Intelligent Automation Inspires New Plans For Onshoring


 

Flying car

Photo… All rights, Newsweek

 

(Previously published in Outsourcing Magazine, 11/4/2017)

Offshoring and outsourcing don’t exist in a vacuum. These are processes that take advantage of and are influenced by technology, politics and the larger economy. Look at the last big round of offshoring at the start of the century. It didn’t just “happen”, without any reason. Very specific changes that facilitated this age of outsourcing.

The three biggest changes… globalization, ubiquitous computers, and cheap telecommunications… created an environment that uncoupled work from work management. Managers could stay in their traditional locations (onshore factories, corporate headquarters) while the work was moved around the world. Initially, work was outsourced to nearby cities, then to other states. Eventually, it went offshore, spreading to nations around the world. This process of “uncoupling”, over greater and greater distances, allowed work to keep moving, in search of still lower wage locations.

Another wave of change is now approaching! Intelligent automation and artificial intelligence. Call it, “The Robot Revolution.” Now, human labor, in both manufacturing and knowledge work (accounting, law, software programming, financial analysis, etc.), is being uncoupled from the local labor market. As machines replace people, the cost of labor is essentially the same everywhere. The same robots, with the same cost of operation, can be installed anywhere.

There will be a few instances where the cost of electricity is a deciding factor. But it will be the cost (and time) of transportation that is the deciding factor. Today’s outsourcing, at least of physical products, requires shipping materials and finished products around the world. Avoiding any part of shipping reduces costs and brings products to market more rapidly.

When shipping matters, the best place to manufacture is in the home market, where the products are sold. Outsourcing moved work to China and India years ago. Since then, both complex electronics and simple textile manufacturing have been moved even further, to the lowest cost locations on earth… Cambodia, Vietnam, and Bangladesh. The next round of outsourcing must come from efficiency, not wage arbitrage. That’s why robots and artificial intelligence will drive the next relocation. However, it is not just the lower cost of machines vs. human labor that is driving work back home.  

Political Risk Is Back – In the early days of 21st-century offshoring, moving work to India or China was still a radical idea. Corporations wanted to quantify the level and cost of risk, but there were no clearly established risk metrics. Still, there were discussions about the range of Pakistani nuclear weapons, if you wanted to outsource to India. The C-Suite wanted to know if China’s communist government would be overthrown. Or if both countries would reverse their recent movement towards globalization and one day nationalize western factories. 

The outsourcing industry has continued to be deeply interested in risks such as rising wages and international currency exchanges, but after 5 or 10 years of successful operations, meta-issues like global stability tend to be forgotten, or at least discounted. Now, political risk is back.

China, as we all know, has become far more expensive in a very short time. A contract with China could lead to sub-contracting to Vietnam or Cambodia. Or you may be tempted to move to the Philippines when your contract renews. Now that parts of China, India, and Russia, and all of Japan, and Taiwan… fall (or will soon fall) within the range of missiles from North Korea, will this affect your outsourcing choices? On October  30th of 2017, we found out that 200 North Koreans were killed in an accident near a nuclear test site. It was probably a tunnel collapse, but it may have released radiation. We’ll see.

The general instability has Japan seriously considering rearmament, possibly building nuclear weapons. In recent years the China Sea has been the site of regular military conflicts between China and just about all other local nations, plus the United States.  Ongoing conflict is degrading the value of these locations.

Cyber Security – One of those “early days of outsourcing discussions” was, “What if your outsourcer steals your information?” Sometimes it took the form of, “What if your outsourcer has bad data security and they let in hackers who can steal your data?”  

American and European corporations have been repeatedly hacked, often by China or independent hackers in Eastern Europe. European hackers usually wanted money.  China wanted technology and the ability to silence anyone interfering with “internal Chinese” issues. When the New York Times wrote about Chinese government corruption, they became targeted by the cyber warfare division of the Chinese People’s Liberation Army. 

One very clear message from repeated attacks from China was this… even if you are a big, internationally known corporation, your cyber defenses will not stand up to an attack from foreign military hackers. Yet, Richard A. Clarke, one of America’s best-known authors of cybercrime books, said that China wasn’t the threat that we should keep our eyes on. Instead, we should watch Russia, the only other nation in the world that could match the US in cyber spying. Just a few years ago when he said this, everyone thought, “How can that be? we’re constantly hearing about Chinese spying, but we never hear about Russia?”

Clarke’s answer was… That’s because only America and Russia are good enough at this to steal data without leaving a trace.” And then we had the 2016 Presidential elections. We’re still trying to sort that one out. There was direct hacking by the Russians, but also the “not-yet-illegal” use of social media to spread fake news.

The newest news from Russia comes via Israel. It seems that Israeli spies, who were possibly spying on US computers, noticed that these computers were sending data to Russia.  The computers had Kaspersky’s Anti-Virus installed, which was made in Russia. Kaspersky denied infecting the machines. That leaves Russia. Did they have spies in the factory or did they add hacking tools somewhere in transit? To add insult to injury, the Israelis said that the hacking tool that Russia used was stolen from the NSA (National Security Agency), American’s top spy group. So now it’s spies, spying on spies, who get caught by other spies. Great.

Did you know that most popular anti-virus tools come from Eastern Europe or Russia? Other communication and server maintenance tools were written all over the world. Big corporations have tools from global banks and organizations. Apparently, we really don’t know what is on our networks, especially if our data is “in the clouds”. Add to that whatever we will learn about how Russia was involved in the 2016 US Presidential Elections, and we all want to lock away our data in a lead-safe at the bottom of the ocean.

Like it or not, firms will outsource massive amounts of data to cloud services to stay competitive. But, given the rising number of government based cyber hacks, a growing number of customers may want “onshore only” storage. There are enough onshore risks. Plenty of hackers in your own backyard that you need to worry about. The best hackers are the biggest threat, and these hackers appear to be government sponsored. The best protection against having a foreign government placing spyware in your data is to not send your data offshore. Banks, media, utilities, hospitals and other prime targets in a politically motivated cyber attack will increasingly look for cloud services that offer an option for “home shore only” data centers.    

Logistics – We’ve already discussed the cost of shipping goods around the world. When goods are manufactured where they are used, there are big savings in transportation. However, goods may still need to be shipped between offshore sites for final completion. The US and Europe are about to have a huge drop in internal shipping costs.

Before the turn of the last century, the US Post Office partnered with Rail Road companies to provide low-cost shipping of mail-order catalogs. Nearly a century before Amazon, Sears, Roebuck and, Co. created America’s first virtual marketplace. Sears grew into one of the world’s largest firms, even though they would not open a physical department store for another 30 years. Everything had to be shipped to customers, from pocket watches to full-size prebuilt homes.

FedEx and other “overnight” carriers launched a new age of logistics. When the speed of business picked up in the 1980’s and 1990’s, customers couldn’t wait for slow rail deliveries. They wanted overnight delivery. FedEx, DHL, and others firms gave customers what they wanted.

Then, email drained revenue as many of their most profitable corporate customers. Instant mail was better than overnight mail. Luckily, online shoppers picked up the slack. Internet purchases could be made anywhere in the world, but you needed your purchases to be delivered to your hometown. Now we’ve come full circle, and we’re back to the days of the Sears’ virtual store.

Now, a new age of driverless vehicles is dawning. Drones, self-driving cars, electric planes, and other vehicles will be both more energy efficient and (without the cost of a driver) far less expensive to operate. This will not only reduce the time and cost of any local transportation, it will also make logistics one of the top outsourcing industries for the next decade.     

 

logistics

Logistics looks at the efficiency of “total” transportation systems… cars, planes, trains, ships, etc. 

The market is looking for a combination of UBER and Amazon. UBERzon? It would take over advertising, marketing fulfillment, and delivery. Amazon already performs these functions and is looking to add drones for delivery. UBER wants to take over ALL vehicles in the US, replacing individuals and corporations as the owners of vehicles and vehicle fleets. UBER has piloted services where a single vehicle is both a taxi and a UPS delivery truck… with a personal messenger service rolled in. UBERzon would need to eventually compete with (or buy out) FedEx and DHL, for national and international air cargo deliveries.

 

Offshoring Goes Both Ways: A lot has changed in how we outsource. Offshoring used to be defined as moving work from the West to lower cost geographies, especially China, India and nearby countries. However, when modern offshoring took hold a couple of decades ago, “offshore” countries had no brand name recognition in the west. Now offshore brands, especially Chinese brands, have strong name recognition in the West.  

Lenovo (formerly IBM laptops) is a top-selling Chinese computer brand. At about the time that Microsoft and Apple abandon China and build the products back in their home markets, we can also expect Lenovo to do their equipment assembly in the US and Europe. Huawei, China’s leading hi-tech phone manufacturer, is expected to win a big slice of the Android market with their flagship Mate 10 Pro. By the time the Mate 12 is released in a few years, expect Huawei to assemble phones in the US.

