When Small Towns Die Out, Can America Survive?


 

City Hall 1.jpg

When you think of America, what comes to mind? The bright lights of New York’s Broadway? Or a small town, with a quaint main street and homes with well-manicured lawns? America’s self-image is evenly split, and both sides are true, in their own way. But when it comes to deciding on where you want to live, big cities are winning out over small towns and rural villages. Cities are growing, but small towns are fading away!

In one of the biggest population migrations in history, people are leaving rural areas and moving into cities. Not just in America, but all over the world. In every developed nation, small towns are going away. What’s happening?

Early Signs: The extinction of small towns was first noticed in Japan. One by one, their small towns lost population, became deserted, and turned into ghost towns. Japan is an ancient country, with equally ancient traditions and laws. Your place in society, where you live, work, and travel were all rigidly defined. After World War II, Japan’s rigid class system was abolished and citizens could move about more freely, both socially and physically.

Japan invested in their train system, making it one of the world’s best, eventually introducing their famous high-speed Bullet Train. Travel became easy, and the governement strongly encouraged travel and tourism. As citizens became less anchored to their hometown, and children moved away, small towns began to shrink.

Education: At the beginning of the 20th century, education was very basic. As the economy developed, more sophisticated goods were produced, requiring a more educated workforce. The best colleges and schools in the world tend to be located in cities, where the concentration of population provides a constant supply of both students and teachers.

In the US, as late as 1970, only 14.1% of men and 8.2% of women graduated from college. But by 2016, college graduations had risen significantly. 33.2% of males and 33.7% of women graduated from college… triple the number from 1970. This rise in education, and especially the rise in female education. Expectations of graduates, of corporations, or everyone… was on the rise.

https://www.statista.com/statistics/184272/educational-attainment-of-college-diploma-or-higher-by-gender/

Employment: Japan was completely devastated by the war. Virtually every factory in Japan was quite literally burned to the ground. New houses, schools, and factories needed to be built. The government not only eliminated the old social hierarchy, it actively encouraged upward social mobility. While their parents may have never left home, their children went away to study at college. Once they were exposed to travel, graduates were easier for businesses to recruit.

As Japan grew into one of the world’s largest economies, the combination of schools and corporations dramatically changed demographics. In the past, even this combination might not have been enough to break the strong family ties of Japan. But a reliable and extensive train system meant that your family was just a high-speed train ride away. By easing the trauma of breaking up families, the transition from multi-generational families to the modern nuclear family was swift.

Other developing nations followed a similar path. A fruitful career was tied to leaving the countryside. Before 1900, many American families broke up in search of prosperity “out West”. But the breakup was usually permanent. By the mid-20th century, children who moved away, could visit their old hometown on a train, a car or even a plane. If that was too much trouble, you could always make a long distance phone call. With few barriers to overcome, children left small towns in unprecedented numbers.

Fertility: For a population to grow, women must have a fertility rate of at least 2.1. Which is to say, 2.1 must live until they are at least a year old. The “2” replaces the parents, and the “.1” allows for diseases, accidents, suicides and other events that may prevent a child from reaching adulthood. In the past fertility rates needed to be much higher, because disease killed so many young children.

In antiquity, families had many children, but few survived to adulthood. Modern medicine has eliminated many of the diseases of early childhood. In America in 1915, infant (a year or younger) mortality rate was 100 out of every 1,000 births. Today it is just 5.9. When all of your children grow up, families become smaller… in America and the rest of the world.

https://datacenter.kidscount.org/data/tables/6051-infant-mortality?loc=1&loct=2&loc=1&loct=2#detailed/2/2-52/true/573,869,36,868,867/any/12718,12719

Prosperity: There are exceptions, but higher education and greater income go hand in hand with smaller families. Families can spend more money on fewer family members, improving their standard of living. This is the universal model. This is why cities are gaining population, small towns are shrinking, and whole nations have declining population.

Declining population can be reversed, or at least slowed. By immigration. Whether that immigration is from within a nation or from outside, immigration is the best way to offset falling fertility and a rising number of “leavers”. If America did not have robust immigration, our low fertility rate of 1.84 would have already put our population into decline.

In 2004, Japan’s low fertility rate (1.46) plus an anti-immigration policy pushed their population growth to zero. Since then, Japan’s population has been in decline. By 2065, their population will plunge from 127 million to 88 million. Japan’s population will be smaller… and older.

https://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&met_y=sp_dyn_tfrt_in&hl=en&dl=en

Age: 15% of Americans are over 65. One out of 6 are retired, and 2 out of 6  too young to work, attending school, in the military, or in jail. That leaves just 3 out of 6 to actually work. Historically, that very few. Of course, if we look at Japan, 26% are already over 65. By 2060, 40% of the citizens of Japan will be over 65. That will be a real crisis. It will completely change Japan’s Culture. Not too much later, the same changes will happen in America.

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

We’ve seen how education and business work best when they are near a large population. The same is true of healthcare. Hospitals, clinics, and other healthcare institutions need a big population to thrive. Medical equipment… such as CAT and MRI scanners and various cancer treatment systems… can cost tens of millions of dollars each. It requires a large number of patients, patients that can only be found in big cities, to pay back the cost of this equipment.

Even basic healthcare may not no be possible in a small town. As the workforce shrinks, small towns don’t just run out of waiters and beauticians. Many small towns have just one doctor or lawyer left. When these critical positions are gone, it is very difficult for a community to survive.

Government: If you’re not in or near your state capital, there may not be very many government employees in your town. However, there are two governement facilities that may determine the survival of your town.

When you run our of teens in your town, the high school may close. High schools are often a critical employer in small towns, and the loss of a high school can be a death blow to the town.

