Musings on the future of US politics

As a futurist and two time failed political candidate for party pre-selection in Australia I am still fascinated by politics and have always had a strong interest in American politics.

Having read several interesting pieces on the current situation in the USA I have been thinking about the possible future scenarios we might see in the USA. As a basis for understanding these possibilities better I recommend you read Rules for a constitutional crisis by Lawrence Lessig and In this case, resistance is futile by Simon Wardley.

Lawrence Lessig calmly and clinically argues that the rule of law will assert itself and that the Congress and the Senate should do their job. That job is country before party. The premise is very well argued and if the rule of law does not assert itself then there are major constitutional problems to face. I argue below that more is needed.

Simon Wardley argues cogently and persuasively that Trump should be allowed to do what he promised to do to the American people but other things should be resisted. The argument rests on a view that Trump wants strong resistance for political reasons. If the situation in the USA worsens then he can point to people not allowing him to carry out his plans and call for more support from the people to allow him more power. If things in America improve despite everything then he will take credit (as every politician in power always has regardless of cause). Another facet of this view is Yonatan Zunger and his description of resistance fatigue. This essentially is that a master political strategy is being run by Trump and Bannon et al that is looking to exhaust the capacity of the people to resist by throwing out red Herrings until the general population is sick of the protests. While I think the arguments are well thought through the political reality of people mostly sitting back and waiting for 4 years seems very unlikely.

So lets look at some scenarios  with a HT to Jim Dator and his four scenario story structure). The scenarios are limited to the political situation but obviously can form the basis for effects on the rest of society and the world. The scenarios are not very detailed in order to fit them into  a reasonable post length but I would welcome input and comments to flesh them out:

Stability/Discipline

This is really the Lessig story and the view that the strength of the institutions of the US political system which were designed to bring stability.

The USA system is designed to limit the power of any one of the Executive, Legislative, or Judicial branches of the government.

Generally these act as shock absorbers although Presidential nominations to the Supreme Court with a compliant legislative branch can change the overall flavour significantly.

The story here would really be one of a long grind of tempering of Presidential actions by the Congress and Senate, and multiple court actions at a Federal and State Level.

This would slow any significant change, remove the excesses and provide time for the rest of the world to adapt. Assuming that there are not significant populist successes in other places such as France which cause rolling change.

This would lead to the next Presidential election being more of a conventional battle between Trump and a new candidate from the Democrats.

While this may create political stability of a sort it is hard to imagine it being good for the USA overall

Transformation

This is essentially a story of significant political change and is premised on a few basic statements (not of fact of course):

  • That the changes that are happening with the Trump Presidency mark the start of a great re-awakening of the political involvement of the centre/left of the American people. Examples such as the current protests and the significant raising of money by the ACLU (Donations to A.C.L.U. and Other Organizations Surge After Trump’s Order) in recent days support this possibility.
  • That political pressure of the sort that has shown success for the Tea Party in America puts pressure on members of Congress and the Senate. We have seen Eric Cantor unseated by an insurgent tea party candidate selection process. Can the same happen from the sort of resistance and political commentary we are seeing now? This requires far more discipline and organisation than what is happening right now and would have to be focused on the mid-term elections (where all 435 Congress Members, 1/3 of the Senators and 36 State governors are up for election).
  • A new leader emerges from the centre left of politics for the public outrage and political operations to coalesce around ( My pick would be Elizabeth Warren but I do not know enough about the next layer of leaders to be adamant about that).
  • A new leader emerges from the Republican side of politics to split the support that currently underpins Trump.

Nothing concentrates the political mind more than the possibility of losing an election. The mid terms are some way off, but if significant numbers of politicians are frightened of either not being selected to run again or not being elected then political opposition to the extremes of the Trump Presidency will grow.

In the USA this is complicated by the political gerrymandering of the seats ( which has meant the Tea Party concentrated on political candidate selection rather than elections) and the issues of levels of voter turnout in a voluntary voting system. This means that it is more difficult to get changes in representation in seats and that hot button issues that increase voter turnout can have a significant effect.

If we extend the scenario to the next Presidential election then it is possible to see a scenario where there is a four way competition for the Presidency:

  • A new Democrat leader
  • Trump but not with the Republican nomination
  • A new Republican leader
  • A popular independent – possibly being far more influential than ever before

An even greater departure from politics as normal would be the creation of  a new political party of the centre.

Side Note: Politicians of all stripes have always used “the enemy” to galvanise support. The picture I have briefly described above needs more – it needs a cogent story of action and policy, not just opposition. It also needs to bring large swathes of the Trump supporters on board , either to new Republican leadership or to the Centre/Left. As Lessig has pointed out the vast majority of the Trump voters are not evil and there are significant and legitimate claims and concerns that they have which need to be addressed. Not the least of these is the income and outcome disparities that exist.

Transformation Counter Scenario

If the Centre Left of American politics creates significant resistance to the Trump Presidency but fails to create a disciplined political operation on the ground we could see almost the opposite of the scenario above:

  • In reaction Trump supporters and the Tea Party put more pressure on sitting members of Congress and the Senate to not oppose the actions of the President by threatening to pile into the selection processes of the Republican Party. Possibly supported by people like the Koch brothers who have been running all sorts of polical activity over the last decade.
  • The economic situation of the USA appears to worsen through a range of factors, one of which may be change in trade and political allegiances structured around more isolationist policies and the desire of China to play a larger role in World affairs.
  • This galvanises Trump supporters even further as they are convinced the limits that are being placed on the President are the cause of these problems.
  • From both the selection processes and the mid term election the Congress and the Senate become more pro Trump.