China is already heavily investing in the US and Europe. Hotel chains (Hilton), media firms (Dreamworks, Legendary, and Lionsgate), General Electric’s consumer goods and just about everything else. In the UK, over 280 firms have been bought out by the Chinese.

In the last round of outsourcing, these relationships existed. Relationships were awkward and there was little certainty.  Now that both sides have a deeper understanding of each other,  many more deals in many different forms are possible. While no one knows exactly what form new alliances and contracts will take, it is almost certain that they will be much more complex and multi-layered.

China VS. India: China and India both became offshoring powerhouses, with China dominating in manufacturing and India in knowledge work (especially IT services). China went on to aggressively invest in the west. India, however, has made few visible investments and does not seem to be actively pursuing the next wave in offshoring. 

China has done more than merely invest in western corporations. They prepared for the next wave by building out its expertise in robotics. Today, China buys more robots than any nation on earth. Soon China will manufacture most of the world’s industrial robots.

Today, China is the premier global manufacturer, giving them significant control over the global manufacturing workforce that builds the goods the world buys. As offshore manufacturing fades, China will switch from providing workers to providing robots. Soon, robots will build the goods the world buys. Then,  regardless of where work is performed, China will have even greater control over manufacturing across the entire globe.

India, on the other hand, has not invested in the west or created partnerships in the US and Europe at anywhere near the same rate as China. Instead, India is “all in” on traditional outsourcing. Accenture, TCS, and Wipro have become recognized brands among the Fortune and FTSE 500. Regulations make it difficult to take money out of the Indian economy to invest abroad. Still, if India does not invest in other areas, it may be shut out of big outsourcing deals by China.

Ironically, much of the talent that is creating new AI software comes from India. Work outsourced to India is building many of the most advanced AI and machine learning systems. In raw numbers, the 43,000 patents India creates annually are a great improvement over the past. However, it pales before the 578,000 from the US or the 928,000 from China. Furthermore, according to the Times of India, 80% of the patents that India has secured are for foreign corporations doing work in India. Indians have been pivotal to the development of the AIs that will rule the world, but unlike China, India may not directly benefit from this achievement.

Brave New World: Twenty years ago, modern offshoring caught fire and became a massive, global business. There were earlier waves of offshoring, but each new wave becomes bigger than the last. In the coming wave, offshoring from the west will recede, as a wave of offshoring approaches from China, South Korea, Japan and the rest of Asia. 

We don’t know how this new outsourcing will express itself, but the earliest forms we will see in the next year will be more sophisticated than the most complex contracts we saw this year. Especially if onshoring is super-charged by tariffs against offshoring in 2018.

Foxconn, the largest employer in the world, is finalizing a $3 billion incentive deal for a mega-factory in Wisconsin. Will Foxconn completely manage the construction and operation of this factory complex? More likely, the government of Wisconsin will negotiate co-management to stimulate local businesses and employment. This is just the start of the new onshore mega-deals. If you’re ready to step up to a new level of outsourcing, a whole new world of opportunity is about to come knocking on your door!

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High Tech Cars Fascinate Buyers and Save the World


 

Photo, all rights, TechCrunch

Photo, all rights, TechCrunch

You’ve heard that robots are taking over? It’s true! A lot of people are frightened about a “workless” future, but parts of the Robot Revolution will be useful. Like cars that can drive themselves. Just a couple of years ago, car experts said that they wouldn’t heavily impact the market until 2050. It made sense. Car companies take decades to introduce new features. Yet, just last year, A.I. experts said that 2030 would be the key transition year. Now, Unicorn firms plan to have production vehicles on the road by 2020. It looks like self-driving cars will hit the road, at least in several major cities, by 2018. 

In past articles, we’ve discussed how cars that can drive themselves will impact employment. Vehicles with paid drivers will go autonomous far more quickly than consumer cars. The financial incentives are huge for taxis, trucks, the UPS and FedEx. And government vehicles! Critical public and government organizations want to go autonomous, but they have special constraints that make their implementation date a toss up.

The United States Post Office (USPS) has been looking for autonomous vehicles for years. They NEED autonomous vehicles. Why? Because the USPS is losing phenomenal amounts of money. They haven’t seen a break-even year in the last two decades. Since 2001 they have lost over $50 billion, $6 billion just last year. They have planned to close over half of all post offices in the US to close their financial gap.

The USPS needs a game changer, and autonomous vehicles look like their only hope. Small towns have a similar problem. The ups and downs of the economy have left many with big financial problems. Towns operate a lot of vehicles… school buses, garbage trucks, street repair vehicles… that they can barely afford to operate. Town vehicles are usually operated by union drivers or are managed by 3rd parties under inflexible contracts. It can take years, even decades, to work out new agreements. The US military purchases a huge number of vehicles and has begun inquiring about electric and autonomous vehicles, to complement their flying drones.

When will the average consumer buy cars that drive themselves? Not in 2018, but not too far in the future either. Right now quite a few models can drive themselves… in some places, at least some of the time. Cars that park themselves or that can apply the brakes in an emergency have been around for years. Your next car will probably be able to drive under “safe” conditions… slow driving, stuck in a traffic jam, certain roads with little traffic… in a year or two.

VW BuzzBy 2022 we can expect to see fully autonomous vehicles from the big manufacturers, starting with Volkswagen. Remember the “Hippy Bus” from the 1960’s? VW has committed to delivering a slick looking, all-electric, self-driving version by 2022. Of course, the production vehicles can look very different from the concept vehicle, but it it is a VERY good looking concept vehicle. It can be a 6 seater van, a camper, or even an “office on wheels”. It has the potential of being a huge success.

Which brings us to an amazing detail that few experts have mentioned. The autonomous car revolution IS the electric car revolution. A gas-powered car can be self-driving, but it is much more efficient to make it an electric vehicle. Here’s why…

  1. Simplicity: In order to turn the steering wheel or press the brake pedal, you need actuators or electric motors, plus circuitry for the computer that runs the car’s Artificial Intelligence. If the car is all electric, you can skip a variety of mechanical “in-between” parts. That lowers the cost of manufacturing.
  2. Weight: Fewer parts means lower weight and higher reliability. The engine is removed from under the hood and replaced by 4 smaller electric motors inside of the wheel hubs. This eliminates most of the gear system and the entire powertrain (heavy parts that distribute power to the wheels). Electric motors also provide braking power, eliminating today’s separate braking system. Finally, the 12-volt electrical system is replaced with more lightweight cables. All told, nearly 1,000 lbs can be cut from the car’s weight.   
  3. Reliability: Internal combustion engines (ICE) have a few hundred to a few thousand moving parts. Electrics have just a handful of moving parts. That means less effort to design and build electric vehicles and lower maintenance costs. Imagine… no more oil changes!
  4. Efficiency: A lot of power in an Internal Combustion Engine (ICE) is turned into waste heat. Gas powered cars waste 75% to 85% of the energy from their fuel. Electric vehicles waste a more moderate 40% of their power. There’s still a tweak or two for the ICE, but after a century of evolution, it’s just about as efficient as it can get. Alternatively, electric motors have more room for improvement.

The same experts that missed the autonomous/electric connection have missed an even bigger point. They usually tell us that if America moves from petroleum to electricity, it could spell the end of the oil industry. That could be good. That could be bad. It depends on what you think about the oil industry. And if you own any oil funds. But what about electricity? When we plug in our cars, what happens? Won’t we need more power plants? What kind of power plants will we build?

Plug And Pray?: First, we have the simple matter of recharging our vehicles. Our 263 million vehicles! America’s 150,000 gas stations can easily add recharge stations as we transition from petroleum to electric. In fact, they need the business. In the 1990’s America had 200,000 gas stations. Consolidation in the oil industry eliminated 25% of all gas stations. The higher efficiency of electric vehicles will probably mean that a recharge will be less profitable than a fill-up. 

As our vehicles transition between power sources, gas stations will have competition. The perfect time for a recharge is when you park. Parking lots and municipal parking meters could easily add rechargers, providing a big boost to municipal revenues and private parking lot profits. Consider the sales of air filters, spark plugs, fan belts and oil changes. Electric cars don’t use these products.

But the big, BIG, change is that you can recharge your car at home. Plug it into the wall and recharge your car overnight. That could be 50% or more of all car recharges. Put all of this together and in 20 years when almost all American cars are electric, there may be as few as 50,000 traditional gas stations.

Astronomical Numbers!: Problem one solved. In fact, more than solved! Replacing petroleum-based vehicles with non-polluting electric cars will take a huge bite out of global warming! Think about it, millions of carbon spewing vehicles retired and replaced by zero pollution cars. Finally, freedom from foreign oil! Well, freedom in around 20 years.

The average new car is sold after 6 years. It then passes down through other hands for another 10 or more years. But 20 years, just about every car is ready to be scrapped. Most cars will be self-driving and electric. Isn’t it great that we can have a win/win with no environmental cost whatsoever? Yep. No cost! None!