Likewise, the post office is a key service for both small towns and big cities. Unfortunately, the USPS is in deep financial trouble, losing nearly $50 billion over the past few years, and falling short in pension funding by billions more. The USPS has put forward plans to return to profitability, each of which requires shutting as much as 50% of all post offices. Small towns would not lose their post office, they would lose many postal services, such as home delivery of mail. In itself, this may not destroy a town, but it adds one more difficulty for residents and employers.

https://www.thoughtco.com/postal-service-losses-by-year-3321043

Of course, with new corporate jobs comes higher pay and prestige. But not necessarily a better lifestyle. In Japan, the life of an average corporate worker… the “Salaryman”… is often a high-pressure life, with long hours at work, and a tiny living space at home. Nonetheless, the best-educated workers have been… and continue to be… lured away from small towns to big cities.

The End: There really isn’t any alternative to the extinction of small towns. The numer driving change are irreversible. Populations will stall and then decline. There will still be boom towns, but not many. And most small towns will go away.

Most. Not all. Some small towns will survive. Which ones? The ones with a plan. I know taht some towns are preparing for the Extinction. I’ve talked to them. Some are focusing on the next generation of “returners”, who left and are coming back. Others are developing innovative events and businesses to revitalize their towns. Yet others have partnered with their best young workers to ensure that “opportunity” isn’t always found somewhere else.

There are thousands of small towns across America that face extinction. What sort of town is your town? Are you prepared to have your town shrink away, or are you ready to fight? Tell us about your plan!

 

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The Retail Apocalypse Has Arrived


Store CLosing

At the start of 2018, America has the lowest unemployment and the best economy in more than a decade. The stock market is at new highs. It feels like the economy is strong. But… that’s not the way it looks. On your own main street, or favorite mall, or nearest shopping district… do you see empty stores? A lot of empty stores? What’s going on? How can a booming economy have a record number of empty stores?

2017 set a record for retail store closings. Radio Shack, Toys r Us, Payless, Gymboree, and True Religion were familiar names in malls across the country. Now they are either filing for bankruptcy or have already closed their doors. 2017 had 8,000 store closures, and 2018 may beat that record.

http://money.cnn.com/2017/10/25/news/economy/store-closings-2017/index.html

http://www.businessinsider.com/list-stores-that-closed-this-year-2017-12

This is the “Retail Apocolypse.” But it’s not just one thing. It is the culmination of many influences, a “Perfect Storm” of cultural change. Let’s break it down…

Clothing: American clothing has changed. First, we buy less clothing. Partially because casual clothing became the norm at work. We no longer need one wardrobe for work and one for the weekend. Partially because millennials see a big wardrobe as environmentally destructive. All of that leads to the second change. In 1959, Americans spent 26% of their discretionary money on apparel and footwear, compared to 11% now.

https://nypost.com/2017/04/18/americans-are-spending-more-on-their-homes-than-their-clothes/https://www.ncbi.nlm.nih.gov/pmc/articles/PMC1964887/

This is more than a passing fad. American clothing is largely made offshore, regardless of the brand name. Without the cost of malls and department stores, the same items online can be sold for less.

Online: Why shop online? Convenience is a big issue. Going to the store often takes time. Waiting on a line to pay also takes time. With empty stores, line waiting is often much shorter, but we are also more impatient. Likewise, even large stores cannot stock every item in every size and color. Online, you can quickly search every store in the world for a hard to find item. And, of course, you not only get a better price, you can shop at any time of the day or night.

Ten years ago, few consumers shopped on the Internet. We downloaded videos, emailed, and just begun to try streaming media. In 2000, only half of one percent of us retail sales were online. By 2016, online sales rose to 9%. By 2022 that will double. As more sales move online, traffic in brick and mortar stores will fall. Empty stores are not about the failure of brick and mortar, they are about the success of online merchants.

Amazon is one of the most successful online merchants. But much of their success comes from their merchant services, where many formerly brick and mortar businesses sell their goods online, through Amazon. Not all of the store that closed went out of business. Some just migrated their businesses to where the customers are… online!

https://fred.stlouisfed.org/series/ECOMPCTSAhttps://www.statista.com/statistics/272391/us-retail-e-commerce-sales-forecast/

https://www.statista.com/statistics/272391/us-retail-e-commerce-sales-forecast/

Walmart: Not that long ago, Walmart led the last retail expansion. They wiped out many small stores, especially in rural areas. Now, with 98% of their sales still in brick and mortar, Walmart is scrambling to develop an online strategy. It is possible for them to move 20% or 30% of their sales online in the next few years, but it will require cannibalizing and closing a large number of stores.

https://www.bloomberg.com/news/articles/2017-10-10/wal-mart-expects-online-sales-to-grow-40-as-it-chases-amazon

Bankruptcy: Other stores failed to develop an online model. Big chain stores like Toys R Us are going bankrupt in large numbers. Restaurant chains are dropping so quickly it’s hard to keep track. We can expect dozens of well-known chain stores to expire in the next year.

Malled In America: Real estate developers contributed to the Retail Apocalypse by building too many malls. Research from Cowen and Company shows that mall growth outpaced population growth in America by 40%. US malls were built at 5 times faster than malls in the UK. Ten times faster than in Germany. At some point, that bubble had to burst, and it has.

https://www.theatlantic.com/business/archive/2017/04/retail-meltdown-of-2017/522384/

Anchors: When a new mall is built, the largest and/or best-known tenant is known as the “Anchor”.  This store attracts customers that help support smaller stores in the mall. Intelligently recruited tenants are supposed to create higher foot traffic and profitability for the entire mall. If this theory is right, however, when an anchor leaves the mall could collapse. Which seems to be happening.

Department stores have been rethinking the “Anchor” model. Big department stores have to pay for big leases and must tie up a lot of capital in inventory. And no matter how large the inventory, when you want to get a specific shoe, in your size, it may not be in the store. Online merchants have more merchandise in more sizes and colors. Smaller stores that only stock best selling items, PLUS an online prescence, can be a more effective combination.

JC Penny is exploring new options. A store today averages 100,000 square feet. Like other department stores, JC Penny offers “store within store” merchants (especially in cosmetics). A 40,000 square foot store, with proportionally smaller “store within store” merchants, are being tested. If new and redesigned stores can dramatically reduce rent, staffing, and inventory, saving stores from closure. But JC Penny is often an Anchor store. If Anchors downsize, will other mall retailers have the foot traffic to survive?