Collapse

It is a truism in futures work that people commonly find it easier to find ways that disaster can occur than any other type of scenario. This situation is no different. Disaster politically could occur with:

  • Impeachment of President Trump due to multiple causes. Examples include findings of collusion with the Russians in the election campaign, hardening of evidence in the Steele dossier from multiple investigations or breaching the emoluments rules through all sorts of way through the Trump businesses due to his lack of willingness to divest.
  • Mounting debt levels if tax cuts are delivered, significantly cutting revenue (Budget office sees small deficit dip in 2017, then $9.4 trillion in 10 years). Market panics on debt problems could trigger a political crisis that Trump is unable to address.
  • Trade wars erupt with China and Mexico , causing rising reduced US growth and rising prices and cost of living squeezes on the very people that voted Trump in in the first place
  • An actual major war (China military official: War with US under Donald Trump ‘becoming practical reality’).

All of these possibilities and others can cause significant political upheaval. I think that in most people’s minds this can result in politics going back to “normal”. I would not be too sure. Impeachment would lead to a Pence Presidency, someone who most people do not know at all. There is also a real risk that people are too focused on sorting out the political structures and ignore the causes that created the issues in the first place. A political response that does not address the legitimate concerns of huge numbers of the American electorate will lead to rolling political crises.

Growth

  • Despite the current turmoil Trump manages to get most of his own way.
  • Tax cuts to the wealthy and infrastructure spending stimulate the economy causing an increase in GDP.
  • Re-negotiations of trade arrangements benefit the USA

The Trump way of doing politics is seen as the new way and a new breed of politician rises up to take advantage of the changes.

Twenty years of Billionaire Presidents or Billionaire backed Presidents ensue.

Australia

As I am an Australian (although I was born in England) it could be argued that these scenarios (and the many more that could be constructed)  are a bit irrelevant to me and the community in which I live. I would argue that both thinking about them and their implications is vital to us because of several key issues:

  • America is still a major economic powerhouse and what they do affects the whole world.
  • We are caught between a long and strong alliance with the USA and a trading and economic dependence on Asia, and China in particular. Changes in the political balance between China and the USA affect us more than most countries in the world.
  • We have our own populist political person in Pauline Hanson and her One Nation party as well as some fringe right wing elements. While to date they have been pretty chaotic and disorganised (and I would argue inherently so), the changes in the USA and Europe could both embolden them and give them access to people, tools and money to pursue their aims. What is about to happen in the USA could be played out here in the future so thinking deeply about them is well worthwhile.

One More Thing

Finally I think it is worth looking at the worldview of one of the main protagonists Steve Bannon. As a futurist I am constantly talking to people about how the mental models they use to construct their view of the world determine how they see strategy. In the link below Steve Bannon shows that he has a very particular worldview as stated in his own words rather than being interpreted by someone else . His views may significantly shape US policy in the next few years and therefore understanding them is important when thinking about the future. I personally find that a very scary thought but watch the video and read the transcript and come to your own view:

This Is How Steve Bannon Sees The Entire World

The soon-to-be White House chief strategist laid out a global vision in a rare 2014 talk where he said racism in the far right gets “washed out” and called Vladimir Putin a kleptocrat. He also outlined the view that we are at the early stages of a global war with Islam

Paul Higgins

Are The Two Major Supermarkets in Australia Doomed?

Yes but it will be a slow train crash

Following stories in the Australian Financial Review and News Limited last week (Amazon delays Australian launch to September to include fresh goods and Amazon to ‘destroy’ Aussie retail ) I decided to complete this analysis which has been kicking around in draft form on my system for a few weeks.

It is not just Amazon that is the problem. A combination of threats on margin, volume, and customer traffic is threatening the existing business model of the major supermarkets. Not all have to be successful for there to be major effects. To understand how that is happening we need to understand the business model.

A long time ago I tried to get ex Woolworths Chief Executive Paul Simons to come on board to market Australian Pork by becoming Chairman of the Australian Pork Corporation. That bid failed but something he told me about the supermarket business when we met has always stuck in my mind. Paul told me that there were five things that attracted people into supermarkets and while they were there they bought a heap of other stuff. Those five things were discounted bacon, Coca Cola, Pal Dog Food, fresh meat and fresh vegetables. A quick look at the Woolworths weekly specials catalogue for Victoria for the week starting August 31st (when I first started putting together this article) shows discount bacon, a discounted leg of lamb and a discounted whole duck front and centre on the first page. That is followed by  a full page spread on fridge mate packs featuring Coca Cola and two full pages of double points on fresh fruit and veg.

woolworth special august 31 2016

Source: Woolworths

 

Given that was the early nineties we could probably add rotisserie chickens, specialty pet foods, Huggies, petrol vouchers, and reward points to the list. That does not change the point that there are major group of items that get us in the shop and we buy other stuff when we are there. We certainly might buy half price Edgell Red Kidney Beans when we are there over another brand or product because they are on special but it is not going to get us in the door.

