GDP – reality catches up with expectations

Today’s revised GDP numbers show a much sharper decline in the 4th quarter of 2008 that previously reported — a 6.2% decline rather than 3.8%. However, the revised numbers are in line with the earlier expectations of a 5.5% to 6% decline (see earlier posting). The biggest change from the earlier data was in inventories, which shrank rather than increasing as reported earlier. That, as the Wall Street Journal points out:

was good and bad. Bad, because the $19.9 billion drop meant inventories added a mere 0.16 of a percentage point to GDP in the fourth quarter, instead of adding 1.32 percentage points as reported originally. But the drop also suggests there is less of an inventory overhang, a bit of good news.

The bottom line is that the situation is still very dynamic — any backward looking indicators are likely to be incorrect in the first estimates. So rather than look back, we need to keep our focus ahead. And that means crafting a transformative economic policy – not one that simply tries to reflate the bubble. The stimulus package and President Obama’s proposed budget seem to be heading us in that direction. For that reason, expect a fair amount of resistance. As the Wall Street Journal noted:

Democrats welcomed Obama’s budget as a long-awaited reordering of the government’s priorities. Republicans expressed dismay for the same reason./blockquote>Changing the status quo is never easy.

Entrepreneurial opportunities in the downturn

It has become the standard view that economic downturns are prime incubators of entrepreneurial activity. New opportunities arise and people who have been turned loose (i.e. fired) are more willing to take the risk of a start up. According to Harvard Business School Senior Lecturer Bhaskar Chakravorti (in a recent interview with HBS Working Knowledge), there are opportunities to “think-outside-the-box” – to use that old cliché:

Clearly there will be areas such as infrastructure, health care, education, clean technologies, etc., that will get a boost because of investments and demand from the public sector. Let us put these areas aside–because they will be readily identifiable. I am more interested in isolating the opportunities that arise organically and will be developed through private initiatives.
Here, I think it is critical to systematically identify what I would call “downturn needs.” There are many different kinds of such needs. First, there are needs that are created by the substitution effects I spoke of earlier. Second, there are needs that emerge because of the availability of excessive time or the unavailability of productive employment. These are by way of necessities. In addition, there is also a need for affordable luxuries. After all, just because consumers are cutting back doesn’t mean that they do not still enjoy products that give them pleasure and entertainment–or even distraction from the difficult times around them. The third category of needs is a more obvious one: products that deliver value for the money spent on them. When consumer budgets are tight, such products will have plenty of appeal.
In terms of lessons from the past, there are many examples that we can turn to. Taking the last of the needs first, in the airline industry alone, Southwest Airlines, Ryanair, and JetBlue were founded during downturns on the principles of delivering value. In terms of affordable luxuries, consider the emergence of cosmetics, such as Revlon, and media, such as CNN, during downturns. I already offered some examples of opportunities that come out of the substitution effect or of products that complement the surplus time that consumers may have on their hands. You could go even further and brainstorm a fairly long list of ideas: for example, think along the lines of meals at home, budgeting tools, job matching, etc.

Other ideas:

The opportunity here is in all the surplus resources that you can tap into and harness. For instance, the downtime created by the collapse of the Internet bubble gave rise to a host of new applications that we now collectively know as Web 2.0. Technologies and materials left unused due to the collapse of one industry can be creatively re-directed towards others that can take advantage of the low input costs. Silicon and wafer cutting technologies that were rendered surplus after the semiconductor industry slowed down during the last recession were picked up by a fast-growing solar energy industry.

What I really like about Chakravorti’s advice is to look for opportunities where others aren’t. Everyone piling into green right now reminds me a little bit of the dot-com bubble. There have to be some other transformational ideas out there – things that no one has thought of but are, in retrospect, intuitively obvious. Those entrepreneurs are the ones who we will look back at as the real pioneers.