Cycles: We are in the middle of a new retail cycle. But it’s not the first cycle. The first cycle was probably a bit more than a century ago when Department stores arose in Chicago and New York. The second cycle was caused by designers leaving the department store and creating their own brands in malls. The third cycle was the rise of the superstore, especially Walmart, which eliminated many smalltown stores. We are now in the fourth cycle, which started at least a decade ago, when the earliest online merchants connected with customers.

What will the fifth retail cycle look like? The next cycle will kick off when most of our buying is online and mobile. We will buy a lot of products by subscription, or through smart devices that know that we’re out of something. More and more, our behavior will be monitored and our needs anticipated. Because we are ordering on like, and not shopping in a store, more of our goods will be shipped to us.

In cities, that means more urban crowding from more delivery trucks. It also means A LOT of boxes and extra shipping materials. And a much bigger carbon footprint as goods are shipped around the country, instead of carried home from a store a few blocks away.

https://www.fool.com/investing/2018/01/09/retail-trends-in-2018-brick-and-mortar-takes-new-f.aspx

The fifth retail cycle will be led by whoever wins the war between Walmart, Amazon, and foreign competition like Alibaba. As more millennials “cocoon” at home, working remotely, having food delivered, and generally not leaving their apartments or homes for days at a time, just about everything will be ordered online.

http://www.businessinsider.com/jc-penney-found-a-way-to-boost-sales-and-now-macys-is-trying-it-too-2017-4

https://www.drugstorenews.com/article/jcpenney-testing-smaller-sephora-format/

Post-Apocalypse: The bubble has burst and shopping centers and main streets have too many empty retail spaces. In New York City, Steinway street in Queens is a major shopping area. A decade ago, before the global financial collapse, if you wanted to open a retail store you might have to wait for years until space was available. A couple of weeks ago I make a quick survey.

Blocks in New York come in two sizes, Streets and Avenues. From street to street is between 10 and 20 blocks to a mile. Between Avenues it is just 5 or 6 blocks to a mile. Even so, when I counted stores on both sides of one block, I counted 13 empty storefronts. I knew that I would two or three, but the number did surprise me. I tried the next block and counted 17 vacancies.

Unlike other economic downturns, the businesses that remain are doing quite well. This isn’t a typical downturn. Customer preferences have changed. Services… barbers, nail shops, beauty parlors… continue to thrive. Banks are closing obsolete full-service locations, but are rolling out a new generation of more capable ATM’s. Millenials, however, have leapfrogged ATM’s instead using mobile banking apps.

The “Apocolypse” is not a single event or even a moment in time. It is an ongoing disruption and redefinition of retail. Waiting on a line in a big department store is an annoyance. Shoping for the perfect sushi knife in your PJs at 3am is great. And Sad. (Can we call it “Grad”?) New forms of business may fill the empty retail spaces. New technology from Amazon and Google that lets us walk into a store, grab what we want and just walk out, could revitalize retail.

Retail is still very much alive and growing. Over the last century, the definition of retail has changed, and it will continue to change. Just as our needs and expectations change. A few years ago I couldn’t have imagined that there could be so high a demand for “nail shops” for manicures. Who knows what sort of services are about to take over retail?

 

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Is the Real Crisis Too Few Jobs Or Too Many Workers?


crisis

Robots are coming, and they’re going to take your job! Sure. We all know that. Cars will drive themselves. New factories will have all robots and no workers. Your manager will be replaced by an AI. Half of all jobs will go away. Forever. The age of “work” may be coming to an end. Of course, there is another theory.

In 1927 the glocal population reached 2 billion. Today it is 7.6 billion. By 2100, the population will peak at 11 billion and then fall. 25 nations already have zero growth or a declining population. Worse still, as the world’s population ages, more of the population will be retired. The world is facing a global worker shortage!

A crisis is headed our way, but which one? Will it be too few workers or too few jobs? It’s like a plot from Star Trek “Discovery”, with America caught between alternatives universes! How did this happen? Let’s go back in time and see!

Post War: World War II changed everything! Workers once relied on personal skills and instinct, and productivity came from personal determination and drive. After WWII, science and technology took over. Germany might engineer better tanks and the UK could be more innovative (penicillin, radar, jet engines, computers, even the “Jerry can”). But it was America productivity that won the war.

Before World War II, airplanes were produced by the handsful. By the end of the war, planes were built by the tens of thousands, with each new model dramatically superior to the one it replaced. In just a few years, propeller-driven biplanes were replaced with jets.

The same techniques that won the war were adopted to consumer manufacturing. Washing machines, vacuum cleaners, motorized lawn mowers, and an endless catalog of luxury items became affordable enough for every family.

Peter Drucker, the most influential management theorist of the last century, said that productivity in America rose 50 fold during the 20th century. Everyone could have a job, work a mere 40 hour week, and afford the newest consumer goods. Technology had delivered the age of leisure!

Globalization: The war had destroyed much of the world. America, however, was protected by the natural barrier of the Atlantic ocean. With zero war damage and huge factories built for the war, America was in the perfect position to rebuild the world.

In rebuilding the war-ravaged world, America replaced many Europe brands around the world, becoming the “Factory of the World”, and the Global superpower of the 20th century. But how would America, with just 5% of the world’s population, get the rest of the world back on its feet? The answer was… PRODUCTIVITY!

Technology and scientific management would deliver unheard of levels of productivity. America alone could produce more goods than the entire world once did! The cost of just about everything fell, and prosperity spread across the globe. Everyone wins… at e\least for a while.

The Treadmill: Prosperity did follow, but the world would not stand still. The Population was rising. In 1804 world population was 1 billion, in  1927 it was 2 billion, and in 1960 it reached 3 billion. The world didn’t just have more people, the speed of population growth was accelerating. The speed of growth was accelerating. Developed nations worried about their standard of living, and developing nations worried if they had enough to eat. As we would see in the 20th century, a hungry nation is never very far from revolution, and prosperity does bring peace.

http://www.worldometers.info/world-population/world-population-by-year/

Factory productivity rose still higher. Agricultural scientists created a “green revolution” that doubled the world’s food supply. There was enough for everyone, but a continuously rising population meant continuous productivity improvements in every business. Factories were automated, workers were freed for more complex tasks, and education standards were raised. A new degree, the MBA, was created to drive higher productivity. Today, every corporation has MBAs and departments to improve productivity.

