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:

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!

How are you going to innovate?

This year everyone appears to be talking about innovation. Many think it’s being driven in response to the pandemic. If that were so, all we would need to do is wait until the vaccine is delivered and we can forget about it and go back to the way it was. Almost no-one believes this to be true.

The commercial world is evolving, and the end state is not yet known. This means traditional budgeting, planning, efficiency drives and cost reduction will not be enough for success. Organisations must accelerate their innovation agenda – this is not about inventing something new; it’s about taking what you know, reconfiguring it to be relevant and continuing to adapt and evolve.

In the previous three posts I set out some of my thinking about the fourth industrial revolution because I think this model serves well to explain why we are experiencing change. As part of your innovation thinking you may want to consider seven fundamental factors that underpin the revolution. They may not have an immediate impact on today’s business but as Wayne Gretski almost said – it’s best to skate to where the puck is going, rather than where it is now.

It is hard to untangle these factors because they influence each other and form self-re-enforcing feedback loops (which accelerates change). I find it useful to use this when considering issues and deciding where to focus, I hope you do too.

1. information creation and connectivity

The ability to create, share and access information has implications across social, political, and industrial spheres. Whether as flash-mob revolutions, exposure of tax fraud, mob-trolling of celebrities or remote monitoring of industrial plant and machinery.

​Transparent information undermines authority by revealing the inconsistencies, lies and hypocrisy required to govern. Anonymous transmission of ideas on social media leads not only to emboldened action but also to misinformation and on-line bullying. Information is conflicting and unreliable and knowledge and certainly is displaced by opinion. The ability to sift and evaluate data and then apply rational analysis is not evenly distributed among populations.

​The cost and availability of creation, capture, and transmission equipment has reduced nearly to zero. It is ubiquitous. The creative idea, installation of capture equipment and the editing of results is rare and not free.  One cannot go back and measure the past, so value may be found in stored experience. If you can curate information and control its presentation, then there is power to influence perception.

​Commercial innovation is likely to arise from creative firsts, unique archives, collection networks, influencing curation, and low-cost data organisation, error-correction, and editing.

2. understanding and acting upon information

Advances in computing power have led to new ways to analyse information, methods to learn and infer meaning and procedures to decide how to act. This leads to automation – unattended service, purchase reccomendations, warehouse picking and self-driving vehicles.

​Too much data causes problems with human-led processing such as overload, decision biases and selective world-models. We have evolved to make binary conclusions “being decisive” and “acting with confidence” are perceived as star qualities. Leading based on flexible decisions resting on the probability afforded by analysing emerging information is uncommon. Motivating others to make swift progress in the face of uncertainty will require a new set of leadership skills.

​Commercial innovation is likely to arise from increased quality of service accurately targeted towards needs, as well as reduced cost of provision. Companies that can harness learn to direct activity and make progress under conditions of uncertainty will also benefit.

3. additive manufacture

This is not just 3D printing. Many things are traditionally created by removing material using techniques like cutting, drilling, thinning, and shaping. This wastes material, energy, and time. The materials we use – cement, steel, rubber, plastics are chosen because they lend themselves to these processes.

Additive manufacture will change the materials we pick, it will reduce waste in production and change the shapes we create and the material performance we obtain. It will not only impact factories but also it will change extraction industries and trade routes. It will be possible to email design files and create what’s needed on site without the need to ship raw materials, sub-assembled parts or finished goods.

We are seeing the rise of extrusions and laser-melted metal powders and will shortly embark on assembly at the molecular level. This will mean the same forces that change building materials will impact other wasteful processes including agriculture, slaughtering, drug formulation, paper making and paint manufacture. We can expect to also see different flow-processes with lower temperatures and pressures, lab-grown meat, structured drug design and smaller-batch runs. Additive manufacture principles will impact a diverse range of industries including specialist machine makers, house-hold construction, manufacturing, farming, and medicine.

Commercial innovation is likely to come from creative designs, disintermediating supply chains and creation of innovative not-possible-before shapes and material-performance. There will be insights for applying this technology to industries not considered before.

4. planet maintenance, collective responsibility

Some call this activism or environmentalism, but whatever you call it there are growing movements encouraging (and forcing) vested interests to consider the impact they have on the wider world. This encompasses the materials consumed, the energy used, and the waste products created.

​Fuelled by information and analysis governments have concluded that there is a climate emergency which calls for rapid decarbonisation. This is leading to energy transition, smart-grids and electric drive trains on the one hand, and examination of the energy intensity of industry and ways of living on the other. It has also given rise to the notion that resources on earth are finite which leads to the circular economy (where goods are recycled into new goods) on one hand, and the drive for mining of materials from asteroids and the seabed on the other.

​Commercial innovation is likely to occur around opportunities afforded by legislation – such as carbon pricing, outlawing of practices as well as the inclusion of sustainable methods and transparency of operation. Smart ways to redirect and reuse energy will become valuable.

5. organisation of labour

We now have remote working and video conferencing; people don’t need to go to the office. People don’t need to be in the same town or the same country.  The COVID crisis of 2020 saw mass adoption and made it normal to use.

On-line retail, automation, self-driving cars, and additive manufacturing will reduce demand for labour in many sectors and, due to our global supply chains and clustering of industries, this is likely to create geographic areas where traditional work will become scarce.

The gig economy is at one end of a spectrum of employment that runs from employee, through contractor, project team into gig work. The quantum of work purchased is becoming smaller and pay is more related to outcome rather than time spent on a task. Bonds and exclusive service to one employer is becoming less common.

​Commercial innovation is likely to encompass ways to facilitate remote interactions, telepresence, and ways to build trust (both emotional and technical). Ways in which goods and people are transported will change leading to opportunities in non-traditional geographies and innovations are possible in the way labour is accessed, motivated, managed and rewarded.

6. culture, art, craft and beauty

The 4th industrial revolution moves us more towards a world where less human labour is needed to produce and distribute the goods, services, and energy we need. Other factors will come to the fore in determining what is more “valuable”.

​Where we are used to optimise for low-cost production, we will increasingly favour products, services and experiences that appeal on an emotional level. Emotions will become more important. This is occurring already via inclusion policies, social movements, and campaigns for various forms of justice. We can see on-line culture forming value through influencers and followers whose product is purely an experience and a connection between people with similar perceived values.

​How one spends time will become more important. Dedicating large amounts of time to an employer will seem less likely to determine level of “success”. This will lead people to choose to do more things that they like – leading to more artisan production.

​Commercial innovation may occur in the labour market by enabling people to find their vocation and navigating the changed expectations required to transition career thinking to match the 4th industrial age. The types of products and services sold, and the labour conditions required for workers will increasingly require taking account of design, beauty and evoke emotions, resonate with the values of buyers and be fun.

7. politics of wealth and power

This is likely to be the slowest area of the 4th Industrial revolution to mature. But it will be the most profound and biggest determinant of outcome. While it is tempting to ignore this because it does not lend itself to traditional commercial analysis, it is likely to prove one of the biggest source of disruption and should not be left unattended.

Changes in this factor are likely to occur in (possibly hotly debated) jumps because this deals with fundamental and, for many, unimaginable changes to basic principles of societal organisation. If labour is no longer in short supply this could lead to what used to be called mass unemployment.

I believe that we are less likely to tolerate wide-spread poverty such as that experienced when people moved from the land into the cities during the first industrial revolution. Perhaps we will find a way to allocate resources to people other than by labour, while still maintaining civil and ordered society. What was once called welfare may become a universal basic income.

