Category: Industry 4.0

Note from the future

Succession, Transition, Resilience, Revolution

At the end of 2022 members of the Bestem Network gathered in London to discuss and debate what we expected from the year ahead. The discussion was seeded with three topics:

  • The 4th Industrial revolution will happen as a consequence of transitioning towards a low carbon economy, do you agree?
  • How will we balance the resilience needed to survive the short-term disruptions (inflation, energy scarcity, supply chain, political upheaval) with innovation and roll-out of the transitions that will be required?
  • What steps are you taking to enable the next generation of leaders to step up and take control, drive their agenda while contributing your wisdom but not getting in the way?

Over the holidays Dan and I wrote up the notes from the discussion and shared them with the network, they are now available for general release. Please read and enjoy.

https://bestemnetwor.hubspotpagebuilder.com/note-from-the-future-2022c

Your next career will be about asking questions

The fourth industrial revolution is comming quickly. I’ve been playing with openAI (more later) and have asked it’s ChatGPT bot a few questions. I also asked it’s DALL-E to generate the image ont the top of this page. 80% of this article is generated by AI.

I asked the AI questions, and it provided the answers. See what you think. In the future I suspect the role of the human is to know which question matters most.

Try these your self at: https://chat.openai.com/chat and https://labs.openai.com/

Write 50 words on generative AI

Generative AI is a type of artificial intelligence that involves the use of machine learning algorithms to generate new data that is similar to a given input. This can be used to create realistic images, videos, audio, and other types of media. Generative AI can be trained on large amounts of data and can produce high-quality outputs that are difficult to distinguish from human-generated content. Some common applications of generative AI include image and video synthesis, natural language generation, and audio generation.

write 100 words on the history and progress of open.ai

OpenAI is a nonprofit research organization founded in 2015 by Elon Musk, Sam Altman, and other leading figures in the tech industry. The goal of OpenAI is to advance the field of artificial intelligence and to promote the development of AI that is safe, transparent, and beneficial to society. Since its inception, OpenAI has made significant progress in the field of AI, including the development of advanced machine learning algorithms and the creation of large-scale language and vision models. In 2018, OpenAI launched Dactyl, a robot hand that was able to solve a Rubik’s cube with human-like dexterity. More recently, OpenAI has been focused on developing AI technologies that can operate in complex and dynamic environments, such as video games and robotics. Overall, OpenAI has established itself as a leading player in the field of AI research and development

Write 50 words on how Regenerative AI will affect the 4th industrial revolution and employment in white collar roles

The fourth industrial revolution, also known as Industry 4.0, is characterized by the use of advanced technologies such as artificial intelligence, the Internet of Things, and robotics. Generative AI is expected to play a significant role in this revolution, potentially affecting the demand for white collar jobs. Some experts predict that generative AI will automate many tasks currently performed by humans, leading to job displacement in some industries. However, it is also possible that generative AI will create new job opportunities in fields such as data analysis and machine learning. Overall, the impact of generative AI on employment in white collar roles is likely to be complex and multifaceted.

write 200 words on the potential economic benefits and pitfalls of the 4th industrial revolution

The fourth industrial revolution, also known as Industry 4.0, is characterized by the use of advanced technologies such as artificial intelligence, the Internet of Things, and robotics. These technologies have the potential to bring significant economic benefits, including increased productivity, efficiency, and competitiveness. For example, the use of AI and automation can help to reduce the time and cost of certain tasks, allowing businesses to operate more efficiently and effectively. Additionally, Industry 4.0 technologies can enable the creation of new products and services, leading to the development of new markets and revenue streams.

However, the fourth industrial revolution also presents potential pitfalls and challenges. One of the main concerns is the potential for job displacement and unemployment as a result of automation. While some experts predict that Industry 4.0 technologies will create new job opportunities, others argue that many jobs will be replaced by machines, leading to a decrease in demand for labor. This could have significant consequences for workers, including income inequality and social unrest. Additionally, the rapid pace of technological change associated with Industry 4.0 may create challenges for businesses and governments, who will need to adapt quickly in order to remain competitive. Overall, the economic impact of the fourth industrial revolution is likely to be complex and multifaceted.

write 200 words on the intersection of energy transition on the 4th industrial revolution

The intersection of energy transition and the fourth industrial revolution, also known as Industry 4.0, is a complex and evolving area of study. Energy transition refers to the process of shifting from the use of fossil fuels to more sustainable forms of energy, such as renewable sources like solar and wind power. Industry 4.0, on the other hand, involves the use of advanced technologies such as artificial intelligence, the Internet of Things, and robotics to drive innovation and economic growth.

