Relevant and even prescient commentary on news, politics and the economy.

Rare earths and trade

A battle to keep using rare earths on our terms
by Tim Worstall in The Register points to a facet of trade policy that would seem to demand some government action…I fail to see why trans-national companies would feel a need to act at least currently to implement more modern technology (or search for an unproven alternative). I can’t speak to the efficacy of his suggestions.

Note that I’m not saying that all of this is easy, that we can just fall off a log and it’ll be all right. I’m only saying that China really doesn’t have a long-term lock on RE supplies. The seeds of how we get out of this half nelson are already there, ready to be nurtured. We can and will deal with competition and industrial dominance from a low-wage/high-pollution country or company by doing what all of you people around here do. We can use brains rather than brawn to design better, more mechanised, ways of ensuring our supply of what we need to keep industry on its feet.

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Trade policy stories

by Dan Crawford

Stormy asks in an e-mail: At one time, I thought America was supposed to lead the way in green technology, providing jobs for Americans…and sends this quote from the Washington Post.

The last major GE factory making ordinary incandescent light bulbs in the United States is closing this month…

What made the plant here vulnerable is, in part, a 2007 energy conservation measure passed by Congress that set standards essentially banning ordinary incandescents by 2014. The law will force millions of American households to switch to more efficient bulbs.

The resulting savings in energy and greenhouse-gas emissions are expected to be immense. But the move also had unintended consequences.

Rather than setting off a boom in the U.S. manufacture of replacement lights, the leading replacement lights are compact fluorescents, or CFLs, which are made almost entirely overseas, mostly in China.

Well, let’s see. The article seems to imply a whole story- Environmental concerns pushed closings and lost American jobs, which was not forseen, and those awful Chinese somehow wound up with the manufacturing.

The IBEW notice adds a bit to the story:

The news stunned Lexington Local 1627 Business Manager David Butcher, who represents 114 workers at the plant. “I knew there was trouble but that was the last thing I expected to hear,” he said.

That local had recently negotiated an agreement with the company to help reduce costs by agreeing to a wage freeze and flexible overtime regulations, hoping to buy more time so GE could update its facilities to be more competitive.

And then this article points to our responses on trade. It describes the next generation after flourescent technology of lighting using LED technology.

The Federal government either has no role to play in trade policy to benefit its own citizens according to free trade enthusiasts, or possibly is only part of a short term ‘stimulus’ package for green technology. Bottom line decisions on how and where to do business are global in nature without regard to your role as a citizen. Admired from afar it all looks good, but how do you voice a concern for where you belong.

As indicated in the article the role of suggesting incentives has been traditionally a function of municiple and state governments, leaving individual trade agreements with countries to the federal government.

Pay special attention to the notion that the national government of China is offering help to locate a manufacturing site in Mexico with the help of the national Mexican government. And that the current employees to manufacture new light bulbs are drawn from former government employees (NASA).

The national narrative on trade bears little resemblance to the reality of doing business from this point of view. When listening to speeches it is best to keep this in mind.

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Increasing internal demand in China for goods needs more thoughtful analysis

A shift to more internal demand for China might not benefit the US in ways we think it will. One such area is the impact of increased demand for resources and energy. And another is where the jobs are.

China Puts Up More Money to Build Solar Capacity

The government-owned China Development Bank has just made its third massive loan to one of the country’s solar energy makers, bringing its total commitment about $17 billion. The combined size of the loans is large enough to allow China to double the global manufacturing capability for solar wafers and cells. The latest recipient of the government’s largess is Yingli Green Energy Holding Co. Ltd. (NYSE:YGE), which today announced that had received an aggregate line of credit from the China Development Bank worth about $5.3 billion. In April, Suntech Power Holdings (NYSE:STP) and Trina Solar Ltd. (NYSE:TSL) received loans of $7.3 billion and $4.4 billion, respectively.

The NYT points to energy use, efficiency, and China (Rdan…the emphasis is on global warming but needn’t be):

Already, in the last three years, China has shut down more than a thousand older coal-fired power plants that used technology of the sort still common in the United States. China has also surpassed the rest of the world as the biggest investor in wind turbines and other clean energy technology. And it has dictated tough new energy standards for lighting and gas mileage for cars.