Later I chaired a board where a senior executive of one of the major supermarkets was also a board member. He told me that the supermarkets did not make money out of selling things. Their main two sources of income were the cash difference between when customers paid and when suppliers got paid and selling prominent shelf space to suppliers. While the story is illustrative of the business model rather than a statement of fact it does help understand the model.

If we look at the cash from customers as a source of of revenue then inventory turnover is important. The faster the inventory turnover the more money the supermarkets get in before they have to pay their suppliers.There are various numbers available for supermarket inventory turnover rates. The Inland Revenue Department of New Zealand reports median turnover of 14 times with a range of 10-19 for large supermarkets and grocery stores). The ratio of sales to inventory in the Woolworths annual reports 2011-2015 vary from 12.46 to 14.81 although these are affected by their non supermarket sales. Because this is not an investment analysis I think that it is safe to assume that the inventory turnover for Woolworths and Coles supermarket business would be at the higher level of the IRD estimates. If we use 16 x turnover that is equal to turning over inventory every 22.8 days. If the average payment terms to suppliers is 90 days (personal experience) that means that on average the supermarkets have customer cash for 67 days before they have to pay suppliers. With daily sales of  Australian Food and Liquor of $115.4m that is a whole lot of cash in the bank. Of course lower interest rates will have damaged the revenue the supermarkets receive form having that cash on hand.

When we look at paying for products to be on shelves and supplier rebates it was reported in The economist last year that In Australia supplier rebates had boosted margins for the major supermarkets by 2.5% point to 5.7% over the past five years (Buying up the shelves)

The other part of the business model puzzle is that the supermarket business is generally a low margin business once all costs are taken into account, although margins in the Australian market have been higher than the rest of the developed world. The Woolworths five year financial summary  to 2015 shows that margins for the Australian Food, Liquor and Petrol operations have been between 6.63% and 7.20% before interest and tax. While this is generally a low margin for businesses it is 30-42% higher than the margins in the Woolworths New Zealand supermarkets in the same report.The margin before interest and tax for 2016 fell dramatically to 4.43% as Woolworths lowered prices to compete with Coles and Aldi. The margins before interest and tax for Coles supermarkets in 2016 and 2015 were 4.73% and 4.67% respectively ( http://www.wesfarmers.com.au/docs/default-source/Quick-guides/2016-full-year-results-shareholder-quick-guide.pdf?sfvrsn=2).

While this net margin is quite low the gross margin is much higher For example the gross margin for Woolworths was 25.37% and 26.19% for 2016 and 2015 respectively ( Woolworths Financial Reports (pdf )) .

The gross margin is essentially sales minus the costs of purchasing goods for sale. This means that the difference between gross margin and net margin is all the other costs such as property leases, energy, staff, etc. This is a critical point because it means that the contribution to profit of the last customer or the extra sale is much higher than the average across the business. What this means is that if I drive down the road and turn left to shop at Woolworths or turn right to shop at Coles the loss in sales to the one I do not choose is very high. Whether I turn right or left both those businesses still have to pay their staff, pay their energy bills, pay their property leases, etc. That means that if roughly 18% of customers disappear and they cannot adjust their costs then their profit disappears, and adjusting high fixed costs like leases, staff and energy is very difficult.

The same applies to sales volumes. If the same amount of customers go through the door but buy 18% less in volume the supermarkets do not make 20% less profit, they make virtually nothing if the same costs structure remains in place.

So the supermarkets run a high turnover, low margin, high fixed cost business where they make lots of money on inventory turnover and payments/rebates from suppliers. This gives is the basis to look at their strategic future. Attacks to their profitability can come from primarily three points:

  1. Lower margin business forcing them to reduce margins as Woolworths has done in 2016 to combat the threat of Coles and Aldi in particular. This may be extended further in a major Amazon push into fresh produce.
  2. Customers being drained away so the high costs structure causes problems for profitability.
  3. Customer numbers staying the same but buying less every time they go to the supermarket.

Lets look at each of those individually:

Customer numbers staying the same but buying less every time they go to the supermarket.

This is the most serious threat to the long term viability of the supermarket businesses. The threat is analogous to guerrilla warfare or asymmetric warfare. Only some of the attacks need to be successful for the supermarkets to be in trouble. People will still go to the supermarket but there purchases will be reduced.There have been lots of efforts to look at direct delivery models with varying success but we are now reaching the point where multiple models are developing that have a good chance of being successful. This is devastating for the supermarkets because if 40% of people reduce their purchases by 30% that is a 12% reduction in  overall sales. But the supermarkets will still have to operate their existing business model to retain the other 60%of customers  as well as to be able to retain the people that have reduced their purchases but are still coming into the store. Lets look at some of their threats:

Dollar Shaver Club

dollar-shaver-club

These guys run a direct delivery service for razors direct to your door. They combine an irreverent marketing attitude with social marketing that gives you free blades if you recommend a friend.  They promise to reduce your costs of shaving and take all the friction out of the process. I don’t use a razor any more as I use clippers to manage my George Clooney like designer stubble, but if I did use razor I would sign up today – no longer buying that product from the supermarket. A small individual purchase perhaps but they start to add up.

Blue Apron

blue-apron

Blue Apron promotes direct delivery of all the ingredients you need to prepare a healthy great tasting meal. I met with one of the Nokia trends scouts in Austin Texas a few weeks ago and she is an avid fan. As Blue Apron delivers the exact amount she needs to make a meal there is no waste and she said that the service is not costing her any more money than shopping for the ingredients. It is estimated that Australians throw away about $8 billion dollars of food a year (fact checked by the ABC) so certainly there is a cost saving there. While they are not yet in Australia the business model is one that is easily transferable here.