Accepted definitions of wealth may change to include more than money. Because time is an immutable constraint, this may become a currency. How it’s spent may differentiate between rich and poor. Manners, deportment, compassion and popularity may be qualities that people will support to determine unequal reward for others. Honour and shame may become fashionalbe once more. In some socieites this may instead become enforced compliance. Human groups naturally form hierarchies. When traditional methods of determining who has more worth changes then so will our definition of who is more worthy. Some people want to be “top-dog” and will use every method to be so (or remain so) – not only by pulling themselves up, but also by pushing others down.

As information asymetry combines with confirmation bias, we are likely to see politics become more fractional. Groupings will emerge like sides on a battlefield. They may be wealthy industrialists with their capital and bankers, career politicians with their nationalistic tendencies, intellectually enlightened middle classes, disenfranchised and once-proud working classes and individuals who want to be made to feel special and better than their peers. These interests will come with different ideas about what to optimise for success and how to go about doing it.

Different factions with competing ideas, their votes, their followers, and their financial means will be pitted against each other. They will use new technologies, historic resources, traditional oratory, and brute force. They will use the structures and institutions of society – as well as whatever form of subterfuge is available – to further their conflicting objectives. Human history suggests that without acceptable compromise frustration will lead to anger, irrationality and even violence.

Conclusion

Commercial innovation here may be hard to achieve but being alert to the political and social dimensions will provide early warnings and adaptation may keep you on the right side of history.

For more information please see:

4th Industrial Revolution Implications parts 1-3

IR4 Part 1: Information and Communications LINK

IR Part 2: Work, Trade, Taxes and Government LINK

IR4 Part 3: Energy Transition LINK

Earlier thinking around the subject

Innovation and Productivity with the 4th Industrial Revolution LINK

Digital Disrtuption Landscape for Upstream Oil and Gas LINK

Get out of the way of digital Crhis LINK

4IR Implications Part 3: Energy Transition

This is the third post in the series considering the left-field consequences of the 4th Industrial revolution (4IR). Not only are there several technology trends leading to breakthroughs in productivity but also there are drivers pushing changes in approaches to energy. This is a long post, so apologies in advance, but there’s quite a lot to say on the topic.

If you were in Surrey and was asked “does the world need any more cars or need a better standard of living”, you might be tempted to answer no. If, however, you were in the poor parts of south east Asia or Africa you might instead agree that raising living standards is good idea. To do that output per person must go up and that will require technology, know-how, organisation, and energy. As living standards rise demand for domestic energy rises too.

Development has implications for energy demand, supply, and emissions. For capitalism to continue to provide improvements to people’s lives different economic drivers will be required if we are to address environmental constraints. Some will come from technological advances, some by regulation and some by changing desires of consumers. In short, we need a transition in our approach to energy.

I’m going to address energy transition in four ways: energy substitution, energy efficiency, decarbonisation, and decommissioning.

Many members of the Bestem Network are involved in the oil and gas industry. Please don’t read this post as a prediction for oil prices, it’s not. It’s also not about the short-term outlook for the oil industry. It doesn’t deal with the decades of piped gas and LNG and the abundant shale gas available. Instead it explores inescapable (if inconvenient) long-term trends. Guided by the insights from members of the Bestem Network, I am concerned to know if I am investigating along the right track more than demonstrating “being right”.

For oil veterans “Energy Transition” is firmly on the agenda in 2021. Many people I talk to are experiencing declines in their current business. Some are starting to believe the value of resources and capabilities that drove business success in the past should now be reconsidered. For them, it’s tempting to term any new line of business as energy transition – because it is a transition away from the energy business they knew. This phrasing doesn’t aid analysis. That’s why I decided to consider this topic in four dimensions.

There’s a lot of resistance and denial about change in the Oil and Gas industry. People can’t comprehend that skills, resources and assets that seemed so valuable three years ago, may no longer be so. Oil companies are writing off reserves, there is talk of stranded assets. Of course, there are people whose interests are served by changing the public discourse and some of the “illogical” conclusions of proponents of the new order may be “wrong”. Perhaps all parties have the same priorities, but in a different order? If enough people subscribe to a new paradigm, they can sway the outcome. Watch out, history only calls this way once.

What’s the data say?

If you haven’t read the BP statistical report on energy and oil – you’ve missed out. LINK

For my oil and gas colleagues, please note the graph above is for energy usage and therefore does not include consumption of oil and gas for other purposes such as chemical feedstock. These other uses account for about 15-20% of consumption. LINK

Perhaps petrochemicals will become a relatively more important use for oil. There are important developments including the configuration of the new Yanbu refinery that hint at this. Perhaps this market will be dominated by the middle east. LINK.

By far the most important sources of energy are Oil, Gas and Coal. Our modern world is built on their consumption which has increased 10x since 1900. In many ways the history of the 20th century is the history of oil. I am currently reading Daniel Yergin’s book the New Map, it’s a great reminder of how mega-politics is tied up with energy. LINK

Figures from the USA indicate that approx. 40% of energy is consumed in the home (heating, lighting, powering equipment, etc.), 30% is used for transport (private cars, lorries, boats, planes etc.), and 30% is used in industrial settings (steel, cement, manufacturing, mining, oil production, etc.). LINK

As other parts of the world catch up with the lifestyles of the Europeans and North Americans sheer weight of numbers could mean another 100x increase in energy consumption is on the horizon unless something changes.

Unfortunately, this poses two problems: Firstly, consumable resources are finite causing scarcity and price rises which slow global development, and secondly it appears that the emitted gasses are inconveniently killing us all (albeit quite slowly). LINK

Apparently we must emit no more than 100GigaTonnes of CO2 before the end of the century. LINK. In 2018 we emitted 40MegaTonnes. LINK. Carbon concentration in the atmosphere stands at 400 parts per million (up 50% from where we stood in 1850). At the current rate, excluding growth, we hit our upper limit in about 25 years, leaving us 55 Years where we must emit nothing at all. So, we must grow and use more energy but emit less carbon.

On top of this, advances in power semi-conductors, computerisation and battery technologies are making electricity more interesting. The use of oil, coal, and gas to create electrical energy that will then be transformed into stored potential and then to kinetic energy is less efficient than directly generating electricity in the first place. This is especially true when the price of new generating equipment is benefitting from economies of learning and scale. Since 2010, utility-scale solar PV power cost has declined 82% LINK and LINK

The upshot of all of this is that:

  • The human population of the world cannot safely advance until its growing energy requirements are met by means other than oil, gas and coal
  • Not only must we not increase the rate of CO2 production, we must reduce it

Combine this with some trends:

  • There is a growing desire to use electrical power
  • Measurement, algorithms, and power-switching leads to reduces losses in electrical power systems
  • Cost of generating electricity from the sun and wind is reducing
  • It’s possible to capture CO2 as it is produced so it is not released
  • It’s possible to remove CO2 already present in our atmosphere
  • There are other fuels that don’t produce CO2 when they burn

All this points to: growth in renewable generation; a stop in demand for oil, gas, and coal for electricity generation; reduction in the tasks that need doing; ways to use less energy to perform tasks; moves to reduce the production and release of carbon dioxide; and ways to remove the darned stuff from the air if at all possible. This is neatly summed up in categories Energy Substitution, Energy Efficiency and Decarbonisation. And will inevitably lead to Decommissioning.

Energy Substitution

Perhaps this is the first true energy substitution? We’ve had fuel augmentation before – adding coal on top of wood, and oil on top of coal. Sure, there was a little displacement, but mainly it was new growth that accounted for the new fuel and we continued to consume the old stuff pretty much at the same rate as before. The method for conversion from chemical to mechanical-power did, however, change – steam, internal combustion, turbine. This time is different as we’re transitioning on three fronts simultaneously: the primary method of capturing energy; displacement of established uses; and finding new (more efficient) ways to consume.

