among Thomas Edison, George Westinghouse, and Nikola Tesla in the competition to create and build out America’s…and the world’s…electrical infrastructure.  It has gotten mixed and generally not-very-enthusiastic reviews; I thought it was well-done and definitely worth seeing.  Visually, it is striking and sometimes even beautiful, thus worth seeing on the big screen.

The movie gets the outline of the history right; also, I think, the essence of the characters.  Edison is a brilliant inventor and self-promoter who is committed to his DC-based distribution system and will do some more-than-questionable things to get it universally adopted.  Westinghouse, who had invented the railroad air brake (among other things) and already built a large company, sees the value of alternating current, which can be stepped up and down in voltage via transformers and hence can be economically transmitted over long distances.  Tesla, a Serbian immigrant and brilliant inventor, provides the missing link in the form of a practical motor that can run on AC power.  The relationships of Edison and Westinghouse with their respective wives are highlighted, and the future utility mogul Samuel Insull appears as Edison’s young secretary.

I was happy to see the movie’s positive portrayal of Westinghouse, a great man who has tended to be overshadowed by the more-glamorous figures of Edison and Tesla.  (The legions of Tesla fans may be unhappy that Tesla did not get a more central role in the film.)

If this movie sounds interesting to you, better see it soon; I don’t think it’s going to be in the theaters for very long.

This pumpkin spice thing has just about gone too far!
Pictorial evidence below the fold. And this is for real – I spotted them this morning at the Bulverde HEB grocery store. Read the rest of this entry »

The irony of very well-recompensed nominally-American basketball players of color reacting with wild indignation to American criticism of China with regard to heavy-handed treatment of citizens of Tibet and residents of Hong Kong is of a density so thick and heavy that it threatens to drop through the core of the earth and come out the other side. This of course, after months of rather public displays by professional athletes of color making a big thing of knee-taking and demonstrations of disapproval during the playing of the American national anthem at the start of various games. This cheap display of woke-virtue sporting world division may already have sunk the National Football League, in the minds and hearts of those fans of football in Flyoverlandia-America. I suppose now we can look forward to seeing the same fatal holed-below-the-waterline-and-sinking-fast pattern in the round-bouncy-ball franchise; honestly, it’s as if the NBA is basically saying, “Hold my beer and watch this!” Read the rest of this entry »

…and what are NBC and ABC?

When referencing these networks…for example, when talking about CNN’s increasingly-extreme political bias, ABC’s running of a video supposedly from Syria which was actually from Kentucky, or the reports about widespread abuse of women at  NBC, people tend to simply refer to them as “CNN”, “ABC”, or “NBC”, as if they were independent entities.  But they’re not.

CNN is owned by AT&T.  NBC is owned by Comcast, and ABC is owned by Disney.

The history is that CNN was part of Turner Broadcasting, which merged with Time-Warner in 1996.  Following a whole host of acquisition and divestiture transactions (which included a very expensive experience with AOL), Warner Media was acquired by AT&T in 2018.  NBC was acquired by GE in 1986 as part of its reacquisition of RCA; the networks was put into a joint venture with Comcast in 2009, and the GE share of the venture was bought out by Comcast in 2013. Disney acquired ABC in 1996 as part of its acquisition of Capital Cities/ABC Inc.

Given how these entities have been shuffled around, it may be understandable that people refer to them simply by the names of the networks; still, I think the proper way to refer to CNN would be “CNN, a subsidiary of telecommunications giant AT&T” and similarly for the others.

Much ink and many photons have been spent discussing Russia’s attempts to influence (or at least disrupt) the American 2016 Presidential campaign.  Meanwhile…

Daryl Morey, general manager of the Houston Rockets, sent out a tweet which said “Fight for Freedom, Stand with Hong Kong.”  Tencent, the NBA’s exclusive digital partner in China, reacted by suspending business relations with the Rockets, and is offering fans who purchased a year-long pass to watch Rockets games the chance to switch it to a different team. A number of other Chinese companies have pulled sponsorship deals with the Rockets as well.  Morey issued an apology which said in part ” was merely voicing one thought, based on one interpretation, of one complicated event. I have had a lot of opportunity since that tweet to hear and consider other perspectives.”