The intersection of these two trends presents both opportunities and challenges. On the one hand, Industry 4.0 technologies can help to accelerate the transition to renewable energy by enabling the development of new energy storage systems, smart grids, and other technologies. For example, the use of AI and machine learning can help to optimize the operation of renewable energy systems, making them more efficient and cost-effective. Additionally, Industry 4.0 technologies can enable the creation of new products and services related to renewable energy, leading to the development of new markets and revenue streams.

However, the transition to renewable energy also poses challenges for Industry 4.0. One of the main challenges is the need for large-scale infrastructure investments to support the transition, which may require significant financial resources. Additionally, the transition to renewable energy may disrupt existing energy markets and business models, potentially leading to job losses and other economic impacts. Finally, the rapid pace of technological change associated with Industry 4.0 may create challenges for policymakers and regulators, who will need to balance the need for innovation with the need for stability and reliability in the energy sector. Overall, the intersection of energy transition and Industry 4.0 is a complex and dynamic area that will require careful planning and coordination in order to maximize the benefits and minimize the risks.

Write 100 words comparing the importance of asking the right question with researching the answer

Asking the right question is just as important, if not more important, than researching the answer. This is because a well-formed question can help to clarify the issue at hand and provide a clear direction for the research. On the other hand, a poorly-formed question can lead to confusion and ineffective research. Additionally, asking the right question can help to ensure that the research is relevant and useful. For example, a question that is too broad or too narrow may not provide the information that is needed to address the problem. Asking the right question can also help to save time and resources by focusing the research on the most important aspects of the issue. In short, asking the right question is an essential first step in any research process.

will careers of the future focus on asking the right question or doing repetitive work?

It is difficult to predict the exact nature of careers in the future, as it will depend on many factors such as technological advancements, economic conditions, and societal trends. However, it is likely that careers of the future will focus more on asking the right questions and less on repetitive work. This is because the widespread adoption of artificial intelligence and automation is expected to automate many tasks that are currently performed by humans, such as data entry and routine data analysis. As a result, careers of the future may focus more on tasks that require higher levels of creativity, problem-solving, and critical thinking. These skills are often associated with the ability to ask the right questions and to think outside the box. Additionally, the rapid pace of technological change is likely to create new job opportunities in fields such as data science, machine learning, and artificial intelligence, which may require individuals to be adept at asking the right questions in order to drive innovation and progress.

Framing Energy Transition

I’m dissatisfied with the term Energy Transition. Everyone’s doing it, but they’re all doing something different. So, I’ve been working on a framework for describing what’s going on.

Much of my network is concerned with Oil and Gas and there is this term “Energy Transition” banded about. Which it seems they define as –

“What we are doing now won’t work in the future. Let’s find ways to apply our skills to ANYTHING new and hey-presto, that must be energy transition”

As a definition it is not helpful. So I am looking for a different way of classifying things. This is what I have so far.

Meta Industries

Firstly, I took the word Energy and examined it. That led me to realise that it is really one of a few “meta-industries” that provide the fundamental requirements for our world. Energy being one. Others include things such as Shelter, Food and, Transport. Each of these meta-industries have alternative outputs which can be used to provide their utility. For instance, Energy, output can be fulfilled by Oil, Gas, Coal, Electricity, etc. You get the picture. It’s the same for the others meta-industries.

Meta Industries in transition

Each Meta industry has alternative outputs which are, somewhat, interchangeable and can achieve the primary goal of supply.

Each of these alternatives outputs have a supply chain of interconnected industries that will be impacted by a switch between alternatives. Such a switch will also require modification of consumption activities. i.e. switching more of the Meta Industry “Energy” output from Oil to Electricity requires electric vehicles, which require batteries etc.