Hiring American IT workers

Are IT jobs coming back? Maybe, according to a story in today’s Wall Street Journal. The story talks about how major Indian IT firms — Infosys Technologies Ltd. and Wipro Ltd. — may begin hiring more American workers. The main reason, according the story: “to make sure they can still do business if the U.S. passes legislation that restricts their ability to send Indians to the U.S. to work.”
Note very carefully the specifics of the concern. The concern is not that they won’t be able to do business with US companies. The concern is the ability to “send Indians to the U.S.” In other words, people still have to come to the U.S. in order to do the work. As the story points out, “if Indians are going to compete with U.S. and European outsourcing companies, they need to have people in the U.S. to work face-to-face with customers, the outsourcers say.”
The standard view is that all the work is shipped overseas. The truth is much more complicated. Face-to-face is still important in the I-Cubed Economy. And our technology policy — including the immigration portions of that policy — needs to understand that complexity.

The Future Is Lithium

To follow up on my earlier posting on cars and battery technology, I would draw your attention to a story Strategy + Business is running on The Future is Lithium. The story reiterates a now standard theme: battery technology has moved to lithium and “Companies in Europe, Japan, South Korea, and China have clear leads in perfecting the battery.” Much of the piece describes the rivalry between GM and Toyota in developing the use of this technology in autos. They point out that GM may be key to developing the industry:

Of course, any U.S. hopes for securing a chunk of the lithium ion industry would be dashed if GM’s Volt project were to fizzle out because of the automaker’s financial problems. The work on the Volt is by far the most advanced lithium ion-based auto program of any U.S.-based manufacturer. “Because of GM’s efforts, the U.S. has a real opportunity,” says Patil. “The Volt is an opportunity to take leadership.”

I’m not sure that Volt is the key for the US electric vehicle industry. I think the trajectory is become clear. There are a number of other ways that the technology could move forward, including the battery consortium I’ve described before.
I do agree with the story’s concluding remark, however:

But even if the Americans don’t make the train, a future with more and more powerful lithium ion batteries is inevitable; after all, the rest of the world is already on board.

And the rest of the world is not only on board but possibly pulling ahead.

FRONTLINE: inside the meltdown

Last Tuesday, Frontline ran an interesting piece — Inside the Meltdown — about the collapse of the financial system. You can view the entire piece below. The website also has additional resources.
I thought this was very well down — a thoughtful look at how the system fell apart. However, it does leave somewhat of an incomplete picture. The story starts with the sage of Bear Stearns. The implication indirectly (and not intentionally) given is that the problems really started with the rumor started-run on Bear in March of 2008. The recession started in December 2007 (according to NBER). The Frontline time line on the website is more complete, starting in the summer of 2007 with the housing slowdown and discusses the fall of two Bear hedge funds in June 2007.
And many believe the economic troubles ran throughout the decade — as real incomes stagnated around the turn of the century.
So the collapse of the financial system is the tsunami that threatens to overwhelm us. But the roots of the crisis – the factors and triggering events – lie much deeper in the rickety economic situation that has developed over the past decade.

Using stimulus to transform education

While the stimulus package may fall short of what some of us wanted in transformative programs, that doesn’t mean that the funds can’t be used in transformative ways. That seems to be the thrust, at least in education. According to a story in eSchool News:

President Barack Obama and his Education Secretary, Arne Duncan, want to do more than save teachers’ jobs or renovate classrooms with the new economic recovery law. They’re hoping to reinvent education for the 21st century–while transforming the federal government’s role in public education in the process.
Public schools will get an unprecedented amount of money–nearly double the education budget of this past year–from the stimulus bill in the next two years. With those dollars, Obama and Duncan want schools to do better.

Duncan will tie funding to reform efforts and help push the most successful programs as national models.
Sounds good to me.

