The Trump Conundrum: American Jobs vs. Good Jobs vs. American Made


Factory Floor

Candidate Trump told America that he would bring back, “Good, well-paying jobs, with benefits.”  Which is what we want. We don’t just want low paying jobs without time off or health benefits. However, as Trump has learned, just the health care part of the job can take quite a bit of effort to define and deliver. When we take a look at what Trump is doing, and the bills that he supports, it’s difficult to imagine how his action will yield the sort of jobs we want, yet his approach may provide some benefits to the economy… just not the ones we expect. We need to dive into this issue and see just what Trump is doing to “Make America Great”.

Bring back jobs or create jobs – At the low end of the labor market, we don’t have a shortage of jobs. Quite the opposite, we have millions of jobs that Americans cannot or will not fill. There are 5–20 million more jobs in the US than we can fill. America’s illegal immigrant issue is really an illegal labor problem. Most of the “illegals” in the US are here to work. They would like to pay taxes, but to do so could get them arrested and deported. Some politicians admit that if illegals paid taxes everyone would be better off… But it creates the problem of illegal workers getting the same or similar treatment as legal workers and citizens. Individual morality is in conflict with economics.

In the 20th century, the illegal worker issue was largely restricted to agricultural work and agricultural states. In the last half of the 20th century, women entered the workforce in large numbers. Two income families became common, which caused an explosion in the service industry. With both parents working, America “outsourced” day to day functions… Fast food restaurants, cleaning services, lawn care, etc. The average American was making more money and wanted professional jobs. Services fell to illegal workers.    

The estimated 11 million illegal workers were able to find jobs because there were so many jobs that Americans will not take, at least not at the wages that are currently offered. Even during our last economic downturn, Americans refused to take jobs such as picking lettuce. Politicians debated over whether this was true or just an urban rumor. Well, during the summer of 2017 we had a chance to test this theory.

The shrimping industry in Texas was an excellent test. The season is determined by nature and shrimp breeding rules. The shrimping season happens during the summer in Texas. One of the hardest jobs, that has to be performed on the boats during hurricane season, is taking the heads off of shrimp. Before 2017, shrimpers brought in labor. Some from Mexico, but most from the Caribbean and Africa. In 2017 the Federal Government told shrimpers that were needed to use American labor. Taking the heads off of shrimp is low paying $7.25 per hour (minimum wage in Texas), dangerous (bad weather), requires expertise to do correctly and is very hard work.

The results were that not enough workers would be hired. Often “newbies” would find that they could not do the work while they were in a storm, and the ship needed to return to port. The summer harvest is down by 75% due to these labor issues (expect a sharp rise in shrimp prices later this year). Similar outcomes were experienced in restaurants in tourist areas… but for different reasons. You see, even if you can get American workers for these restaurants, most American workers are young college students. They need to return to school 30 days BEFORE the high season ends. These restaurants make most of their profit for the year in these last 30 days. They cannot shut down, and they cannot change the season. For different reasons there are many other jobs, seasonal and permanent, that American’s cannot fill. If the US government does not allow foreign workers next year, tens of thousands of small businesses could go out of business in 2018.

Create good jobs – Candidate Trump talked about good jobs, workers rights, workers having a say in outsourcing, jobs with health care and other benefits, etc. Trump sounded surprisingly like a 20th century union boss… “Trust me and I will make it happen, I will make America Great Again”.

Notice the similarity between “Make America Great again” with the old union ad for “Made in America”. Made in America was an ad campaign by the Amalgamated Clothing and Textile Workers Union. Trump clearly borrowed from the earlier campaign, yet it is telling that Trump’s campaign materials (flags, hats, etc), were all made in China.

This lack of awareness flows through Trump’s pro-worker policies. Trump stated that he is for the common worker, but he has also signed or requested bills that slash the budget for the Department of Labor. Remember, the one Federal agency that is supposed to protect American workers is the DOL.

Trump has stated his opposition to unions, but that’s almost a requirement for any Republican. But while candidate Trump asked for worker rights, President Trump has backed legislation that makes it harder to join a union and he has supports court decisions that reduce overtime payments to workers. Trump may genuinely sympathize with workers, and want the same kind of jobs that unions pushed for in the past, but when it comes to specific actions or laws, he goes against his campaign promised. Trump may be thinking about the good of America’s workers, but we have as yet to see Trump acting for the good of workers.

American made – To understand how much the American labor market has changed, let’s go back to that “Made in America” ad. Back in the 1980’s when the ad was running, producing textiles required a lot of manpower, even though the automation of textile manufacturing began more than a century earlier. American textiles were some of the best in the world. But the economy changed, and big factories moved south, first to the southern states, then to mexico and South America. Eventually it moved to India and Bangladesh. No place on earth has a lower textile manufacturing cost than Bangladesh.

“Made in America” was created to stop the flow of work offshore. A century ago, New York City was a major manufacturing location. It was a center of textile manufacturing, that worked with the design industry in NYC, which was also one of the to markets for high quality textiles. It made sense for all of these industries and workers to be near each other. As communications technology improved (telephone, computers, etc.) it became possible to gain the advantages of offshore markets (low cost labor) while still being able to manage all of the suppliers, regardless of where they are. This is the logic that led to offshoring from the middle of the last century to about a decade ago. Importantly, this is the business logic that President Trump was raised on.    

Now, new technologies have changed this equation. It makes business sense to build products in America once more. BUT just moving the work to America doesn’t mean that you’re building American jobs.