Uhhh. Unless. Hmmm. If every gas-powered vehicle in America, all 263 million, become electric… won’t we need to produce more power than we do today? On a typical hot summer day when air conditions are cranked all the way up, cities across America have blackouts. A blackout means that more power is used than is available. If millions of electric vehicles plug in somewhere to recharge, we’re going to need more power. Or we’re going to have a lot more blackouts, all year round.

Miami trafficHow much more power will we need? Every year America consumes 170 billion gallons of petroleum (gasoline and diesel). If we convert this into electricity, we get 5.4 million Gigawatt hours (GWh). To meet this demand, we would need to more than DOUBLE the That’s more than all of the electricity… that’s coal, nuclear, hydroelectric, natural gas, geothermal, wind, solar, everything!… consumed by Americans every year!   

Luckily, we won’t need to add quite that many new electric power plants. We already know that electric vehicles are more efficient than petroleum vehicles. At least twice as efficient. Also, our power grid has some excess capacity. Not on those hot summer days, but just about every night, especially very late at night. Just when we will program our cars to recharge themselves. So, lets cut our needs in half again. Now, we need just 1.3 million GWh. Spread that over the next 20 years, we only need to build 67,000 GWh of new power every year.  That’s still a lot, but it is far less astronomical than the total power gap.

Power Is  A Breeze: Of course, this leads to another question, “What type of power plants will we build?” Let’s start with wind turbines. Wind turbines are rapidly evolving. Every year they are bigger and more efficient. New turbines are averaging 2-3 MegaWatts (1/1000 of a gigawatt). The largest wind turbine (so far) can generate 7 MWh and is a massive 650 feet tall. For now, let’s stick to more modest models. Something in the 2.5 MWh range, and just 300 to 400 feet tall. How many will we need?

The first rule of power generation is, “No power system produces at full capacity all year round.” Even a nuclear power plant needs downtime for maintenance. And then there are low demand times when the plant runs at less than 100% capacity. Since the wind isn’t always blowing and some days are cloudy, wind, tide, and solar power generation all have low utilization.  

Wind TurbineRule number two, “Location, location, location!” Some locations are windier (or sunnier) than others. The same turbine in two different locations will generate different amounts of power. Wind and solar are more land intensive than nuclear or petroleum based power. Identical wind turbines, in different locations, could have dramatically different costs per MWh.  For example, if the turbine is placed on the coast, just offshore where the wind blows continuously, utilization is high and the land may be given to you by the government. Onshore, most locations will have a much higher cost.

Most turbines are likely to average 30% utilization. That means that America needs 1.8 million wind turbines to power our 263 million cars, or 90,000 installed every year (1,900 every week) for 20 years. That would create quite a very large wind power industry. But, it wouldn’t work quite this way. 

That’s our next rule, “Costs are rarely linear.” The first new turbine we added would be in a great spot, where the wind blows often, the land is cheap and we’re near the users (farther away and you lose too much in transmission). The next turbine will be put in a slightly less ideal location. You go from great to good, to barely break-even locations. After 100,000 turbines… maybe 200,000 possibly 500,000… either the wind isn’t reliable or the land costs too much, or something else is wrong. Wind and solar power can be a big part of the solution, but other power sources will also be needed.

Carbon Is Back: Other options? Hydro-electric is out. Rather than building new dams, dams are being torn down across America because of environmental concerns. There’s always nuclear, but its reputation is so far from spotless that it’s a non-starter. Which is a pity. That bad image comes from reactors built to 1950s design specifications. The latest designs, using Thorium instead of Uranium or Plutonium, are simpler, cheaper and far more reliable. Still, it takes such a long time to approve and build a reactor, even without public opposition, that if we planned a new reactor today the first watt of nuclear power won’t appear until well after our 20-year time frame. Let’s move on.

So. Ahhh. Ahem. Coal.  A third of our electricity comes from coal. Even if we don’t build a single new coal-fired power plant, we are likely to ramp up the utilization of existing coal plants, especially overnight. We could also close the oldest and dirtiest coal power plants and replace them with newer, cleaner facilities. However, the newer the plant, the more it will be automated. Which is another rule… Newer = Cleaner = Less jobs. Clean coal is technically possible, it’s just not likely to be economically feasible. Of all of the forms of energy we can expand, coal offers the fewest jobs.

Nonetheless, ever since the 2016 Elections, Washington has talked about putting coal miners back to work. But more coal, clean or dirty, isn’t going to create a lot of new jobs. The problem isn’t the power plant, it’s the mine itself. The political ads show coal country miners from Virginia, Kentucky, and Tennessee taking crowded elevators deep underground into claustrophobic tunnels. That’s an accurate picture of the coal industry… a century ago. But not today.   

Today, two-thirds of America’s coal comes from open pit mines and draglines. It works like this. Find a mountain with a seam of coal running under it. Now, carefully lift the top off of the mountain and gently put it down in the valley. Sorry… got that wrong. I meant to say, use tons of high explosives and turn the mountain into gravel.

Now put a gigantic crane, weighing as much as 1,000 school buses, on the highest spot overlooking the coal seam. This crane is the dragline. It throws out a massive bucket that is dragged across the floor of the mine, scooping up hundreds of tons of rock and coal. The largest dragline ever built is operated by a crew of five.  That’s why the Department of Labor lists a mere 3,150 jobs in “Excavating,  Loading Machine, and Dragline Operators”.  From cramped mines filled with miners to one machine digging up more coal with a crew of 5, it seems obvious that the next step is fewer, if any, workers. 

 

Big Muskie Bucket

Dragline bucket

Likewise, the giant trucks and other vehicles to move coal from the mine to the nearest train are the heavy duty trucks we’ve already said will be the first vehicles to be converted to self-driving. If we use more coal to meet the demand for electricity, it will unquestionably accelerate the use of automation throughout the coal industry.

 

Natural Gas?: Of all the petroleum products we can use, natural gas seems to be the best option. It’s abundant, inexpensive, and the cleanest petroleum fuel. For all of these reasons, it has been natural gas… more than pollution regulations… that killed coal.  

Then, fracking came along. Well, that’s not quite true. Fracking…  using hot pressurized water to crush shale deposits deep in the earth… was invented in the 1950’s. This process produces oil and natural gas. Fracking picked up speed when horizontal drilling was developed, allowing the profitable extraction of small pockets of petroleum.

However, the new technology made so much new drilling possible that new problems were created. Oil spills. Petroleum showing up in drinking water. Even earthquakes! We’re not talking about a tiny but statistical number of quakes. Ohio used to have 2 quakes a year. Now it is well over 1,000 every year, with each quake under an active fracking site.

Clearly, fracking has been misused. And environmentalists can point to some pretty bizarre side effects, like drinking water that catches fire. Or pipelines that are being forced onto Native American tribal lands, completely ignoring tribal rights. The 200 trillion cubic feet of natural gas in US shale deposits could recharge our cars for the next 300 years. If we were just a bit more selective in where we drill, we could greatly reduce these effects. Or we could ignore fracking and just use non-fracked natural gas, which is enough to keep things running for the next 50-100 years.   

Getting There:  There are tremendous benefits to self-driving cars. It seems inevitable that all developed nations will quickly adopt vehicles that are intelligent enough navigate our streets and highways. However, the transition to intelligent vehicles entails another transition, from petroleum to electricity.  THAT transition requires a massive expansion of our national power grid… the biggest expansion ever!

Most of the power grid is nearly a century old. It’s not just the powerplants, it’s the distribution infrastructure. Cables that carry current from the power plant to our homes and offices are still made of copper. Using copper cables means that we lose between 8% and 15% of all the power we generate in the transmission and distribution process. Newer alloys and even some early superconductors can greatly reduce lost power, saving billions of dollars every year.

And then… A lot of change is on the way! Self-driving electric cars are all but inevitable. But the changes that these cars will bring could take a number of different directions. With these cars, we will build new industries, change how we work, and perhaps… just perhaps… save our environment.

But before we reap all of the benefits that electric vehicles will bring, we have to make decisions. How will we grow our power grid? Should we utilize the unused capacity of our coal power plants or should we focus on building the next generation of power generators? Should we even consider what we will do after our 20-year timetable? Time for a bit of fusion power?

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The Other Shoe Just Dropped


Reshore

(Previously published in Outsourcing Magazine)

For years, the outsourcing world has been buzzing about reshoring (or “backshoring” in Europe), taking the jobs we sent offshore years ago and bringing them back to the US and Europe. Low wages, cheap property, and favorable taxes made offshore manufacturing very attractive. But in recent years property values rose, staff turnover increased, and wages just keep heading up. Despite weakening economics, offshore still made sense. Until today!

By far, the greatest financial advantage to offshore manufacturing was derived from labor arbitrage – lower wages from “replacement” workers. Low wages plus workers who can do the work are a winning combination. To access low-cost labor, manufacturers will happily build the factories, roads, and infrastructure needed for manufacturing. China has been the gold standard for outsourcing, but western manufacturers are being lured by still lower wages in Vietnam or Thailand. Now, technology has taken a big leap forward, and suddenly… wages don’t matter!