Continuous improvement not only made goods cheaper and more plentiful, it shrank electronics that could fill a room into a device that fits in your pocket. TVs, computers, cellphones, tablets, and other electronics followed Moore’s law, cutting the cost in half every year or two.

End Of The Begining:  Global population will peak at 11 billion, in 2100. African nations will continue growing for some time, but at least 25 nations have already reached zero growth or have a declining population. But this understates the problem.

America’s population is 325 million and will to grow to 400 million by 2100. But with older citizens and fewer children born, our population should have already declined. Only immigration has kept America growing, preventing massive worker shortages. This could change tomorrow if we rewrite our immigration policy.

Turning Point: We need a growing population because we’re aging. The retired portion of our population is growing. Older citizens need more services. In 1960 just 5% of our economy was in healthcare. By 2025 it will rise to 20%. Restaurants, hotels, house cleaning, and other services have expanded, requiring new workers.

When our workforce transformed from agricultural to factories and services, many ex-farm workers moved from the agricultural South to the industrial North. In the 1970’s, tens of millions of women who were previously excluded from work (and college) joined the workforce. But it still wasn’t enough.

We added computers, and automated, and offshored work. We even turn a blind eye to an estimated 11 million illegal immigration, who performed work that no longer attracted Americans (agriculture, fast food, construction, and caring for our homes). Any serious reductions in immigration (legal and illegal), and we would have a huge hole in the workforce.

http://www.pewresearch.org/fact-tank/2017/04/27/5-facts-about-illegal-immigration-in-the-u-s/

Crunch the Numbers: In the mid-1970s, the speed of population growth peaked and then slowed. Today’s growth is just half of that of the ’70s. But corporate expectations were developed during that “peak” period. And we followed a simple system… productivity brought new jobs, new jobs brought more employment, and more employment delivered prosperity. But what happens when productivity continues to speed up, while the market grows more slowly?

http://www.worldometers.info/world-population/world-population-by-year/

Robot Revolution: Early automation replaced human muscle with machines. Think about how much easier it is to work around your house with an electric sander than a piece of sand paper. Add to that artificial intelligence (AI), and you can replace knowledge workers like lawyers, programmers, doctors, accountants, and managers. If a powered screwdriver is better than a manual one, think about a screwdriver that you just point at the work and it gets done. That’s what automation plus AI will deliver.

A few years ago, an industrial robot cost $150,000. But it needed an additional $300,000 to $450,000 for programming. To perform one job, in one factory. Change the work (even slightly) or move the robot to a new location, and you need to reprogram the robot.

Today’s robots cost less, and are “smart”. They can work out little issues on their own. For bigger tasks, another AI writes most of the programming, rather than relying on expensive human programmers.  This is a gamechanger, lowering the cost and increasing the span of jobs suitable for automation. That’s why experts expect robots to wipe out at least half of the world’s jobs, in just 20 to 30 years.

Our Future: Due to its inexpensive labor, China became the land of outsourcing, China is where most of the world’s “stuff” is made. But the cost of labor has been rising. Now their population is hitting the tipping point where it will shrink. By 2100 China’s workforce will plunge from 1 billion to just 500 million, while the market they serve will more than double in size. Just to keep up, they need a 400% increase in productivity.

The solution is… automation, robots and AI’s. China already buys more industrial robots than any other nation. Now, China is ramping up to be the world’s largest robotic manufacturer. A million robots will be sold every year by the early-2020’s and ten million a year just a few years later.

If each robot replaces just 5 workers, in less than a  decade robots will replace 50 million workers every year. China intends to retain the title of “Factory of the World”, until at least the end of the century. China can only do this if they implement the most advanced automation. That means that China will consume almost every robot they produce for the next few years. By the mid-2020s they can then shift their attention to global sales. China will build… and control… most of the world’s robotic workforce.

Happily Ever After?: Robots will take over. Period. The real question is how fast and with how much disruption. The speed of new automation probably won’t match the speed of workforce decline. But we should try to match these two trends so that disruption doesn’t become disaster.

In the last century, the 40 hour work week became standard. Much of the disruption in our century could be defused by implementing a 30 hour work week. Of course, working fewer hours could raise costs, but adding all those robots will lower cost. So, it’s a Goldilocks world… too hot, too cold, and just right.  This could all end with a happily ever after 22nd century. We just have to make the right choices!

Posted in Decision Making, Improvement, Robots, Unique Ideas | Tagged , , , | Leave a comment

Written In Sand… The Next Global Shortage has Arrived!


Sand MiningAs the world becomes more globalized, international projects are getting bigger. As a result, the most unexpected shortages can suddenly appear. A few years ago, China went on a building spree, creating a global shortage of scaffolding and construction cranes. As cities compete with farms and recreation for water, shortages are inevitable. But now we face a shortage that could break the foundations of the global economy… sand.

Sand? Yes, that’s right… sand! Sand is a critical component of concrete. And concrete, along with steel, is the literal foundation of civilization. Over the last 20 years, the world was on a building spree. Skyscrapers are now a common sight around the world. Skyscrapers consume a huge amount of concrete. Add to that, concrete plazas, concrete sewers, tunnels, sidewalks, and bridges. Cities need concrete….

… and concrete needs sand! But beaches and deserts are filled with sand? Why can’t that be used for construction? Ironically, desert sand is too fine and too round. It makes an inferior grade of concrete. You might get away with it for a wall around a house, but not in a skyscraper.

Sea sand has its own problems. It may be made of tiny stones (good) or shells (not as good), but it’s all contaminated with salt which is very bad for concrete. There are ways of getting the salt out, but it’s expensive.

