Environmental marketing – part III

In one more example of financial innovation and the monetization of a previous intangible, it looks like California may be creating a new market in green house gas emissions, according to this morning’s Wall Street Journal:

Leaders of the state legislature and Gov. Arnold Schwarzenegger announced a deal yesterday under which California will mandate a reduction in the state’s emissions of gases contributing to global warming to 1990 levels by 2020. The cut would target the state’s biggest industrial emitters of greenhouse gases, such as power plants, oil refineries and cement factories. California already has passed a law requiring greenhouse-gas-emission cuts from cars and light trucks sold in the state.
. . .
The measure still must pass both houses of the state legislature to become law, but the agreement by Gov. Schwarzenegger and the majority leaders of both houses all but ensures that outcome. “We can now move forward with developing a market-based system that makes California a world leader in the effort to reduce carbon emissions,” Gov. Schwarzenegger, who is running for re-election this year, said yesterday, when the agreement was announced.

The emphasis, however, is on “may”:

Business representatives wanted a guarantee that the state would include a mechanism allowing companies to buy and sell carbon-dioxide-emission permits among each other as needed, to soften the potential financial blow. But some environmentalists argued that would make it too easy for California businesses to avoid cleaning up their own operations. The final legislation says the state “may” include such a trading mechanism in its final plan.

I would think that they could create a market involving credits for reductions only within California. This would satisfy the environmentalist concern and be true to the Governor’s goal of a market-based system.
Stay tuned.

Innovation in health care

The Veterans Administration hospital system has engineered an amazing turnaround, according to TIME.com: How VA Hospitals Became The Best:

Until the early 1990s, care at VA hospitals was so substandard that Congress considered shutting down the entire system and giving ex-G.I.s vouchers for treatment at private facilities. Today it’s a very different story. The VA runs the largest integrated health-care system in the country, with more than 1,400 hospitals, clinics and nursing homes employing 14,800 doctors and 61,000 nurses. And by a number of measures, this government-managed health-care program–socialized medicine on a small scale–is beating the marketplace. For the sixth year in a row, VA hospitals last year scored higher than private facilities on the University of Michigan’s American Customer Satisfaction Index, based on patient surveys on the quality of care received. The VA scored 83 out of 100; private institutions, 71. Males 65 years and older receiving VA care had about a 40% lower risk of death than those enrolled in Medicare Advantage, whose care is provided through private health plans or HMOs, according to a study published in the April edition of Medical Care. Harvard University just gave the VA its Innovations in American Government Award for the agency’s work in computerizing patient records.
. . .
The roots of the VA’s reformation go back to 1994, when Bill Clinton appointed Kenneth Kizer, a hard-charging doctor and former Navy diver, as the VA’s under secretary for health. Kizer decentralized the VA’s cumbersome health bureaucracy and held regional managers more accountable. Patient records were transferred to a system-wide computer network, which has made its way into only 3% of private hospitals. When a veteran is treated, the doctor has the vet’s complete medical history on a laptop. In the private sector, 20% of all lab tests are needlessly repeated because the doctor doesn’t have handy the results of the same test performed earlier, according to a 2004 report by the President’s information technology advisory committee.
Another innovation at the VA was a bar-code system, as in the supermarket, for prescriptions–a system used in fewer than 5% of private hospitals. With a hand-held laser reader, a nurse scans the bar code on a patient’s wristband, then the one on the bottle of pills. If the pills don’t match the prescription the doctor typed into the computer, the laptop alerts the nurse. The Institute of Medicine estimates that 1.5 million patients are harmed each year by medication errors, but computer records and bar-code scanners have virtually eliminated those problems in VA hospitals.
Private hospitals, which make their money treating people who come to them sick, don’t profit from heavy investments in preventive care, which keeps patients healthy. But the VA, which is funded by tax dollars, “has its patients for life,” notes Kizer, who served in his post until 1999. So to keep government spending down, “it makes economic sense to keep them healthy and out of the hospital.” Kizer eliminated more than half the system’s 52,000 hospital beds and plowed the money saved into opening 300 new community clinics so vets could have easier access to family-practice-style doctors. He set strict performance standards that graded physicians on health promotion.

Technological innovation (IT) – organizational innovation (performance standards) – innovation in the business model (shift from treatment to prevention). A winning combination.
I guess some times even dinosaurs can dance.

Chinese brands

As Business Week points out, get ready for the Chinese:

The 2008 Beijing Olympics will doubtless be a gloriously defining moment for China—an international image blast underscoring the mainland’s arrival as an economic power. And perhaps more important for Chinese companies selling everything from booze to bank accounts, it is shaping up to be the marketing opportunity of the decade.