Today’s robots are intelligent machines that can perform almost every function a human being can. The latest intelligent machines don’t just help workers to be more productive, they completely replace workers. Robots eliminate the need to build factories where low-cost workers live. You can just build the factory where you want and install robots instead of workers. When wages no longer matter, onshore factories make a lot of sense.

Onshore factories certainly make sense to Adidas. Last year Adidas built their first SpeedFactory in Germany. A SpeedFactory is their name for a new generation of onshore factories that provide three benefits. First, it is highly automated, delivering a lower cost of operation than an offshore factory. Second, by building the factory in major consumer markets, transportation costs are greatly reduced. Lastly, because SpeedFactories are built near consumers, Adidas can quickly restock sold-out products and reduce customer frustration.

Not surprisingly, Adidas is building a second SpeedFactory in Atlanta, scheduled to open in 2017. Reebok, a subsidiary of Adidas, has announced the construction of a similar factory in Rhode Island. Nike has been talking about building a new factory in Oregon for the last year. (Come on Nike… Just do it!) What looks like a pretty good idea today, will be an irresistible financial proposal in a year or two.

One of the biggest difference between a human worker and a robot is the way costs change over time. Workers want raises and promotions. Over time, the same factory producing the same number of goods has higher labor costs. When the factory is offshore, this happens even faster due to higher offshore inflation and increasing competition for workers. Robots, however, cost less every year. Next year’s model will work faster, have more capabilities, and still cost less. As time goes on automation looks better and better.

If this is the beginning of a new era, where onshore can be more efficient than offshore, what will happen to all of the work that is already offshore? If a location only offers lower wages, we can expect that work to be reshored in a few years. Offshore factories need more compelling advantages to resist reshoring? Since China has the most to lose from reshoring, let’s see if their plans tell us anything about the future of offshoring.

  • Domestic Market. When offshoring took off at the turn of the century, products were manufactured almost exclusively for the West. Today, China is the largest consumer of Chinese manufactured products. For example, while America has peaked at 100 million iPhone users, China has 135 million users and plenty of room for expansion. China is able to be a “local” supplier for East Asia and India… if they maintain their manufacturing edge.
  • Energy. Manufacturing requires electricity, and next to labor, energy is often the highest cost for manufacturing. America has a significant cost advantage for electricity compared to most of Europe. Underdeveloped countries have high-cost power and unreliable power grids. In many offshore locations, manufacturers must invest in generators and other infrastructure. The cost of electricity in China is comparable to America. However, in the past decade, China built hundreds of new coal plants, is building 20 nuclear plants and has more solar and wind power in production than any other nation on earth. Old and inefficient plants are being closed. By the 2020’s, China may set a record for low-cost power generation.
  • Technology. China’s population has almost plateaued, and by 2100 will decline by 500 million. China already has problems hiring for manufacturing jobs, which has led to runaway wage increases. China has very ambitious plans to add between 1 and 4 million robots by 2020. If China succeeds, China will need to build and install enough robots to become the world’s undisputed #1 manufacturer and consumer of industrial robots. Furthermore, because of this robotic work, by 2020 China must develop the ability to build the most efficient factories in the world.
  • Financing. If hundreds (if not thousands) of robotic factories are going to be built in America and Europe, that will require capital financing. Four of the top 10 banks in the world are Chinese, two of which have “Industrial” or “Construction” in their names. China also happens to be home to six of the world’s largest construction firms. With leading positions in banking, construction and robotics China is going to build most of the world’s new factories.

Adidas pointed out the value of reshoring, and other big-brand athletic gear companies are hot on their heels to find new onshore manufacturing efficiencies. If China dominates in robotics, energy production, financing, and construction, they will move beyond the title of “The World’s Manufacturer”. China is positioned to also dominate in building the next generation of factories throughout the world, or at the very least to be the default option for every factory that is built in the 2020s.

The latest generation of technology will level the playing field for manufacturing, making a factory built onshore as financially attractive as locations halfway around the world. After a very long time, the tide has turned and new factories will be built in America and Europe. The trend has just begun, but every week we’re going to see new models of industrial robots at ever lower price points.

Everyone who manufactures offshore will soon start thinking, “Does it make sense to stay offshore?” If you are an outsourcing provider, you need to ask yourself, “If low wages no longer matter, what is my new value proposition?”

When it comes to robotic factories, onshore and local has big advantages over offshore and distant. As all factories become robot factories, the change in locations is just the beginning of changes that factory owners, outsourcers, consumers and experience as technology replaces workers, and the world’s factories are made in China!

Posted in Delivering Services, Employment, Improvement, Robots, Unique Ideas | Tagged , , , , , | Leave a comment

The Evolution Of The Millenial


plantilla

The Robot Revolution is on their heels and catching up! By the second decade of the 21st century, everyone can see that “change” is speeding up. By the third decade, a quick glance in the rearview mirror and all you can see is the Robot Revolution. Robots are expected to take over half of the world’s jobs. Self-driving cars, banking on your mobile phone, order kiosks at McDonald’s, virtual reality, and automated factories are our future.

What about the human beings? You remember them? The rulers of the planet… the top of the food chain? It’s obvious that technology is changing our world, but is technology changing us? As more of our economy and our culture becomes robotic, will humanity could become nothing more than a wetware interface to the corporate machine? Technology could change the very definition of what it means to be human. But this isn’t the first time that the evolution of man has been dictated by technology.

Humans started out as nomadic hunters. After tens of thousands of years we developed tools to produce more food. Farming became a better option than hunting. We settled down. First in small settlements and then in cities. We discovered metals, which made better tools than bone or wood. Humanity experienced the bronze age. Then an iron age. And, a long time later, we built our civilization on steel. Soon, it will be carbon fiber and robots.

When the human race moved from settlements to cities, we went from individual self-sufficiency to becoming specialists. Specialists… such as blacksmiths… would make their specialty products (swords, shields, nails, and iron wheels) and then trade for foods and other necessities. Trade-based society requires other technologies… shipbuilders, gold miners, coin makers, horse breeders, paper mills, insurance… which fuel the trading routes that spread goods and technologies around the globe. Well, after we invent the globe, of course.

Other species ruled the earth before, but they changed themselves. They evolved into new species to fill in gaps in the environment. Humanity, on the other hand, makes the environment change until it suits us. We leveled mountains, changed the course of rivers, turned forests into farmland, and then our well-clothed ancestors moved into colder climates. As difficult as it is to believe, the next century will bring even bigger changes.

Human beings can change faster than any other species. In fact, humanity has changed so quickly in the last few centuries that the rest of the planet is having a hard time keeping up with us. We’ve heated up our atmosphere, wiped out countless species, emptied the ocean of fish, cleared away rainforests. 

When archeologists examine ancient civilizations, they look for artifacts. These bits and pieces, a fragment of pottery here and an arrowhead there,  tell us how this civilization came into being, how it’s people lived and how a new civilization came to replace them. For example, let’s consider Otzi. 

Back in 1991, archaeologists discovered the body of Otzi. Otzi lived 5,000 years ago, during the end of the last ice age. One cold winter night, he froze to death. For thousands of years, Otzi and all of his possessions were entombed in ice, beneath an Alpine tundra. When the ice above Otzi melted, he was found by mountain climbers and whisked away to a local museum. His perfectly frozen body… and a knapsack full of artifacts… tell us all about his civilization and even Otzi’s last days on earth.

What if we could do the same? What if we could look at our world from the point of view of a future archaeologist? What would they think about our lives and culture? Imagine if one of our Millenials was found a thousand years from now? Along with an iPad clutched in his frozen hands? Let’s call our future corpse, Milo.

Meet Milo: Milo is a typical Millenial. He is ambitious, well educated, overly stressed, too often medicated, and a tad… ahhh… fat. Still, even though he has a few problems Milo, and all the Millenials, lived a long life. Longer than any generation before him.

Millenials are generally considered to be weak, soft and temperamental. And they are, at least compared to earlier generations. But they had problems unique to their generation. If we look back at our iceman, Otzi, we believe that he died escaping… someone. He was injured just before he died, possibly by a flint knife. He was carrying an ax with a copper blade, indicating that he was either wealthy or important. He might have trespassed on someone’s property, or he just might have made a good hostage. In either case, he escaped his pursuers by hiding in a ditch in the hills. Unfortunately, that’s where he froze to death and was later covered by an Alpine Glacier.

Milo never feared these life or death situations. Except when he plays Call Of Duty. His office job did not leave scars upon his body, although his bathroom scale would beg to differ. The unique thing about the Millenials, Milo included, were their brains. Just about every generation of workers in the world worked with their hands and their muscles. Milo’s was the first generation where Knowledge Workers dominated the workforce.