The best sand is either river sand or sand deposited under relatively primal forests (by extinct rivers). Mining that sand can be very destructive. And expensive, since the law often requires miners to return the land to its original state. America as just one remaining sand mine, which is set to close in 2020. The sand shortage is a major issue for construction, but it is going to get much worse! And here is why…

Middle East: Some of the world’s tallest buildings are in  Saudi Arabia and the United Arab Emirates. Super skyscrapers are very new to this part of the world. Therefore, there is very little data to know how safe these buildings will be. Especially if local managers cut corners on safety to meet building schedules. If there are problems, it won’t be in the early years, it will happen after the buildings have been around for awhile, and then have to withstand a major storm or an earthquake.

If the right sand is not available, construction will be halted. The Burj Khalifa, the tallest building in the world, cost $1.76 billion and took 6 years to build. That’s $800,000 a day, but during the middle of the project costs probably peaked around $2 million a day. Not every building is the Burj, but it is easy to see how managers can fold under the pressure, and make bad decisions. Including the use of questionable sand. Similarly, if problems show up later… such as cracks in walls and foundations… will these problems be reported?

The United Arab Emirates has also built whole new islands off of their coast. These islands (starting with Palm island) are for the ultra rich. These islands consumed 94 million cubic meters of sand, scooping up virtually all of the sand within 6 nautical miles of Dubai’s coast. How did they use sea sand? Simple, they didn’t turn the sand into concrete, they just pushed piles of sand together to form islands. This was driven by aesthetics, not engineering.  That means constant maintenance for these man-made islands.

China: While Palm island is a modern miracle of construction, China is still the world’s biggest user of concrete, and will be for decades to come. In less than two decades, China has built over 500 new cities. While China has slowed down in building new cities, they will still keep the global demand for sand high.

Illegal Mining: India is on a similar building spree, driving up competition for local sand.  In fact, India has coined a new term, “Sand Mafia”, to describe all of the illegal sand mining around India and the neighboring nations.  Unfortunately, a lot of local warlords have learned that tearing up the countryside to steal sand it is a very quick way to make a lot of money.

Climate Change: “Storms of the Century” now happen several times a year. During a storm, sand is scoured from beaches and dunes and swept into the sea. Further inland, flooding destroys homes, and rebuilding requires sand. Hurricane Harvey in Houston and Hurricane Maria in Puerto Rico have put further pressure on the global sand market. As the weather gets wilder, demand will continue to rise.

Fracking: The price of oil is rising! With oil is above $50 a barrel, closed wellheads are reopening, especially in North Dakota’s Bakken oil fields. In the Bakken, oil is Fracked, requiring Fracking fluid… mostly water and sand. More of America’s power, for at least the next two decades, will rely on Fracking, and sand.

Belt and Road Initiative: China is leading the world’s largest construction project, the Belt and Road Initiative (or BRI).  This project runs through 65 nations, with tens of thousands of miles of roads, hundreds of new railroad lines, and scores of seaports, with an estimated cost of $8 trillion dollars. The BRI will require more sand than anything in the history of the world.

Silk Road Economy: The BRI is staggeringly huge, but it is nothing compared to all of the projects that it will spin off. The BRI, also called the New Silk Road, will accelerate the globalization of developed and developing nations while kickstarting the development of the poorest nations on earth. The BRI will build new railroads and seaports, but these economic centers will, in turn, employ tens of millions of people. This means hundreds of new cities will be built, along with thousands of power plants and factories, and scores of millions of new homes. All of which require sand, steel, and concrete.

Alternatives: We’ve exhausted the world’s supply of sand. Yet, over the next decade, we will accelerate construction. Economic pressure will force the world to open up new sand mining sites. The demand will be so high that even banned practices, such as dredging rivers for sand, may return. But there is an alternative! if you cannot find sand, make it!

For years, it has been possible make artificial sand from crushed rocks, but the quality is often uneven. Artificial sand improved over time, but skyscrapers keep getting taller and specifications for sand more demanding. Construction sand needs to be of ever higher quality, which is increasingly difficult to find.

A new form of synthetic sand is made from glass and can be made to very high standards. But it is not yet clear how much glass/sand can be produced. Only a fraction of waste glass is collected and sent to recycling facilities, and only a third of the glass that is collected is actually recycled. Glass based sand may substitute for the natural kind, but we don’t yet know how much we can make or what it will cost.

We shouldn’t worry about the price too much. The cost of sand has gone through as many ups and downs as the price of oil. In 2016 the cost of a ton of sand was $15-$20 but rose to $40 in late 2017. That’s not even the peak price of $60 to $70 a ton in 2014, China was still building new cities and fracking was big. Once the BRI ramps up, construction managers will pay any price to get the sand they need.

The Future of Sand: The economic forces that are driving the need for sand will become much greater in the early 2020s. Yet, at that time America will close it’s last active sand mine, for environmental issues. There is no simple or cheap solution to the sand shortage. Crushed rock and glass based sand will help, but it probably won’t be enough.

If there were more forms of industrial or post-consumer waste that could substitute for sand, it would be a win-win. A few years ago when China was at the peak of it’s building spree, it had a similar shortage of portland cement, another critical ingredient in concrete. While China lacked portland cement, it had a chemically similar waste product from coal power plants… fly ash. China successfully turned this nuisance waste product into a valuable new resource.

Other coal waste products, such as bottom ash, are being explored as replacements or partial replacements for sand. Other industrial waste products from the iron and copper smelting, also appear to be usable in commercial concrete. With more research, many more materials are likely to be found.

Turning waste glass into synthetic sand is a good start, but we need to find many other waste products to make high-quality concrete. Use of industrial waste would be highly y beneficial in Eastern Europe, where decades of Soviet-era coal and smelting tailings might finally be removed and turned into One Band One Road Initiative construction projects.

Cleaning up the environment and creating new construction jobs is a win/win. But if we want to keep the economy humming and avoid the next big shortage, we need to speed up research and create sand alternatives. If not, well… civilization is going to need a new foundation!

 

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How to Avoid The Latest Outsourcing Dangers In 2018!