And if you don’t think they are ready, take a look at BW’s 20 Best Chinese Brands. Many of these brands are positioned mostly for the local Chinese market, such as Bank of China, China Construction Bank, China Merchants Bank, insurance giant Ping An, China Mobile, China Telecom and Internet/on-line gaming leader NetEase. But others, such as mobile phone makers ZTE and Gree Electric Appliances (already the world’s largest air conditioner manufacturer), are actively pursuing global markets. Others that didn’t make the top 20 cut, such as Tsingtao Brewery, appliance-maker Haier, DongFeng Motors and Shanghai Automotive Industry, are also moving into the global market. Haier is already becoming a design leader in the US with what Business Week calls a “line of eco-friendly, tech-rich appliances.”
China and other “developing” countries are moving up the value chain – including in design and innovation. Those who think that the US can survive economically simply by living off the royalties from our past great ideas, think again. The I-Cubed Economy is one of relentless innovation. And other nations are working hard to prove they are as good at that game as we are.

Slow growth

BEA revised its estimate of 2Q GDP up slightly this morning. As the Wall Street Journal reported – GDP Is Revised Up to 2.9% Rate On Stronger Inventory Building:

The U.S. economy didn’t brake as hard last spring as first thought, said the government, raising its estimate for second-quarter growth partly because of stronger inventory building by businesses.

Wait a second. This is a good thing? In the old business cycle models, rising inventories was a sign of an impending recession as productive capacity outstripped demand, unless inventories were excessively low. And in today’s just-in-time production process, what is an excessively low inventory level? Just because we are putting more things into warehouses doesn’t mean the economic is doing better.
And what about all those intangibles which can’t be warehoused? How do we account for them in this model?
Too many questions, not enough answers.

Environmental marketing – part II

Just so people don’t think that the idea I talked about yesterday of environmental marketing is just wishful thinking, here is a story from today’s Wall Street Journal – “Biggest-Ever Emissions Trades: $1 Billion Deal Benefits Beijing”:

The World Bank and 11 utilities, banks, trading firms and others have put together the largest greenhouse-gas emission trades in history, a $1 billion deal that will help two Chinese chemical companies reduce emissions believed to cause climate change by the equivalent of 19 million tons of carbon dioxide a year.

A billion dollars — that is real money!
But the creation of this market requires government action:

Seventy-five percent of the money is coming from European and Asian corporations, many of which are hurrying to buy emissions credits that can be used to meet the terms of the Kyoto Protocol. The treaty, ratified by 164 countries, requires 35 participating industrial nations to reduce emissions of carbon dioxide and five other so-called greenhouse gases by 5.2% below 1990 levels between 2008 and 2012.

Since the US does not recognize the Kyoto Protocol, this US companies are not interested in this type of international deal through the World Bank’s Carbon Finance Unit. But not to worry, one of the major players in this market is Natsource, a New York based asset management firm. Natsource reports that greenhouse gas market transactions in 2005 were valued at $10.9 billion.
Now that is really real money.

Environmental marketing – and monetization

The group Business for Social Responsibility has identified a key intangible asset – environmental marketing:

How much are well-functioning environmental services like flood control and climate regulation worth to a company’s bottom line? BSR has released a new Environmental Markets Trends Report in conjunction with launching an initiative that will help companies assess the risks and opportunities of emerging markets in carbon, water quality and biodiversity. Companies taking the lead in this field are seeing increased real estate value, consistent and high-quality supplies of raw materials, more cost-effective environmental management, cheaper cost of compliance and regulatory “goodwill.”

This is not just feel-good advertising, or even brand protection (see the Christian Science Monitor story Stopping the outcry before it starts). BSR is referring to the increasing monetization of environmental services:

The emergence of market mechanisms to protect environmental services promises new business approaches to these issues. Efforts already underway are pricing environmental services, based upon the value they represent to corporations, communities and individuals. Environmental market mechanisms, already a success story in the U.S. in the 1990s, are evolving and are now trading in environmental services.
. . .
As hard, tangible value is assigned to environmental services, companies will be well served by exploring potential investments, as well as their exposures associated with them. Some companies are beginning to see increased value for their real estate, a new ability to ensure consistent and high-quality supplies of raw materials, more cost-effective environmental management, cheaper cost of compliance and regulatory “goodwill.” It is likely that in the foreseeable future, attention to these services will become similar to the attention companies give to other corporate assets, such as infrastructure. In this case, the “infrastructure” is the environmental services upon which the company relies.
(Emphasis in original)

Assigning a tangible value to intangible assets is the key. Monetization is one way of doing this (and something that Athena Alliance is looking more closely at). Non-financial reporting requirements is another (see our working paper, Reporting Intangibles). The combination should give us better tools for managing intangibles and the I-Cubed Economy.