Food: You can tell a culture by what the people eat. And drink. Otzi had a simple diet, and he burned off his calories running cross country, up and down and across the Alps. Otzi’s last meal was fatty meat, providing lots of energy for mountain climbing. It was probably an early form of bacon. Milo was not unfamiliar with bacon. While many Millenials were vegetarian, bacon was very popular. Still, when it comes to energy, Milo and the Millenials had a special secret. They called it…  

Caffeine! The Millenials didn’t discover caffeine, but they may have perfected it. Sure there was coffee. Millenials love coffee. And soda. But it was Millenials that doubled down and became the energy drink generation. Milo loved coffee. On an average day, Milo drank 2 cups of coffee, a half cup of tea, 2-3 glasses of cola, plus an occasional energy drink.

You can understand why Otzi would need caffeine to elude his pursuers, but why did Milo need so many stimulants? When Milo graduated college with an MBA, he expected to become a corporate executive. Instead, he spent years in other low-level positions, including a job as a barista. A bit ironic, eh?

Milo had a much more varied diet that our Iceman. Otzi would have been jealous of Milo’s dietary choices. Rather than being thrilled with his choices, food made Milo anxious. Is today’s lunch special organic, or all natural? Is it gluten-free? The shrimp look good, but doesn’t shrimping destroy the sea floor? Can’t have the hamburger. Cattle make methane. Maybe almond milk? Nope! Almond trees use too much water. Millenials are hyper-aware of their environment and know that everything will doom them… eventually. For Millennial, life is like that line from GhostBusters, “Choose and perish!” Then the Stay Puft Marshmallow Man attacks New York. I wonder if the Stay Puft Marshmallow Man is free trade?

Education: Milo was privileged to belong to the most educated generation in history. Milo had an MBA, a degree in business. This late 20th-century invention was intended to make business management more predictable, reduce financial risks and make business more profitable. For Milo, an MBA was synonymous with debt. He needed two barista jobs to pay his school loans, while he waited for several years to land a “real” corporate job. Milo spent endless sleepless nights worrying about his loans. Good thing barista’s get a discount for that midnight coffee run!

But coffee alone won’t get you through school. It takes focus, determination, and willpower. Or Adderall. Traces of Adderal in Milo’s system tell our future archaeologists that he first tried Adderall in grade school, and became a daily user in high school and then in college. Of course, Milo didn’t have a prescription for Adderall. Milo didn’t have attention deficit or any other specific complaint. He just needed Adderall to give him the super-human focus needed to get into a highly ranked college.

Unlike the opioid crisis, or the anti-depressant crisis, or the sleeping pill crisis, or even the diet pill crisis, Adderall isn’t addictive. But Milo was never an “A” student, before Adderall. It got him into a good college. Of course, staying in a good college, meant 4 more years of Adderall. OK, 6 years. Milo had a few setbacks.

If we go through the files on his iPad we can see that it was easy for any Millenial to obtain Adderall. Just turn to Craigslist. Put in an order and have it delivered to your dorm room. Along with just about any other drug you need. Eventually, after Milo graduated and went through a few dead-end jobs, Milo went back to his Adderall addiction to compete for a high paying corporate job.

Work: Slavery and warfare fueled the prosperity of many civilizations. Work was long and hard and took place out in the fields. You worked on a farm, or dug in a mine, or traveled with a caravan. Perhaps you were a soldier. Very few workers, such as craftsmen and artists, worked indoors. Glorious, glorious indoors! You didn’t get rained on. There weren’t any wild animals. You rarely dealt with floods and avalanches.

Milo lived in the golden age of work. Milo works indoors in airconditioned splendor! As a knowledge worker, Milo is even allowed to sit… all day long. Most of America’s workforce has similar indoor jobs. That’s historically unprecedented! Yet, these spectacular working conditions led to the greatest paradox of the early 21st century.

Factory workers used to be the core of the economy. They manipulated materials, creating higher value goods. Knowledge workers manipulate data, also creating value. In the last quarter of the 20th-century knowledge workers… financial analysts, lawyers, computer specialists… were relatively rare. By the time Milo was promoted to a corporate executive, the workforce was full to the brim with knowledge workers. For example, Milo’s bank had tens of thousands of financial analysts. To manage this number of knowledge workers, positions needed to be more standardized and templated.

The irony, of course, if that you hired knowledge workers for their brains, for the independent decisions they could make. But as their numbers swelled it was more important to get everyone to work the same way. Like a factory. A Knowledge Factory. Banks, accountants, consulting and law firms have all “evolved” into knowledge factories. The rise of knowledge workers happened alongside the rise of computers.

Knowledge workers combined with computer processing made a powerful… and irreversible… alliance. Now every corporation was becoming a knowledge factory. If we look at the files on Milo’s iPad, we can see that his job required him to fill out computer templates and fix templates from other workers. Everyone used the same software and the same templates. Milo was a cog in the machine. Or maybe a CPU cycle in the corporate computer. When all of the workers work in exactly the same way, it certainly increases efficiency. But it also means that the computer that assisted the Millenials could soon do their jobs. And, as we’ll see, they did.

Recreation: Previous civilizations had little time for leisure. Work was too tiring. By the time you were middle-aged, assuming that you lived that long, you were bent over and arthritic. When Milo was middle-aged, he stood up straight, need neither walking stick nor wheelchair. His blood pressure was too high, but he felt relatively good. And his lifespan was the longest in history so far.

Milo had more time for recreation than any generation before him. Workers in the mid 20th century watched Baseball and participated in urban team sports like Bowling and Pool. If Milo ever played bowling or pool it was on a game console. Milo’s preferred his recreation as video games. He also has binge nights streaming NetFlix and media services. A big part of Milo’s recreation is keeping up with his friends from college and the gaming world, who are spread around the globe.

Milo spends hours every week on his social network, what he did, ate and met. His iPod (and his iPhone and his computer) was central to his recreation. At work, he spent all day on the computer and at home he spent all night on a computer. Hey, those selfies aren’t going to take themselves! While the Millenials were very intelligent, they failed to notice that they were being shaped to fit the way that computers worked, and computers were being shaped to fit the way that Millenials lived. Millenials and microchips were co-evolving. Soon their work would be interchangeable.

Robot Revolution: And then it happened. The technology took over. The first self-driving cars were cool! It was great when his smart TV told Milo about a new movie to watch. As artificial intelligence improved, AIs arrived in the workplace. At first, AIs helped knowledge workers. But just a little while later, AIs replaced many of Milo’s friends.  Every year computers became faster and cheaper. Alternatively, a Millenial’s brainpower peaks in the late 20’s or early 30’s, and every year they ask for a raise. If buying an AI isn’t a better deal than hiring a Millenial, just wait a year or two and it will be.

Every year computers got faster and cheaper, while the brainpower of a Millenial probably peaked by their late 20’s or early 30’s. Millenials expected a raise every year, compared to computers which got cheaper and faster with time. Inevitably, computers stopped assisting and started directing. With a small twist in job descriptions and a slight change in HR rules, Milo found himself reporting to an AI.

The computer revolution was a good thing. Computers improved our lives. Computer-driven cars eliminated the 35,000 deaths a year that human drivers caused. The stock market prospered when financial analysts like Milo selected the stocks for Mutual Funds. But computer managed funds consistently outperformed humans, including Milo.

As AI’s took over, the world became a safer place and everyday goods became cheaper. On the downside, a lot fewer people were employed. It used to be that new technology meant new jobs. AIs created new jobs, but they also took those jobs as quickly as they were created. Eventually, the government realized that it wasn’t getting anywhere with 6 months of unemployment insurance and job training for jobs that no longer exist. Slowly, the Federal government piloted UBI payments. UBI (Universal Basic Income) is basically a paycheck for being a citizen. The idea is that no matter how cheap things get in an AI world, people still need some money.

Some of Milo’s co-workers tried to keep up by taking higher doses of Adderall, using enough stimulants to work all night and even using electrical stimulation to improve brain functions. For a while, they were hyper-productive, but a year or two later a new  AIs could outperform them.

By the mid-21st century, Millenials were pushed out of employment and forced to play game and binge TV watching all day long. With his bills paid by the UBI, Milo and his generation retreated to their man caves and worked no more. A terrible end for a promising generation, but a better ending than getting flash frozen and buried under a Tundra.

Life After Milo: Wipe away your tears for Milo. Remember, Milo life is a possible future. Like Scrooge said to the Ghost of Christmas Future, “I yet may change these shadows you have shown me, by an altered life!” Maybe. Millenials still have a few years to change. The Robot Revolution will be focused on big corporations and manufacturers. Small firms will adopt far aggressive automation and will take longer to replace jobs. The creative economy will continue to make millionaires and billionaires, in art, music and innovative services.

Our Iceman, Otzi, was a victim of the dangerous times he lived in. He probably spent his entire life just one step ahead of the bandits that eventually killed him. Milo, on the other hand, never had to deal with physical violence. Just the same, those robots are catching up with Milo and the temperature is dropping. Will the Millenials learn and change their ways? Don’t ask me! In my house, Alexa gives all the advice!

 

 

Posted in Best Practices, Decision Making, Employment, Robots | Tagged , , , , | Leave a comment

Back To The Future… Of Outsourcing!