And from last year:  here’s an appalling story about how anger from the Chinese government led Marriott Corporation to fire an employee who had ‘liked’ a tweet which congratulated the company for listing Tibet as a country, along with Hong Kong and Taiwan….of course, the Chinese regime considers Tibet to be a part of China, not a separate country.

Turning now from the hotel industry to the movie industry, Richard Gere says that Chinese pressure due to his stand on Tibetan independence has led to his being dropped from big Hollywood movies.  Also:

Gere’s activities have not just made Hollywood apparently reluctant to cast him in big films, he says they once resulted in him being banished from an independently financed, non-studio film which was not even intended for a Chinese release.

“There was something I was going to do with a Chinese director, and two weeks before we were going to shoot, he called saying, ‘Sorry, I can’t do it,’” Gere recalled. “We had a secret phone call on a protected line. If I had worked with this director, he, his family would never have been allowed to leave the country ever again, and he would never work.”

See also How China’s Censors Influence Hollywood.  Because the Chinese market is so large…(Fast and Furious 7 pulled in $388 million in China, more than it made in the US)…the influence of the Chinese regime on US film production and distribution has become immense.

In recent years, foreign filmmakers have also gone out of their way not to provoke the Communist Party. For instance, the 2012 remake of the Cold War action movie, Red Dawn, originally featured Chinese soldiers invading an American town. After filming was complete, though, the moviemakers went back and turned the attacking army into North Koreans, which seemed a safer target, at least until last year’s hack of Sony Pictures.

and

Ying Zhu, a professor of media culture at the College of Staten Island at the City University of New York, worries China’s growing market power is giving the Communist Party too much leverage over Hollywood.

“The Chinese censors can act as world film police on how China can be depicted, how China’s government can be depicted, in Hollywood films,” she says. “Therefore, films critical of the Chinese government will be absolutely taboo.”

In the late 1990s, when China’s box office was still small, Hollywood did make movies that angered the Communist Party, such as Seven Years In Tibet, about the life of the Dalai Lama, and Red Corner, a Richard Gere thriller that criticized China’s legal system. Given the importance of the China market now, Zhu says those movies wouldn’t get financing today.

Plus, Chinese companies have snapped up Hollywood studios, theaters and production companies.

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(This is a 3-part series, link to next post is at the end)

Here’s a new factory for making automobile frames, specifically designed to minimize the need for human labor.  The CEO of the company that built it actually said, “We set out to build automobile frames without people.”

At the start of the process, rough steel plates are inspected by electronic sensors, automatically pushing aside any that deviate from tolerances.  Conveyors take the plates through punching, pressing, assembling, and nailing machines, as well as a machine that can insert 60 rivets simultaneously in each frame.  A set of finishing machines then rinse, dry, spray-paint, and cool the frames.  Aside from a few men moving frames between conveyor belts, the floor routine of the plant requires almost no hand labor.

And today’s robotics and artificial-intelligence advances go far beyond automating routine manufacturing labor and take over the kind of cognitive functions once thought to be exclusive to human beings. Here, for example, is a new AI-based system that displaces much of the thought-work which has been required of the people operating railway switch and signal installations:

The NX control machine is in effect the “brain” of the system. It automatically selects the best optional route if the preferred route is occupied.  It will allow no conflicting routes to be set up. It eliminates individual lever control of each switch and signal.

Pretty scary from the standpoint of maintaining anything like full employment, don’t you think?

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Bitter Waters: Life And Work In Stalin’s Russia by Gennady Andreev-Khomiakov

A fascinating look at the Soviet economic system in the 1930s, as viewed from the front lines of that system.

Gennady Andreev-Khomiakov was released from a labor camp in 1935, and was fortunate to find a job as a book-keeper in a sawmill. When the factory manager, Grigory Neposedov (a pseudonym) was assigned to run a larger and more modern factory (also a sawmill), he took Gennady with him.