Making green technology in the US

As I noted in yesterday’s posting on the auto industry, policymakers are beginning to look seriously at the question of whether new green technologies will actually be produced in the US. For all the talk of “green jobs,” the stickiest of them are actually construction related – dealing with installation and retrofitting. These are not the highest-value added parts of the “green” value chain. Nor are green jobs necessarily even good jobs – as a new report from the Good Jobs First coalition – High Road or Low Road? Job Quality in the Green Economy.
We are likely to be hearing more and more about the issue of both US manufacturing and good jobs as the debate over an energy bill and climate change legislation continues. As the Wall Street Journal noted last month:

Congress is beginning to fear that the Obama administration’s push for renewable energy will produce more jobs in Asia and Europe — where most wind turbines and solar panels are made — than in the U.S.
The proposed remedy is a provision in the economic-stimulus bill that offers tax breaks to U.S. producers of the equipment.
Sen. Jeff Bingaman (D., N.M.), chairman of the Energy and Natural Resources Committee, is urging support for a provision in the Senate version giving a 30% tax credit to companies that expand or build U.S. manufacturing facilities geared to renewable energy, clean transportation or electric-system upgrades.
“Several of us have come to recognize that we’ve outsourced the very things we’re going to need to change the nation’s energy mix, and this is a way of encouraging more manufacturing here at home,” Mr. Bingaman said.

That provision is in the final bill – Sec. 1302. Credit for Investment in Advanced Energy Facilities. It is a good step forward. I expect we will see additional steps in future legislation.

Debating the American Brand

The Economist is running an online debate on Brand American:

This house believes that Brand America will regain its shine.

Interesting way of phrasing the question – since it assumes that everyone agrees that the American brand has lost its shine. While I would agree with that assumption, I think there are those in the neo-con world who might dispute it. That The Economist takes the proposition of the decline of the American brand for granted is especially telling.

Changing auto value added

GM and Chrysler have laid out their restructuring plans and the car mini-czar, Ron Bloom – recently appointed as Senior Adviser in the Treasury Department, is settling in. The plans call for cutting production, cutting jobs and otherwise downsizing. One of the actions will be for GM to spin off or eliminate the Saturn brand. As I’ve written before, spinning off Saturn is the best course – not eliminating it. Saturn was an experiment in re-designing the industry, which GM never fully backed. I hope there is a far-sighted group of investors out there (they must be far-sighted if they are sitting with enough cash to pull this off right now) who can take over Saturn and make the concept work. The industry – and the US – would be stronger as a result. And the Treasury Department should facilitate that transaction.
A stand-alone Saturn would be one innovation to help the industry and economy. More importantly is the broader set of new products. In a letter to stakeholders, Chrysler CEO Robert Nardelli outlined some of his near term innovation objectives:
•  More fuel-efficient powertrains such as the all-new Phoenix V-6 engine
•  Gas-electric hybrid technology such as the two-mode hybrid system that will be available on Dodge Ram next year
•  The electric-drive program developed by our ENVI group, with the first electric-drive vehicle coming in 2010 and other vehicles to follow
•  A changing portfolio mix that will include more small, fuel-efficient vehicles
This is all fine and well — but it only begins to touch upon the massive shift about to occur in the industry. Ever since the internal combustion engine became dominate, the key to success in the auto industry has been control of the drive train technology. Companies that controlled this key element — engine, transmission and differential — reaped the highest value added.
Now that might be changing as transportation technology is changing. Electric motors and battery technology are coming to the fore as the key value added components. Batteries have not been a strength of the US auto industry.
As the Washington Post pointed out in its coverage of the Washington auto show last earlier this month:

The auto industry has placed its bets on lithium-ion batteries. The batteries are already under the hoods of many of the concept cars at the auto show.
But, while lithium-ion technology is widely used in laptops and cellphones, it has taken years for it to be tested and vetted for use in automobiles. As a result, Asian companies specializing in consumer electronics, such as Panasonic, have significant leads, analysts said. LG Chem beat out A123 Systems of Watertown, Mass., for GM’s battery partnership.

Note that Bolivia is a major source of lithium.
It is not as if the industry and policy makers don’t understand the challenge. As Michigan Senator Carl Levin said last month:

Because the heart of these green cars will be their batteries. As the nation makes a serious push toward greater use of hybrid electric, plug-in hybrid vehicles, and all-electric vehicles, there will be increasing demand for the advanced batteries that will power these vehicles. We must ensure that we can meet the demand for production of these batteries here in the U.S.