Youfoodz

youfoodz

Youfoodz is a company that will deliver a week’s worth of fresh (non frozen) meals direct to your door in Australia. You can choose all meals or a proportion of meals and snacks. I have done a cost comparison on their service and while they are slightly more expensive than making your own food for quality meals the difference is not large. Again there is no waste and for the time poor there is no shopping or preparation to be done. For people working long hours or running their own businesses where more time means more money this is a very viable alternative.

Amazon Dash

amazon-dash-button-washing-machineAmazon Dash is a programmable button that you can put in your house. The example here is one of putting one on your washing machine so that when you run out of washing powder you just push the button and washing powder is delivered into your house. It takes all the friction out of buying and I imagine them building in services integrated with Alexa (the interactive home system) so that rather than just buying your normal brand the system can queue up order requests and talk to you about special offers, etc at your convenience. Once adoption gets high enough then Amazon can use its considerable logistics and information system to package up multiple orders, supply weekly orders based on your usage, and give you special offers.  It has not really caught on yet but the system is adding more and more brands and Amazon is pushing it out to more countries (Amazon triples Dash Button brand lineup, orders surge 75% in Q1  andAmazon brings its Dash buttons to the UK, Germany and Austria for ordering staples with one touch). It has the smell of a long term strategy to harness all of their capabilities into an offering that makes sense, especially for dry goods.

So if we think of an example household of an above average income couple (the most attractive customer) that are busy with work or their own business you can imagine a combination of all of these services. They use a service like Youfoodz to have a couple of meals pre-supplied on their two busiest days of the week when a combination of work and commitments for kids activities have them stretched. They use a service like Blue Apron once a fortnight for a lunch or a dinner where they want to cook but want to eat healthy and not think about recipes or shopping. They use Dollar Shave Club for monthly supplies of razors. They install Amazon Dash buttons for washing powder, toilet paper, paper towels, dish washing liquid, and cereal and it all gets delivered. Gradually Amazon influences them through their Alexa to buy more dry goods because the marginal cost of freight is so low the system is cheaper. Convenient and lower cost is a killer combination.

They still go to the supermarket they always went to but slowly but surely the amount they buy there until it is down to 50%. Some families at that level then start questioning the trip to the supermarket and start changing their total shopping habits.

The problem with all this from the major supermarkets point of view is that they don’t really have a strategic response that makes sense because of their legacy model. They cannot abandon the majority of their customers so their model stays the same and their margins get steadily eroded.

If they reduce stock lines then they slide more towards an Aldi/Costco model and they don’t want to go there. If they move to more and more online systems they can sort of compete but they still have to supply their standard customers and that model is based on big stores based in solid catchment areas. If they close one of them or move to a small store model a lot of customers probably end up with their competitor who did not close. So neither wants to be the first to do that. It is a little like the banking branch model problem. Less and less transaction are being carried out in branches but people will not travel far to conduct those less frequent transactions so banks keep branches open for fear of losing customers.

At every step of the way their business model is eroded:

  • Lower customer traffic/less spend per customer reduces cash held in the money market.
  • Lower customer traffic/less spend per customer erodes margins as there are less customers/customer dollars to spread non cost of goods costs over.
  • Lower customer traffic erodes the capacity they have to charge for shelf space. It is a bit like television advertising rates. If you have less eyeballs watching your shows you cannot charge as much for advertising.

The final straw in this nightmare scenario for the major supermarkets may be Amazon moving its vision to applying its impressive logistics and intelligence systems to support a national network of independent specialty shops. This is where the high margin customer of the future, who has already reduced their supermarket purchases as described above, may be headed. If that is the case then the major supermarkets are caught trapped in a legacy business model they cannot get out of and assailed on all sides.

Only 5% of each attack has to be successful. No-one has to destroy them.

Brexit Vote a Fantastic Opportunity

There is a lot being spoken about the vote for the UK to leave the EU but I think it is time for everyone to slow down a bit and take the time to digest what has happened and think about the opportunity. Once when I was young and involved in national agri-politics here in Australia I tried to get four national bodies amalgamated into one (of course orders of magnitude less complex than the UK/EU situation). I lost that vote 17-16 on the conference floor. A wise old hand came up to me later and said “son, that is the best loss you will ever have”. What he meant was that a close yes vote would have emboldened the opponents to undermine any moves to make the vote into reality and caused more problems than it was worth.

The effort was subsequently re-attempted (not by me but with my support) and passed unanimously. I was asked to come back and chair the new body which  has operated successfully ever since. Now the situation in the UK is much more complex but the principles are the same. The vote has a majority and that is how democracy works. However the margin is not large, and while governments have to be elected by a simple majority, making seismic decisions of the type that we are discussing here needs much more support by the people. From a distance the referendum seems to have riven the country more than just a simple 52-48 vote. The leave vote has a clear majority and is entitled to take that in the way that the referendum was intended. However there is a very large minority that disagreed. Within that difference there are significant fault lines:

  • The older people seem to have voted largely to leave while a large majority of those under 24 and under voted to stay.
  • The Scots voted overwhelmingly to stay.
  • Areas with people with a larger percentage of tertiary degrees voted to stay.