Although he had almost no formal education, Neposedov was an excellent plant manager. As Gennady describes him:

He was unable to move quietly. Skinny and short, he moved around the plant so quickly that he seemed to be running, not walking. Keeping pace with the director, the fat chief mechanic would be steeped in perspiration…He rarely sat in his office, and if he needed to sign some paper or other, you had to look for him in the mechanic’s office, in the shops, or in the basement under the shops, where the transmission belts and motors that powered the work stations were located…This enthusiasm of his, this ability to lose himself completely in a genuine creative exertion, to give his all selflessly, was contagious. It was impossible to be around Neposedov without being infected by his energy; he roused everyone, set them on fire. And if he did not succeed in shaking someone up, it could unmistakely be said that such a person was dead or a complete blob.

With his enthusiasm and dedication to his factory, Neposedov comes across almost as a Soviet version of Hank Reardon (the steel mill owner in Ayn Rand’s Atlas Shrugged), with this difference–Nepodesov could throw himself as enthusiastically into bureaucratic manipulation as into his technical and leadership work. All of his skills would be needed to make this factory a success.

Although the sawmill had modern equipment, it was producing at only a fraction of its design capacity. One of the problems was energy: the plant was powered by a 200HP steam engine, and whoever had built the place had spent almost all of the budget on other equipment, leaving very little for the boiler. The original boiler that came with the plant turned out to be useless, and was replaced with a salvaged boiler..this worked, but was not in good shape and produced only about half the steam needed to run the engine–and the plant–at full power.

At this point in history, and in this particular corner of the Soviet economy, the amount that was available to be paid to workers was strongly related to the output of a plant. And workers at this sawmill were becoming increasingly desperate, on the point of actual starvation. Neposedov, aided by Gennady, pusued a three-part program of improvement: (1)fix the boiler, (2)improve the workflow (as we would now call it) within the plant, and (3)put in place an incentive system for the workers.

New “pipes” for the boiler were somehow obtained (I think “pipes” in this context refers to boiler flues) and the workflow was continuously analyzed and improved. The most interesting part of the story, though, deals with the incentive program. The plant manager apparently had discretion to put such programs in place as long as he could pay for them out of increased output. (As the book describes it, there were extensive accounting systems in place throughout the Soviet economy–indeed, Lenin had once gone so far as to say “Socialism is accounting.” The accounting seems a bit similar to what you would find in a multidivisional American company with extensive intracompany transactions.) The incentive system that Gennady designed for this sawmill was based on very sharp pay increases for the workers when production exceeded target–so that, for example, you could double your pay by producing only 25% over target. (Actually, the plan paid collectively by group and by shift, rather than on an individual basis.)

The incentive plan, together with the repaired steam boiler, resulted in very high production–140%, then 160% of target–and correspondingly high pay for the workers. Gennady had some nervous moments when he feared he had made a mistake in the calculations and the cost of the additional wages would exceed the amount generated by the new production….a mistake like this could easily have landed him back in Siberia, or worse. But it turned out that the new system was indeed sustainable.

The local Communist Party leadership, while pleased with the increased production, was disturbed that the propaganda buzzwords of the day were not being implemented. “Socialist competition” was hot at the time, and the Party organizer insisted on competition at the individual worker levels, not just the group and shift level.

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Tulsi Gabbard is suing Google for $50MM and also seeking injunctive relief.

Link

The article at the link includes the complaint.

Privatization reform of Fannie Mae and Freddie Mac, a hot topic on and off since their founding eight and five decades ago respectively, is heating up once again after more than a decade of temporary conservatorship. All past reform efforts have failed. What should we have learned?

• Private markets operate on one set of incentives and accountability, government on an entirely different set. Each has its problems and imperfect solutions.
• Private markets may inappropriately discriminate against qualified borrowers, for example, whereas public programs may fail to adequately discriminate.
• Public enterprises created to jump-start or complement private markets often miss the mark, with unintended consequences.
• Politicians much prefer to deliver subsidies through taxes (in this case tax exempt debt substituting for taxable equity) rather than expenditures – especially since the Budget Control Act of 1974 – and implicit off-budget credit guarantees that delay the reckoning.
• In spite of good intentions and design to get the best of both, privatized hybrid public-private systems inevitably embody the worst: public risk for private profit. Lacking both market and public discipline, they cause systemic failure that “nobody could have seen coming.”
• Political reform reflexively blames private market failure, doubling down on unaccountable and ineffective bureaucratic methods while providing opaque bailouts through greater tax and credit subsidies.
• Political reform starts with what is, not what should be, repeating the cycle.