The benefit of electro-mechanical conversion

Direct use of electric drives to replace fuel combustion is occurring in both transport and in industrial settings. There are some areas that prove harder to electrify – especially when heat is the desired end-product. These include steel making, cement manufacture, distilling, cooking, and domestic heating.

There are positive drivers pushing the direct use of electricity in mechanical drives. This method provides excellent controllability using complex sensors, computer control and high-power semiconductors. It also provides excellent scalability – very small motors up to massive monsters. Electricity is also relatively easy to distribute.

The downside to electricity has always been difficulties related to is use in temporary, new, or moving applications. This relates to portability, transport, and storage. Battery technology is an issue as is gaining a connection and maintaining grid reliability. Users tend to fall back on diesel-based generation for both portability and reliability.

In transportation (especially aviation) weight is an important factor because, unlike fuel tanks, batteries do not get lighter when they are empty.

The business drivers of electric energy adoption:

  • Falling cost of direct electricity generation from wind and solar
  • Increasing battery performance
  • Requirements for fine-control and monitoring driven by computer control enable new solutions
  • Opportunities for efficiency from system level monitoring and prediction coupled with intelligent distributed control

Obstacles are:

  • Cost of infrastructure for grid establishment
  • Time to establish connection
  • Difficulty in transporting stored energy
  • Difficulty of use in mobile applications (battery storage and weight)

The societal drivers are:

  • De-carbonisation
  • Energy security

Under the current business rules, when positive drivers are strong enough and the obstacles small, users will naturally substitute. To maximise the societal drivers (or public good) regulation changes may be required to tip business decisions. These can come in the form of subsidies, penalties or license-to-operate. The decision is dynamic – what doesn’t make sense today, may do tomorrow (note the 82% fall in the price of solar over the last decade). The more that electrification occurs: the more technology is developed and the more the price falls; the more experience we gain and the less risky the outcome becomes. As demand and volumes fall for older technologies, they become more expensive and less convenient. Over time tipping points are reached and business decisions become easier to make. I explained this dynamic in relation to electric cars here LINK

There is a great piece by Tim Harford examining the shift from steam to electrical drives at the turn of the 20th Century. It provides a framework for understanding the drivers of the elongated time lines required for a transition. LINK

Scale Matters

Renewable generation used to be a cottage industry, but scale matters and it’s starting to swing the economics decidedly in favour of renewables.

Solar power is a factory manufacturing and construction problem. Site operation is pretty much zero intervention. Factors that have driven down cost will continue to do so with manufacturing costs decreasing and per-cell-output rising. While it’s unlikely to rival Moore’s law, research into cooling, focussing and reflected energy is promising a 10x improvement in output, which will compound the learning economies we’ve already seen. Solar is already the cheapest way to make power, and result of development may mean that we see a further 10x fall in price per MW generated.

Scale in wind power matters. GE are trialling a 12MW turbine in Rotterdam LINK It won’t be the last.

Standardised production

Unlike oil and gas platforms each turbine is essentially the same as the last one. There is no top-side processing to be designed and no process modification during its life. Wind has already achieved the standard, reusable, modular offshore design that Oil and Gas have been talking about for so long and never managed. This will lead to reduced requirement for engineering design and economies of scale and learning for installation and operation.

Oil and gas have been very wasteful for decades by creating bespoke engineering solutions on a field-by-field basis. There are many apocryphal stories of cost escalation in oil and gas facility engineering. Including one operator specifying 20 shades of yellow for sub-sea valves, which may or may not be true. But here’s a link that makes me think maybe it is LINK

Large generation assets promise cheap, reliable power distributed by a common connection. That’s a welcome development because small-scale generation posed unexpected public-good problems. In several underdeveloped countries central generation is unreliable, and users are tempted to go off-grid. Unfortunately, this has a detrimental effect on the public grid subsidy and leads to a death spiral for national utilities resulting in even worse service for citizens.

Energy Efficiency

There’s not a huge amount to say about energy efficiency other than its about stopping waste which means: for heating more insulation; for energy conversion making less heat and noise; and for moving parts less friction and less weight. Overall, it means stopping doing what’s not really needed – such as unnecessary journeys by better planning and routing, and not heating or lighting spaces no one is occupying.

This leads to energy reduction technology using predictive algorithms, sensing and fine control of systems.

Examples include google reducing energy consumption of its data centres by 30% by predicting the weather. LINK

High-power semiconductors enabling DC power transmission and reduced line-losses.

And there is tons of work going on using big data and AI to reduce logistics costs. LINK

There are activities that can not only be made more efficient but also completely replaced by new technologies. For instance, additive manufacture and additive construction may displace some of the need for energy used making materials such as cement and steel, thereby increasing construction efficiency and reducing energy requirements and carbon emissions.

Decarbonisation

I’m not a climate scientist but if enough smart people tell me there is a problem, I tend to believe them. Though, in my view, this is not about saving the planet – the Earth will be fine – it is about preserving an environment within the tight tolerances required for the human life we’ve come to expect.

For climate change, my reading of the situation is that we have a problem related to imbalances of gasses and particles in the atmosphere. Energy substitution and energy efficiency will naturally reduce carbon emissions in some areas. It may help continued growth of middle classes across Asia and Africa without a proportionate increase in carbon emission. However, this won’t be enough as there are still areas where electrification is not yet practical, and efficiency gains not enough.

This leads to two approaches to decarbonisation: chemical fuels which are not carbon based; and methods to rid the atmosphere of un-eliminated carbon emissions.

Alternative fuels maintain the thermal cycle but don’t produce CO2. The two most often noted are Hydrogen and Nuclear. I would not want either if it were not for the carbon argument (in almost every application it’s a compromise) but they may be necessary as sub-optimal answers until better ones can be found. Hydrogen wins on portability and Nuclear on reliability and capacity (and portability in applications like marine warfare and space exploration).

Its unfortunate reactions with steel aside, hydrogen is interesting as replacement fuel in domestic settings where pipes, compression and metering etc are available. Like copper phone lines, it is unlikely that any country that does not already have the legacy infrastructure would invest in it now.

Capture and storage

Talking of legacy, the oil and gas folks are pretty good at drilling holes, moving fluids, and running large pipelines. They also have some bits of kit in the North Sea (and pipes running to and from them) that it would be great to find a use for these when the oil stops. There is a lot of interest in finding ways to pump CO2 through the system and store it in underground spaces vacated by the oil that was pumped out.

I can see why you’d want to do that if you owned the infrastructure, and it’s an interesting short-term measure but it doesn’t seem like this would be a scalable solution to on-going growth and just like oil wells run dry, storage facilities will eventually get full. The idea that we have to add a complete industry with scale and complexity of oil and gas solely to deal with the emissions of other industries adds a layer of inefficiency and cost that, if allocated correctly, would make them even more open to replacement by alternatives.

Fuel Cells

The use of hydrogen in fuel cells makes little sense in the long run if battery and super-capacitor storage improves. Generating electricity, to convert to hydrogen, to transport under high pressure, to convert back to electricity seems absurd to me.

In my view, hydrogen is not part of the endgame of energy transition. It may be an interim step where direct electrification and transport/time-shift of stored electrical-energy is not yet practical. It does make sense to accelerate decarbonisation when an alternative has not been established, but it is inferior to many other forms of chemical energy except for its emission properties.

Hydrogen is more viable while legacy resources and assets exist in abundance such as low-cost infrastructure, fabrication facilities, mechanical engineering, and process engineering. It would require a lot of careful handling under pressure, temperature and, combustion. Luckily it can be consumed (less well and with modification) by legacy assets such as internal combustion, jet engines and domestic boilers.