 

brexit-big-five financial times demographics

Source: http://blogs.ft.com/ftdata/2016/06/24/brexit-demographic-divide-eu-referendum-results/

There are other differences as well.

Again from a distance,  the leave vote seems to be the combination of a number of sub groups with different concerns including the lack of real democracy in the EU, the effects of globalisation on their communities, the feeling that the political elites have ignored their concerns, issues with immigration, etc. I cannot possibly analyse these in any detail from a distance but I think the real opportunity is to really understand what has happened here and change political party attitudes and policies both in the EU and the UK. What has happened in the UK seems to be a microcosm of significant political disillusionment playing out across the world so we need to take the time to slow down and utilise the opportunity. This will take real leadership at every level and across the political divide, perhaps too much to expect?

In practical terms I think that this means:

Delaying any decision formally enact article 50 to start the negotiations to leave the EU. This is an enormously difficult and long process so the delay of a few months will not affect it adversely. This will give everyone a chance to sit back and think more deeply about what has happened and have calm negotiations.

Then the course can be:

1/ Enact article 50 and go through the process.

OR

2/ Revisit the referendum for a second vote.

Of course re-visiting the vote is fraught with problems. The leave vote can claim they have a clear mandate and it would be a disaster to run a second referendum and have the stay vote win 52-48. That would leave the country riven with deeper entrenched fault lines. Therefore it could only be done if:

1/ There is a genuine attempt by the major political parties to understand the political problems that have created the divide and address them via both domestic and European policy and legislation. This would have to include negotiation with the EU which they may or not wish to do (see EU leaders call for UK to leave as soon as possible ). Another reason for everyone to take a step back and think through things. It may be that negotiations with the UK could be helpful in precluding other problems within the EU.

2/ After that,and only after that there is a clear indication via respected and independent polling that a significant majority (say 60% or better) that they want a second referendum.

For this to be successful the subsequent vote would have to have a much clearer majority.

Personally I favour looking to see if the second referendum can work but the main thrust of what I am saying is that a calm and detailed analysis of what has happened should be the prelude to what happens next. Otherwise the UK risks being affected by the significant fault lines that underlie the votes of various groups. That could cause significantly more problems than staying in or leaving the EU.

As the cliche goes we should never miss the opportunity of a crisis.

 

Paul Higgins

 

 

Note: Before people start commenting about someone from the other side of the world commenting on this I was born in the North of the UK (Oldham, just near Manchester) and still hold dual passports. I still have lots of family there and have visited several time and just this month had family here from the UK discussing the referendum at length. I also have some experience in politics having been President of Country Labor in Victoria here and running for Federal pre-selection twice in regional seats. So I have some experience in the difference between city and regional people and their politics, albeit in a different country. Having said that it should be the thinking that is critiqued.

A Painless Way To Tax?

The tax system is being buffeted in many ways by the new ways the world works. What if we could have a new and painless tax based on governments capacity to create business models that beat commercially owned ones?

In Australia we have a Goods and Services Tax of 10% which currently does not apply for internet purchases from overseas under $1,000 but that will change in 2017,  although there is some doubt of the actual result of that change in reality. Changes to the music industry mean that now that I use Spotify for music and don’t purchase music any more, the GST that used to apply to my music purchases has disappeared. As more products and the way we pay for them has moved from the tangible to the intangible the taxation flows have been affected. If we add the global efforts of multi-national companies to create their profits in low tax countries and the capacity for “digital nomads” to work anywhere in the world. there are multiple challenges to the tax system.

I would like to propose an alternative using driverless cars as an example of significant revenue effects and possible opportunities. In previous posts I have described that if we move to mass scale adoption of driverless cars then it will have massive effects on the global supply chain of cars and their associated service industries. If we project forwards to 2030 it is possible to envisage mass scale adoption of electric driverless cars linked to solar energy and battery systems as the cost of solar and storage continues to fall at staggering rates.

At the first level of implementation massive levels of government revenue disappear. if it is all electric vehicles then fuel excise disappears to a greater or lesser extent (roughly 5% of revenue at $18B). At other levels of government income from parking and parking fines, speeding fines and other traffic offences such as drink driving disappear. As examples:

In Victoria, it was revealed that road safety camera fines, police on-the-spot fines and toll road evasion fines generated $256.9 million, $125.7 million and $109.7 million in revenue respectively, in 2011-12

The city of Melbourne alone relies on almost $90 million in parking fines and parking charges annually. These all disappear with mass adoption of driverless cars.

Now the easy answer (but may not be that easy to implement in a modern world of permeable national barriers, Blockchain financial exchanges, and increased bartering systems in the sharing economy) is to implement a charge per kilometre traveled for every driverless car to replace these income sources. Given modern data recording systems for those vehicles that should be easy to measure.

An alternative is for Government to provide driverless vehicles as a mass public transport fleet tied to the current public transport system. The model that I have in mind is:

  1. Government purchases a large fleet and then allows each vehicle to be its own autonomous corporation programmed just to replace itself in an economic sense.
  2. For those concerned about government running stuff the fleet could be managed by commercial operators or by a group of competitive commercial  operators.
  3. The cars themselves would decide where to purchase energy and where to purchase tires, maintenance, etc. I imagine that this would result in large scale servicing centres that would destroy all the businesses of local petrol stations, repair shops, panel beaters, tire outlets, etc.
  4. If this could be operated in real time then cars would be continually receiving bids for services and demand and supply would regulate themselves.