But even as Beijing imposes the world’s most rigorous national energy campaign, the effort is being overwhelmed by the billionfold demands of Chinese consumers.

Aspiring to a more Western standard of living, in many cases with the government’s encouragement, China’s population, 1.3 billion strong, is clamoring for more and bigger cars, for electricity-dependent home appliances and for more creature comforts like air-conditioned shopping malls.

Chinese cars get 40 percent better gas mileage on average than American cars because they tend to be much smaller and have weaker engines. And China is drafting regulations that would require cars within each size category to improve their mileage by 18 percent over the next five years. But China’s auto market soared 48 percent in 2009, surpassing the American market for the first time, and car sales are rising almost as rapidly again this year.

An older generation of low-wage migrant workers accepted hot dormitories and factories with barely a fan to keep them cool, one of many reasons Chinese emissions per person are still a third of American emissions per person. Besides higher pay, young Chinese are now demanding their own 100-square-foot studio apartments, with air-conditioning at home and in factories. Indeed, one of the demands by workers who went on strike in May at a Honda transmission factory in Foshan was that the air-conditioning thermostats be set lower. [Rdan…the mandate is 79 degrees F.]

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A fable: The Guitar Player who sold his gear or, Bruce Henderson vs. Gordon Moore

by divorced one like Bush

Gather all around the camp fire and enjoy your marsh mellow toasting as I tell you the fable of the “The Guitar Player who sold his gear”. Long ago in a far away land of rock and roll there was a young man who played well. Not great, wasn’t going to necessarily be a guitar hero, but who knows? He had the gear, the amp to make your ears ring for days, the gold top Les Paul, couple pedals, cables…all he needed. And he played. Jammed, earned some money on the side. Life was good. But, along came another desire. He needed some money and the playing was becoming less as life with the loved one became more. So, he sold it. All of it. He had maybe $1 thousand in gear. He got $500 for it. It seemed good at the time. He had gotten his use of it all, made some bucks but it really was just money sitting there it seemed.

A few years pass, the kids grow up and the man has some spare time. He has been dabbling on a folk guitar for years, so when he hears that a friend is jamming on Thursday nights, he gets an urge. That potential just sitting there to be tapped, but…no gear. No problem, he’ll just buy some. The only problem is, when he first goes to practice and sees the friends 2 Les Pauls and a jazz box, 2 ear killing amps and bottoms, a full board of pedals worth what he sold his gear for, he wonders how the friend did it and thus how is he going to do it. It was thousands in gear. The friend answers: I never sell any of my music equipment because it is part of my life activities, it makes me who I am, it helps me think and you never know what will come up for an opportunity.

Such a fable is common among those who used to play music.

I have written at AB that my thoughts about when the flash point was for our change to a focus on making money from money was the first Reagan election. I do believe this is the case however, having finished reading Richard J Elkus’ book, Winner Take All, I now have learned of a perspective as to why it flashed and why we are bailing out finance with more money and fewer questions than bailing out the auto industry. I also see just how back ass-ward this bailing out concern is.

You see, the thought that the purpose of business is to make money was not always the winner in the argument. The argument has been back and forth for ages. It is part of the class war. In fact, there was a movie in 1954 with William Holden looking at this issue called Executive Suite.

…McDonald Walling, who oversees the company’s manufacturing plant and is preparing to test a new molding process… process did not go well in his absence. On the way home, he complains to his wife Mary that financial analyst Loren Phineas Shaw focuses on the bottom line at the expense of the company’s creativity…McDonald speaks passionately about the company, condemning Shaw’s short-sighted emphasis on quick profits as “a lack of faith in the future.” After McDonald outlines his vision for restoring the company to its former high standards, the board unanimously elects him president.

We have not always thought that the purpose of business is just to make money.

Mr. Elkus’ (MBA) thesis is that in the 60’s, two laws of economic process were formalized and presented that were the guiding thoughts influencing economic development. Both lines of thinking came from viewing the same show: semiconductors. One is by Mr. Bruce Henderson (engineer and MBA degrees) the other by Mr. Gordon Moore (PhD chemistry). Both addressed the relationship of costs and production. I note the degrees of each just as a curiosity.

Mr. Henderson, watching Texas Instrument, came up with the Experience Curve. In it’s simplest form it states that unit cost goes down over time as experience increases.