Money Case

(Previously published in OUTSOURCE, 01/04/2018, Updated 3/25/2018)

By now everyone knows about outsourcing, the big issue of the 20th century that revolutionized the 21st century! But outsourcing didn’t start in the 20th century. In the 18th and 19th century Europe developed Imperialism, setting up colonies around the world. These colonies provided the language skills and education systems that made offshoring possible.  

If you look at the map of outsourcing, it matches the map of European colonies from a century earlier. India was the first to lay claim to being a destination for knowledge work outsourcing. Hong Kong, however, has an even stronger case for being the 1st global financial outsourcing destination… even though that claim is slightly muddled by Hong Kong being the “property” of England up to the 20th century, and later becoming China’s financial powerhouse.

Such changes may be the fate of ex-colonies. Still, it is undeniable that the business acumen gained from a century of British colonialism in Hong Kong provided the foundation for mainland China building hundreds of cities specifically for outsourcing. Pakistan and Bangladesh, which rose as destination centers for textile outsourcing, were formerly part of India.

In 1980’s the United States focused textile outsourcing on South America, which has former Spanish and Portuguese colonies. These colonies had their laws, financial structures, culture, etc. shaped and adapted to European institutions. 

After price, the most important factor selecting a location for outsourcing was Language. In manufacturing, offshore managers need at least a moderate grasp of your language (usually, English). Contact centers go further, requiring each worker to have at least rudimentary English skills. Financial outsourcing and knowledge work required both a solid understanding of colloquial English plus expertise with the unique terms used in Investment Banking, Research, Accounting, Trading, or Healthcare.

Before the US became the financial center of the world, the UK Invented the financial today’s world. Today’s world is divided between the UK running European trading and finance, and America dominating most of the rest of the world. In the early 20th century, the financial world spoke English, French, German and other Western languages, with English as the undisputed king of the financial world.

By the end of the century, China will be the worlds largest economy and the financial leader. Chinese will undoubtedly become the second language of finance. Someday. But not yet. What is surprising is that after the dominance of English and before the dominance of Chinese, the financial world will need to learn German.

German? Yep! Big changes (big, BIG changes) are about to rewrite the rules of Wall Street, even changing the languages we speak. The first change is the Brexit. If you haven’t been following this, back in June of 2016, the UK were unhappy about how the European Union worked. Many felt that they were paying into a system that did not give back enough jobs and benefits to be worthwhile.

One improbable event followed another, and somehow the UK voted to leave the EU. Every economist, financial expert, and pundit said it would be massively expensive and politically risky to leave the EU, but it didn’t matter. The UK had until March of 2019 to complete their exit. If they don’t complete the exit, in April they will not be able to trade goods, move money across a border, or even visit another EU nation. At least that’s the threat.

There were questions if it was feasible, but on December 7th, 2017 a key agreement was settled, and the Brexit moved forward and newer agreements have moved them past the point of no return, but banks and financial firms cannot wait to see the fine details for life after the Brexit. Instead, UK financial firms are moving their headquarters to the EU before regulations are finalized in 2019. This ensures continued work with the EU, regardless of the final agreement between the UK and the EU.

Where will the UK’s financial firms go? Predominantly… Frankfurt. That means new work rules, new regulations, massive retraining and… German? Between 75,000 and 300,000 professional jobs are expected to migrate from London to Frankfurt. Let’s get back to this a little later, first let’s look at the second big change, MiFID II.

On January 3rd, 2018 MiFID II, a set of European regulations to ensure transparency in stock trading, become the law for all of the EU and UK. Formerly, when you bought stocks you were charged a fee for the transaction and were given access to “free” research. For decades this “free” research allowed the trading firms to decide the sort of research customers would need. The result? Research is concentrated in a few big firms.

Companies like Apple have 50 analysts, while others are lucky to have 1. The top 15 Investment Banks produce 40,000 research reports every week, but surveys show that less than 1% are actually read. This “throwaway” research costs billions of dollars to produce and increases the cost of stock transactions.

Now, unless trades can continue to provide free research without billing for it, customers will have a stronger say over what research is produced in 2018, and possibly over what it costs.

We can be certain that a third, half or even more of the research positions in the UK and possibly the US will disappear. Add that to the already high (50%) reduction in researcher positions over the last decade. This is just the biggest and latest step in a long process. Of course, MiFID will have other results.

MiFID II is a European regulation, but it will be followed by many US firms. Otherwise, they must follow two separate and incompatible sets of regulations. Very large financial firms, with multi-million dollar research costs, are discussing the virtues of building their own research departments.

However, big market data services… Thompson, Bloomberg, Moody’s… have incentivized the consolidation of global research departments by offering a lower price per seat. With half or more of the “seats” going away, can firms stay in business?

Changes in long-established rules, a dramatic drop in research positions, a shift from London to Frankfurt, and… that little language problem. Some seasoned British financial professionals will become Expats, and move to Germany, but new financial professionals are likely to be hired in Europe. The language of the financial world is about to be diversified. But what about the jobs already offshored from the UK to India?   

India has been hugely successful in offshoring> With English language work. Outside of English, success has been more limited. The British are very used to Indian English. Others find communication more challenging. Likewise, when faced with other European languages, or even accents (such as Scottish), communications slow and mistakes rise. Other languages have been piloted in India, but the results have rarely justified moving into production. Will India lose projects, or are there alternatives?

India could rely on its programming expertise, and integrate translation technology into offshore operations. AI translation could crack the language barrier. Unfortunately, while India creates a great deal of innovative technology, it is rarely patented by Indian firms. Instead, outsourcing clients usually own the technology. With the possible exception of IBM, outsourcers have not attempted to create an Indian translation software franchise.

Without Indian translation expertise, non-English work is not “anchored” to India. That makes it a prime target for China, for several reasons. First, China is investing in translation technology and is fanatical about patents. While China has not announced any specific plans for translation, they have announced plans to be the world leader in Artificial Intelligence. Translation is a sub-category of AI. Already a leader in search engines and robotics, China has plans to buy billions of dollars of robotics and AI firms. It would be a simple matter to scoop up a translation firm. 