Nuclear

The same arguments apply for Nuclear energy, but not so strongly and even less for fusion. Nuclear fuel is abundant and (with care) easy to transport and energy conversion is centralised. Energy is, however, still derived from the release and recapture of heat and the physical movement and containment of molecules and (and particles) under extreme conditions.

Decommissioning

When thinking about decommissioning my mind normally turns to removing infrastructure from the North Sea at the cessation of oil and gas operations. To be fair with an almost £80Bln prize at stake in the UK alone it’s not surprising that there is interest. LINK

But there is much more. If we are going to move to a low carbon world based on electrification, then there are many more assets that need to be decommissioned or refreshed. Ranging from filling stations, pipelines, car plants, car scrappage, domestic boilers, lorries etc.

If we combine this with the other changes in technology coming from the fourth industrial revolution, we are also going to find new uses for car parks, high streets, out of town retail centres and the list goes on.

It goes without saying though, that we will have to make sure we can decommission without emitting carbon dioxide in the process.

Implications

Implications: Energy Substitution

Even now, without any change in the incentives there are many areas where renewable generation is the best commercial choice. It is only going to get more so as more breakthroughs occur in generation and grid-level and portable energy storage.

The demise of internal combustion engines will have knock-on effects for manufacturers of components including radiators, hoses, vibration dampers, seals, drive belts, spark plugs, lead-acid batteries, gearboxes, and pumps.  Innovators may want to consider how to reskill and serve power engineering, distribution systems and electric control. Additionally, they may want to consider which ancillary manufacturing assets will be affected (either interrupting supplies or creating opportunities for low-cost acquisitions). Innovation is also likely to be available in any area which relies on diesel or other fuel oil to create electricity or provide non-transport related rotary motion.

Will cars and solar panels be manufactured and sold as consumer white-goods and semi-conductors? In which case they are going to come from Taiwan, Korea, and China.

As turbines become common place and large ones most economical, they will become like the Airbus A-380. There will only be a few manufacturers. They may not be operators. Unlike an oil-field that starts as a risky proposition but then provides a natural monopoly, offshore wind generation will become routine and be open to competition. Capital may be cheaper, but the returns will be lower. The bloat of the oil and gas industry cannot continue to be supported.

Implications: Energy Efficiency

Anything that can be done to increase the amount of useful energy output from the energy we consume will help. This comes in two forms – reducing the things that need to be done and improving the way they are done if they are unavoidable.

Innovation will come from increasing the utilisation of energy through sharing, careful planning, insulation, and conversion efficiency. Search out unoccupied space in containers, trucks, and aircraft. Plan who goes where when and in what sequence. Predict when power will really be needed and when it’s not. Any process that gets hot when heat is not its primary objective should be examined.

Transmission of energy is inefficient, as is standby generation. Expect to see DC supply, smart grids, community generation and local storage/recharge solutions emerge. Expect the need for AC power to diminish – semiconductors and high-frequency switching is much more efficient, light weight and controllable.

Look for opportunities to displace concrete and steel in manufacturing processes, perhaps finding a new use for solid-state carbon fibre or graphene and for additive manufacture.

Implications: Decarbonisation

In the absence of market distortions there is no business case for decarbonisation. But the world needs it to happen. This will require a combination of intervention policies (subsidies, penalties, regulation) and a willingness for consumers to pay extra for low-carbon products.

Programs to capture carbon at source and sequester it in some form add to the costs of production and only make sense if the alternative (in the form of penalties or sale of credits) tip the balance. The cost of carbon-inclusive production will provide opportunities to innovate in no-carbon alternatives at price points not currently viable, once these products start being adopted, learning and scale economies will kick in to speed adoption.

As carbon pricing becomes widely adopted across industries, innovation is likely. From understanding sources of carbon in supply chains (and engineering it out), planning for low carbon production and finding alternative ways to operate that do not produce carbon.

Fundamental research opportunities are still available for atmospheric scrubbing and short-term opportunities may be available around capture and storage of carbon from industry.

Implications: Decommissioning

Unfortunately, no-one wants to pay for decommissioning. The activity does not create productive assets so there is no return on investment and traditional business cases don’t work. It’s only done because it’s mandated and because there is a sense of responsibility for the environment (which may have brand and license implications).

Contracts will be let to the lowest price operators; innovation will therefore be required to reduce the cost to enable profit while bidding at the lowest price. All Seas managed to do this with their vessels – low cost but, by moving first with large capital assets and capacity to dominate demand thereby deterring competition. They can charge a low price but well above their cost resulting in healthy profits. LINK

When it comes to decommissioning infrastructure such as high voltage AC power transmission lines, domestic boilers and old cars, efficiency in the operation will be important, but so will re-use of the materials. Removing old infrastructure and scrapping cars may not sound like a gold mine, but perhaps it is. Literally.

Decommissioning old power stations, nuclear or conventional, is risky business where quality will count. There are stringent standards for Nuclear and projects that will last for decades. Conventional can be a little more “cowboy”. With wide scale decommissioning perhaps new rules and regulations will be needed to avoid this sort of tragedy? LINK

Points to Ponder

As of January 2021 ExxonMobil was valued at about $175 per barrel of oil equivalent from upstream production over the past nine months. French nuclear generator EDF is valued at $280 per barrel of oil equivalent produced over the same period. Spain’s Iberdrola, with its high renewables output, trades at $1,200 per barrel of oil equivalent produced. LINK

There is some evidence that there may be a squeeze on oil supply in the short term, and there may be a last hurrah of the oil and gas industry, but the writing seems to be on the wall.

We are likely to see more policy interventions around CO2. Business cases need to be dynamic and make space for emerging scenarios. The direction of pricing is clear but magnitude and timing are yet to resolve.

I fear for my friends in Aberdeen and Stavanger who expect to be involved in renewable generation. Despite these places being repositories of skills and expertise, I doubt there will be labour shortages significant enough to drive a search for talent – and the inflated labour prices and high-cost working practices are unlikely to be appealing.

Areas such as decarbonisation are likely to be subsidised. Engineering skills bases exist in the North West ship building areas, in Teesside, the Welsh Valleys as well as the South East coast of Norway, southern Sweden, Northern Germany, industrial Belgium and Denmark. There is no obvious reason that governments will bestow subsidies on the oil-rich provincial towns, and there is no unusual depth in high-power electrical engineering skills or modular manufacture that creates a pulling force. Look to Airbus and RollsRoyce for a hint on which locations may be subsidised.

Energy production is turning into a 4th industrial age process now. Over time energy will become essentially free to western consumers (in the absence of new taxes) and will become affordable for developing countries providing the elements required to swell the educated middle classes

Tax and Trade

In the UK fuel is taxed at the point of consumption, domestic electricity is taxed at a lower rate than petrol. North Sea oil has its own tax and royalty regime (on a field-by-field basis). When electricity moves cars and oil stops pumping, these tax revenues will need to be replaced. Expect changes to the tax system.

Globally this tax issue is one of national wealth, balance of trade and currency. Many economies are supported by petro-dollars. That may cease. Even if impoverished populations can benefit from cheaper energy, it is still likely that there will be political tensions within and between many countries.

As we continue to electrify there will be increased demand for copper, nickel and rare earth metals. These extractive industries are out of keeping with 4th industrial age processes. Perhaps we will see a boom in resource rich areas such as Africa and south America until such time as we can harness graphene and ceramic based super conductors.

Business models that are based on bespoke designs, complex operations, resource scarcity and speculative exploration are likely to be replaced by ones supported by more standardisation, predictable un-manned operation, with steady, predictable returns. This will lead to reduction in man-power requirements, creativity, and variability. Cost structures and operating characteristics (and associated returns) across the energy industry are likely to evolve to resemble those of other utilities such as water.