But, this was just the bases for a broader concept, a “strategy” for guiding business development: Stars, Cash Cows and Dogs.

As a particular industry matures and its growth slows, all business units become either cash cows or dogs. The natural cycle for most business units is that they start as question marks, then turn into stars. Eventually the market stops growing thus the business unit becomes a cash cow. At the end of the cycle the cash cow turns into a dog.

The overall goal of this ranking was to help corporate analysts decide which of their business units to fund, and how much; and which units to sell.

This was and appears to still be a very big concept. Big as in influential. Via Wiki:

The Economist magazine stated that Henderson did more to change the way business is done in the United States than any other man in American business history. Well known to many now is the famous Growth Share Matrix (‘cash cow’) and the ‘Experience curve’. His books were published in 27 languages.

Huge influence. Taught throughout our business schools according to Mr. Elkus and Wiki. Came about in 1970.

Mr. Moore, being a founder of semiconductor manufacturing businesses, namely Intel, came up with Moore’s Law. In it’s simplest form, it states that there would be “a doubling of computing power per given area of silicon every year at basically the same cost…”
Mr. Elkus’s thesis is that both describe models, ultimately truths regarding making money. Both are used as strategies for basing an economy upon. Only one is truly sustainable and makes all of America’s dreams possible. Japan picked that one.

He comes to this by way of his involvement with Ampex. Ampex owned video recording “…controlling nearly 100 percent of the world’s video recording patents and more than 70 % of the market”. Mr. Elkus literally introduced the first video recorder for home use, September 2, 1970 in NY. In the next few days, Ampex stock climbed 50%. Only one VP attended, no other top/senior management. “It was not a good sign.” His lesson from the event: “The introduction of Instavideo set in motion a long chain of events, resulting not only in the explosion of consumer electronics into nearly every facet of daily life but in a global shift in economic power to Asia.”

In the same year, he saw a presentation of high definition video by Japan’s “primary” broadcasting company, NHK. It is at this point in the story Mr. Elkus relays the concept of convergence of technology. The ability to record video on a consumer level scale represented the ability to store and process massive amounts of data. This ability converging with digital video presentation meant that the entire information economy would be exponentially growing based on Moore’s Law. Mr. Henderson’s potential Star. Moore’s law also meant that as the ability to process ever larger amounts of data on ever smaller media, the cost would be ever greater. Mr. Henderson’s potential Dog. What to do?

Mr. Elkus knew Ampex needed a partner that could take the technology to the consumer. Coming up with the technology, he recognized is only part of the expertise and cost, the other is the ability to manufacture it such that technology, in short, is dummy proof in the hands of the consumer. It is an ability all of it’s own. Mr. Elkus wanted Magnavox or Motorola as partners; keep it in the country. The boss said no, feared competition so went with Toshiba. This gets us to the next part of Mr. Elkus’ thesis: Infrastructure. Which gets to the final cog in the process: investment.

Using his experience with Ampex’s Instavideo, Mr. Elkus presents the counter to Mr. Henderson’s Stars, Cash Cow’s and Dogs: Investment, Convergence and Infrastructure. A relational model that follows the production law of Moore.

What the thesis of Investment, Convergence and Infrastructure means to a nation is presented in the tracing of the loss of our manufacturing base to initially Japan and ultimately to all of Asia. It is the counter to Mr. Henderson’s model which is basically just focusing on the money. It is the movie Executive Suite for real only for us, the story ending is looking different.

The relationship of Investment, Convergence and Infrastructure is presented early in the book via Zenith. There was a fight for control of the board as reported by the AP 11/1988. A couple Wall Streeters wanted Zenith to dump the “money-losing television business”. The dog. The article also noted: “for an outsider, jumping into the TV business would be like trying to hop onto a speeding train…” In the end, Zenith a company that “helped establish the standards for high definition television in the US,… contributing significant technology for the potential development of the industry” was gone by 1996 to LG of Korea “for a fraction of what it now costs to build a single display manufacturing facility”. We lost our infrastructure and thus the advantage of economic growth based on convergence and all the knowledge that is the result there of because of our focus on cash flow as the bases for deciding on where to invest.