The UK relationship with Hong Kong is as deep as the connection between the UK and India, allowing for a significant extension of financial work offshore. Of course, Hong Kong is also a direct path through to outsourcing in mainland China.

While India has created world-class Universities (IIT and IIM), it has failed to reform the overall quality of education. Outside of technology schools, China is not (yet?) known for its top-tier Universities, it has significantly reformed elementary, secondary and undergraduate schools, as well as adding at least 10 million new English speaking workers. 

The “change agenda” for 2018 is already overflowing. Dealing with MiFID, moving headquarters, dealing with new languages and regulations AND moving to new outsourcing providers is a lot to take on. In all likelihood, it is more than the Financial world can manage. By the second half of 2018, we can expect disruptions in the day to day operations, including outsourcing. Here are the five key areas to closely manage…

Client Contacts: Outsourcing firms spend years developing relationships with their clients. Client contacts are highly influential. Realistically, MiFID driven terminations will result in outsourcing programs without a known contact, especially in research programs! Big Investment Banks expect to lose half or more of their research staff. Even those that stay, may be reassigned. Expand your contacts before clients make staff changes.

Shifting Priorities: Outsourcing may still be a priority, but may other items will be added to their priority list. Expect more regular meetings to be moved or suspended. Ensure that all management reports are on time and you are ready to meet customers on short(er) notice. Continue to work as normal, but prepare for drastic changes in your program. In the past, a drop in staffing at your customer meant more work. There might be a temporary addition to outsourcing, but it is likely to be transitional rather than permanent.

Eliminated Positions: Research is ground zero for budget and staff reductions. Expect that many programs will shrink, merge, or be eliminated by the end of the year. Some of you may be thinking, “Your numbers MUST be wrong! The stock market is reaching new records. How could their budgets be down?”

Unfortunately, 40% of the trades made on the stock exchange are for indexed funds. Indexed funds are based on a market basket of stock, such as the NASDAQ. Since this is just a fund based on the stocks in an exchange, it requires no stock pickers, no funds managers, and no research. As much as 70% of market activity is expected to be generated by indexed funds by 2025.

As the market moves towards products that don’t use research, plus a dramatic reduction in the number of reports for the remaining funds that do use research,  we can expect major reductions in these departments.

New Positions: While the overall direction will be towards smaller outsourcing programs, with less staff… there may be new opportunities. Big fund managers, like Vanguard, are considering building their own research departments.

This may not replace all lost positions, but it will open up new positions for new clients. However, as fewer research reports are produced, only the best-crafted reports will remain. This could lead to consolidation in outsourcing. To remain in research outsourcing, you must be the best there is!

Contract Renewals: The contracts you have today may no longer be a good fit by mid-2018. Be prepared for renegotiation well before the contract expiration. Be very careful about committing to anything you’re not absolutely sure you can perform. Like, learning new languages.

Well, the future has arrived and changes are already being implemented. 2018 is going to be immensely challenging, but it’s not the last challenge you will face. Next year could have even more challenges as the Brexit arrives!

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The Surprising End After 25 Years of Successful Outsourcing To Mexico


 

Nafta

1992 signing of N.A.F.T.A. by US and Mexico

When President Trump was merely Candidate Trump, he said that he was able to negotiate with Automaker Ford to end outsourcing and keep jobs in America. HIs campaign got a big boost, even though Ford said that it did not make any agreement with Trump to change its plans to outsource to Mexico. In the end, Trump’s version of their discussion has won out. Ford has announced that it will not outsource the Ford Focus to Mexico. Instead, the Ford Focus will be built… in China.

Let’s think about this for a moment. China has a GDP of $10.9 trillion, vs. $1.12 trillion for Mexico. The US exports $115 billion in goods to China, compared to $262 billion to Mexico. Let’s put that another way. China imports American goods worth 1% of its economy, vs. Mexico importing 22% of their economy. Nearly a quarter of the goods bought in Mexico are made in America. Mexico is incredibly loyal to U.S. products. American goods are insignificant to the Chinese economy. So. Which trading partner would you value the most? Maybe the one on your southern border?

What did Trump name his book, “The Art Of The Deal?” I’m pretty sure that Trump’s book doesn’t say that you should keep insulting your best customer. Nor does it say that you should then publically state that you are going to break your trade relations with your best partner. That kind of talk can lead to things like… Ford moving to China.

Ford’s decision to build the Ford Focus in China is bigger than you think! By building the Focus in China, it hands over two important markets to China. First, transfers critical knowledge needed to advance China’s fledgling automotive market. But not quite as much as you would think. China has been building up its experience in building cars, working for Volkswagen, Buick, Toyota, Honda, Audi, BMW, Fiat, and others. Ford is just the icing on the cake.

More importantly, it fulfills China’s ambitions in Robotics. China is already the world’s biggest buyer of Industrial Robots. With a massive $250 billion infusion of cash last year for automation, China is becoming the world’s biggest BUYER of robotics companies and the largest manufacturer of robots. While the 250,000 industrial robots built every year in America, Europe, and Japan are counted, the 100,000 Chinese manufactured robots are invariably omitted.

Why are they forgotten? Because they are often used by the firms that make them, they don’t register on the global market. Just one firm, Foxconn (the world’s largest corporation), has talked about building a million robots on their own. That’s a LOT of robots!

If we add China’s robots to global sales we will start with 350,000 robots in 2016. If sales continue to grow at the 35% rate of the past few years, in 2020 1.2 million robots will be sold. If one robot can do the work of just 10 people… that means that 12 million people will be replaced in 2020. In 2025, 5 million robots will be built. At the same rate of replacement, that’s 50 million jobs. Carry that forward for a few years and you can see the massive impact robotics will soon have on employment.

That seems like an impossible number! Yet, consider your first smartphone. There were earlier mobile phones, but the iPhone started the trend of a phone having a screen, GPS, music playback and other features. The iPhone is 10 years old. Before that most people didn’t have mobile phones, let alone smartphones. Today we manufacture 1.6 billion annually. Smartphones went from devices that no one knew that they needed to something that more than half of the world owns. Robots won’t be any different.