I think talking about working in “Energy Transition” is almost meaningless. Energy Transition is an outcome created by other activities. These activities are things you can work on. Energy Transition is not a thing in itself but a description of what happened. It would be the equivalent of saying you work in “Energy Profitability”.

Working Up, Working Down

This thinking has led me to a framework around each alternative supply chain (working down) and from each “traditional” industry (working up).

To explain, the Oil Industry is a component of the “Energy” supply chain, but is also a component of the “Fertiliser” supply chain which is part a “Food” Meta Industry output alternative.

It is difficult to analyse the “oil industry” in isolation as it gets caught up in all it’s supply chains from energy to chemicals to road construction to transportation. I propose that we can simplify the analysis by looking down from a fundamental Energy Meta Industry.

There are 4 Industry groups impacted in a transition between alternative outputs of a Meta Industry. E.g. the switch from Oil to Electricity.

  • A: Industries that will cease to be needed
  • B: Industries that mitigate the impact of (A) industries until they do
  • C: Industries that will replace them
  • D: Industries that do not need to change at all

Industries that die and ones that help them pass peacfully

The (A) industries are unwelcome but necessary for a while. The goal should be to make them obsolete as soon as possible.

This removal creates economic opportunity:

  • To reduce the environmental impact until they do (for instance by reducing unnecessary emissions)
  • As facilities are removed from service, activities for dismantling the infrastructure will flourish
  • Professional services for financing, operating, and advising in this space.

The reducing capacity of (A) industries will lead to reduced scale economies and higher cost of capital.

Temporary mitigating industries emerge

The (B) industries are temporary, they will somehow clean up the unavoidable impact that (A) industries have until they are closed down. Carbon scrubbers that sort of thing.

The doom-spiral for doomed industries

Even if they are doomed, (A) industry projects will still be required to be around for a time. But they will also need to execute unpopular projects with loads of political risk. They will have higher cost of capital. They will carry increased costs from compliance, regulatory charges, and penalties. They will need to pay for a new input cost – (B) industries. They will have higher operational costs. They will find it hard to recruit and retain staff so labour costs will increase. These increased costs will lead to increased output prices. This will cause further reduction in demand for their product. Scale economies will kick in for competitive substitutes. It will become a downward spiral for the old, and an upward whirlwind for the new.

New industries emerge as innovation accelerates

The (C) industries are the up and coming replacements. They will likely be easier to finance, enjoy tax breaks and subsidies. They will also benefit from scale-up, learning economies and rapid innovation. They are likely to employ modern technology such as autonomous vehicles, AI, 3D printing and big data from the start. They will be the foundation of the 4th industrial revolution.

Some things stay the same

The (D) industries are the ones with very little impact on the environment that don’t need to change in this Meta Supply chain. But may be impacted by due to interference from other Meta Industry transitions.

Meta Industries need to be analysed seperately

This lens applies to all the Meta Industries, and can help disentangle the analysis.

Of course there are interconnected implications, because if the Oil Industry is a type (A) industry for energy, it may be type (D) for, say, fertiliser manufacturing. So even if it is eliminated from the Energy Meta Industry, it may not be from the Food one. But the implications of the changing cost of production may have interesting implications for fertiliser pricing and availability.

Two brand new Meta Industries

On top of this there are two more new Meta Industries. These meta industries don’t seem to function well with our current rules, regulations, incentives and rewards. To get them to function we’ll need some changes to the economic rules of the game.

Meta Industry 1: Coping with Climate Change. As sea levels rise and storms increase there will be activities required to deal with this. From insurance, to design, to retro-fit conversions, to disaster recovery.  Meta Industry Output is “resilience”.

Meta Industry 2: Cleaning the biosphere. There are technologies being worked on that can remove harmful gasses from the air, can rehabilitate rain forests, rewild habitats etc.  Meta Industry Output is “Biosphere Maintenance”

The problem with these two Meta industries is that it’s not clear who would pay. In an individualist capitalist society it is in no one person’s interest to pay for this, but we will all benefit from it if it occurs. We have moved away from socialist policies for the common good for a long time, but maybe these industries will require us to return to them – and on a global scale.