Consider running shoes. This was one of the first significant industries that totally moved out of America. Brands like Reebok and Converse defined the running shoe as an American icon. Yet,  by the 1970’s the manufacturing of American running shoes started to move offshore. By the 1990’s, no running shoes were manufactured in America or in Europe. But starting in 2016, Adidas opened its first shoe factory in Germany, and then another one just outside of Atlanta in 2017. This is only the first of a huge wave of “re-shoring” that will hit starting in 2018.

There’s just one problem. Moving work to the US will not create many new jobs. Automation is now capable of performing more jobs, at a lower price. Athletic shoes… and a growing list of other products… can now be manufactured on shore for just slightly more than the offshore price. When you eliminate the time and cost of shipping goods around the world, “Made in America” goods can cost less than offshore.

Foxconn is a Chinese firm that is the world’s largest employer. Foxconn assembles parts made by other firms… into LED TV’s, smart phones, and other consumer electronics. Foxconn is inking a deal with the state of Wisconsin for a mega-factory that will employ 13,000. However, the state will pay $3 billion for Foxconn to start the project. You can bet that this will be the most automated factory in the world, and could produce as many goods as a factory with ten times as many employees.

But if the work is all performed by machines, what does America truly gain? It would bring money into the economy. We are entering a new economy where the majority of “workers” may be machines rather than humans.  If governments are going to encourage new businesses to move in, and they plan to subsidize their work, there needs to be a very clear understanding of what that firm needs to deliver. Just revenue for state, jobs, good jobs, or something else?

Sum it up? – Trump believes that cutting worker rights and employment benefits can make America a more attractive place for some businesses. He could be right. Trump’s strategy could improve the economy and raise revenues. A few jobs might even be created. But those actions probably can’t create high paying jobs with good benefits.

If new factories open in the US, they can easily produce high value goods and increase profits. But the new generation of automated factories will employ few workers. Political leaders need to understand that manufacturing technology has changed. “Made in America” is still a good battle cry for manufacturing. But if Trump and other leaders do not understand the new technology, “Made in America” may ironically mean no more than made by American robots.

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7 Lessons Ted Cruise Can Learn From Hurricane Harvey


Harvey

“Super hurricane” Harvey ended just two weeks ago, and the next super hurricane… Irma… is headed straight for Florida. Storm of the Century? We’ve suffered through so many superstorms that have caused multi-billion dollar damage… Katrina ($108 billion), Sandy ($75 billion), Ike ($37.5 billion), Wilma ($29.4 billion), Andrew ($26.5 billion) that we’re getting a bit numb to the term “storm of the century”. Maybe these used to be storms of the century, but in the 21st century, they’re just… storms. If the climate science people are correct, this level of storm will soon be an annual event.

Isn’t it strange that when a storm is in progress, everyone… the governor, the mayor, and the President… intently watches the news for any clues on when to evacuate, areas that will be underwater, which shelters need to be opened, and which travel routes are safe. Yet, when the flood waters recede and it’s time to plan for next year (or five or ten years from now), that same governor, mayor and President say, “Climate scientists? What do they know! You can’t predict the weather!). But all of these super storms ARE what the Climate scientists told us would happen a decade ago after Hurricane Katrina. 

Regardless of what politicians believe, next year will come, and it will bring more storms. Even this year, we still have three months before the hurricane season is over. Hurricane Sandy hit at the end of October. There’s still time for another 2017 superstorm. Even a moderately strong storm could devastate Huston if it strikes in the next few weeks. It’s time to end the debate about whether there is Global Warming (Answer: Yes, there is!), figure out what it costs to do nothing (Answer: Trillions of dollars), and agree on how we can reduce the risks of Climate Change.    

Flood cities aren’t just on the coasts.  Big rivers have also been flooding. The Mississippi, the Red River, Ohio and other major rivers have all taken lives and destroyed property. Climate Change affects more than just the US. The UK is experiencing the worst flooding in almost 300 years. Venice has been flooding for centuries, but today floors happen just about every year, and every year the floods get deeper and deeper.

The storm toll is enormous. As of this writing, the death count in Houston is at 70 and is still rising. But, if we look on the other side of the world… in Bangladesh, Nepal, and India… over 1,200 have died so far in their version of the Hurricane (Monsoon) season. Weather is global. Industry in the US impacts other countries around the world, and the growing economies of China, India, and Africa increasingly impact our own weather. That’s why it is so important that the most advanced nations, including the US, set an example for the rest of the world. If not, we will all pay an enormous penalty.   

How big is that penalty? Hurricane Harvey will cost between $50 billion and $200 billion, costing as much or more than Hurricane Katrina. As more and more private insurance firms drop out of the flood insurance industry,  FEMA (a Federal program) will increasingly be responsible for paying the bills. Hopefully, Ted Cruise and other Climate Change naysayers will learn a few lessons from Harvey.