U.S. secondary markets evolved entirely in response to anachronistic political forces. FHA was created in 1936 to stimulate new construction jobs subsequent to a huge housing construction boom. Fannie Mae was created two years later to prop up flagging demand for FHA mortgages. Ginnie Mae was created in 1968 to liquidate Fannie Mae after prior privatization attempts failed to reduce official government debt, but the residual $1 billion secondary market facility with minimal shares outstanding as a result of a mandatory user purchase program was instead privatized. When that entity turned down tax exempt pass-through securitization to circumvent the myriad laws and regulations preventing the development of a national securities market, Ginnie Mae stepped in. Rather than liquidate, the privatized Fannie turned to funding conventional mortgages for their mortgage banker clients. To protect their turf, portfolio lending savings and loans then demanded their own secondary market facility, Freddie Mac. It later privatized mainly to provide management incentives comparable to Fannie, particularly stock options.

They then morphed into massive public directed credit institutions, with profits from government subsidies privatized but otherwise lacking the benefits of market efficiency and discipline. About half of F&F subsidies were captured by shareholders, managers and politicians (my estimates), an invitation to affordable housing proponents to share in this booty. Several 2018 Democratic presidential candidates have proposed upping these goals.

U.S. mortgage markets were characterized by cut-throat competition decades before the advent of government sponsored enterprises (GSEs): the indiscriminant lending and private market securitization during the sub-prime lending bubble of 2004 to 2007 suggests that is still the case.

What the private market can’t deliver are the tax and credit subsidies – worth tens of billions annually – that result from federal backing to support fixed rate mortgage interest rate and affordable housing credit risks. Any re-privatized hybrid system that promises to mimic the market, e.g., by requiring that it actuarially price a government credit guarantee as the market oriented Milken Institute and others recommend and to impose market capital requirements and risk regulations directly conflicts with these goals and is doomed to failure. Regulatory restrictions will remain malleable because politics has and will continue to trump bureaucracy. Nor will the market discipline this regulated too-big-to-fail public mission duopoly, having correctly inferred an implicit guarantee in the past for the GSEs, disclosures, regulations and legislation notwithstanding.

There is a better “public/private” policy option to deliver these subsidies. Long term fixed rate FHA insured mortgage loans have since 1970 been funded almost exclusively with Ginnie Mae securities. Investors take the interest rate risk, HUD takes the credit risks and all ancillary functions are delegated to a competitive private marketplace. FHA, a government sponsored mutual insurance fund with de facto public backing since incorporated into and regulated by HUD insures each mortgage. The un-capitalized Ginnie Mae de jure security guarantee covers only timeliness of FHA payments, but de facto acts as a guarantor of FHA mortgage securities.

While FHA has failed actuarially – in part due to overly ambitious political goals and its focus on borrowers who may not have qualified for a conventional loan – bailouts have been opaque with minimal or no budget transfers, investor losses or market disruption. It survived the sub-prime lending debacle relatively unscathed. This system hasn’t failed systemically because it separates the private and public functions into different entities, minimizing public risk for private profit incentive conflicts.

A federal guarantor for conventional mortgage securities modeled after Ginnie Mae (something Ginnie Mae proposed in the late 1970s but I opposed on grounds that it would displace the private savings and loan system of the time) should replace F&F, with the existing infrastructure auctioned to the highest bidder .

Properly designed, a federal guarantor wouldn’t experience any loss except in catastrophic circumstances. The original Fannie Mae and particularly Freddie Mac secondary market system that left credit risk primarily with multiple state regulated private mortgage insurer’s (pmi’s), experienced negligible credit losses until the market collapse of 2008, after which F&F credit losses of about $300 billion were ten times total pmi industry losses, due to loss severity far exceeding insurance limits. A federal guarantor should be limited to pools of fixed rate mortgages with deeper pmi coverage to reduce exposure, and ideally partially re-insured with private mortgage pool insurers to further capitalize and diversify risk.