We must act together or not at all

Climate saving behaviour is binary and it’s global. We’re either all in, or all out. You cannot get off the bus or sit this one out.

As a species we have been very good at creating multiple view points on many topics. Each side convinced that they are right. History being written by the victors and the untrodden path left shrouded in what-ifs.

With the Internet we have “culture wars” where no choice is made but factions live side by side (with various degrees of friction) and multiple opinions matter.

While there are a few points of view on climate change, the science seems to be clear. But then not everyone believes in science. Most engineers believe in science. But not all the ones I know choose to believe climate scientists. They explain to me (with no data) that forces bigger than us must be doing it (volcanoes, solar weather etc.).

Many don’t believe in religion. Whether they see the irony in being scientific, rejecting religion as hocus pocus but then assigning climate change to a “force bigger than us that we can’t understand” I’m not sure.

We cannot have co-existing points of view on climate and succeed. We, as a species are either for cleaning up our act, or we are not. There can be no compromise. To be successful with a path of modifying the atmosphere the vast majority of the world will need to act. It is not a personal choice, it is a collective one.

The world seems to be increasingly insisting that we need to clean up our act. Whether “right” or “wrong” does not matter, it looks like it is happening. There will be a battle for public opinion but will not be national. It will be global.

Will Peace Keeping Forces, may become environmental enforcers working at the behest of the UN, the World Bank, the IMF, WHO or goodness knows? Perhaps the IPCC will mobilise an army to takeover polluting plants and shut them down.

I’ve been a banging the drum for a technology led 4th industrial revolution for years, but I now feel we will have a technologically enabled, climate led one.

The implications of technologies such as AI, Autonomous Vehicles, Remote Sensing, Big Data etc. means that the outcomes will be similar to those I’ve written about before but they will be a by-product. I’ve realised the optimisation function has changed, or it was always this and I’ve just woken up to it.

Should we nationalise oil and gas?

6 Years ago, I touched on the UK boom years from 1979 and how much of that was financed by selling state industries and taxing oil and gas. It also discussed the reduction in tax revenues and the power of private money to distort local markets that has arisen lately. https://bestemnetwork.com/2016/02/02/schumpters-cayman-island-holiday/.

Today we are in a world of record gas price rises with electricity being sold at the marginal rate of production – which is determined by gas prices. This has led to massive state interventions in the energy markets of Europe. One approach is to tax the super-profits of non-gas electricity producers and use the money raised to distribute to the poor to help with their bills (French model) and another is load up on borrowed money and distribute it to power companies and the general population through bill subsidies and caps taking no regard to income or usage (British Model). The British model leads to borrowing almost 2x the money required for the furlough scheme. They are heading for borrowing levels (104% of GDP) not seen since the end of the Second World War.

I wrote about tax systems and wealth distribution in regard to the 4th Industrial Revolution here: https://bestemnetwork.com/2021/01/08/part-2-work-trade-taxes-and-government/

It is apparent to me that political tensions are mounting around the issue of private ownership of essential services. These include things such as education, health, rail, water, and power. 

The movement towards cooling the planet will require global co-operation. After the second world war trans-national institutions such as the Nato, the IMF and the World Bank were set up to ensure that we did not recreate the problems that led to the hyper-inflation in Germany of the 30’s and the Great Depression that enabled dictators to flourish – this eventually led to global conflict. Maybe access to essential services should be controlled this way in the future?

Thought Experiment

Consider this if you will. It is only a thought experiment.

Neoliberal markets seem to be failing to create public good as witnessed by the electricity suppliers’ bumper profits and freezing grannies who can’t afford to eat.

Water companies continue to pump raw sewage into the sea while taking money without any real-choice from households and distributing it to their foreign owners as dividends.

Profit seeking behaviour can lead to bad outcomes for the public if it is used to withhold goods and services essential to life and when poor behaviour towards our shared environment is rewarded.

In these situations the customer essentially has no choice but to pay. To me this sounds a lot like a tax, but where the benefit does not go to the citizens, and the “tax payer” has no control over operations whose side-effect is unwelcome.