  1. Global Climate Change Predictions – If we cut through the hype, Climate Change experts made a simple prediction about floods. The weather will get warmer, storms get bigger, and more super storms would happen. Which is exactly what has happened over the last decade. We lived through Katrina and Sandy, and Larsen ice shelves A, B, and now C have almost entirely melted away. Recently, it was revealed that big oil companies had their scientists advising them about Climate Change wince the 1970’s, even though oil CEO’s (such as former ExxonMobile’s CEO  and current Secretary of State Rex Tillerson) have repeatedly said that no evidence of Climate Change exists. Will Ted Cruise will ExxonMobil’s scientists?
  2. Storm of the Century – When you have a storm of the century every year, how do you pay for it? Think quick Ted! The Federal Flood Insurance program runs out at the end of September. If superstorms are the new baseline for storms, funding needs to go way, way up. Especially as private insurance companies are exiting the flood insurance business. That means that the cost of GCC will be paid by US taxpayers.
  3. Human Activity – Climate Change predictions go back to the last century, but now there is increasing certainty about the cause… “human activity”. Pollution is one contributor, but the destruction of our wetlands may be even more important. Wetlands soak up rain. Turn wetlands into condos and cities flood. If you don’t save the wetlands you can build storm drains and runoff systems, but Huston consumed it’s wetlands and failed to engineer flood systems. How about that Ted! Maybe we can shift the flooding problem from big oil pollution to unscrupulous Real Estate developers. The Donald should love that discussion!
  4. Environmental Regulations – After years of a depressed economy, local governments bend over backward to accommodate new businesses. Like the Foxconn deal in Wisconsin. Foxconn will receive a huge state tax credit, and will probably be given exemptions from environmental regulations. Chemical factories in Houston negotiated exemptions from some environmental regulations. Today these factories are venting toxic smoke and have had several explosions. Executives have stated that at some point, they expect the factory to burn down. Nearby, are toxic Superfund sites, which have flooded and the contaminated waters may mix with the local drinking water. Are we going to storm-proof toxic sites?
  5. Housing – As Hurricane waters recede, housing becomes an urgent issue. After Katrina 45,000 personal shelters were needed; Harvey is expected to require at least 30,000 shelters. Katrina-era shelters are worn out and have been disposed of. Newer, high-tech shelters and mini-homes can more be moved, assembled, and stored more quickly. HUD (Housing and Urban Development) usually provides guidance and manages these shelters. If super storms hit every year, America needs a stock of mobile shelters that can be swiftly deployed.
  6. Corruption – Today we focus on the victims, but soon scam artists and swindlers will catch our attention when billions in federal funds are stolen or mishandled. Major corporations and minor thieves will overbill or defraud housing and rebuilding projects. This cycle will repeat in the next disaster. If Climate Change means going from disaster to disaster, it also means going from scam to scam. FEMA’s need to invest in “warehouses” to store portable housing units and supplies for the next disaster, and a standing task force to deal with corruption.
  7. The Long View – Harvey is over, but Hurricane Irma, which has the strongest winds ever recorded, is just beginning. Just behind Irma are tropical storms Jose and Katia. Triple storm? Yep, yet another “only happens once in a century” storm conditions in the last two weeks. Is it time for the Climate Change deniers in Washington to give up discredit changes in the weather or debating who caused Climate Change, and instead identify ways to flood proof our cities? This will cost hundreds of billions of dollars… but so too will just a couple of super storms. TED! Are you taking notes?

Storms are expensive, and big storms are more expensive. So far, Climate Change predictions have been pretty accurate, and we are told that more storms that will cause record damage are on the way. We have treated big storms and big flooding as occasional disasters instead of seasonal events. As a nation, we need to raise the priority of flood prevention. Storm proofing out flood cities will be hugely expensive. But, there is one thing that is many times more expensive… doing nothing!

 

 

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More News About MiFID II


news

In the 21st century, Wall Street has faced repeated crises, each of which each followed the same pattern. At first, the impending problem is ignored by all except a few experts, in specialty publications. A few months before the problem is due to hit, the pace of discussion picks up. Just before “going over the cliff”, the nightly news begins to mention the impending disaster. Soon… if it’s “too big to fail”, “the Great Recession”, or “Cybersecurity”… we all get a new word for our financial vocabulary. Today, we learn about, “MiFID”: our next Financial crisis.    

MiFID or “Markets in Financial Instruments Directive”, is a European directive that started in 2004. This was a European reaction to problems in the Equities Market. Lack of transparency in trading and antiquated fee structures from the last century needed reform. MiFID delivered a laundry list of changes, and set MiFID II into motion, to drive further transparency.

On January 3rd, a key component of MiFID II takes effect. While the rules were released in 2012 and were to take force in 2017, implementation was delayed until January 2018. What are these rules? Today, when institutional investors buy stock, brokers charge a single fee, and research is provided for “free”. After January, brokers must charge separately for executing a stock purchase, and for research. Simple, right? Maybe not.

MiFID II technically applies to just European firms, and even if just Europe was the only market impacted, MiFID could still be the biggest change to the financial world in the 21st century. However, it may not be possible to just change Europe and leave the US market alone. Investment Banks have the largest equity research departments. Not only have I-Banks integrated both markets, but research departments have long since merged, now sharing staff and contracts for market data (Reuters, Bloomberg, Moody’s, etc.).

Separating the costs of these two markets will be difficult, and will create unexpected issues. MiFID demands that research and execution costs are separated, but it gives little guidance on how (or it) the cost of European research is separated from US research and research for other markets, such as China, Africa, the Middle East. Yet, in just a few months, every broker must start billing for research. Here’s why everyone is talking about MiFIDJanuary…

Billing: Just dealing with delivering the mechanics of billing by January is a tall order. Especially when so few firms have settled on billing details. Brokers that tentatively discussed how they will bill released new plans a few weeks later. Some plan to simply split the current fees into execution and research. Others will charge a flat monthly fee for research, while others will add an hourly fee for talking with analysts (perhaps as much as $10,000 an hour). The ongoing changes suggest that few clients like what they have heard.