The stimulus package includes funds for battery research (see story in Technology Review).
The trick however is not just research but, as Senator Levin said, production. As I noted before, the industry has formed an National Alliance for Advanced Transportation Battery Cell Manufacture. If that group is to make a difference, it will need to move far beyond the research agenda and look toward actual US-based production. That is different from the Semitech model that the group’s founders point to.
It should be noted that the switch to fully electric cars (rather than hybrids) will require a shift in the infrastructure. Hybrids can use much of the gasoline fuel delivery system – fully electric require a different system. Clayton Christiansen devoted a chapter to electric cars as a disruptive technology in his path-breaking book, The Innovators Dilemma. While the market dynamics have changed since he wrote the book in 1997, some of the key elements of his analysis remain.
So the change over is not be easy. Nor is it assured that the current players will remain (if Christiansen is right, they most certainly will not). At some point, the government’s new auto industry task force will have to decide what its mission is: creating a new industry or mitigating the effect of the demise of the old industry. It can do both if it understands the watchword is change. If it simply tries to save the existing industry, it will only fail. True industrial policy is transformative; defensive industrial policy doesn’t work.

Nightly Business Report’s innovation list

Following up on my earlier posting, here is the list of the Nightly Business Report’s 30 top innovation in the last 30 years:

30. Anti retroviral treatment for AIDS – Health Care
29. SRAM flash memory – Electronics
28. Stents – Health Care
27. ATMs – Finance
26. Bar codes and scanners – Retail
25. Bio fuels – Biotechnology
24. Genetically modified plants – Biotechnology
23. RFID and applications (e.g. EZpass) – Electronics
22. Digital photography/videography – Electronics
21. Graphic user interface (GUI) – Computer Science
20. Social networking via internet – Media
19. Large scale wind turbines – Energy
18. Photovoltaic Solar Energy – Energy
17. Microfinance – Finance
16. Media file compression (e.g., jpeg, mpeg, mp3) – Computer Science
15. Online shopping/ecommerce/auctions (e.g., eBay) – Information Technology
14. GPS Systems – Electronics
13. Liquid Crystal Displays – Electronics
12. Light emitting diodes (first real devices in 1960s; in products in mid-70s) – Electronics
11. Open source software and services (e.g., Linux, Wikipedia) – Media
10. Non-invasive laser/robotic surgery (laparoscopy) – Health Care
9. Office software (Spreadsheets, word processors) – Computer Science
8. Fiber optics – Telecommunications
7. Microprocessors – Computer Science
6. Magnetic resonance imaging (MRI) – Biotechnology
5. DNA testing and sequencing/Human genome mapping – Biotechnology
4. E-mail – Computer Science
3. Mobile phones – Telecommunications
2. PC/laptop computers – Computer Science
1. Internet/broadband/WWW (browser and HTML) – Telecommunications

I must say that I am rather disappointed in the tech-centric nature of the list – although I should have known better. Only three of these can be remotely not gadget oriented: microfinance (clearly non technological); open source (an organizational technique – although they seemed to play up the technology output side of this); online shopping (Amazon and eBay are more organizational innovations than technological).
Granted, one of the Wharton professors did acknowledge that financial services innovations got knocked off the list because of the current negative view. But that should not have disqualified them.
And where were the other organizational –industry creating innovations? For example recycling? Yes, people recycled before 1979. But I used email back in 1976. The creation of the recycling industry and its impact on our lives really happened in the last 30 years. What about the big box store — Wal-Mart and Costco? Again, existed before but really took off in the last 30 years. What about the coffeshop? Again, around for ages but the model fundamentally changed in the past 30 years. Same for microbrewers. Same for bottled water. And what about ESPN (founded September 7, 1979) and CNN (June 1, 1980).
I’m sure everyone could come up with more examples. The fact that the Wharton professors and Nightly Business Report apparently couldn’t only reinforces how difficult it can be to break out of the gadget mindset.