The tax and credit subsidies all go to uniformly lower rates. Deeper affordability subsidies in pursuit of federal home ownership affordability goals were previously provided by HUD’s Section 235 homeowner program targeted to individual FHA mortgage borrower needs, the right approach for achieving this goal. But after years of default losses, Congress shut it down in 1989 rather than increase the budget to reflect the true cost. Following the law of unintended consequences, the affordable housing goals were then dramatically expanded in the Federal Housing Enterprises Regulatory Reform Act of 1992, a precursor to their subsequent failure.

The debate over the desirability and magnitude of homeownership subsidies remains unresolved. This proposal shifts it to the political arena.

Kevin Villani

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Kevin Villani, chief economist of HUD during the Carter and Reagan Administrations and Freddie Mac from 1982 to 1985, is the author of Occupy Pennsylvania Avenue on the political origins of the sub-prime lending bubble and aftermath.

… in his 1950 story, The Man Who Sold the Moon.  Given the upcoming anniversary of the actual first moon landing, I thought it would be fun to go back and take a look at this fictional version of the first trip.

In Heinlein’s story, the first manned lunar landing is not government-driven. Rather, it is the achievement of entrepreneur/industrialist Delos D Harriman, known to his friends and associates as ‘D.D.”  Having long dreamed of going to the moon, he finally decides that the time is right.

Harriman-known as “our bad boy” to his fellow Directors of the power cartel–finds his colleagues reluctant to invest in a venture whose costs are so high and whose returns are uncertain.  Even his long-time partner, George Strong, fails to see either financial return or emotional appeal in the effort:

George, isn’t there anything in your soul but discounts and dividends? Didn’t you ever sit with a girl on a soft summer night and stare up at the Moon and wonder what was there?

Yeah, I did once.  I caught a cold.

Nevertheless, Strong supports the project out of loyalty, and some tycoons support it because supersalesman Harriman is able to convince them that there is money for them in the project–or loss, if they decline to participate.  Much of the story is devoted to Harriman’s strategies for fund-raising, some of which skirt–or go over–the lines of legality and ethics. He implies to the Moka-Coka company, for example, that another soft drink maker plans to turn the Moon into a massive billboard (using a rocket to scatter black dust on the surface in patterns), and suggests that the public-spirited Moka company might like to invest in the project to preclude such use of the moon by their rival.

As an old real-estate operator, Harriman is very focused on the question:  who owns the moon?…he argues that the question is indeed meaningful, based on real-estate doctrine that a property owner owns a wedge going down to the center of the earth and extending up to infinity. He doesn’t want lunar ownership vested in any country, even the US, because he thinks it would result in world war (given the moon’s value as a rocket-bomb base), and he does want it vested in his operation, for reasons of profitability as well as protection from bad uses.  His legal maneuvering, involving the UN as well as all countries over which the path of the moon passes–and a mix of non-profit, for-profit, and anonymous corporations–is intricately described.

For the technology of the moon trip, Harriman had hoped to use a nuclear fuel which has been applied to power generation, but it proves too unstable for use in a rocket–so well-known chemical rocket technology must be employed instead (rockets are commonly used for long-distance transportation in the era where this story is set).  On the advice of Harriman’s chief engineer, Andrew Ferguson, the most technically-qualified man in rocketry, Bob Coster, is hired to run the project…but he evidently lacks sufficient management experience and is soon overwhelmed.  Harriman tries to help him out:

“Top administration ain’t engineering, and maybe I can show you a few tricks there, if you’ll let me….Top bossing is like sex; until you’ve had it, you don’t know about it.”  Harriman had the mental reservation that if the boy would not take advice, he would suddenly be out of a job, whether Ferguson liked it or not.

Although the story does deal with the technical aspects of the moon trip, that is not its primary focus…it is really a “business romance”, as Colby Cosh called it. “The Man Who Sold The Moon” emphasizes the financial difficulties, deals, the marketing, and the interpersonal stresses involved in the project–even Harriman’s wife is strongly opposed to his pursuit of his dream.   There are endless angles for the raising of money developed by Harriman and his friends, even soliciting contributions from children.