Transactions: While the big issue is research, once execution fees are paid separately, it will become another argument with clients. Will there be a big enough difference in fees to influence which brokers are used? Brokerage fees today are a tenth of what they were a couple of decades ago and falling fact. Clearly, whatever the announced fees on January 3rd, we can expect them to fall significantly by the end of 2018. With billions of dollars of fees at stake, don’t expect negotiations to be… ahem … genteel.

Research: Today, just the top 15 Investment Banks produce 40,000 research reports every week. Most of these reports have a “buy/sell/hold” recommendation, with “buy” being the overwhelming recommendation. Surveys indicate that less than 1% of reports are actually read. Once research is paid for, how many reports will analysts need? Or, are analysts even getting ANY research that they truly want? In a paid world, the smart money says that research departments will need to shed staff very quickly.    

Awareness: Bloomberg reported that in the last 5 months of 2016 there were just 10 mentions of MiFID II in company earning calls. That rose to 50 mentions in the last 5 weeks. For months, regulators have been rejecting requests for MiFID extensions, so expect mentions to rise into the hundreds over the coming weeks.

The news is our, MiFID is coming. We’re all going to see more stories about MiFID, starting with what some well-known research departments are charging for their work. In just a little bit, the news will shift to the loss of thousands of high paying research jobs. After that… it’s anyone’s guess, but in 2019 I’m betting that the top I-Banks will cut the number of reports and ask their clients what kind of research they want to pay for! That’s my Niccolls worth for today!

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Countdown To Armageddon: MiFID II Arrives!


Nuclear Explosion

Change is on the way… BIG change! On January 3rd, 2018, MiFID II takes effect. MiFID was designed to make the global markets more transparent, but one seemingly innocent new rule could blow the markets apart. Starting January 3rd, Equity Research must be paid for, instead of being bundled in “trading fees”. Trading fees and research fees must then be separately and explicitly billed. Let’s dive right in and see just how much today’s “free” research is worth!

Equities valued at trillions of dollars are traded around the world. But which stocks should you buy and sell, and when? The answers are found through research! Equity research is a multi-billion industry. Investment banks have huge Equity Research departments. Smaller trading firms have specialized research groups. A few firms even independently sell research. And then, of course, there are global data providers (Bloomberg, Thomson-Reuters, S&P, Moody’s etc.) that sell Research departments all of their data from stock exchanges.

Yet, research is given away to Institutional Investors for free. In exchange, Institutional Investors buy stocks from those brokers that provide research. But when research isn’t for free? PAYING FOR RESEARCH changes everything! Not only will fund managers (and their financial managers), question what research costs and how much is needed, they will question how they are charged. There is, unfortunately, no roadmap.

Every broker will have a different plan on how to charge. Some will bill each transaction with execution and research fees, others will charge a flat monthly rate. A few will further separate billing into written research vs. consulting time with analysts. Better known research departments are expected to charge $5,000 to $10,000 per hour to discuss stock insights with analysts.

MiFID is not a US regulation. It was created by European regulators and only applies to equity sales in Europe. MiFID was created to level the fragmented EU playing field. Since research is given away, but Institutional Investors only buy from brokers with “free” research… this arrangement has the appearance of an “inducement” to do business. When “gifts” worth millions of dollars are given away, it’s not a level field. Alternatively, when research is no longer free, will clients still need the thousands of reports that are created every week?

January 3rd could be a quickly forgotten blip, or it might be the day that all hell breaks loose! Let’s do our own countdown to MiFID II and see what we learn! Starting with…

10… Cost  Some research groups only research a few stocks, others offer global coverage. That translates into different billing rates. Some will be visibly higher, some considerably lower, and some will be more difficult to compare. On day one, expect client feedback to contain a lot of negative comments about overcharging, and demands for remediation. The rest of 2018 could be a firefight over rates. Billing will be renegotiated, and research products will be re-aligned to match client demand. Expect changes in the number of research providers and their staff by mid-year.

9… Competition  Institutional Investors manage trading disruption risks by working with multiple brokers. But after January 3rd, multiple brokers cause duplicate research fees. If you use 5 brokers, are they each providing unique research or are two or more providing the same information? Are you willing to pay for duplicate research? Does every broker give you value for each research Euro?” Or Dollar? Speaking of which…

8… US vs. EU Clients  MiFID is a European regulation, but global clients will quickly ask, “If European clients know their costs, why can’t I?” Wall Street is very aware of MiFID. Clients will demand voluntary adoption of MiFID billing rules. Don’t want to provide it? Are you willing to bet that Washington will provide a better standard? If your firm follows MiFID today, you might have a single U.S. and European rate. But if you wait, you might be required to follow separate U.S. and European billing rules. And how will you bill for research in China (and “other” areas)?

7… US vs. EU Regulators  Most global firms consolidated their local research offices into a central operation years ago. But MiFID complicates how global operations work.  It’s more than just how they allocate billing. EU research must be produced by EU registered analysts, just as US research publications require FINRA registered analysts. Managing analyst registration and duplications in expertise is another task that MiFID adds to global research. As MiFID regulations continue to be written, more conflicts will arise between US and EU offices, raising costs.

6… Duplication  Billions are spent on research, but what is it really worth? A study from Reuters found that the top 15 Investment Banks produce 40,000 research reports every week, but clients read less than 1% of these documents. Even with this huge number of research reports, not every stock is fully covered. Research is overly focused on the “top stocks”. Thirty analysts cover HSBC, with 50 covering Apple. The top 3 or 4 analysts might have original insights about a stock. But what about the least insightful analysts? Fund managers don’t read 99% of reports. How many will they pay for?