Large oil and gas companies are currently moving to re-invent themselves as renewable energy companies. They have spotted the trend, but there is no guarantee that they will bring the right behaviours to the table to be able to operate in the way that will be required. Their strong balance sheets, engineering skills and ability to operate in harsh environments internationally may provide them with a well-financed head start.

During the 1980s RACAL was a military radio, radar and missile guidance provider. They were highly experienced in complex frequency hopping radio systems. This gave them a well-financed head start into a new industry, just like oil companies have today. Racal were well placed to develop mobile phone technology.  

However, Racal was the wrong place create a consumer marketing and general-public-facing service. By 1991, as the technology became mainstream, the Racal board took the wise decision to float the division and spin it out as a standalone company that could develop its own culture. RACAL ceased to be independent when it was acquired by Thales in 2000. Vodafone, the division it spun out has done rather well. LINK

Perhaps we will see the renewables divisions of Shell, BP and Statoil spin out and compete with Iberdrola if they want to be utilities or Siemens, GE and RollsRoyce if they want to make turbines. Unlike Vodafone, their spin outs will be competing with established successful companies with long track records. It may not work out as well as it did for Racal shareholders.

Innovation is Key

In whatever way this pans out there is one thing clear – there are lots of unknowns and lots of variables. The only way to survive will be to be vigilant of the macro forces and constantly innovate to evolve offerings as events reveal themselves.  

4IR Implications Part 2: Work, Trade, Taxes and Government

This is the second post in a little series considering the left-field consequences of the 4th Industrial revolution (4IR). There are several technology trends leading to breakthroughs in productivity across many industries, and I think these will have knock on implications. Guided by the insights from members of the Bestem Network, I am concerned to know if we are investigating along the right track more than demonstrating that we “are right”. As in the last post, I am only going to briefly touch the upside possibilities of 4IR because information on this is now widespread and easily found.

What a year 2020 was. It gave me both time to reflect on some angles of 4IR and showed samples of the types of situations and responses that might arise in the future. Rather than write a large piece covering every aspect, I am writing a small series, each post looking at aspects in isolation. This post deals with productivity, remote working, and the effect on public finances.

Increased productivity

One common definition of productivity is the amount of output for every unit of human activity put in. Traditionally this has been calculated as GDP added per hour worked. There are lots of reasons to argue that the measure is no longer appropriate and you can read some of my previous deliberations here [LINK]

If you subscribe to the belief that we’re consuming and exploiting too much of the planet’s resources, and combine this with the productivity arguments of 4IR then it seems that we will either end up drowning in a sea of products we don’t need while killing ourselves, or there will be a lot of idle labour capacity.

The positive argument resulting from this is that it will free our species from needless drudgery, will increase artisan production and lead to a life of increased leisure. Some people advocate the requirement for universal basic incomes, of which the UK Government furlough scheme could be an example. These arguments are not new as this letter to Personal Computer Weekly in 1978 demonstrates.

Self-Driving

Autonomous vehicles reduce the requirement for physical presence of humans in dangerous or expensive locations (think of remote inspections or inside nuclear sites), it also reduced the need for drivers (commercial and private) while increasing the utilisation potential of vehicles. This will lead to reductions in labour in direct driving roles but also indirect such as driver training, motor insurance, parking lots, and staffing of road-side café. [LINK ]

Economy moves on-line

During the pandemic activity has migrated on-line. Online shops require less people in the supply chain than high-street retail, and with the rise of robotic pickers and packers perhaps will need even less in the future. This article talks about this in the context of Ocado. [LINK]

There are many arguments concluding that much economic activity will move on-line. There is, however, an imbalance between the numbers of producers and consumers. Between sellers and buyers. Here the productivity arguments become even stronger. For example, consider a video game like “Among Us” (which is now played by over 60m people daily). It only took 185 people 3 years to write, and far fewer to keep it running. There is not much employment created by this and a concentration of money from the many to the few. [LINK]

There are 350million players who use fortnite, that game is published by Epic games. The entire company employs a mere 700 people. Epic games are backed by KKR private equity. [LINK] [LINK] [LINK]

In a more professional sphere, after a massive growth spurt, Zoom still only has 2,500 employees (which is double what it had last year). It is used by 300 million meeting participants each day. [LINK] [LINK]

Who remembers Linden labs? [LINK]

Education may change

In a more traditional setting, on-line education has been a lifeline for schools and universities. However, if this type of delivery becomes normal – consider a class recorded for Physics 101 by (say) Richard Feynman. It would never need to be re-recorded. Maybe Khan Academy has this right, maybe a career in teaching is not what it used to be, maybe education will not be enough to differentiate you once many more people have access and get smart? [LINK] [LINK]

What about the other issues?

While the fourth industrial revolution will see technologies such as self-driving, self-analysing, remote working, remote control, and robotic automation become more prominent. We may see a rise in purely digital products and services – such as computer gaming – where the entire value chain exists only within computers, and consumption and delivery are not dependent on co-location.

If labour requirements are permanently reduced (and not replaced with new roles – there are arguments that this time it may be that way) then we are faced with issues of wealth distribution that free markets won’t be able to solve. There are arguments that 4IR requires a more interventionist central control to organise behaviour, set societal objectives and to distribute resources. The pandemic response may have revealed how this sort of thing may operate. [LINK]

This is all very good and well. I can envisage the upside of productivity as well as the potential problems it will engender. The arguments are well rehearsed and not yet solved. But what about second order consequences?

Central taxation reductions

All governments have endured a hit to their finances during the COVID-19 pandemic. Borrowing from future to fund today’s spending only works if governments can capture the tax revenue associated with future growth.

We have recently proved that we in a world where many can work from anywhere, hold meetings without travelling and remotely operate large plants and machinery. This is not new but since COVID it has become normalised and now widespread. The physical property of the company may only be a TEAMS server in the Bahamas and workers can be located wherever they wish to be.

So how do you tax this activity? How and where can you collect payroll taxes? Where is the economic benefit created? Whose rules and laws apply? How can a government even know what is happening within its borders?

Automation in transport, manufacturing and logistics are also likely to increase pressure on labour tax revenue.

Will we see restrictions on commercial data, handling, and transmission across borders like we have seen for personal data with GDPR regulations? It’s not unheard of – in the oil industry some geological data was prevented from leaving countries for years, forcing exploration activity to establish a physical presence in country.  

Commercial property taxes and rents

Until recently landlords and local government were able to extract rents and rates from physical businesses that wanted to be located where the crowds came. Recently, local governments have even borrowed large sums to buy the properties on the high streets. They are speculating in the properties for which their previous role was to sweep the street and collect rubbish.

They do this to rent them out, trying to exploit the difference between their cheap borrowing and the return from commercial rents. So that they make enough money to pay for the street sweeping and bin-emptying that they used to charge for explicitly. They have an inbuilt advantage over private landlords because buildings left empty force the landlord to pay rates, but these just recirculate inside the finance dept of a local authority. Perhaps this will end in tears for the public (and risk-free profit for financiers) when they need to refinance and interest rates are higher and vacancy has increased? Surely there must be a better way to fund public services? [LINK]

Working from home seems likely to reduce the requirement for prime office space not only leading to worsening public tax receipts but also reductions in income for pension funds and insurance companies who own the buildings – just at a time when returns on other forms of assets are also falling, and insurance playouts are increasing. [LINK]

The pandemic saw an accelerated rise in on-line purchasing and home delivery (which is often less expensive due to lower labour costs and lower property taxes). This means retailers are going bust, rents are not being paid and rates are on hold. This causes another of problem for public revenue which means spending must be reduced, borrowing increased or new methods of taxation found. [LINK]

The end of the freelancer?