The “man who sold the moon” tag becomes literal when, inspired by stories of the Florida land boom–“sometimes a parcel would change hands a dozen time before anyone got around to finding out that the stuff was ten-foot deep in water”–Harriman suggests selling lots on the moon itself:

“We can offer bargains better than that–an acre, a guaranteed dry acre, for maybe ten dollars–or a thousand acres at a dollar an acre.  Who’s going to turn down a bargain like that?  Particularly after the rumor gets around that the Moon is believed to be loaded with uranium?”

“Is it?”

“How should I know?  When the boom sags a little we will announce the selected location of Luna City–and it will just happen to work out that the land around the site is still available for sale.  Don’t worry, Saul, if it’s real estate, George and I can sell it.  Why, down in the Ozarks, wheter the land stands on edge, we used to sell both sides of the same acre.”

Comparisons between Harriman and Elon Musk come readily to mind–see the Colby Cosh article–though I don’t think Musk has been credibly accused of anything as far over the line as several of Harriman’s maneuvers.  It has also been suggested that Harriman’s name, and some aspects of his character, are owed to the railroad builder Edward Henry Harriman.

I don’t think the date of the first lunar landing is mentioned in the story itself, but it has been placed–based on Heinlein’s future history timeline and on other stories–in 1978.  So real life beat out science fiction, at least from a date standpoint, by nine years.

Could it have really happened that way–the first moon trip not via a gigantic government/corporate program piggybacking off of military missile technology, but rather by a private/corporate venture?  Given the vast amounts of money spent on the Apollo program and its predecessors–certainly much more than the fictional Harriman and his tycoon friends could have raised–it may seem impossible.  But would it really have been?

Hot weather encourages feelings of gratitude for the existence of air conditioning, the primary inventor of which (at least as far as a practical system goes) was Willis Carrier.  His original motivation was not the improvement of human comfort, but rather solving air quality problems affecting the operations of a printing company.  But A/C was quickly applied to the dehumidification and cooling of human was well as industrial environments.

Initially, systems were large and expensive and hence better-fitted to businesses and other environments serving a lot of people than to individual homes.  One of the first industries that adopted air conditioning was the motion-picture theater industry, starting with an installation at Sid Grauman’s Metropolitan Theater in 1922.

It makes sense to believe, and seems to be generally accepted, that the introduction of A/C had much to do with the great success of the movie industry…if the theater was one of the few places in town where you could be cool, then it would be nice to have enough new movies constantly coming out to justify going the the theater as often as possible.

The same phenomenon applied with department stores…starting with a Hudson’s in Detroit in 1926…though I would think A/C was not quite as impactful in that case as in the case of the movies.

BUT, with the introduction and constant improvement of home air conditioners, the process would have likely gone into reverse: if you can be cool at home, there is less incentive to “go to the movies” unless there is something showing that you really want to see. Similarly with retail..although until the introduction of the consumer Internet, you still needed to go to a store for most things.

It is pretty common that a technology that helps a particular industry at one point will, later and with further development of that industry, harm that industry.  Another example is the newspaper industry:  one of the great enablers of the growth of the newspaper industry was the telegraph (along with the high-speed printing press and the Linotype machine.)  But as digital communications (of which the telegraph was an early example) developed into data networks and ultimately the Internet, the ability to conveniently extend the information flow into the home was devastatingly harmful to that industry.

Returning to the air conditioner, another impact of this technology has been geographical: making areas that were previously not-so-desirable for reasons of climate much more generally inhabitable…as in the cases of the US south and southwest.

A/C is a significant consumer of energy in the form of electricity, and as it is more widely adopted in places such India, it will have a major impact on electricity consumption in those countries.

Thoughts?  Other industry examples?

China’s intelligence services appear to be using LinkedIn, with profile pictures generated artificially, for the recruitment of agents.

Chinese intrusion into US affairs has not generally gotten anywhere near the attention that Russian intrusion…real, attempted, or imagined…has gotten, but it needs more visibility.  See my related post So, Really Want to Talk About Foreign Intervention?