5… Bias  The Financial Times of London stated, “The “Buy/Sell/Hold” headline is both heavily regulated and more or less worthless.” If research reports are sales documents, we expect them to over-hype equities, just as they do today. For example, McKinsey, the world’s largest consulting firm, reported that earning growth estimates are 100% overstated. When research is no longer free, will accuracy matter? But accurate research would produce fewer buy recommendations, and lower trading volumes?

4… Indexing  Index Funds and passive investing are now 30% of total equity fund assets and growing. Index funds, outperformed 80% of actively managed funds, without traditional research. As more money flows into Indexed Funds, fewer traditional trades must absorb research costs. Either fees will rise or costs must fall.

3… Whale Hunt  The more a stock is traded, the more coverage it receives. Top firms are over-covered and small cap firms (with low trading volumes) lack coverage. Small cap firms rarely produce the revenue needed to pay for research coverage. However, research departments that are able to dramatically lower the cost of research can transform small cap from a financial burden to a profitable new market.

2…D.I.Y.  According to the Financial Times, Vanguard expects to pay $5 million in research fees in 2018. Another firm that is a mere 10% of Vanguard’s size, but with more complex research needs, expects to pay $10 million. That’s enough to start a research department. It is inevitable that some Institutional Investors will simply write their own research. How many will “defect” from the current system?

1… Market Data Services  We’ve only discussed brokers and Institutional Investors. If just a portion of these changes take place… the breakup of global research, fewer researchers, changing research products… market data providers must quickly pivot, and develop a new research model with fewer subscribers and smaller budgets.

Launch…  It’s anyone’s guess what research will look like in 2019. But in 2018, research quality must rise, costs must fall, and operations must be flexible enough to deal with ongoing changes. Artificial Intelligence is the key technology to offset MiFID changes. AI can write the primary research, allowing high-end analysts to identify new trends and provide original insight. Research departments that do not aggressively adopt AI will lack the resources to produce the quality research clients demand, or they will simply price themselves out of the market.

Tough times are ahead for Equity Research. MiFID is still open to interpretation, but it has already triggered seismic changes. Research departments will soon struggle to reinvent themselves, with fewer analysts, reduced budgets, and a mandate to create unique research. Not every research department will survive. But a few of today’s research departments will aggressively adapt Artificial Intelligence and other new technologies that transform the cost of research and define the next stage in Equity Research.

 

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The Golden Age Of Outsourcing


Golden AgeAt the turn of the 21st century, outsourcing was going full blast, moving from obscurity to mainstream. It quickly improved corporate profits and promised long-term benefits through continuous improvement…at least that’s what was supposed to happen. Now, robots are arriving in the workplace. Is it a threat? Or is the “Robot Revolution” our second chance for a golden age of outsourcing?

The last wave of outsourcing was an eye opener for corporations. Everyone had heard about outsourcing and offshoring in auto factories. Yet, it seemed impossible that the same techniques could work for banks and non-manufacturing corporations.

Early on, outsourcing suppliers talked about more than just lower wages. Survey after survey told us that corporations wanted innovation, improved quality, and freed-up time for managers, not just lower wages. But after receiving a huge financial benefit by the first or second year, other benefits were de-emphasized or forgotten by corporations. A few programs did prioritize Six Sigma, LEAN, and other efficiency methodologies, but they were exceptions. Long-term planning and management is stressful and can be risky, but when it is successful program costs are kept under control and the program can deliver exceptional benefits. Yet, few programs were “ambitious” enough to demand, and pursue, all of the benefits they originally agreed to.

It was easier for companies to get their big financial benefit with the first contract and then try to negotiate a lower price for the renewal. However, when productivity and quality were not addressed, costs rose. Offshore inflation in Asian countries was usually higher than in Europe or the US. Companies that used offshore locations might luck out on foreign exchange rates on their second contract, but by the third contract, companies surely had to deal with rising prices.

Addressing internal inefficiencies might have worked just as well, but most companies began to look for lower cost locations. China (manufacturing) and India for knowledge services (legal, banking, insurance, research, IT) were the lowest prices on earth…for awhile.

By 2015 Chinese wages were two to four times higher than neighboring Vietnam and Cambodia. Brazil, Eastern Europe, and other locations tried to duplicate India’s success, with mixed results. By 2017, outsourcing work was tried everywhere—it had literally gone to the ends of the earth! The days of wandering around the world in search of a significantly lower wage are over. But if you stay where you are? Then costs will inexorably rise. It’s time to think about the most efficient place on earth, which may be closer than you think!

Producing a physical product offshore costs time and transportation. Real estate in China and India is surprisingly expensive, at least in any place that it makes sense for you to operate. Many domestic locations cost far less and do not require extensive power backup, dedicated employee transportation, and other infrastructure.

IF wages can be neutralized, the best place to manufacture might be in your home market. More specifically, if a machine can build a product in one location, it can build it in another. The “labor” then becomes the same anywhere in the world. Transportation, real estate, and other costs become more significant, as does opportunity cost. Restocking offshore products can take a month or more. Onshore, customers can go to another store or buy a similar product from another manufacturer. Factories built near the markets they serve can restock quickly.

As manufacturing returns to the US, will these corporations build and manage their own factories? Or will they outsource factory management? New factories MUST be highly automated with few employees. It may make more sense to build super factory complexes that can be efficiently supplied and perhaps powered by factory controlled power plants. Factory complexes that support multiple companies and brands will have greater leverage when negotiating with states over tax breaks and work conditions. It may also be easier for customers to outsource rather than renegotiate an existing union contract.