Other commercial operators could still compete with this system but the government owned fleet would form a base level service in the market that maximises economic efficiency and eliminates rent seekers.

So where does the painless tax come in?

My proposal is that government arbitrages its capacity to borrow money at low rates and lends that money to each car at a higher rate, collecting the margin between the two rates.

If 5 million cars were purchased at $40,000 each  (there were 13.5 million passenger vehicles at the last census in Australia) then a margin of 4% over a 10 year payback period would raise $4 billion a year. If the service was a lower cost than the commercial models could provide then that is $4 billion in tax the government does not have to find and as a customer I feel no pain because the overall system is saving me money. Higher margins may be possible if we take a derailed look at the model.

If all driverless cars had a per kilometer charge as well then money raised would be higher and all entities would be competing on a level paying field.

I think the idea is worth exploring in more detail and it would be interesting to think where else it could apply in the economy. Of course it would take a huge mindset change for government in relation to their attitude to debt

 

Paul Higgins

 

 

Emotion Farming and The Reality Trap

 

facebook abc milk dairy campaign farming

There is a bit of a media frenzy around the plight of dairy farmers with the recent price drops by Murray Goulbourn and Fonterra here in Australia (Facebook support group for branded milk goes viral, image shared more than 20,000 times) While I am empathetic with the terrible situation that dairy farmers find themselves in I am concerned that the short term sugar fix of these sorts of campaigns will make people feel better and then be able to ignore the realities of the situation while the media and social media wagon rolls on to the next issue.

Lets look at some facts

  • Milk production in Australia in 2014/2015 (the last full financial year) was 9.731 billion litres (yes you are reading that right, approximately 421  litres for every man woman and child) and the majority of that was produced in Victoria (66.4%).
  • Per capita consumption of liquid milk was 105 litres (so approximately 25% of all production)
  • Of that consumption only about half goes through supermarkets (information via Dairy Australia) and about half of that is in non branded product rather than in existing branded product.
  • So roughly 6.25% of milk produced in Australia goes through non branded supermarket product.

So if we were wildly optimistic  and we could change 10% of that back to a branded product (and I am almost completely sure that would not be achieved even in the short term) that would mean that effected a change of 0.625% of the total production or 60 million litres of milk. Lets be even more wildly optimistic and assumed that 50% of the change resulted in an extra 20 cents per litre that went completely back to the farmers  for all of the product (Coles has announced it would develop a new milk brand which would return 20 cents a litre to a fighting fund aimed at helping dairy farmers facing devastating cuts in their payments from processors).

That would result in an extra $6.08 million going to dairy farmers. A welcome number but a net increase of 0.0625 cents per litre across all milk production. That is an extra 1/16th of a cent per litre increase in the price paid to farmers. To put that another way just under 1 cent per cow per day (1.74 million cows in the herd).

So while I am fully supportive of the highlighting of the issues the grim reality is that they are unlikely to effect long term significant change and the entire market needs to be looked at.

So given all of that what needs to be done

1/ Alter the crazy payment system 

All of us in business would love the current set up for the dairy companies where they can go back to their (mostly captive) suppliers and tell them “hey we did not make as much money as we would have liked so we are getting back some of what we paid you so we can restore our bottom line””.  Imagine being a shop in a shopping center and being able to go back to the center owner and say I have not made my profit target so you have to refund part of my rent for the last 12 months. Or being a small building company and going back to your concrete supplier and doing the same thing. You would be laughed at. Why do dairy companies get to do this? Part of the reasoning is that it allows them to provide more stable pricing. Hasn’t that gone up in smoke. This will not change the long term average pricing but it will avoid the sort of current retrospective clawback that is occurring which hurts people in much larger ways.

2/ Continue to drive towards value added and branded product owned by farmers and companies that share gains with their farmer suppliers

While there have certainly seem to have been problems with the approach that Murray Goulbourn has taken the overall strategic direction is correct. If you want to continue to supply commodity products you will get commodity prices. So you have to create products that create higher margins by providing greater value to the customer. No-one should pretend or believe that a drive towards value adding  is easy. It is particularly hard for farmers who have been used to having a primarily production driven focus and some of whom believe that the companies who buy their product have some sort of obligation to do so because they are producing it. Having been on the board of a farmer owned company that followed this strategy, partly because I banged on about it for years, I can attest to the difficulties of this change in practice. The good thing is that it does not have to be a majority of your product. You can still be part of commodity markets to drive economies of scale that keep your costs low while 10 or 20% of your product significantly increases profits. A word of caution though, a different group of people have to be involved in the commodity part and the value added part. They require a completely different mindset.

3/ Increasing use of technology to drive transparency

This follows on from my second point. It is fine for consumers to buy branded products but if those products are owned by a company that pays it farmer suppliers commodity rates then there is no benefit to the farmers. The use of data, and social media systems to demonstrate that the brand treats its suppliers differently can then drive brand loyalty. The farmers also have to change though. A partnership where both parties drive towards customer value is necessary for this to work. That will provide long term change rather than a quick social media driven hump.