If we are to reduce emissions, perhaps we might need to treat Oil and Gas as a controlled substance like say plutonium, or asbestos. I have been disappointed that some of the oil executives I speak to don’t really want to reduce unnecessary emissions – even when doing so would generate positive cash flow from saved fuel gas. They just don’t see it as a priority when their time can be spent elsewhere for more profits.

Perhaps the profit motive should be removed?

We also have a transition problem to deal with. We will need to develop new oil and gas fields, but we also want to shut them down as quickly as they can be replaced. That’s going to lead to some expensive risk capital and an inevitable rise in prices if the “free” market is put in charge.

One solution to capital availability and the required policy volte-face (to switch from building to shutting down capacity) might be re-nationalisation of assets. Operators can be paid a service fee to produce them.

Perhaps it won’t be a nationalisation but a super nationalisation (internationlisation? globalisation?). Setting up an institute like the IMF to control all global oil and gas operations, control the product prices and set consumption quotas to ration usage. Perhaps that might be a new role for OPEC to regulate and license consumption rather than regulating production quotas to maintain the price.

Let’s see how the political winds blow, but I feel the limits of free markets are likely to be tested when it comes to Oil and Gas.

If you have time, check out this post on energy security – it’s good to remember where we came from. https://bestemnetwork.com/2016/02/09/energy-security-and-geopolitics/

Are we there yet? (or road-bock ahead – let’s take another route)

What a period of unpleasant surprises we’ve had recently. In my view they are a combination of causes and effects of the 4th Industrial Revolution. Global warming concerns are driving decarbonisation which is driving energy transition which is driving new technology adoption and resulting in the 4th Industrial Revolution by the back door. It’s not smooth and gradual – external shocks are accelerating and decelerating the process. Not everyone’s happy about it.

There have been a series of large shocks to the economic system. The system that prevailed from 1979 until 2008 no longer functions. The word crisis has been overused. It has not been a single crisis but a series of lurches during a sustained dismantling of a globalised integrated approach that was fuelled by logic and data in what will be seen as a politcally benign period.

I am not going to detail all the main drivers and the minor and major shocks but it’s quite a list. One that includes drivers like digitalisation and information transparency, speculations such as the CDO market (and probably bitcoin), and unplannable events such as Icelandic volcanoes, pandemics, Brexit and a war in Europe.

Almost 10 years ago I started the Bestem journey in pursuit of understanding and helping others cope with the 4th Industrial Age. If you had asked, I would have explained how I believed the rise in technological capability would inevitably result in its adoption. Increased efficiency and the “rise of the machines” would lead to changes to working patterns and force changes in the way wealth was distributed.

You can imagine how disappointed I am that, even with solid business cases in place, companies I talked to resolutely couldn’t have cared less. Certainly not enough to implement change. They were doing just fine thank you and there were more important things to spend their time on. Admittedly I was talking to Oil and Gas operators who exist in a quasi-monopolistic position (where they rarely feel the pressure to compete with each other) but the story was similar in many established industries. Taxi drivers and Hotels were disrupted by Uber and AirBnB – but they were victims of an information revolution rather than an industrial one. If anything, their systems became less efficient, but the profit-distribution changed.

A couple of years ago, I realised that the economic case for solar had dramatically improved. Semi-conductor technology and electrical efficiency had also experienced a step-change improvement. I was sold on the case for energy transition where electrical systems replaced chemical ones based on traditional economic drivers. Of course, I argued, in certain applications where portability of high-density energy was required (air travel etc.) there really were not many alternatives to gasoline available. So, my view was that energy growth would be taken care of through electricity but that fossil fuels would remain the baseload for a while to come.

Then I saw the data on climate change and decarbonisation. I did my research, I read Bill Gate’s book, I watched the BBC series on the obfuscation operations conducted by Big Oil and re-watched Al-Gore’s inconvenient truth from 25 years ago.

I still speak to oil companies that see compliance with environmental legislation and emissions reductions as some form of cost to be managed. It really isn’t. Protecting the atmosphere (or as Al Gore put it, the layer of varnish on top of the globe on your desk – yes it is that thin, and the only thing that makes life possible) is extremely important. It should be our number one priority, it’s a matter of morals not profits. It should be a matter of regulation.