Future Image

Photo, All rights Kristian Bjornard

(Previously Published in Outsourcing Magazine Sept., 30, 2017)

To understand the future, it often helps to examine the past. The past may not have all our answers, but we often find useful models that can be repurposed in new ways. Turn back the clock one hundred years, and we will find just such a model for future outsourcing… the modern hospital! Don’t worry, you don’t need to get the croup or have the vapors! We will step back in time to the early days of the modern hospital, and Go Back to the Future… of Outsourcing!

Hospitals have been around for millennia. Early hospitals had few effective medicines. Instead, they were more like rest camps. Still, the best hospitals were relatively clean and they were often built by a mountain or a lake where patients had clean air and fresh water. Removed from a polluted city and it’s contaminated water, and given regular meals, a patient had a much better chance to recover.

Prior to the turn of the last century, “intensive care” meant little more than sawing off infected limbs. Hygiene was a bit of a mystery to the medical staff, and the operating room was often fatal. Still, with a little luck, you just might get better. By the mid-1800’s medicine became “scientific” and the rate of recovery for patients slowly improved. By 1920, a hospital had a 50/50 chance of improving your condition.

As hospitals improved, health improved… in hospitals, and across every developed nation. Infectious Diseases… cholera, diphtheria, tuberculosis… were the primary causes of death in the early 20th century. Hospitals joined with departments of sanitation and medical colleges, and infectious diseases began to disappear. By the mid-20th century developed countries eliminated most infectious diseases. Hospitals turned to more complex medical challenges… heart disease, cancer, and genetic research.

To meet these new challenges, hospitals needed to retool. Early hospitals had a lot of beds, trained staff, and operating rooms. Early hospital labs had a lot of test tubes and Bunsen burners, but conquering cancer required more advanced medicine and sophisticated diagnostic equipment.

X-ray machines were one of the first miracle machines. Doctors could now look inside patients without cutting them open. Ultrasound, MRI and PET scanners soon followed and the inner workings of human biology became an open book. To cure cancer, radiation equipment, cryotherapy, and many other devices were invented. Hospitals were soon filled to the brim with futuristic equipment.

Doctors and nurses, however talented, were not trained to deal with this sophisticated equipment. With too many multi-million dollar pieces of equipment to count, hospitals needed help to maintained and repair their fleet of medical devices. Some equipment, especially in nuclear medicine, requires special care in its use and in the disposal of radioactive components. And, of course, this technology requires extensive training. Tools like the “Gamma Knife” (a knifelike beam of radiation), can cure if correctly used, but can also do great damage when operators are not properly trained. With life and death consequences, outsourcing is essential!

Just containing all this equipment, and providing room for the volume of patients needed to keep these expensive devices fully occupied, forced hospitals to grow even larger. Typical hospitals contain multiple buildings and thousands of workers. These “Super-Hospitals” have become campus-wide structures, with power plants, warehouses and immense parking lots to keep the hospital running and fully stocked.

“Super-Hospitals” are incredibly capable, but even they need help as medicine has begun to peer into humanity’s own genetic code. Healthcare is now dominated by clusters or networks of organizations that work together to cure patients… government agencies, insurance groups, education and certification bodies, specialty clinics, and (most recently) data outsourcers using tools like IBM’s WATSON to develop insights into medical care and personalized treatments.

Very impressive! But exactly how does the evolution of the hospital predict the way that outsourcing will evolve? Let’s take a look, starting with…

Last Generation Outsourcing: We’re just at the tipping point where outsourcing becomes something new. Until very recently, outsourcing was driven by lower wages in common offshore locations, such as India and China. However, we until recently, outsourcing meant moving from a relatively sophisticated work environment to a less sophisticated one. The offshore factory would have less automation and equipment than the previous factory. Buying all of that equipment offshore would have raised the cost of operation, increased capital investments, and slowed down implementation. 

Instead, we chose to hire more people offshore than we had onshore. It meant working in a different way, but the results often satisfied all parties. Remember, offshore nations allowed us to work in their country because we provided employment. Money spent on equipment (that was manufactured in another country) did not help the offshore economy. Besides, when offshore wages are one-fifth of onshore wages, you could hire two workers for every one you had onshore, and still be ahead financially.

50/50 Chance: Early on, outsourcing was unreliable. Some projects worked well and some failed. “Lift and shift” alone failed. When outsourcing exploded in size at the turn of the 21st century, outsourcers had very variable results. Around this time McKinsey, both the world’s largest consulting firm and an early outsourcer, stated that only 50% of outsourcing is successful. Failures often arose from skipping necessary steps, lack of specific skills, and unreasonable expectations.

Now outsourcing… at least when a reputable outsourcing firm is used… is better understood and generally more successful. Yet, there remains a nagging sense that some forms of outsourcing, especially for knowledge work, just won’t work offshore. At the very least, it is more difficult to convince some customers that they can perform work offshore rather than onshore.  

Proximity: Intelligent automation and robotics diminish the role of wages in outsourcing. Automation produces products with few or no wage earners. The more we automate business functions, the lower the total cost of production. We’ve also learned that when we offshore, wages eventually rise. Offshore wages usually will rise far faster than onshore. The cost of automation, on the other hand, falls over time.  

We are at the beginning of a wave of onshoring. Athletic shoe manufacturers were a big part of the offshoring culture of past decades. Athletic shoes, and athletic clothing, aggressively moved offshore, leaving little production onshore. Automation makes onshore manufacturing viable. By being onshore, manufacturing not only met the price of offshore but could add new value.

Work can be sent halfway around the world efficiently, but it adds to turnaround time. When the next iPhone is released, orange might be the most popular color. But if there weren’t enough orange phones on hand, a request will be sent to an offshore factory to for the orange phones. Total turnaround time to produce new parts, assemble the phone and ship them back to the customer? A month or more. By then, the buyer might give up and buy a different phone.

Size: When manufacturing was outsourced to China, the scale of outsourcing changed. The U.S. and Europe already had big factories, producing cars and airplanes. In the last decade, China built over 500 new cities (capable of supporting a million citizens). These cities were created to house the workers needed by new factories. Factories and related networks of factories (bicycle factories built next to bicycle tire factories) took on a new scale in China. 

This scale of operations not only created big single use factories, it has created a new type of outsourcing. Foxconn corporation is the world’s largest private employer and is based in China. What does Foxconn do? They assemble consumer electronics. They don’t build CPUs, or memory chips, or circuit boards. They just assemble the parts into a phone, for almost every cell phone in the world. They also assemble a huge percent of the computers, tablets, flat screens and other electronics that consumers buy.

By assembling every possible type of cellphone, Foxconn developed unique expertise in phone assembly. When a new iPhone is released, Apple’s marketing campaign has publically announced (and very tight) release dates. This has been amazingly effective in marketing the iPhone, creating huge lines at Apple stores when a new iPhone is released. Samsung’s Galaxy and other top-tier phones are now released in the same way. Without the massive capacity of Foxconn, this would not be possible. Assembly firms like Foxconn didn’t exist a decade ago, but now many products cannot exist without them. We’ll get back to Foxconn in just a little bit.   

Technology: As discussed earlier, when work moved offshore, key equipment and technology were left behind. This reduced the time to ramp up and required less investment to implement. It took more people offshore to replace a team onshore, but if wages were low enough it still made financial sense.

To understand relative levels of technology between the U.S. and China, consider the “robot ratio”, the number of robots per 10,000 workers. In early 2016, China had 36 robots for every 10,000 workers. Today, China may have as many as 50 per 10,000. The U.S. has 175. As you can see, workers in China have quite a disadvantage. Still, you can see that China is quickly catching up. By the early 2020’s China will pass 100 robots per 10,000. However, the world’s robotic leader is South Korea, with 530 robots. That tells us that there is a LOT of room for automation even with just existing technology.

China is investing heavily in robots. They are already the world’s largest buyer of industrial robots, and China is investing in its own domestic robot industry. Recently, China started investing in European robotics firms and has already bought several multi-billion dollar firms. As soon as 2020, the majority of the world’s industrial robots will be “Made in China” or will be made by firms owned by China.

Onshoring will explode in size in the next few years. Domestic factories will become much more automated. Work will move from China back to the U.S. and Europe. But only a fraction of the jobs will be re-shored. Robots will do most of the work. Traditional factories in the U.S. won’t always have the ability to maintain these robots. Just as hospitals turned to outsourcing to deal with training and maintenance, the arrival of a massive number of industrial robots provides a huge opportunity to outsourcers… IF they have the skills and the scale needed to support this transition.

Need another example? Consider… computer support. The old model was that any corporation of significant size ran its own IT department to roll out servers, add hard drives, and monitor networks. Amazon WEB Services (AWS) and Microsoft Azure have taken over the IT functions of thousands of companies. Startups are now starting up without server rooms. Amazon Marketplace has taken over warehousing, distribution, and other aspects of America’s small businesses.  