In Europe at least, workers within traditional employment structures (and public sector workers most of all) have been better protected by the government. Self-employed, freelancers and small company directors have not been supported well. [LINK]

In recent years we have witnessed the fragmentation of work and a slow reduction in the number employed in professional classes. The world of private commerce seemed to be dividing into successful owners (and financiers) and jobbing workers, with a rise in zero-hour contracts and “gig” work. [LINK]

One of the attractions of freelance work for some was the flexibility it afforded in terms of working from home, this benefit seems likely to become more available to traditional office employees in the future. Policy is likely to shift towards increased taxation of small owner-managed companies and freelancers. The benefits from freelancing are being eroded. [LINK]

Will there be a rebalancing in favour of a stable employment contract and the re-rise of big employers, or will the welfare state make new arrangements with its citizens to enable flexible, part time working? What will this mean for personal finance and the unintended consequences of “prudential lending” that have forced many to rent properties they could easily have afforded to buy? [LINK]

The role of the state and its relation to private commerce

Our elected government has been willing to incur large debts and restrict personal freedoms to protect lives during this pandemic. This brings into question, perhaps, the lack of spending up until this point for other preventable causes of death such as seasonal flu and driving motor cars.  Though one has to be careful not to downplay the seriousness of the current pandemic, the argument may be extended that intervention should increase in the future. [LINK]

Governments have stepped up to support rail operators, aviation, provide furlough schemes and give grants to the performing arts. The narrative of the free market and the accepted arguments for roll-back from state activity in commerce we’ve seen for the previous half century will likely be revisited. [LNIK]

I have noted many more articles about the collective response of public services, the requirement for us all to contribute (and not try to dodge taxes) if we want potholes filled in and have a medical service that works. We have even seen large corporations such as Tesco return COVID rates relief payments without obligation because it was “the right thing to do”. [LINK]

Perhaps we are moving to a phase where more collective responsibility will be shown, and individualism will be less valued. Perhaps we are moving towards basic universal income. Perhaps we are changing our relationship with tax and with state spending? Perhaps companies will revise their arrangements with workers? [LINK]

The UK government continues to make overtures about investing public money into science and technology research through an industrial strategy. [LINK]

We’ve seen government intervention in the hospitality sector on the grounds of public health. Perhaps it will not be “the right thing to do” to spend a universal income on gambling and drinking? Will it be “the right thing to do” to compromise your health at the expense of the nation’s taxpayers? Where will the new boundaries for state intervention in private life be drawn? How will the people who control business take steps to voluntarily increase their tax bill? What will all this mean for basis of competition and fiduciary duty to shareholders?

Conclusions

If we are to see wide-scale automation, movement of economic activity on-line and a substantial rise in remote working for those that remain employed, there will implications for tax, wealth distribution and state intervention which are likely to follow. Organisations may wish to consider how to set up systems of work that enable innovation, so they are not be left behind by these advances.

Scenario planning might consider wider societal responsibilities as well anticipating changes in rules, regulation, worker expectations, less flexible labour markets and competition from state-backed entities (possibly publicly owned). They may also anticipate changes in expectation from the public as regarding corporate citizenship and modifications to taxation systems.

4IR Implications Part 1: information and communication

Introduction

I am more concerned to know if I am on the right road than “being right” – I believe that we are at the starting phase of the fourth industrial revolution (4IR). There are several technology trends leading to breakthroughs in productivity across many industries. I am only going to touch on what these effects are – as information on this is now widespread, easily found and I don’t want to repeat myself. But if these are true, then perhaps there are far-reaching consequences and profound questions that should be considered. It is in these areas where I feel the greatest risks and greatest potential for innovation will be found.

2020 gave me both time to reflect on this and an insight the types of situations that might arise. Rather than write a large piece covering every aspect, I’ll write this as a series, each post looking at aspects in isolation. This post deals with information and communication.

How this will improve efficiency

There are vast amounts of information created, it’s easily stored and transported, and – with increased compute power and new algorithms – it can be quickly analysed. This is leading to opportunities for increased productivity. This is only achieved if we know what information to collect, can understand what it means and – most importantly – change how we act based on it.

I am finding examples in the fields of computer vision, satellite imagery and remote sensing. Technologies such as LIDAR, LoRAN, Hadoop, ESP32 are commonplace in industrial settings meaning that the cost of measurement, distribution and storage of information has fallen dramatically.

We are connected by mobile devices, we hold multi-way video calls with colleagues, customers, and suppliers. We can track packages from factory gate to end user, we can store every aspect of manufacture and store it directly on an object.

There is little excuse for not knowing exactly what is going on, understanding the consequences of that, and acting to make things better.

The unintended consequences

As an industrialist it is tempting to see all these advances in information and communication solely in terms of their positive impact on the workplace. It is tempting, and wrong, to think the world around the workplace and those working there will remain static. They will not. The world will change because the general population have access to these tools and they will impact your workforce in ways that you won’t control.

Information influences behaviour

Information has become more influential as it has become quickly available at scale. Modes of transmission have rapidly evolved; society is moving further away from long formal written communication towards short media-rich content bursts. On the one hand this is leading to rich emotion-laden communication between previously unconnected and perhaps illiterate people. On the other hand, it is reducing consideration of more complex issues and drowns out nuanced voices expressed through traditional means. It is also becoming harder to remember and prove what information led to which decisions and why.

https://www.researchgate.net/publication/313860181_Internet_Memes_-_A_New_Literacy

http://bestemnetwork.com/wp-content/uploads/2021/01/f8edc-miltner-internetmemes.pdf

Can you trust what you think you know?

There are an increasing number of artificially created video characters (referred to as deep fakes) which can either be entirely fictional people or manipulated images of prominent people made to look like they are endorsing a false message. Backgrounds and images can be created that are almost indistinguishable by humans. This means that we could soon see (or may already have seen) reports from wars and atrocities that never happened. Perhaps, even if you see it with your own eyes, you will no longer be able to believe it. Persuading emotionally charged people (who may not understand how a fake video image can be created) to change their minds might be very hard.

Have you heard of Q? He’s a fictional character and the basis of QAnon, what has become a far-right movement in the USA: https://www.nbcnews.com/tech/tech-news/how-three-conspiracy-theorists-took-q-sparked-qanon-n900531

MIT has a great primer on deep fakes here: https://www.technologyreview.com/2020/12/24/1015380/best-ai-deepfakes-of-2020/

This site creates a unique image of someone that does not exist each time you load the page. These people are totally fictious. https://thispersondoesnotexist.com/

This has been predicted for a while – Have a read of Victor Pelevin’s Babylon published in 1999 – (or watch the film) [….]Tatarsky is invited to join an all-powerful PR firm run by a cynically ruthless advertising genius, Leonid Azadovsky, who invites Tatarsky to participate in a secret process of rigged elections and false political advertising.[…]

Are you seeing the other side?

We are exposed to so much available information that a person can easily succumb to their own biases and seek out only items that reinforce their snap judgements. This has led to fractionating, polarised camps who no longer share a “Mutual Reality”. They have great difficulty in engaging in reasoned debate as each side has fundamentally different frames of reference. These frames induce them to interpret observations in very divergent and (to the other side) incomprehensible ways.

http://changingminds.org/explanations/models/frame_of_reference.htm

Will information cause wars?