Bernanke on globalization

The annual Fed confab is underway at Jackson Hole, with this year’s focus on the topic of globalization. To start off, Fed Chairman Ben Bernanke assumed his old role as professor and delivered a history lesson – Global Economic Integration: What’s New and What’s Not?.
The press was quick to characterize the speech in the usual way:
New York Times – Bernanke Extols Perks of Globalization
WSJ.com – Bernanke Praises Globalization, Urges Broad Sharing of Gains
Washington Post – Bernanke Emphasizes Importance of Globalization
The outlier seems to the FT.com – Bernanke calls for fairer globalisation
But the speech was not just a standard paean to the benefits of free trade. It was also much more than an interesting tour of economic history, including a discussion of how opposition to greater economic integration arises out of the tensions it produces. Near the end of the speech Bernanke focused on the current situation with insightful precision:

What, then, is new about the current episode? Each observer will have his or her own perspective, but, to me, four differences between the current wave of global economic integration and past episodes seem most important. First, the scale and pace of the current episode is unprecedented. For example, in recent years, global merchandise exports have been above 20 percent of world gross domestic product, compared with about 8 percent in 1913 and less than 15 percent as recently as 1990; and international financial flows have expanded even more quickly. But these data understate the magnitude of the change that we are now experiencing. The emergence of China, India, and the former communist-bloc countries implies that the greater part of the earth’s population is now engaged, at least potentially, in the global economy. There are no historical antecedents for this development. Columbus’s voyage to the New World ultimately led to enormous economic change, of course, but the full integration of the New and the Old Worlds took centuries. In contrast, the economic opening of China, which began in earnest less than three decades ago, is proceeding rapidly and, if anything, seems to be accelerating.
Second, the traditional distinction between the core and the periphery is becoming increasingly less relevant, as the mature industrial economies and the emerging-market economies become more integrated and interdependent. Notably, the nineteenth-century pattern, in which the core exported manufactures to the periphery in exchange for commodities, no longer holds, as an increasing share of world manufacturing capacity is now found in emerging markets. An even more striking aspect of the breakdown of the core-periphery paradigm is the direction of capital flows: In the nineteenth century, the country at the center of the world’s economy, Great Britain, ran current account surpluses and exported financial capital to the periphery. Today, the world’s largest economy, that of the United States, runs a current-account deficit, financed to a substantial extent by capital exports from emerging-market nations.
Third, production processes are becoming geographically fragmented to an unprecedented degree. Rather than producing goods in a single process in a single location, firms are increasingly breaking the production process into discrete steps and performing each step in whatever location allows them to minimize costs. For example, the U.S. chip producer AMD locates most of its research and development in California; produces in Texas, Germany, and Japan; does final processing and testing in Thailand, Singapore, Malaysia, and China; and then sells to markets around the globe. To be sure, international production chains are not entirely new: In 1911, Henry Ford opened his company’s first overseas factory in Manchester, England, to be closer to a growing source of demand. The factory produced bodies for the Model A automobile, but imported the chassis and mechanical parts from the United States for assembly in Manchester. Although examples like this one illustrate the historical continuity of the process of economic integration, today the geographical extension of production processes is far more advanced and pervasive than ever before. As an aside, some interesting economic questions are raised by the fact that in some cases international production chains are managed almost entirely within a single multinational corporation (roughly 40 percent of U.S. merchandise trade is classified as intra-firm) and in others they are built through arm’s-length transactions among unrelated firms. But the empirical evidence in both cases suggests that substantial productivity gains can often be achieved through the development of global supply chains.
The final item on my list of what is new about the current episode is that international capital markets have become substantially more mature. Although the net capital flows of a century ago, measured relative to global output, are comparable to those of the present, gross flows today are much larger. Moreover, capital flows now take many more forms than in the past: In the nineteenth century, international portfolio investments were concentrated in the finance of infrastructure projects (such as the American railroads) and in the purchase of government debt. Today, international investors hold an array of debt instruments, equities, and derivatives, including claims on a broad range of sectors. Flows of foreign direct investment are also much larger relative to output than they were fifty or a hundred years ago. As I noted earlier, the increase in capital flows owes much to capital-market liberalization and factors such as the greater standardization of accounting practices as well as to technological advances.
(Emphasis added)

That is a good list of characteristics of globalization in the I-Cubed economy. For course, he left out the rise of intangible assets, although he did mention the rise of tradable services. It is the rise of intangibles and the spread of knowledge that, I believe, has undercut the core-and-periphery model. When knowledge becomes simultaneously local and global, there are many cores and few peripheries.
Last year, I worried whether Mr. Bernanke would understand the I-Cubed Economy the way that Alan Greenspan seemed to understand the “weightless economy”. I’m still not sure. But today’s speech was a positive sign.