Using a simpler example:

In 1964, one year before Gordon Moore wrote his prophetic article, semiconductor sales reached $1 billion. Today sales are in excess of $260 billion, it is projected that in a dozen years the number may reach $1 trillion. And growth in revenue has occurred while prices have dropped at an average compound rate of 29 % annually…But that is really chump change when you realize that $260 billion of silicon makes possible a $2 trillion electronic systems industry today…So it is possible to imagine an electronic systems market approaching $4 trillion to $5 trillion in the next twelve to fifteen years—an amount equal to the current GDP of Japan…

The error of US having followed Henderson, which if I understand Elkus properly, I conclude has lead to NAFTA, outsourcing jobs and ultimately the fight over whether to save our auto industry (which I noted is the last “infrastructure” we have that uses “convergence” via “investment”) verses little questioning to save the banks is summarized thusly:

The common denominator driving the world of information and its communications infrastructure was the need to store, process and distribute extraordinary amounts of digital information. [Store = Ampex. Process = Intel. Distribute = Zenith.] If one understands HDTV as the result of learning how to process massive amounts of digital information, as both a convergence and catalyst in the digital revolution, then it should be easy to see that the need to process that information is not limited to the HDTV display and a pretty picture….

It now costs upward of $10 billion to build just one semiconductor manufacturing plant. $3 billion to build a single display fabrication facility. Zenith was sold for $350 million. Based on Measuring Worth, 1996 to 2008 these money minds following Henderson, sold Zenith for 1/6th the cost required to build just one display panel plant in 2008. This number differential is the total fallacy in Henderson. How do you know? How do you know what really is the next big thing? How can you be sure that nothing else will come of what you have? It is the “The Guitar Player”. But worst of all as shown in the example of selling Zenith, is just how short sighted Henderson’s thinking and thus American business thinking is in general. If I may, Henderson’s thinking is analogous to watching your rear view mirror while driving forward as you decide whether to turn or drive straight. Henderson’s thinking is the point of thought that began the money from money economy. It is the thought that lead us to a purposeless existence of no substance because it leaves unanswered the question of why do we want to earn money or create wealth, for what purpose.

Mr. Elkus gave a talk at The Commonwealth Club in California on 9/3/08. It covers a time line of what he is writes in his book. It is one hour long, but well worth the time, especially the question at the end regarding Apple’s business arrangement regarding it’s Iphone as the questioner brings up “competitive advantage” and money from royalties. You know, that information/service economy model that has gotten us to the point that the biggest service sector (finance) took down the economy and the next largest is unaffordable(health care).

The most profound comment by Mr. Elkus during this lecture is: If you don’t have the infrastructure, then you don’t know what’s possible.

How far reaching is this persepctive of Investment, Convergence and Infrastructure? Mr. Elkus suggests that even our education system is influenced by it.

When a nation’s politics and economics fall out of step with its education system, the cost of reengagement is extraordinarily high.

Therefore any attempt to explain the plight of education in America must look first at the country’s current political and economic attitudes. They are directly linked.

Eventually, because of the exponential acceleration in convergence, infrastructure, and investment, there’s a cascading effect, and the loss of one industry begins to threaten the stability of others.

These events are noticed by the educational community, which must provide a measure of career guidance for its student population and thus looks to political, economic, and business leaders for answers.

We have Intel fortunately, but we don’t have the infrastructure of Zenith which would have been using Intels output to market Ampex’s technology which lead to the Iphone.

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Trade policy debate to begin for mid-term elections?

rdan

Trade policy debate begins in Pennsylvania?

America’s economy is now struggling to recover from the Great Recession. But even when the economy was said to be humming, it did not work for most Americans. Wages were stagnant or declining and the costs of basics – health care, housing, college – were soaring. Growth was built on unsustainable debt, as the country borrowed $2 billion a day from abroad and Americans spent more than they earned. Wall Street captured fully 40 percent of the country’s profits.

President Obama has stated that we can’t go back to the old economy, and shouldn’t want to. We must make more, sell more and consume less. The question is: What is our economic strategy in a global economy?

“The fight for American manufacturing is the fight for America’s future,” Obama has declared. That fight will require a fundamentally different economic strategy, one that will ensure a sustained prosperity that is widely shared, one that will leave the American dream within reach of those who work hard.”

So how do we actually start?

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