Add to that the evident issues of energy geo-politics and how “western” civilisation and values seem increasingly at odds with the behaviour of “strong-men” leaders who control fossil deposits, and it seems clear that independent, non-centralised, distributed generation and consumption adds resilience that can withstand shocks and provide stable, reliable and fairly priced energy.

We are on the cusp of change in many industries forced by energy scarcity, emissions reduction, supply chain re-configuration, demographics, and work-force expectations. There will be no choice but to adapt to these new configurations, some of which will be underpinned by legislation and international sanctions.

Of course, if you are setting about re-configuring an industry it will inevitably use new information and digital technologies, it will use AI and it will use 3D printing. You might not choose to swap your perfectly functional old system with a slightly better new one, but if you must change anyway then of course you will replace with systems that use the new technologies. These new technologies will be more efficient and will lead to different employment mechanisms and the distribution of wealth.

It’s the same outcome I’ve been banging on about, but it will take a different route.

Change is hard, Business case for survival is hard – screw it let’s cut costs

BA still can’t get operational IT right. The 4th Industrial Revolution has been delayed due to myopic business cases. I suspect BA as a large encumbant in a stagnating industry suffers from this. Fighting climate change will change the calculus and global enforcement of new laws, and what is viewed as acceptable behaviour will require a rethink on spread-sheet optimisation.

When my focus was solely on the digitalisation aspects of the 4th industrial revolution, I wrote a story about BA in 2017 [link], and then again in 2018 [link]. On both occasions I highlighted both how fundamental “Operational Information Technology” was to the heart of the business (rather than a support function) and how “business-case” led decisions had led to bad outcomes.

My friend Krzysztof [link] talks about technical debt  and how, like fast food, it’s occasionally acceptable – but in the long-term will kill you. He speaks of this in the context of software development, but I think it could equally be applied to deferred and missed modernisation opportunities for operational systems.

I thought BA had got the message, and then this:

https://www.theguardian.com/business/nils-pratley-on-finance/2022/mar/31/ba-investors-as-much-as-customers-deserve-explanation-for-it-woes

Change is hard

BA said they would change, and I assume they tried. Just goes to show, change is harder to achieve than it looks. The first step is for leadership to acknowledge that change is required, but implementing that change can be difficult, especially if most of the reason for bad outcomes is their own inability to admit to blind spots. Add to that some bad decision making processes (and possibly some autocratic opinoins) and this is what happens.

Diversity is often talked about but not always understood. Building “Cognitive Diversity” into leadership decisions is challenging, especially when – in order to reach new decisions – the fundamental value decision frameworks need to be challenged. My friend Csaba over at ICQ Global [link] works extensively in this area. If anyone has a line into BA’s management, they might pass on his number.

This is the digitalisation problem. It comes down two factors:              

  • cost justification cases for the SURVIVAL of companies cannot be made due to an inability to demonstrate a return on investment. (daft when you think about it)
  • cases for cutting flexibility and reducing performance on the grounds of cost saving are quickly approved and implemented.

The result is, no digitalisation, no change and a crash course in crisis management. I think this all stems from most “business case” and ROI calculations assuming that the business environment will remain static and everyone will wait around until you can educate senior management and make sense of their digital investment opportunities.

Innovation will be driven by decarbonisation

With the race to decarbonise the atmosphere well and truly on – goals such as electrification and energy transition will impact whole swathes of supply chains.

Digitalisation and the wider adoption of 4th Industrial Revolution technologies will be a prerequisite for survival. The purpose will no longer be to boost short-term profit, but to achieve outcomes that enable companies to survive. It will be interesting to watch how myopic business cases will be overcome.

Perhaps there is a case for saying that financial returns are a hygiene factor and should have a target optimal. Maximisation – for this phase of the transition – should perahaps be focussed elsewhere.

How are you going to hire, train, incentivise and manage the performance of the leaders we now need in place?

It’s all about productivity

If you have followed this blog for a while you will know that, like a broken record, I have been banging on about digitalisation, the 4th Industrial Revolution and the productivity conundrum. I have often referred to Tim Harford’s article about electrification and how long it can take to make a transition.

Recently, I’ve started to add the “Energy Transition” into my thinking on the topic. The outcome remains the same but I keep finding more and more reasons why it will inevitably happen.

