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.

 

Sell now while stocks last

Who’d have thought it?

In December and January, I was writing about what we might face this year. The world looked very different than it does this morning.

As I write the London market is off 8%, the Oil Price has dived to $35/BBl and Energy stocks are off 20-30%.

Continued shocks

The world seemed a rosy place in 2013. Since 2014 we’ve experienced a series of shocks – 2014 Oil Price crash, Brexit, Trump, refugee crisis, Syrian wars, trade wars, climate strikes, energy transition, Covid-19 and now Saudi & Russia are playing poker. None of this was predicted widely.

As we head deeper into the 4th Industrial revolution we will see more “externalities” that will further disrupt our best laid plans.

What about Covid-19?

Maybe Covid-19 isn’t “THE ONE” maybe it is. But it has certainly exposed how susceptible our current end-of-3rd Industrial Age, free-trade, globalised and business-case-obsessed economy is.

We have not priced risk correctly and we have not built in contingency. Workers on zero hours contracts can’t self-isolate, just-in-time imports from China are not working. To address this will require changes in policy and macro-rules to make a response possible in the face of short-run economic competitive pressure.

For more information on Covid-19 McKinsey has an excellent primer here [link]

Will business need to change

It seems clear that changed business practices will be needed if we are to become more resilient in an era where travel can be minimised, whole communities quarantined and trade in physical products localised.

Perhaps we will quickly switch to business that makes more use of information-rich scenarios (video conferencing, designs for 3D printers, remote controlled operations)?

We also now have another example of what can happen when information travels wider and quicker than knowledge. In this case panic buying of toilet roll. As we become more information-reactive in our business processes we need to bear this in mind.

Innovation is the answer, now what’s the question?

The only strategy I can see that will help is to learn to innovate quickly and be ready to react with purpose and knowledge as the future reveals itself to us.

It will never be this slow again!

Mood music changes

So BP have gone back to the future. Beyond Petroleum all over again.

When I started the Bestem Network 7 years ago I focussed it on issues surrounding the Oil and Gas industry – specifically how to use technology and reconfigure operations to develop and produce projects at lower cost and risk.

Last drop or leave it in the ground?

The Wood report was flavour of the month and much of my work centred around MER-UK (Maximum Economic Recovery). One of the categories of posts on this site was (and still is) labelled “Last Drop”; it focussed around the changes that would be required to make it possible to cooperate economically to achieve the maximum aggregate profit for the industry. It tackled things like tying together infrastructure, developing small pools and draining the basin over the long-haul and not to optimise short-term or locally.

While I never expected that the industry would return to 2012 levels, I did expect that it would come back and stabilise at a more “normal level”. I was concerned that the “big-crew-change” would mean that young people would not have the knowledge to operate our much-needed oil and gas infrastructure. I had no idea that they would reject oil and gas completely. That thought occurred to me in 2019 when I visited London Tech Week.

In 2017 I wrote that exploration was really of waning interest [Link] but I didn’t expect one of the primary reasons was that we didn’t want any more hydrocarbons.

Contrast this recommendation from Wood in 2014: “Government and Industry to commit to a new strategy for maximising the recovery [of oil reserves] in UK Continental Shelf] with the growing idea that we might leave reserves in the ground.

I wonder what the report on maximising the economic recovery from the whaling industry said.

Could the oil industry just disappear?

Despite sounding the drum for the 4th Industrial Revolution and arguing (nicely) with Patrick Von Pattay ( I was the more conservative because I thought that oil and gas really wouldn’t change fundamentally). It appears I may have underestimated things.

A very successful (and foresighted) businessman recently told me that the plastic-straw industry had simply ceased to exist within six months of the revelations of the damage it did to the oceans in the TV programme the Blue Planet. This chap now takes into account environmental position before bidding for work from a company – not for ecological reasons. He wants to direct effort to customers that will remain in business!

Surely we can’t do without oil?

Of course, there are oilmen who will tell you that the world economy cannot work without hydrocarbons – their case has always been that growth will come from renewables, and that demand would be flat. I tend to agree. But what if we’re wrong?

Here are a couple of thoughts for this (exceptionally) rainy Feb morning.