4/ Price contracting/hedging systems for farmers

If farmers want to complain about the prices they receive and or the volatility of them perhaps they should take more control of that pricing. We already see this used widely in other agricultural industries with grain farming and marketing being  a case in point.  Then they can complain about themselves. However the reality is that even done well this is likely to only smooth out the volatility. Just as the vast majority of people believe that they are an above average driver  It is a fool’s game to believe that everyone can beat the market.

 

All of this means a long term grind towards change rather than a quick fix. That is the reality of agriculture and agricultural investment at the farm level.

Addendum May 26th 2016

Talking to farmers this week from outside the dairy industry this week (I am at an Australian Ag conference) several things are clear:

  1. They are sympathetic to the plight of dairy farmers.
  2. They cannot believe the crazy pricing system (see above) but believe that dairy farmers have to hold some responsibility for agreeing to it.
  3. That you can’t beat the market.
  4. That they believe that the supermarkets are actually rubbing their hands together in glee with the social media campaign because they are selling more higher priced branded product where they make a bigger margin. Every farmer I have talked to believes the supermarkets are making more money and little or none of that money is going to dairy farmers.
  5. That if farmers want to get better margins they have to own the assets that provide branding and value to customers or they will continue to ride the ups and downs of the commodity cycle.

Change will not come quickly if at all.

Paul Higgins

Is it Time for Ethical Taxable Investments Led by Consumers?

An article in Bloomberg on April 6th ( The Sharing Economy Doesn’t Share the Wealth ) discussed the nature of the tax arrangements for the new “Sharing Economy” companies including:

“Uber processes payments for rides outside the U.S. through the Netherlands, a company official testified at the hearing in Australia. Last fall, Fortune reported that, according to presentations to investors, Uber had assigned its IP to the tax haven of Bermuda, leaving less than 2 percent of its net revenue taxable by the U.S.”

Tax officials are concerned that as these companies move to profit tax revenues will be lost.

In a related response to the Panama Papers on the ABC’s Drum entitled Are the Panama Papers really such a scandal?  Chris Berg of the Institute of Public Affairs made the interesting claim that:

Tax havens perform an important function by putting downwards pressure on domestic tax rates. They are the global economy’s escape valve – preventing sclerotic Western welfare states from pushing taxes up and up.”

While this is a clearly arguable position a counterpoint was put up by commenter Forrest Gardener:

“Strange. I would have thought the reverse would be true. Nations must tax more to compensate for revenue forgone”

I am fair and square in that camp. Surely if everyone pays their fair share of tax then the average tax burden on everyone is lower.

But what to do about it? There has been a huge and meandering debate about tax policy in Australia over the last few months with lots of things being ruled out and I think that Chris Berg makes a good point when he says governments and oppositions are better at putting out press releases about cracking down on  this sort of behaviour rather than actually collecting the money.

I am very cynical about changes from governments working given the huge incentive companies and people have to game the rules I have a proposal for businesses selling directly to the consumer, especially those that rely on media, social media, and word of mouth the thrive. We, the consumer must simply insist that they pay tax on revenue gained in our country or we will move our business to those that will.

There is a precedent for this in the UK :

Starbucks moves to UK in tax climbdown following threatened consumer boycott

but maybe we need to go further.

I am a big advocate for social enterprises run as best in class businesses having a commercial advantage over standard corporate models. If a social enterprise business provides me a service or product as good as its competitor and does some social good at the same time then I will buy their product every day of the week over their commercial competitor’s offering.

I think there is a definite space for an ethical investment fund supporting such businesses. If a competitor wants to establish itself against Uber in Melbourne and guarantee it will pay all relevant taxes in Australia on revenue gained in Australia I will invest in it and transfer my purchases to that business – with the caveat that it must provide a great service.

We must counter the incentive for tax avoidance with a larger incentive – customers!!

Who wants my money?

 

Paul Higgins

 

Who is Australia’s Donald Trump?

I recorded a podcast yesterday with John Briggs at Technotopia (the podcast should be up by Sunday Australian time). The discussion was around a number of future stories and we touched on the nature of work and what was happening in US politics which got me thinking a bit more deeply about Australia.

Trump Christie from imgflip

Image source: https://i.imgflip.com/zx3rm.jpg 

A lot has been written about Donald Trump over the last few months including this mornings revelations that The Economist Intelligence Unit had rated a Trump Presidency as a global risk ( The Economist dubs Trump a ‘global risk factor’ — but not for the reasons you might think ) Some of the analysis has centered on fringe elements of his supporters rather than the core reasons that most people are voting for him in the Republican primaries.

It is my view that the core reason that people are voting for Trump is a general dissatisfaction with the professional political class. A large part of that dissatisfaction is driven from a significant minority of people in the United States that either have gone backwards economically or or stagnated as the winds of change have swept across the world. This includes globalisation, outsourcing, and the developments in automation that are only just starting. The changes are also a product of systems and decisions that benefit the well off and leave others behind. These changes have resulted in headlines like:

 Now these are not sudden changes, they are slow burn changes and as we are now learning political and social events can build slowly until they reach a tipping point and it is very hard to pick that tipping point. The Trump political insurgency and the sudden Arab Spring events are cases in point. While we do not have the same level of economic issues or disparity in Australia it is clear from these sorts of events that we need to be looking well into the future when we think about the issues.
In Australia we have certainly had protest votes in the past. People have voted for Pauline Hanson in particular, One Nation as a party, and more recently Clive Palmer. These sorts of movements have fallen apart because of a combination of there not being enough critical mass and through the incompetency and infighting of the people involved. However I do believe that there is a scenario where a successful Australian Donald Trump could emerge.
In my view we are on the verge of an unprecedented wave of change and volatility and Australia could possibly face a perfect storm of three factors.
Firstly there a significant problem of the economy in China with very high debt levels which have rapidly built since the GFC:

China cannot escape the economic reckoning that a debt binge brings

and Australia is very dependent on our trading relationship with China as the falling revenues from commodity prices have shown.