The Daughter Unit and I spent most of Saturday morning in the lovely little town of Wimberley, Texas. Wimberley is situated on a particularly scenic stretch of the Blanco River, in the hills to the west of San Marcos. It’s closer to Austin than to San Antonio and seems to have become even more of a weekend tourist draw, since we first visited it in the late 1990ies. Then there were just a handful of little shops catering to tourists, and one restaurant with had memorable hamburgers and an outside deck which overlooked the riverbank, all grown with cypress trees, great and green. There were a fair number of hippie artisan types; potters, glass-blowers, metal-fabricators and the like, plus the usual number of antique shops, which tended more towards the ‘quaint old country junk’ side of the scale. On the first Saturday of the month, Wimberley stages a mammoth open-air market – something we’ve been to a number of times. It’s supposed to be the oldest and biggest one in Texas.
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A website devoted to that topic:  Reshoring Manufacturing

So, I’ve been following, in a desultory fashion, the kerfuffle over various movie projects suddenly discovering that filming in a state where the local voters and their legislature prefer putting limits on the availability of abortion is … OMG! The Handmaids’ Tale is upon us! Flee, Flee for your lives, those TV series and movies choosing to shoot in lower-cost states than California (where about every scenic local has been seen in the background many a time. It was, once a upon a time, my private amusement, in spotting familiar locations in and around Los Angeles appearing in popular TV series.) Geeze, it’s almost as if among the Hollywood glitterati the need for abortion services occurs at least once a month and twice on Sundays. Given the various reports of disgusting rapey-sexual conduct among producers and directors (mostly male) perpetuated upon (mostly but not exclusively) female performers, perhaps on-command abortion services might be required at that. Funny old thing that – these are the same producers and organizations who have no problem filming in foreign countries with even stricter limits on abortion. Read the rest of this entry »

It has often been asserted that the US doesn’t need to worry overmuch about our position in Manufacturing, because Services are the future and that is where we will have the most competitive advantage.  And, indeed, the balance of trade in services is more favorable than that in the goods-producing industries: for 2018, exports of services totaled $821 billion, whereas imports of services were only $557 billion.

However, while imports of services are today small compared with imports of goods, which for 2018 were almost $2.7 trillion, it would be a mistake to conclude that services businesses and services jobs are immune to offshoring.  Indeed, for many types of services, offshoring/exporting is easier than the offshoring/importing of goods:  there are no transportation issues, and, in the case of imports to the US, there are no tariffs at all.

Telemigration…the term was introduced by Richard Baldwin in his book The Globotics Upheaval…is the ability to have remote workers doing things that previously would have required their physical presence.  Obviously, the ability to do this has been greatly enhanced by the availability of the Internet and other forms of high-bandwidth low-cost communications.  Today, medical images and legal documents are being reviewed in low-cost-of-labor countries.  Software is being developed for American companies in countries around the world.  Offshoring of clerical operations has been practiced by US firms for a couple of decades, and, of course, the offshoring of customer service is common.

Baldwin also argues that telemigration will be greatly enhanced by the availability of machine translation technology, especially Google Translate.  I think he may be overstating the case here–from what I’ve seen, the quality of GT translations is highly variable.  Not sure how well this approach would work in facilitating the interaction that is often required among team members to create something or solve a problem, and I am sure I wouldn’t want to trust it exclusively for something like, say, translating the functional specifications for a life-critical avionics system to be programmed by non-English speakers.

But there are a lot of English-speakers in the world, and a lot of activities in which fluency in a common language is not essential.

One area in which a lot of telemigration seems to be occurring is in software development and maintenance.  Here for example, is a company which acquires application software companies and offshores much of the ongoing work (which presumably includes incremental product enhancements as well as problem-fixing) to contract programmers: company’s chief recruiter asserts that the current cloud wage for a C++ programmer is $15 an hour. As the Forbes article notes, that’s what Amazon pays its warehouse workers.  (Well, at least in the US–and $15/hour for a programmer in, say, India is surely worth a lot more than $15/hour in this country.)  What makes this story particularly interesting is that the founder/CEO of the company was noted, in his earlier incarnation in a different software business, for paying software people very well indeed and going to great lengths to recruit them.

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