  • Solar is the cheapest form of energy production already. It’s getting cheaper and more efficient at a blistering rate.
  • Petroleum products might become classified as a dangerous substance – think asbestos or CFCs, what would that do to demand and price when supply, licensing, permitted uses and public perception of the product changes.
  • Microeconomics – which is what many businessmen optimise for – operates within Macro economic boundaries. Macro economics are formed by policy, are political and by nature are ideological. Think about: Soviet Russia, China, Thomas Pickety, Trade Wars, Sanctions. Things you think are “real” business decisions can be usurped by political will in an instant.
  • The IPCC report on climate change was issued in 2007, the Paris agreement was 2015 we seem likely to go beyond this and as a world embrace Net Zero sooner rather than later. For insight listen to Myles Allen on the life scientific (BBC https://www.bbc.co.uk/programmes/m000fgcn )

Engineering will still be important

With all this doom and gloom around it’s easy to get despondent. But, here’s the good news: if the world decides it wants to change then this will call for difficult and complex engineering, delivered in remote locations across political divides on an unprecedented scale over a mulit-decade period.

Not only will we need to invent all sorts of new technology for carbon reduction, energy efficiency, generation, storage etc. etc. We will need to deploy them all and decommission all the legacy assets.

There are not many companies that can muster the amount of engineering talent, capital control processes, large scale international project management, logistics construction that will be required. In fact, I can think of two that could – Energy and Shipping. And of course, if the world doesn’t change, oil and gas will have a renaissance.

Under all circumstances the people inside the oil industry will have skills that are needed and which are hard to replicated at scale. The only loss of value will come from those who can no longer exploit their control of underground deposits of oil in the future, and those that must pay for legacy assets and impact from the past.

Fundamental engineering practice still matters

With all the digital wizz (which I fully support) it is important not to lose sight of the practical situational requirements, human organisation and civil society that we need to enable the “platform” in which the innovative start-ups, electric cars and energy transition can happen.

Basic engineering discipline still matters, and is sometimes overlooked by hand-waving innovators and wet-behind-the ears management consultants.

You probably know about the 737-Max flight-stability software and instrumentation scandal. Recently, I read an article on Boeing where it says they are now re-inspecting new plane fuel tanks because they have found rags and tools left in them by construction workers: https://www.flightglobal.com/air-transport/boeing-orders-737-max-inspections-after-fuel-tank-fod/136819.article

It’s a sobering thought when flying :- if the wrong culture takes hold and introspective and solid processes are overtaken by gregarious and extroverted leadership.

The world still needs good engineering.

Ubique & Quo Fas Et Gloria Ducunt

2020 Vision

Sorry for the title. It’s not very original. Everyone’s been using that for the last decade, but still it seems appropriate. Every January I’ve made a post predicting the year ahead. I normally write this in December and publish it at the beginning of the year. It normally makes a few tongue in cheek exaggerations to in order to raise a smile. I stole this idea from Old Knights Almanac that used to appear each year in the RETRA magazine [Link ]

Today is the day we leave the European Union. My advice is to ignore this and go and buy today’s FT. It has many stories that summarise the transition we’ve witnessed and sets out the stall for next year. Below I’ve taken extracts and headlines and they tell the story. The one thing not mentioned is the UK Government’s industrial strategy, more on that in another post. Oh, and my watch phrase for this decade is “Society 5.0” – I think we’ll be hearing more about this in the comming while.

First here is an extract from this story (https://www.ft.com/content/b64b692e-4387-11ea-abea-0c7a29cd66fe).

This caught my eye because it illustrates the emerging tech leadership that is flowing from a very entrepreneurial and exceedingly smart China, the comming tech trade-wars and how there is a shift in earnings among tech players reflective of the shift in tech approaches – showing even when you are the innovator you have to keep innovating!

BT has said the cost of implementing the UK government’s cap on the use of Huawei equipment will cost it £500m over the next five years as it reported its third quarter figures.

[…]

There’s a bumper crop of earnings to report: Microsoft reported a 14 per cent advance in revenues, to $36.9bn, helped by cloud revenues which grew 39 per cent to $12.5bn, Tesla has notched up its first-ever back-to-back quarterly net profits. The electric car pioneer called 2019 “a turning point”. AT&T’s entertainment business WarnerMedia revealed a $1.2bn hit due to costly investments in its upcoming streaming service to rival Netflix. Nintendo’s quarterly operating profit rose 6 per cent to $1.5bn, missing expectations. Samsung Electronics confirmed its fifth straight quarterly decline in profits but said it expected memory market conditions to improve in 2020.

To avoid the risk of plagiarism I am going to direct you to today’s FT (go buy a copy or have Amazon deliver you one). The headlines from these stories paint the picture and tell the story all by themselves.