It is possible that our future wars will be between ideologies and triggered by insults, or that – in the face of popular internal revolt – governments will launch “defensive” hostilities to stop the influence of their populations by alien states. Propaganda may cease to be a tool to assist armed conflict and instead become the sole purpose of hostilities. Perhaps the lines of conflict will not be those of countries but between ideologies, vested interests, and traditional institutions. Maybe we should watch the Hong Kong situation more closely?

https://owlcation.com/social-sciences/The-Main-Reasons-For-War

Is there a case for censorship?

In 1984 I received a UK transmitting license for a radio set. At that time (and in the decades before) the license permitted someone to use a station for experimental purposes and research into radio propagation. Of course, I also (and mostly) used mine to chat to my other geeky teenage friends. The point of bringing this up is because the government realised I was to be granted the power to communicate across the world. I, therefore, had the potential to find information and broadcast local conditions to others. Not only was an examination required to obtain a license, once acquired it was very clear about what topics I was allowed and not allowed to discuss. I had to identify myself using a centrally registered callsign. Violation of the rules would mean revocation of the privileges. Now anybody, with no training, no examination can say pretty much anything to anybody (and everybody) without restriction. They can say it anonymously. This is new in human history and the results, so far, are mixed.

https://www.theguardian.com/commentisfree/2017/aug/21/the-guardian-view-on-censoring-the-internet-necessary-but-not-easy

What is the role of cyber security?

Cyber security is currently focused on preventing people from seeing information you want kept secret or preventing people denying you access to your own files. In the future security may be required to prevent others from injecting false information into systems and influencing your or your staff to behave in the wrong way. That could be by planting rumours, or direct manipulation of operating data, financial reporting, or automated firing of workers.

https://en.wikipedia.org/wiki/PLA_Unit_61398

https://www.sciencedirect.com/topics/computer-science/data-injection-attack

https://www.wired.com/story/russian-hacking-teams-infrastructure/

Conculsion

Business has been slowly taking advantage of information and sensor data and transmitting it around the world. Remote working has been trialled and tentatively used when there were no alternatives. Now this technology is ubiquotous and in use by the “average Joe”. This is leading to new ways to communicate, new ways to manipulate the unwary and new expecations from workers.

Innovation will be the key activity for all companies that want to operate in this new environment. Setting up systems of work that promote the new and commercialising it quickly will be imperative.

I believe that it will be a responsibility for leaders – including business , political, spirtual and community – to use the tools available to them to continue to promote ordered society. Some of our most important human developments around organisation of effort, support for each other, goals for shared endeavours and, jointly agreeing what we fundamentally value, will depend on it.

2020 closing thoughts

Well what a year it’s been. I have been spending a lot of time at home this year and the Bestem Network members have not been able to meet for most of this year which is unfortunate. Interestingly I dug out last year’s notes from the dinner (link) and they tell an interesting tale of how we were thinking then.

This year the network came together virtually to share experiences at the start of the pandemic. We kept up this approach and, with network members at AGM Transitions, we turned this into a book (link). It’s been a year of finding new ways to do business.

Did you build resilience?

Those that listened to Capt. Mike Paterson’s talk at the network dinner in 2015 (before Trump and before Brexit) might recall his sage advice:

Change is happening faster than ever fueled by: high-speed communications; close trade links; and cross-border
investment. Rising inequality, climate change and cyber-development combine with politically/ideologically motivated ‘real’ and ‘Maskirovka’ type conflict. With increased change comes increased risk and, whilst we are accomplished at compiling risk registers, scenario planning better helps us to understand and to respond quickly.


Business leaders must ask: How do we build resilience? How to make risk based decisions to drive behaviours?

Read the whole report here

Business has been changing for a while

About seven years ago I started to sense that traditional business approaches weren’t working as they used to. I started to investigate what might be going on and uncovered work by people far smarter than me. They were starting to conclude that society was heading for a 4th Industrial revolution. I wrote about some of my influences in this post which I published almost 5 years ago. https://bestemnetwork.com/2016/03/29/innovation-and-productivity-with-4th-industrial-revolution/

At that time, I was a Non-Exec director on the board of an oil and gas technology company. I guided the excutives to pivot part of that company and pursue oilfield digitalisation. This included a mail-out to COO’s of oil companies setting out the case for digitalisation by assembling the works of leading writers. I urged them to make the case that it was too important to be something led by IT. This was now to become the backbone of an operational transformation.

I recall there was division among the owners of this company, I was almost laughed out of the room by one who, despite the evidence, was unable to acknowledge that the world would change and was convinced there was no such thing as digitalisation in the oil field. His view was that IT should remain in charge of anything computers and leave operations to operations people. It was not an isolated view in the industry.

My post on digital disruption of the oil and gas industry (link) from three years ago was this year’s most-read post on the blog, with hundreds of visitors each week. When I published it, it seemed no-one was interested.

The case for flexible innovation

After covid, perhaps the case has been made for investing in flexibility and contingency (as advocated by Capt. Paterson) even if the business case is based on a balance of probabilities and not a black-and-white P&L. I urge you not to be so stuck in the present and the current “rules of the game” that you believe the future will not be radically different. It may.

Perhaps look at the wise words of Patrick von Pattay from 2017. (Pattrick has been the hero of the year for his company.)

Just because we have not yet identified the potential disruption does not mean to me that there cannot be any. It just means that we haven’t thought hard enough. If it were an obvious change then it wouldn’t be so disruptive as we’d all have the ability to respond. A disruptive threat, by its very nature, is likely to come from left field.

https://bestemnetwork.com/2017/11/27/interview-with-patrick-von-pattay/

To me it’s clear we are heading along a 4th Industrial Revolution path. It is a transition and, as with all transitions, it will take longer to get where we are going than we expect, but we will go a lot further than we can imagine.

What will happen in 2021?

COVID-19. First, we scrambled to keep going, waiting for things to return to normal. Then we started to talk about the New Normal, and The Great Reset. People talk about this year accelerating change. I don’t think that captures it. It makes it sound like we’ve just gone a bit faster along a normal path. We’ve seen step changes, fleeting moments of opportunity grabbed, and old models fail.

I am putting together a post for the new year highlighting some of the trends that the network is telling me about. I think these will play out well in the coming period for those that take the heading from the course they set . It will be a jouney of rapid discovery, the answers are not final even if the direction is clear.

Overall though, it’s obvious that to be successful we will all need to innovate and to try new products, services, customers, partners and ways of working – no one has this covered yet, but some people are finding new and interesting ways to respond to the changing world.

You could wait and see if you finally get the opportunity to try the 2020 strategy you made last year – or you can get up, shake off the dust, scratch your head and figure out a way to commercialise the innovations that your team have been making.

For a hint of the changes to come, have a read of this post from 2019: https://bestemnetwork.com/2019/06/17/london-tech-week/

The future is coming, how you choose to prepare and respond is up to you. The choice is yours.

Watch out, they are comming for you

The cost of innovation is going down, barriers to entry are falling

Keeping it special

If you work in heavy industry and are near technology, you will know that there are some very robust pieces of kit out there. What I’ve always been surprised at is:

1. how simple many of the devices are in terms of functionality; and

2. how “special” they are in terms of obfuscating the obvious.

The effects of these two factors has been, for years, to reduce competition. By making it difficult to get hold of units (via price) and creating a jargon around the obvious configuration/deployment it has promoted a closed shop approach.

Keeping up standards

In some ways keeping out the riff-raff can be promoted as a good thing – it provides assurances around quality and safety. But it slows down innovation. You might say that perhaps this is good. Maybe you don’t want to be too innovative around safety and compliance systems. Afterall making mistakes is expensive and dangerous.

Keep up!

One of the aspects of the 4th industrial revolution that will challenge that thinking is simulation. I used to think that digital twins, virtual worlds and simulation would help reduce the cost of maintenance, let the experts create new ways to work and basically bring down the operating costs for the incumbents.