Automated factories require lifecycle management. In the past, factories were built and run until they had no value left. Machinery might have been upgraded occasionally, but most equipment lasted for 20-50 years. Some industrial machines were so large that the building had to be built around it. Automated factories will require much more frequent changes.

If a complex of factories contains multiple corporations, some will grow, some will shrink and some will go out of business. Early adopters will start off with far fewer workers than comparable factories of the past. Over time they will evolve into “lights out” facilities, requiring no staff at all.  Former employee parking lots will be redeveloped into other types of space. Automated equipment will undoubtedly require more frequent upgrades. There is a strong argument to be made for outsourcers to take on this role. If major US and European outsourcing companies are not quick to tackle this challenge, a new competitor may be very eager to develop an onshore presence. China. Think about it!

China dominates offshore manufacturing, but recent increases in compensation have hurt its competitiveness. China’s wages are four times higher than Cambodia’s! The writing has been on the wall for years, which is why, in 2015 the, the government allocated $250 billion for projects to replace manufacturing workers by 2021.

Even before this mammoth infusion of money, China was the world’s largest buyer of industrial robots. Now they will also be the world’s largest buyer of industrial robot manufacturers. In 2016, they bought $10 billion worth of European robotic firms, and they have plenty of money to buy more.

The official global production of industrial robots is 250,000, growing at 35% annually. A little-known fact is that China produces at least 100,000 additional industrial robots that are not counted in global production Why are they left out? Because they are often used by the companies that build them, and because they are outdated by international standards. But, in China, they do the job. And as China buys more and more Western robotics and artificial intelligence (AI) firms, we can expect China to DOMINATE global robotics.

Today China builds 100,000 and they buy 70,000 robots annually. They’ve barely begun to spend their $250 billion nest egg. If robot sales grow at their current rate, between 1 and 1.5 million robots will be sold by 2021, and half a million will be built in China. By 2025 China will produce half of the world’s robots.

In a handful of years, no matter where you build your factory, your (robotic) workforce will be “made in China.” Not interested in lower cost Chinese robots? What if the construction was financed by a Chinese bank and a special discount was offered if a Chinese construction company did the work? Similar interlocking deals have powered China’s expansion in Africa and Asia. I’m betting that a Chinese end-to-end factory could be far better priced than more domestic funding.

Knowledge work has different needs but will create similar new opportunities. Because physical products don’t need to be moved around the world, transportation is not an issue. Productivity is.

India has been successful in all sorts of knowledge work. However, it often hits a glass ceiling. Many junior knowledge workers are created, but the big prize—senior knowledge workers—has been elusive. The old promise was to have junior work performed by more skilled staff, resulting in a more educated knowledge worker, but that never materialized. Is it because of prejudice against foreign workers, lack of “real” work environment exposure, or the resistance of skilled workers to performing less skilled work? Whatever the reason, outsourced workers often fail to become the MOST educated knowledge workers, instead falling into support roles. These roles are likely to be automated. Soon.

India’s legendary IIT and IIM Universities have highly respected graduates. Yet, basic education has not risen above sub-standard. Some experts say that the secret to surviving in a robotic world is education. Should the offshoring platform of the future be Canada, Singapore, Israel, Australia and other countries with the best-educated citizens?

While India is the world’s back office support for IT, they produce few notable software products. India should produce more than 3,000 patents every year. Without more software, AI or robotic leadership, India is in for a rough time in the next decade.

Outsourcing once promised more than lower wages. Work was going to be revolutionized. For the last 20 years, outsourcers have talked about continuous improvement and long term benefits. The Robot Revolution could be Outsourcing 2.0. But if your focus is still on lower wages, you probably won’t survive the coming big squeeze. If, instead, corporations focused on quality management, continuous improvement, and the strategic use of automation, long overdue benefits will help your program thrive!

 

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A.I. Saves The World!


 

Robot Hand

Photo: All Rights – Richard Greenhill and Hugo Elias, The Shadow Robot Company

Robots, Artificial Intelligence, automation. Machines are taking over the world… and it’s about time! Our environment today has far more technology in it than it did a generation or two ago. And tomorrow? You can bet on even more technology. Now we constantly hear that Artificial Intelligence (A.I.) is taking over the world, or at least taking over your job. Is technology still a good thing? It sure is! In fact, new technology is about to do some ridiculously great things for us!

It’s the 21st century. I get it! We’re supposed to be surrounded by technology. Computers are everywhere. Of course… I still don’t have a jetpack. Or a flying car. But my smart phone is a computer in my pocket, and that’s something. What are the other big benefits of A.I. and new technology? Let’s take a look at just a few big changes that we’re all going to benefit from…

MEDICINE – Everybody hates going to the doctor. Soon, we will be able to hate going to the Robodoc. Yet, millions of patients have been treated with Robo-surgery. Consider Lasik. Originally, it was a fairly manual procedure. But technology advanced, and machines did more while doctors did less. Today, one computer examines your eye with a laser, mapping any imperfections. Then, a different type of laser reshapes the lens, eliminating flaws. It takes 15 minutes for a Robodoc to complete a very complex surgical procedure. The doctor? If he agrees with the computer’s plan, he gets to press the “go” button.

In most professions, A.I. tends to start with the simplest work. The opposite is true with surgery. “Computer assisted” surgery has been around for years, helping doctors with work that is so complex (or so small and intricate) that they must use a computer in order to perform them at all. Also, any semi-autonomous robot or A.I. may be just an upgrade or two away from working solo.  