One of my go-to reads is Ian Stewart, Deloitte’s chief economist. If you’ve not signed up for his Monday briefing then you really should – it’s excellent. Today I have lifted most of his post (available here: https://blogs.deloitte.co.uk/mondaybriefing/2021/06/the-looming-capex-boom-.html) not only because I’m being lazy but also because it talks to many of the points I’ve been trying to communicate to my clients over the last 7 years (since I started Bestem).

Throughout history economies have been shaped by shocks, from recessions to technological shifts and energy transitions. The Great Depression helped change thinking about the role of government, paving the way for a permanent expansion in the state. The switch from steam power to electricity triggered a vast reorganisation of manufacturing.

The pandemic and the drive to net zero are similarly epoch-making events. The pandemic has driven technology adoption and changes in business practices. The energy transition involves an overall of energy production and distribution.

The structure of the economy will change. The sectoral balance of the economy, the skills needed, the uses of capital, the allocation of capital, will shift, creating winners and losers. It will also bring opportunities to rethink organisations, invest and raise productivity in ways that had not previously been considered viable or necessary.

The unlocking of the economy has unleashed a surge of pent-up demand into an economy operating with reduced capacity. That is creating inflation and bottlenecks, and incentivising investment. Meanwhile large corporates are flush with cash, capital is cheap and institutional investors want businesses to step up investment.

The global semiconductor shortage has spurred a flurry of investment announcements in new factories. Automakers are building new battery plants to meet demand for electric vehicles. Rising freight rates have prompted a surge in new orders for container vessels. And the move to ‘hybrid’ working and the growth of online shopping require a reconfiguration of office space and an ever- rising volume of warehouse capacity.

Labour costs play a role in investment decisions too. As countries emerge from lockdowns labour shortages have started to appear in sectors including manufacturing and construction. In the UK increases in the minimum wage continue to outstrip inflation, raising costs for firms and sectors reliant on lower-income work. An exodus of some 650,000 foreign-born workers from the UK last year, equivalent to 2.0% of the workforce, and a reduced flow of less skilled labour from the EU, create new pressures. More expensive and scarcer labour would sharpen incentives to invest in productivity-enhancing equipment and skills. Machines, for instance, could readily substitute for labour in washing cars and coffee preparation (I was in a motorway service station last weekend where the queue for Starbucks led me to get the same product from a self-service machine in the next-door Waitrose. I couldn’t tell the difference).

In the UK government policy has set out to boost investment with the capital-allowance ‘super-deduction’ targeted at plant and machinery. The Bank of England estimates that this will have its greatest effect in raising investment in some of the most capital-intensive sectors including manufacturing and transport.

A surge in private sector capital spending is likely to coincide with rising levels of public infrastructure investment, particularly related to ‘green’ projects. So, with private and public investment likely to grow, this recovery is looking very different from the one that followed the global financial crisis. Then UK business investment took six years to climb back to its 2008 peak. Today the Bank of England sees investment snapping back quickly, ending next year almost 10% above pre-pandemic levels. A similar story is likely to play out globally. Morgan Stanley believes that global investment will stand 20% above pre-pandemic levels at the end of 2022, a remarkable recovery from last year’s downturn.

This sort of surge in capex could help shift the dial on productivity, especially if, as seems likely, it is accompanied by organisational changes and the application of technology. (While business investment fell in the US and the UK last year, spending on IT and computers rose as firms investing in remote working and new ways of doing business.)

Much of the problem of poor productivity in the UK is concentrated in the long tail of medium- and smaller-sized businesses. The pandemic may, paradoxically, have had some positive effects here, as businesses of all sizes adapted and used new digital practices to weather the downturn.

One encouraging sign comes from the retail and administrative services sectors. Both sectors have registered strong productivity growth over the past decade, defying the characterisation of these as labour-intensive, low-productivity parts of the economy. Online shopping, self-service and use of IT in administrative tasks seem to have played a big role. It may be that other labour-intensive sectors, such as healthcare and education, might in time achieve similar gains in productivity.