Consolidation: What’s next? Remember our friend’s over at Foxconn? They negotiated a deal to build an “assembly factory” in Wisconsin. The key factors to follow in this deal are…

  • Scale: The factory, when fully built, will employ 13,000. Keeping in mind that Foxconn has stated that it will build a VERY automated factory, that makes it a VERY BIG factory. Inside of this huge factory, Foxconn will initially build flat screen TV’s, but by building on the expertise they developed in China, they can create virtual assembly lines for smaller customers with a variety of assembly needs.  
  • Automation: Whoever builds the robots usually gets the first opportunity to maintain them. Because China is building these machines, and will soon be seen as the nation that best understands robots, we can expect Chinese competition. Both the firms that build the robots and a new generation of Chinese outsourcers. Local outsourcers must step up their game if they want to compete in this area.  
  • Government Relations: Giant factories need government support. Mega-factories lead to mega-employment or at least new revenue. Foxconn shopped around its plans to several states and chose the one that offers the most. Modifications to the minimum wage, changes to environmental regulations, and many other “perks” that can be offered only by the government are being discussed. Future outsourcing will involve more mega-projects. Tomorrow’s outsourcers need to be skilled in government negotiations.
  • Financing: Wisconsin will provide $3,000,000,000 in government incentives. That’s a staggering amount of money. If all government incentive packages start to look like this, government funding could become the key element in every new project.
  • New Industry: Foxconn and Amazon are developing new types of outsourcing. In a world where our homes are filled with electronic gadgets, assembly and technical support will be HUGE and growing industries. Start-up firms increasingly want to focus on design and market, leaving it to other partners to manufacture their products.
  • Customization: This new model of automated, onshore, manufacturing allows more products to be released, more often. Soon, customization will become the norm. For example, smartphones offer different amounts of memory, color options, and processor types. But these customizations are built-in to the phone and must be installed when you buy the phone. That means a long wait for the next batch of phones if you choose popular options. When the factory is just a few miles away, and robots can be quickly reprogrammed, new assembly lines can be instantly converted to build your product. Then, your custom phone could be just a day away… especially if it is delivered by an Amazon drone!

Hospitals grew, developed new technologies, grew some more, developed a network of services and suppliers, and then outsourced many of their day to day functions. On-shore manufacturers are in a very similar position. The new wave of onshoring will trigger the movement of more work in product distribution, IT support, hardware management and other services to outsourcing providers. 

If the Foxconn deal proceeds, who will build the factory? Foxconn has powerful connections with China’s government, construction firms and banks. In other nations, Chinese companies that build new factories use Chinese construction firms (the largest in the world) and Chinese banks (which are in the top 10 largest) to finance projects. If Chinese firms are not brought into the Foxconn deal, Foxconn is likely to make major investments in local construction firms and contractors.   

The arrival of intelligent robots and advanced automation are changing the way that factories manufacture and corporations work. This in turn will lead to larger outsourcing projects, and the need for multifaceted outsourcers with a wide range of skills and deep pockets. There will still be room for specialized outsourcing and smaller implementations, but more and more money will be tied up in big projects that only a small number of outsourcers can deliver. If you want to be in this elite group, now is the time to start lining up your partners!

Posted in Best Practices, Employment, Improvement, Improvement, Continuous or Not, Uncategorized, Unique Ideas | Tagged , , | Leave a comment

Ready For The New Normal… In Weather?


Drown

Sex, politics and the weather. Until someone can figure out which bathroom school kids can use, or until EVERY NIGHT isn’t a new story about dysfunctional politics in Washington… I’ll just talk about something non-controversial. Like the weather. I mean, at least THAT’S not controversial, right? Yep, weather. No controversy there. So… How are things going in Puerto Rico?

Geeze! Why does everything need to be so political? As we rolled into hurricane season, the worst of the climate deniers in Washington were either dropping out of the conversation or had their hands out for money for hurricane relief. It’s been one of the worst years ever, and it’s still weeks before the Hurricane season ends. Have we learned anything?

I HOPE we’ve learned that the climate is changing. The weather has been consistent with the changes predicted by climate scientists. Not just the three big hurricanes that we have seen so far in 2017, but changes that have been we documented for decades. Rising seas, melting glaciers, storms on the coasts, droughts in the interior, and of course a warming earth.

The conditions that are facing FEMA and other disaster agencies are different than a decade or two ago. It’s not just a matter of a bigger budget. The future will certainly require more money to address bigger storms and larger flood disaster zones. But it is also going to require different thinking from our leaders. Consider the following…

Acceleration: For decades climate scientists have said that the weather would change. It has. Then they told us the reason it was changing was “human activities”, including CO2 emissions, byproducts of industry, urban development (especially building on wetlands), the loss of forestlands, and of course… more people. The speed of change in our climate is still accelerating.

While we cannot predict what the weather will be tomorrow, we can predict that for at least the next 10 years the weather will be warmer, windier, wetter (on the coasts) and more destructive than 10 years ago. Climate change will only become faster. Expect that America will spend more money on storm damage every year.   

Frequency: A mid-term report card for 2017 could be… Houston: B+, Florida: B+, Puerto Rico: D- . Puerto Rico’s low score has less to do with FEMA, than the fact that Puerto Rico was hit by two hurricanes in two weeks. When one hurricane weakens infrastructure, the second needn’t be very strong to completely destroy whatever is left standing.

As the earth continues to warm, the chances of a double, or even triple hit by hurricanes increases. It takes months or years for a city to fully recover from hurricane damage. The first hit could happen in late November (end of the hurricane season) with a second hit a few months later when the next year’s season begins (in June). Cities with double hits, or even with a hit every 3 or 4 years, can expect insurance carriers to shrink or kill their coverage. In the past few years, the Federal government has picked up the business the Insurance Industry abandoned. But it has been a money-losing business.

Finances: Money affects everything. Communities with more money are often better engineered. More paved roads mean better access during floods. Higher priced properties are usually on land that is well graded, and without low spots that easily flood. Poor communities have fewer drains and uneven ground and “water traps” that frequently strand vehicles. Poor and poorly built communities are easily isolated by flood waters.  

Puerto Rico is very poor, with only half of the US median family income. They can’t afford to stockpile in advance of a storm, and they lack emergency equipment. Add to that the decades of financial crises. They lost key tax credits in the early 2000’s, defaulted on government debt in 2015,  and since then eliminated many government jobs that they need now to deal with this disaster. 

Before the storm, home mortgage defaults were already at a record high. Not surprisingly, few homes have wind or flood insurance. After the immediate disaster is taken care of, and lives are no longer at risk, Puerto Rico’s long-term survival… the ongoing fate of the island’s 3.4 million population… will depend on financing. Yes, America will help Puerto Rico, but will we invest in it? Especially if more storms are on the way? This horrid little question is going to be asked over and over again, as one post-disaster community after another looks for the billions of dollars they will need to rebuild.

Protection: Storms and floods will damage coastal cities, Tornados will tear up the center of the US, and dangerous rivers (Mississippi, Red, Ohio) will have record floods. In-between the storms, old buildings are repaired or torn down. But what prevention? What about the problems that make these storms so damaging? A seawall might keep out a high tide. Flood waters can be temporarily directed to underground storage tanks. Low lying areas can be raised. Or you could even build new wetlands and plant trees.

Over the past couple of decades very little has been done to reduce the risk of flooded cities. Instead, bad urban planning, often done to generate short-term revenues, has eliminated natural storm protection. Hurricane damage from Katrina was worse due to lost wetlands that once slowed incoming tides and soaked up flood waters. Preserving and expanding natural protection, engineering ways to keep water out, and developing systems to get flood waters out… could be the only thing that keeps the “potential” in our potential flood cities.     

Atlantic City, Boston, Charleston, Miami, New Orleans, New York, and Tampa… to name just a few US cities… are all on the flood city list.  Just 10 years ago, Boston completed the Big Dig, a project to ease traffic congestion in central Boston. At $22 billion, this is the most expensive highway project in the US to date. Construction projects of a similar or even greater size will be needed to save each city.  

Moving On: The big picture for global climate change can be too big to wrap your arms around. Let’s look at it more locally. In Houston, 50 inches of rain fell over 5 days during hurricane Harvey. To understand this, Houston is about 630 square miles. A gallon of water is 231 square inches. That equals 550 billion gallons of water. While this was only 1.5% of the water Harvey dumped on Texas, it’s too big a number for mere humans to understand. Have you ever seen an Olympic pool? They’re huge! In Houston 2 Olympic pools worth of water needed to get out of the city every minute! It’s just math. The water has got to go somewhere. But, when the tide is high… that water cannot get through to the sea.   

When the next storm arrives the same scenario will play out once again, and the city drowns. Areas closest to the water are usually the oldest part of town, and the most likely to flood. In a world where flood insurance is harder to obtain, how many times can the homeowners… or the city… afford to rebuild the most frequently flooded areas? Some cities may close neighborhoods rather than fight this losing battle.