LOGISTICS – “Logistics” is a term used by big corporations, but it affects just about everyone. Logistics is about managing the flow of people, goods, and services. Getting to work in 30 minutes, rather than a traffic jammed hour, is a great example of logistics. A broken traffic light, flooded street, or just an accident can complicate your trip. In New York City, millions of people every day rely on the subway to get to work. In order for the trains to run, they rely on a signal system that is similar to traffic lights for cars. NYC’s signal system is a hodgepodge of aging technology that goes back nearly a century. And it’s breaking all the time.

It will cost $3 billion to update NYC’s subways to a computer controlled signal system. That not only reduces train accidents, it will solve many other problems. Today’s slow response time requires that trains must be at least 2000 feet apart. A new computer controlled system can react much faster, allowing more trains on the tracks at the same time. More trains, faster rides, and less crowded subways. Not a bad deal!

Consider your last plane flight. It takes too long, and there are always problems. Have you noticed that planes change direction several times during your flight? It’s not because of turbulence or weather.  Your plane needs to be tracked at all times, and it turns to stay within the range of the next radar tower. Soon a satellite and A.I. controlled radar system will be in place. The results? Fewer lost planes, and less flight time. A straighter route is a faster route, and satellite radar means flight will take a third less time. That cuts 2 hours off of the typical coast to coast trip.

TRAFFIC ACCIDENTS – Everyone knows about self-driving cars. Different versions are being tested around the world. They seem to perform as well or better than the average driver. What? You disagree? You think you drive better than an A.I. can? You might be right. After all, car accidents are caused by other people, right? Especially people that drive when they are tired, or distracted, or texting or even when they’ve had a bit too much to drink? There are 35,000 traffic related deaths and millions of injuries every year. Self-driving cars would dramatically reduce the toll on human lives.

A.I. guided vehicles would eliminate almost all driving accidents and property damage. By communicating between vehicles, cars would know about closed streets and other obstacles well in advance. When rare accidents did occur, A.I.’s would not rubberneck as your car passed the scene. A sudden winter “white out”, in a snow storm would not blind the radar and infra-red sensors on your car, and every car would stop at the same time. Even annoying drivers that want to be the last one to cross the intersection, and get stuck, wouldn’t sit in the crosswalk, obstructing traffic.

EDUCATION – Every parent has heard their child tell them that a teacher doesn’t like them. They may be right! We know from independent testing that a test scored by two (or 3, or 4, or 10) different human teachers have more variations in scoring than if two A.I.’s scored the same work. We also know that scoring tests and homework requires 40 to 60 percent of a teacher time and few teachers like doing this task.

That means that the best teachers… the VERY best teachers… can focus on teaching, not administrative tasks. Will this eliminate teaching jobs? Yes, it will. But for the children and the parents who pay for school, it means receiving a higher levels of service and greater objectivity. It also means that the cost of education goes down, and schools that have consistently resisted reform and improvement, can focus financial rewards on teachers that truly improve education.    

The march of the Robot Revolution may be inevitable, but that does not mean it’s a defeat for humanity. We will be healthier, have fewer crippling injuries, better education and we can expect to live longer lives. Not exactly a bad revolution. There will be change. No doubt about it. The few items listed here are just the start. If we embrace change rather than resist it, the 21st century could be the golden age of humanity… but I still want my flying car!

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Zero Work Is Not Zero Happiness


Work-Pays-POsterThe world is faced with the greatest economic crisis or the greatest opportunity since man was let into Eden. Even before the earliest civilizations, Man has labored. At first, Man fought against nature for food and shelter. Later, people became workers, serfs, and even slaves. We created tools, to be more productive. The Industrial Revolution further increased productivity, elevating pay and creating “leisure time”. The computer revolution turned factory jobs into desk jobs, with air-conditioning, better pay, and benefits… like health care. Now automation, Artificial Intelligence, and Robots threaten to steal the world’s jobs in just a few years. What if… not having a job was a good thing?

Technology pundits, economists, and futurists are well-aware of new technologies. But traditional economics say that society will continue to adjust, regardless of the technology. Just as factories replaced farms, a “new economy” will arise to solve all problems.

The experts, however, have started to change this message. Factory jobs may be the first to go away, but they won’t be the last. Artificial Intelligence (A.I.) and robots will be equally good at replacing high paying jobs. Outsourced work and even whole factories may return onshore, but new factories will be highly automated factories and create few workers. Experts no longer see a “next economy” on the horizon. Any “new jobs” can be performed just as well as “old jobs”… by robots.

In the 19th and 20th centuries, American’s were primarily farm workers. By the mid-20th century, we were factory workers. Now we have a service economy. The next economy, the jobless future, will be our fourth (and last?) economy. After 150 years of transition, just 2% of workers are farmers. After just 50 years of transition, just 8% of jobs are in factories.  Robots and automation have already taken over some service jobs. These transitions have become shorter. Will the transition to the Zero Work economy take just 10 or 20 years?

Back in 1980, a labor organizer in India, Valerian Texeria, looked at Communist and Capitalist theory. He thought that both theories shared a flaw. Machines were becoming more intelligent and new energy sources could be nearly free to produce. If machines replaced human workers, and energy was free, machines could directly replace human workers. While this seems obvious, political and economic experts of the day largely ignored Texeria’s “Zero Work Theory” (ZWT). Today, however, experts are beginning to discuss jobless future that looks a lot like Zero Work.

A jobless future shouldn’t cause panic. That is if the loss of jobs is… a good thing.  The history of labor has been a continuous march from long hours and bad work conditions to shorter hours and better work conditions. This is what workers want, and what labor organizers demanded for generations. But it does raise a question, “If less work is better, then is no work best?”