Also, just like the iPhone, robots will improve. The average robot of 2030 will be five to ten times as productive as robots today. Look at that original iPhone from 2007. Or your first iPad. Whoops! There was no iPad 10 years ago. It arrived in 2010. How advanced will industrial robots, or Artificial Intelligence, be in a decade? Meanwhile, you and I and the rest of the human race will be pretty much the same as the 2017 model.        

Back to today. Whether work goes to China or if it stays in the US, China will “own” the world’s workforce. That’s the future guys! The world spent the 20th century worrying about Communism taking over the world. Now we can spend the 21st century worrying about Chinese robots taking over our work. Who would have thought that Communist robots would take over the world! Gee. Thanks, President Trump!

OK. It’s not really Trump’s fault. Anyone sitting in the White House has the same options. Do you promote outsourcing, prevent it or just leave the issue alone. You can create all the penalties you want, but if the benefit is greater, you’re still going to outsource. Now that a lot of the work that has already been outsourced can be performed by AI’s robots and automation, that work WILL come back from Mexico to the US. After all, the robots cost the same regardless of where we put them, and if the work stays at home, we save the cost of shipping materials around the world.

Likewise, work that was going to go offshore will be re-evaluated and stay at home. But when we build new automated factories onshore that can compete with offshoring, old and inefficient America factories are going to upgrade. Instead of being built to Mexican workers, US goods are going to be built by America robots (well, Chinese robots rented by American’s).

What does all this mean? It means that if Trump does what he says, he will cut off manufacturing work in Mexico, and keep it in the US. He may be able to do that, but the work that is kept in the US will not create a lot of new jobs, due to automation. Taking jobs out of Mexico means that fewer Mexican will be employed, and unable to buy US products. If Mexico is unhappy about the new rules we create, they could retaliate and further reduce the sales of US products in Mexico.

If anyone in Washington is listening… a lot has happened in the last 25 years. It’s possible that back then America should have negotiated a different, better deal. But today the technology of outsourcing has changed. The White House believes that Mexico can be made to negotiate a deal that would have been more beneficial to the US in 1992. Perhaps it can. But will that deal truly benefit us in 2018? Maybe not. But the facts clearly show that Washington needs a better understanding of how the relationship with Mexico works today before we try to change the last quarter century of economic history.  Don’t agree? Then comment and tell us your opinion!

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MiFID II is Here And Layoffs Are On The Way


layoffsWe’re now a full month into 2018. For a long time, we’ve been saying that MiFID is coming. Well, it’s here!. MiFID II is a huge set of regulations but the big change was supposed to be transparency in transactions. In 2017 if you bought stocks or debt in Europe, you got a single fee that bundled transactions with research and other cots. After MiFID II, all 2018 will separate transaction from everything else. That means that customers, rather than research directors, will determine the size and direction of Equity Research. How big a difference will this make?

FUND MANAGERS

  • Lower Research Fees: As Fund Managers receive and review fees from traders, there are going to be differences. If two traders provide the same service, but one charges more, why not just keep the lowest cost provider? Isn’t that the core takeaway from years of working with procurement?
  • Fewer traders: There is an argument for some redundancy. What if something goes wrong? You need more than just one trader. You may need two or three, or if you use ten what do you gain? Before MiFID, it really didn’t matter since bundled fees made true cost analysis difficult. Now, dealing with fewer traders could significantly cut operating costs.   
  • Kill low-value reports: In the lead up to MiFID II, everyone agreed that far more reports were written than read. The 15 biggest investment banks produce 40,000 reports a week, with less than 1% read by customers. We’ve created a multi-billion dollar research and publication industry (with tens of thousands of employees) that has no readership.
  • High-value reports: Some reports are better written and more insightful than others. Apple has is covered by 50 analysts. The top five or ten probably have more original insights than the remaining 40+ reports. Do we benefit from more than 5-10 analysts covering a stock? Yet we have so many small-cap stocks that are barely covered.
  • Spread To USA: MiFID II is specifically a European regulation. However, the US and European market are so tightly integrated that it would certainly make sense to just follow MiFID rules in Europe AND the US. If so, the combined jobs losses in research will be huge.
  • Profitability: If equity research departments are aggressive, a hundred thousand or more positions would be terminated, and software and data service licenses reduced. Billions saved here could keep the stock market’s momentum going through 2018.

Traders

  • Fewer Reports: Fewer equity reports will be written and distributed, slashing costs. Firms like \Bloomberg and Thomson/Reuters will also need to reduce staffing. At a minimum, data firms can expect urgent demands for contract renegotiation.
  • Specialization: it’s hard to guess the “voice of the customer”.  But I’d bet that customers are going to say something like, “Kill that mediocre stuff!” Big, highly paid research departments need to produce reports with insight, with info directly from the c-suite and above. Few research department can do that across a large number of stocks. But maybe someone can develop a new approach to equity sales research that surprises the market?
  • Unfamiliar Faces: 2018 will be a year of unfamiliar faces. Many sell-side analysts will disappear, but some may reappear as buy-side analysts. Researchers on both sides may swap places, swap specialties or be retrained to fill new positions… after the “voice of the customer” is heard we will know which firms, industries, and specialties are worth the cost of research. 
  • Higher Efficiency: MIFID isn’t the only big thing happening in 2018. For decades automation and Artificial Intelligence has been at the forefront of Wall Street’s evolution. Automation is taking over processing (buy, sell, compliance, billing); AI is taking over decision making (what to buy or sell, when to change strategies, building portfolios); and customers are moving towards indexed funds that don’t require traditional research.     

During the first quarter, customers will analyze their billing. By the end of the quarter, trading firms are going to tell us what they do and do not want to pay for. By the Second quarter, we can expect a wave of terminations and position changes. In the third and fourth quarters, we will find out if the cuts are just 20-30%, or if MIFID plus new technology takes away 75-90% of research and other staff.  

Will 2019 be a quiet year for Wall Street to recover, or are this year’s changes just a ramp up to even deeper transformation? If you have insight into the next set in Wall Street’s evolution… we’re all ears! Tell us what you think!

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