It won’t be plain sailing. In some important respects the pandemic and the energy transition could act as a drag on productivity. It’s not, for instance, clear how significantly increased levels of homeworking will affect productivity. A recent study of a large Asian tech company found that increased communication and coordination costs more than offset gains from reduced commuting times and reduced overall productivity . Ben Broadbent, a member of the Bank of England’s Monetary Policy Committee, cautions that lower use of offices and transport infrastructure imply a less productive use of the capital stock . Nor is capital spending rising everywhere. Some fossil fuel companies and airlines are cutting capex in anticipation of lasting weaker demand. Structural shifts in the economy risk creating mismatches between supply of and demand for labour. The interruption to education and rising youth unemployment could leave lasting scars.

The pandemic and the energy transition represent the greatest structural change since the shift to electrification and the Great Depression in the inter-war period. The question is how these changes can be harnessed to build a better future. The years after the financial crisis were marked by weak investment, productivity and wage growth. We should be able to do better this time

Here are a selection of earlier articles that talk to the same themes.

Innovation and productivity with 4th Industrial Revolution
To innovation and beyond – 2019+
Working Hours Vary by Country

How’s your Covid score card?

Today the FT ran a story about food inflation. They said:

“Global food prices surged by the biggest margin in a decade in May as one closely-watched index jumped 40 per cent in the latest sign of rising food inflation.”

https://www.ft.com/content/8b5f4b4d-cbf8-4269-af2c-c94063197bbb

15 months ago we flagged that possibility. Mark, Ken and I sat down to collate the findings from our network and to analyse it through our innovation and transformation frameworks. We not only had some sound advice on what approaches could be considered, but also we threw in some “wild-cards”.

Corporate debt overhang will need to be erased before growth emerges – that may be through default, forgiveness or increased inflation. The availability, cost and impact of capital may be unlike anything experienced by today’s finance professionals. Long term mass-unemployment may result from the disruption to our daily lives and lead to political pressure to change the order of beneficiaries from the production of wealth from the application of capital.

It wasn’t universal of course – we also suggested that house prices might crash. I think the government thought that too, because they suspended property purchase tax to stimulate the market. We were wrong, we didn’t expect that thousands of people would want to leave cities and drive up the price of properties with outside space. Though it’s not over yet…..

Why not read the report again (it’s short) it would be great to hear your take on our other advice – where did we nail it, and where did we miss? Alternatively you can also read the much more extensive book “Responding to Crisis, a Leader’s handbook” available from amazon here:

COVID – The Transformation HandbookDownload

Energy Transition is a horizontal technology.

Until today I thought energy transition was a consequence of the fourth industrial revolution. Now I am convinced it is fundamental driver of change.

I have been an advocate of digitalization being at the heart of the fourth industrial revolution for a few years now. One of the reasons for it is that it is a “horizontal technology”. It is called this because it affects many other industries. Farming gets better, industrial processes get better and (when they get self-driving to work) others, like taxi driving, cease to exist. While I still think digitalisation is at the core, I don’t think it stands alone.

I am a gen-Xer and, 5-10 years ago, I started to notice there was a lack of interest in careers in engineering of fossil fuels from new entrants. I blamed that on all the old folks in grey suits not listening to new hip ways to be digital. While the ignorant old men rejecting digitalisation (and pooh-poohing new ways to work) was definitely correlated I’m no longer sure it was causal.

When I went to the energy sessions at London tech week, no one was talking oil and gas. No one. Not a single fossil fuel company was present. It was all renewables, smart grids, energy efficiency. Now I know why.

Energy transition – and in a broader sense decarbonisation – affects every industry. In the same way that digitalisation is not doing business the same way and just replacing paper with computers, energy transition is not about going about life in the same way and just changing the fuel used.

Today I watched this remarkable video by my friend Rob West who has been in the Bestem Network for a few years now.

It also looks like Rob might think that video is a new skill that’s going to be required to function in the commercial world soon. I do.

Not only has he provided me with a light-bulb moment around energy transition, but also he explained the dilemma of being true to your metier while trying to get people to pay you to do more of what you think is important work. In a way he also shows how digitalisation allows businesses to be more specialised and to reward those who know what they are talking about rather than just those that can harness the power of others. That’s how I intend to run Klynetic Innovation.

Good work Rob, keep it up!