“What happens to the homeowners?”, is the big question for the next few decades. Without insurance or local governments to buy out homeowners where can they turn? Don’t look to Washington! The Fed has no plans, and no appetite, for any kind of bailout!

A Way Out?: In 1900, less than 40% of the US population lived in cities; in 2015 it rose to over 80%. Storm soaked Florida has gone Urban even faster. At the same time, Florida went from 20% urban to 90%. Rural counties and small towns are less able to deal with big infrastructure projects than big cities. As sea levels rise, coastal populations will move into cities. That means we can protect fewer square miles of land, but at the cost of more urbanization around cities.

Perhaps, the solution is right under our noses. While the entire world is busy fighting climate change, another global change taking place… The Robot Revolution. Experts tell us that 50% of all of the jobs that exist today will be lost in just a decade or two. Without replacement positions, unemployment will rise to unprecedented levels. For this reason, governments around the world are considering how to adopt something called a UBI, which would provide all citizens with a stipend to replace lost income.     

With a greatly reduced need for paid employees, many worry that even with financial issues  taken care of by a UBS payment, people still need a purpose in life. Perhaps, these two efforts can go together. This could take any form, but imagine an organization something like the old Peace Corps. Make it a primarily volunteer organization, that allows citizens to work on projects to help before and after storms.

The Future: Climate change is still accelerating. Even the most optimistic plans to address urbanization and air pollution won’t stop or reverse the rise in global temperatures that make our weather more violent. And with more urbanization, there will be more creating bigger and more destructive storms

While two wrongs rarely make a right, we have a rare opportunity to take two problems and create one very timely solution. Many of our cities are at risk of flooding. We have seen early signs of how extensive our flooding risks are. Before cities flood, we need to develop a consensus on how each threatened city can be helped. When do we rescue a neighborhood, and when do we let it go? Which issues will be handled locally and which must be part of a central plan controlled by the Federal government?

Let’s not miss this opportunity! We will need many different kinds of skills to keep America’s cities above water and operating. Automation and artificial intelligence may make the second half of the 21st century a “jobless future”. But no job doesn’t mean no work. Enormous changes in the economy just might provide the volunteers to save us from the enormous changes in the environment. Let’s hope so! The future is now no farther away than the next change in the weather!

 

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Everyone Into The Cloud!


Cloud 6

(Previously published in Outsource Magazine, 9/8/2017)

Outsourcers fear that the coming Robot Revolution. Robots and A.I.s will wipe out traditional outsourcing… or so you have been told! The reality is that the technologies behind the Robot Revolution will create the greatest outsourcing opportunity of all time, Cloud Services! Let’s dive in and see how the Robot Revolution will save Outsourcing!

Cloud Services are a new way to support IT. Or at least a new name for support. Back in the 1960’s when computers and IT were just taking off, IT was already outsourced. Yet the model was clearly similar. The granddaddy of American computer services was IBM. IBM did not sell their MainFrame computers. You could either buy slices of computers that ran at IBM headquarters, or you might even be allowed to have IBM computers on your site, as long as they remained under IBM control.

Not even to America’s military could buy IBM computers. By the 1980’s competition in the market changed the model and managed facilities, equipment buy-outs, sub-contracting, subscription services and every other method of paying for IT was launched. Including traditional third party outsourcing.   

However, the proliferation of options suddenly made it very difficult to answer a simple question, “How many people are in IT?”. Earlier, headcount would give you a simple way to measure IT growth. But contract workers, outsourced workers and “IT as a service” obscured this number and IT managers only vaguely understood their headcount. Every year IT services would change and new devices fell under the responsibility of IT. The phone PBX, ISP’s, external data providers, research services, voice mail, cell phones, even printers, and copiers might get thrown onto the every growing IT heap.

Then the Internet arrived! Just connecting a single user to your network could be a complex and expensive project. Now, you had a way that you could connect to the world and the world could connect to you. More expensive ways to connect were retired. Even sending printed documents to users was replaced by URL connection to a library of PDF’s.

For overwhelmed IT workers, it was like a fairy tale. One of your many impossible tasks could finally be accomplished!  By the way. Have you read a fairy tale… lately? They all go something like this… you have a problem, it gets solved, you expect to be happy, then you find out that no one gets anything for free. That great solution from the traveling bean salesman? It didn’t quite live up to the demo, did it?  

Managing IT has been like a fairy tale lately. But not the part where Jack climbs the beanstalk up to the Cloud to take the Giant’s treasures. No, we’re dealing with the part where the Giant says, “Fee-Fi-Foe-Fum, I smell the blood of…” Well, YOU. Something just got dropped on the grill and it smells like IT. All of those wonderful solutions that the Internet planted throughout your infrastructure? They don’t look much like magical gifts today, do they?

Instead, it looks like a decade of living on the Internet has punched holes into every part of your firewalls. Bad guys can even attack your clients and then tunnel back through your network. Viruses, malware, phishing, Trojan Horses, and ransomware are everywhere. Corporate IT departments can no longer keep up with the pace of new cyber threats.

Of course, not all of the threats are from the outside. Not all of the protocols and technologies on your network play well together. An obscure application that some other department occasionally uses has suddenly knocked your team off the network. Is something wrong with the software, is it a faulty upgrade? Hundreds of updates must be carefully examined to find the problem. Every issue takes too long to fix, costs too much, breaks down too often. But that’s not the worst of it.

For every story about a million stolen IDs or hijacked tax records, you can bet that an IT career went down in flames. The perpetrators? Perhaps a small criminal ring in Estonia, or hacktivists in London, or maybe just some disgruntled teen in suburbia. Not the most formidable opposition. Cyberclowns, more interested in embarrassing the corporate world than burning it down. But our Cyberclowns are being replaced by professional Cyber warriors.

For years China’s government has sponsored attacks on the US and Europe. Websites have been crashed, corporate documents stolen. When the New York Times ran a series of articles on Chinese corruption, they were repeatedly and successfully attacked by Chinese hackers. The NYT is not some small, technologically literate firm. Their IT department is at least as good as the average and knows a thing or two about espionage. If the NYT can be hacked, so can you!      

North Korea, upset by the politics of a recently released Sony movie, hacked Sony and the information they released led to the firing of their Co-Chair. North Korea? Not exactly an IT  powerhouse. What about the real IT powerhouses… like Russia? It is just possible that if you have been living in a monastery with a strict code of silence that you haven’t heard…  no, No, NO! Not even then! You could still use sign language! Yeah, we all now know that Russia spends A LOT of time hacking America.

By interfering in the American Presidential election, without any visible penalty, we have guaranteed that Russia will try again. Thanks to a series of almost unbelievable events in Washington, the unraveling of America’s national security has been the world’s # 1 rated soap opera for 2017.

The world now knows that even America can be beaten by anonymous hackers. Every regional dictator who has ever lusted after nuclear weapons or an aircraft carrier to elevate their status will soon realize that a team of professional hackers can be bought for a tiny fraction of the cost of military weapons. The threat level is about to go through the roof, and there is little that IT can do about it. We have moved the world’s business onto the Internet, but the Internet was never built to be secure.

The Internet was created to connect a handful of research Universities, and a few thousand graduate students and Ph.D.’s that worked on government funded projects. They were guided by formal ethical codes. Cybercrime? Internet trolls? Early pioneers lived in terror of a releasing a report with a mistake in their footnotes. The small community and high ethical standards ensured that even being slightly impolite could cause expulsion. The idea of security, forcing limits on data and people, was seen as a crazy at best and Fascist policy at worst. Espionage and financial crime were laughable!

There are millions of companies around the world. Their IT departments have wildly variable technical skills. What skills they have are spread across innumerable operating systems, applications and devices. It has been impossible for IT to mount an effective defense. Until now. The answer is pretty simple… we all need to head into the Cloud!

Cloud Services like Microsoft Azure and Amazon Web Services (AWS) have massive scale. JPMC had 58,000 servers in 2014. That’s enormous! Yet, that number is tiny when we compare it to the 1.5 million servers at AWS. Amazon can buy more equipment at a lower price, has the staff to develop expertise in far more applications, and can buy the most advanced technology (Solid State hard drives and graphics processors rather than platters and CPUs). They also have on-site virus and malware experts and have the expertise to ensure that every server runs the most current updates. One financial analyst concluded that AWS is three times as efficient as a typical IT department.

Because of their enormous scale, Amazon has developed its own management and automation tools, allowing them to do the work with a fraction of the staff.  It also allows Amazon clients to add storage or CPU cycles to their environment with the flip of a switch. The uniformity of this environment plus their concentration of expertise makes cloud services like AWS far more secure than most internally managed IT facilities. The cost is lower, the maintenance is better and the chance of surviving a cyber attack is a lot higher.

Cloud services will not solve every problem in IT, it can elevate IT quality and security. Can the Cloud cut the cost of IT? Of course, it can! But more importantly, Professional hackers are raising the threat level to your data. That’s a very compelling reason to use Cloud Services. Every IT department is facing giant problems. Your solution, and even a few treasures could be waiting for you in the Clouds!

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