Remember Communism? Communism and Capitalism battled for dominance for most of the 20th Century.  SPOILER ALERT. Capitalism won. Big Time! 50 Communist nations faded away, leaving just China as a significant Communist nation. Communism said that a new society without the need for money would arise. Maybe not!

Capitalist said that automation drives down the cost of labor, freeing up money for workers and new jobs. Automation has indeed improved profitability, but profits mostly went to the “1%”, and buying power for the 99% has been frozen for decades. Now automation is replacing jobs faster than new jobs can be created and even more wealth is moving from the middle class to the “1%”.

Texeria proposes that this process of “Technological Unemployment” will increase. Instead of trying to chase lost jobs, Mr. Texeria believes that we should focus on how people will pay for food and shelter without jobs. The idea of UBI goes as far back and Sir Thomas Moore’s 16th-century novel, “Utopia”. There,  governments provided a stipend “sufficient for necessaries”. Modern Universal Basic Income (UBI) works by converting government entitlement programs into UBI. The cost for UBI can vary but for the U.S. is around $3 trillion. That’s what the government currently pays for education, socials security, healthcare, and housing. Having citizens choose and buy their own services will eliminate multiple bureaucracies, reducing the cost of government.

Modern Universal Basic Income (UBI) works by converting government entitlement programs into UBI payments. UBI for the U.S. has been estimated at $3 trillion, the current cost of education, socials security, healthcare, and housing programs. Under UBI, citizens will choose and buy their own services. This eliminates multiple bureaucracies, reducing the cost of government.

The Robot Revolution won’t just eliminate jobs. It will reduce the cost of EVERYTHING. Corporations are installing robots because they are cheaper than human workers.  That means that when the UBI arrives, it will cost less than today. Because everything will cost less.

The Robot Revolution also means that the “1%” that own the factories and the corporations that are automated will be more profitable. That means provides a new stream of profits that can be taxed. Some experts prefer the idea of a “Robot Tax”, on every robot that displaces a human being. Whatever method is chosen, the economy will be as strong as it is now and will continue growing. UBI represents a restricting of taxes and payments. By removing the most inefficient government programs, rather than increasing the government budget, it may be possible to pay down the national debt.

Robots will continue to take over factory jobs, but they will also drive cars, replace cashiers, and out-perform “knowledge workers” (doctors, lawyers, financial specialists, etc.). That us back to Mr. Texeria and Zero Work. In 1981, he wrote a book, “Zero Work Theory”, predicting an optimistic future that economic experts rejected. His view was simple. Economics laws, including Moore’s Law (computer costs drop by 50% every 2 years) are inescapable and has been eliminating jobs for decades. Technology now eliminates jobs faster than they can be replaced. If not his ZWT and UBI, is there a lower cost and more effective alternative? If so, it’s being kept a secret.

Technology has simply reached a point where jobs are being eliminated faster than they are created, and the speed of elimination is accelerating. ZWT points to massive societal changes, but advocates adjusting to a jobless future rather than trying to prevent it. Of course, experts that are still tied to Communist or Capitalist alternatives haven’t come forward with an alternative to ZWT and UBI that will cost less, or that will be more effective.

Some experts warn that without the “sense of worth” you derive from your job, you can’t have positive self-esteem. How does Mr. Texeria address this? “That’s just leftover thinking from religion and 20th Century economics.”

He may have a point. Soldiers, engineers, and firefighters can “become” their job, and their fellowship with their workmates may be closer than with their family. But these are exceptions. 70% of American’s are unhappy with their jobs. Cashiers, fry cooks, and the guy who cleans the men’s room urinals are much less likely to confuse themselves with their jobs. But they might be… parents of their children, fans of their local sports teams and experts in their favorite hobbies. This is what drives them and this is where they want to spend time.

What will people do with their spare time in the jobless world? The same things that they do today… participate in their community, become involved in politics, play games (in 3-D), participate in increasingly dangerous sports (base jumping, free climbing, parkour…), and experiment with drugs.

Is it desirable for citizens to experiment with drugs?  At the moment, no. America is gripped by an opiate epidemic causing 40,000 fatal overdoses annually. One in 10 Americans (1 in 4 over 40) take anti-depressants, which are often contributing factors in 50,000 annual suicides, and workplace killings. Alcohol kills nearly 90,000 American’s every year. Yet, Starbuck’s and Red Bull have built respected caffeine empires. Marijuana legalization is likely to happen in the next few years. in part a movement to discover less destructive drugs for depression and pain relief. And drugs will be used for

Perhaps, given the dramatic rise in leisure time that we will soon face, this might be just the right time for America’s vast pharmaceutical industry to look for less destructive drugs for depression, ADHD, and pain relief. That just might eliminate thousands of mass killings. Of course, without the stress of the modern workplace, many of these drugs may not be needed.

Today’s economic experts have largely failed to adapt old economic theories to the Zero Work future, after “workers” largely disappear. Technology has been moving towards a jobless economy for centuries. Nations are at different levels of development. The U.S. and Europe (and Japan, Canada, etc.) could adopt UBI in just a few years, but it could take a century or more for today’s poorest countries to have large enough economies to pay for UBI.

The Robot Revolution will cause enormous changes, just as the agricultural and industrial ages caused great disruptions in the past. Are we headed towards the destruction of the world or into a new golden age? That largely up to us, and how we hold our governments accountable managing a Zero Work world!

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