What if it leads to a whole new raft of competitors? What if anyone can have low-cost access to a virtual oil rig, or virtual power station, or virtual chemical plant? Not only will they learn how it’s supposed to work, they can try things and see what happens – learn by doing, learn by breaking, but do it virtually. Perhaps this will lead to:  

  1. they might come up with much better ways to operate it that you do; and
  2. train themselves to operate it before you hired them

Result: Better ways of working, access to more talent, incumbents get beaten.

If you have ever witnessed teenagers playing fortnite, you will know how fast their thinking can become and how fast their brain-hand connetion is. Imagine how quickly they will be able to react to real-world situations and think through the information being thrown at them.

Examples

I’ll provide two examples of where “public access” and “new ways of working” are already influencing established hierarchies. It won’t be long before these mechanisms appear in heavy industry.

Don’t expect today’s engineers to enter the workforce unprepared nor unwilling to take on the establishment. Watch out for competition from smart people who are not part of the established hierarchy. Don’t think the way you work today, will be the way you work tomorrow.

Example 1: Team Huub-Watt bike

I was lucky enough to see this cycle team win gold at the Track Cycling World Cup in December 2019. The team is comprised soley of amateur racers and they ran a completely novel strategy calculated using simulations and software. Their budget is £15,000 per year. They beat Team GB who have the best coaches, facilities and trainers available – and a budget this year of £26m. That’s over 1,000 fold decrease in cost and substatially BETTER performance.

Response from the establishment was to change the rules, enforce the status quo. This may not work forever. It probably won’t work for you.

https://www.tri247.com/triathlon-features/interviews/huub-wattbike-uci-interview

They were not, however, afraid to make use of the technology for their own ends. Zwift is a cycle simulator that people can use at home and join in real-time cycle events and ride-outs while collecting performance statistics. It is now being used by pro-teams to identify and recruit talent.

https://www.cyclingweekly.com/news/latest-news/i-want-to-ride-in-the-worldtour-how-british-cycling-are-using-zwift-to-help-identify-young-talent-454806

Example 2: British Touring Car Championship

In the gentleman’s toilet at the Royal Automobile Club in Pall Mall – in the heart of establilshment London – there are a series of framed caricatures of some of motor racing’s greats from the last 100 years. These include W.O. Bentley and Mike Hawthorn. Motor racing is glamourous. And costly. The money needed to race in formula 1 are legendary, but even the karting in a 125cc class will likely cost you the best part of £50K a season. Developing cars, tracks and drivers costs money.

So what do you think will be the outcome of last weekends win for James Baldwin in the first of the British GT Touring Car championship races? It’s a pretty big series, and winning a race is not easy.

Especially if it’s your first race you’ve ever competed in.

James honed his skill as a driver in a simulator he set up at home for under £1,000. And his talent was found when he entered a competition in an “E-Sports” event.

Turns out that the simulation prepared him surprisingly well.

https://www.goodwood.com/grr/race/modern/2020/8/worlds-fastest-gamer-wins-on-british-gt-debut/

https://www.bbc.co.uk/news/newsbeat-53554245

In transition! what’s your strategy?

COVID 19 and all that

I don’t want to be the Cassandra who brings bad news, but this is not over. In fact, it will never be over. I think we are transitioning.

Through this blog I’ve shared some of my exploration of the fourth industrial revolution, what we will experience and what technologies will drive it. When we look back at this time, we will see this as the moment the old world ended, and the new world began. Of course, there were hints of what was to come that happened before now, and there will be vestiges of the old world carried forward – but this is the moment we will talk about. It will be like we mark the start of the  jet age by referring to the end of the second world war.

It’s in the news

The headlines in the papers have been about: job losses; social distancing; and remote working. We are seeing a drop in demand, an increase in cost to serve and reduction in capacity and competition. This must lead to increased prices and suppressed demand. The consequence of this is inflation of real-prices that will drive out the old ways  and encourage emergence of new ways of doing business with lower structural costs that will create new ways to consume.

Innovation will be required

Every sector will be affected and the only way to respond is through systematic commercialisation of innovation. The future may be unpredictable, but the direction is clear. What will your strategy be?

FT stories today

Today’s FT had two stories that I think are indicators of the future:

The future of manufacturing

This one: https://www.ft.com/content/5610b913-d763-4d5f-a7cd-c51ff7adde21 tells of BAE communicating with it’s supply base that it intends that the Tempest fighter will be 50% assembled by robots and 30% of the components will be 3D printed.

How long will it be until we can have a general factory which can assemble anything using software and downloaded designs? In 50 years will we have one in every town? Every home? What will that mean to distribution, logistics and manufacture? How can you have international trade? How can you secure intellectual property? How will you distribute wealth?

The future of information and society

Then there is another story today: https://www.ft.com/content/b13ff98d-ffcb-4cfc-a853-3ba2cb75e717 Where Wolfgang Munchau argues that COVID-19 has marked the end of the analogue age.

He makes a clear case for the use of direct real-time monitoring of digital data and how we can compile and use this information to guide our actions. He talks about central government’s role in disseminating information (like inflation), and the use of drones to reshape our military.

Previous writings

If you’ve not read them already – here are a couple of blog posts that explored my thinking around this topic.

October 2018 – Self driving cars and tech-tipping points: https://bestemnetwork.com/2018/10/10/self-driving-and-the-digital-avalanche/

June 2018 – Elon Must and the reinvention of manufacturing: https://bestemnetwork.com/2018/06/11/the-fourth-musketeer/

May 2018 – Ocado and the reinvention of logistics:  https://bestemnetwork.com/2018/05/09/ocado-wheres-my-avocado/

May 2018 – Four Grand Challenges – the (re) emergence of british industrial strategy:  https://bestemnetwork.com/2018/05/22/four-grand-challenges/

July 2017 – Automation Risks. Automation itself poses a new risk to operations that needs to be managed seperately:  https://bestemnetwork.com/2017/07/07/automation-risk/

May 2017 – Technologies driving change in upstream oil and gas, their implications and impact https://bestemnetwork.com/2017/05/31/4th-wave-value-upstream-oil-and-gas/

March 2016 – Primer for the 4th industrial revolution, what technologies are driving it and it’s wider implications for industrial society.  https://bestemnetwork.com/2016/03/29/innovation-and-productivity-with-4th-industrial-revolution/

Responding to the Crisis: Leader’s Handbooks

What should we be doing right now?

It’s an economic emergency. Every company is having to rethink what they do and how they operate. Together with AGM Transitions we’ve asked our networks to share their recent experiences. We’ve written three guides:

COVID – Responding to the crisis – Leaders Handbook

COVID – The Transformation Handbook

COVID – Remote Working Handbook

What happened?

Since I published my post on March 9th the world turned upside down. Covid-19 is a “big one”, certainly when considering the economic impact of the measures taken to stop its spread.

Couple that with the shocks to both supply and demand in the oil world and members of the Bestem Network have been left slightly shell shocked.

What will happen next?

We are starting to understand where we are – but we’re battling to understand where we will need to go.

As Gordon Ballard said in the FT on Saturday: “In the past, activity decreased then picked up again — each time, we saw it come back,” he said. “Now it’s not entirely clear if things just come back as normal. Everything has changed.” [Link]

For some context however I should point out that even with 30% drop in oil demand we are now only at the level that was normal in 1996 [Link]

What have I been up to?

Alongside my hour’s cycling, home cooking, housework and playing with electronics:

  • Looking after my clients
  • Contributing my skills to my community to innovate systems to support neighbours in need; and
  • Working out what we have to do to come out of this ready for the next phase.

Stay Safe, together we will get through this.