Why Microsoft and Tesla are the decade’s big disrupters

https://www.ft.com/content/b3e659fc-4380-11ea-a43a-c4b328d9061c

Ginni Rometty steps down as IBM tackles cloud era

https://www.ft.com/content/aabee59a-43aa-11ea-abea-0c7a29cd66fe

Rich and famous turn to ‘personal cyber security’ to protect phones

https://www.ft.com/content/96c79040-40ea-11ea-bdb5-169ba7be433d 

The Apple effect: Germany fears being left behind by Big Tech

https://www.ft.com/content/6f69433a-40f0-11ea-a047-eae9bd51ceba

Elon Musk jolted by German protests over Tesla factory plan

https://www.ft.com/content/8b10555e-4345-11ea-abea-0c7a29cd66fe 

The UK’s employment and productivity puzzle

https://www.ft.com/content/a470b09a-4276-11ea-a43a-c4b328d9061c 

For today’s oil market the real threat is to demand, not supply

https://www.ft.com/content/5bf49cb0-41cb-11ea-bdb5-169ba7be433d 

Shell to slow investor payouts after earnings fall 50%

https://www.ft.com/content/4e1fa700-4334-11ea-a43a-c4b328d9061

Orsted/offshore wind: Go-Greta:

(Henrik Poulsen has turned a national oil company into the world’s largest offshore wind builder and green energy champion)

https://www.ft.com/content/719dd81d-2527-4b83-8aed-e6624476c191

Competition rules stymie co-operation on climate goals

https://www.ft.com/content/b3e0da9c-3eba-11ea-b84f-a62c46f39bc2 

I wish you a healthy, hearty,happy and prosperous 2020.

No point being right at the wrong time

Experts, at least the ones I have talked to, cannot see how renewables and electric cars will make a meaningful impact on hydrocarbon demand in the medium term. Factors such as intermittency of supply and storage, coupled with economic growth in India, China and Africa and the requirements for chemical inputs are some of the factors that drive their opinion.  Add to this the energy required to produce cement and the methane contribution from red meat farming and it covers many of the themes suggesting the modern economy would fail quickly without oil and that this is not changing anytime soon.

When I talk to the investors, however, they tell me that it is now much easier to finance renewables than oil. The returns required are often 5-10x higher for fossils than for wind or solar. Though some are fearful of the potential knock-on effects of the “CRD-IV” Basel regulations.

When I hear Rob West speak, he tells us about the is the possibility that the current low investment in oil and gas may meet the natural decline curves on the way-down and growth demands on the way-up to form a spike in the Oil price. Such increases have previously been the portent for economic slow-down, the rise in violent protest and countries going to war with their neighbours.

There are countless articles that repeat the claims about the fall in Solar prices being dramatic enough to threaten conventional and nuclear generation. Here’s just one sample on “oilprice.com”:

“The Next Stage Of The Solar Boom Is Already Underway”

https://oilprice.com/Energy/Energy-General/The-Next-Stage-Of-The-Solar-Boom-Is-Already-Underway.html

However there was a rather underreported article recently in the FT which migh suggest something different:

https://www.ft.com/content/be1250c6-0c4d-11ea-b2d6-9bf4d1957a67

[…] Yingli was the world’s largest solar-panel maker in 2012 and 2013, exporting all over the globe and celebrated in China as a national champion…..Today Yingli is insolvent. It has been defaulting on debt payments since 2016, and in 2018 it was kicked off the New York Stock Exchange because its market capitalisation had sunk below the minimum $50m threshold. Although Yingli still makes solar panels, its factories operate at a loss and the most valuable asset it has left is the land underneath them….The company is the highest profile casualty of a change in policy that is being felt across the renewable energy sector in a country once celebrated as the world’s clean energy champion. Chinese investment in clean energy is plummeting — down from $76bn during the first half of 2017, to $29bn during the first half of this year.

Maybe the fall in the price of solar may not be all to do with manufacturing efficiency and fall in production cost, perhaps it’s also to do with the marginal cost of production, large fixed asset factories, sunk costs and supply-and-demand.

Whatever opinion you may rationally deduce is of no relevance. We’re going down a renewables route on a green agenda that no longer needs to stand the test of traditional economics and logic but will become a defining shared belief. Something that can’t be questioned. Something that is above rational thought. As one of the UK Ministers said a few years ago “We no longer need experts”.

If members of our network are to proposer in the short-run they must understand the impact these forces will have on their business and take action. In the long-run economics and logic will re-assert, but by then the world will have changed and who knows what we might discover we can do by making seemingly irrational choices? Perhaps there will be game-changing, unpredictable inventions found. You cannot prosper in the long-run if you don’t survive the short-run.

As John Maynard Keynes said in 1925, “The market can remain irrational longer than you can remain solvent”.