Secondly we seem to be moving towards a significant re-ordering of the energy systems of the world with huge leaps in renewable energy cost structures and investment. That impacts on revenues from coal and gas. A wild card here could be increased action on climate change if accelerated climate change occurs.

Thirdly we are seeing huge advances in Artificial Intelligence and Robotics and this is likely to impact on jobs in a significant way over the next ten years. Mckinsey has released some preliminary findings from a report they are writing on this issue and one of the conclusions is that:

about 60 percent of occupations could have 30 percent or more of their constituent activities automated

This is a huge change that will sweep across our jobs landscape and there is a very real chance of what is termed a “hollowing out of the middle”where there will be very highly paid jobs for those that can do them, very low paid jobs for those with few skills and very few jobs in the middle.

If all these three come together with low commodity prices affecting our resource dependent economy and middle range jobs disappearing at the same time we could have the sort of social settings which breed political revolutions.

So the answer to my question is I don’t know who Australia’s Donald Trump is but there is a very real possibility that we are breeding the conditions for one to emerge.

We need to be carefully thinking through how our economic and social systems work and avoiding both high levels of disparity but also people going backwards economically. If technology does in fact start destroying jobs more quickly than it creates them then we need to be rethinking what work and the economy are all about in a “Post Normal”world. New Zealand is already starting:

New Zealanders want to give everyone a ‘citizen’s wage’ and scrap benefits

 

Paul Higgins

 

Agriculture, Technology and Future Careers

Paul Presenting at Bendigo November 2015 Teachers Agriculture and Career Opportunities

A couple of weeks ago it was my privilege along with several other speakers to engage with a roomful of teachers to talk about future possible careers for their students in Agriculture based around technology. The overall message was that the future was very bright for those with the passion and sills in technology to have well paid and fulfilling careers in the regions.

You can access the presentation at :

Agriculture, Technology and Careers 

The key messages were:

  • That more and more value is going to be created through data and technology in agriculture. For example Merrill Lynch has released a report saying that the use of agricultural drones are projected to create 100,000 jobs and $82 billion in economic value over the next decade in America alone. This prediction n terms of where drones will be used is seen strikingly in the following graph:

drone predictions for agriculture in the USA

source: http://www.marketwatch.com/story/how-drones-will-drastically-transform-us-agriculture-in-one-chart-2015-11-17 

  • Because of this there is going to be a massive demand for people with the skills to create and supply services into agriculture.
  • That because many of these services can be supplied via the internet or via mobile phones there is both an opportunity and a risk. If we can build a capacity regionally then we can both defend ourselves against outside providers and provide services in other countries and regions.
  • That the skills will be a combination of technology, the capacity to collaborate, and the understanding of agricultural business models.
  • The skills are also transferrable. So for example if we want to maintain aged care services at the highest possible level in regional communities the capacity to use predictive data and healthcare data will be vital. Therefore developing the skills opens up far more career opportunities than just agriculture. On top of that our ability to maintain viable regional communities will be in part dependent on these skills and I would much rather have people in our communities supplying the services than money flowing out of the community to service providers elsewhere.
  • That we need three things. Passion, market and skills.  I think that it is obvious that there is a market but if you have a market and no skills you cannot provide the necessary services . And if you have skills and market but no passion you will burnout. Therefore we need to help equip those individuals with the passion to be involved with the skills to support that passion.

Following the day there was a significant increase in the number of teachers who saw possibilities for their students in agriculture.

I would like thank the Bendigo Tertiary Education Partnership  and Community Leadership Loddon Murray Inc,and especially Kerry Anderson for inviting me along.

I believe that there is huge potential in our regions for careers around technology and we need to grasp that opportunity now.

Beans, Uber and the Post Office

This is the second post on social media versus messaging and its effects on suppliers into the supermarkets and business relationships with customers in general. The first one can be read HERE

As applications like Facebook Messenger or WeChat or Slack ( Slack Improves Slash Commands So You Can Call A Lyft And More From Inside Slack) move to have more and more activities and transactions inside their apps it is changing the nature of how people use their mobile devices and where they spend their time. From the applications point of view it is a very smart move because the more time that people spend inside the apps the more they can serve ads in their system . In addition if they become the gateway for all sorts of suppliers to the consumer and tie that contact with identification and other social data they can take a cut of all transactions through their application. A dual income business model.

The example that has been used to describe the Facebook Messenger changes is that of booking an airline flight which then creates a permanent one on one connection between the airline and then purchaser through which they can send boarding passes and notifications. Done in the right way and with subtle advertising approaches this link minimises friction for the consumer and provides information for the seller. An ideal win win.

If I move back to the subject of suppliers into the supermarkets the conversation has to be different. Either the product has to be different or the way it is delivered has to change in a way that reduces friction or reduces costs, or preferably both

Take me for example. As part of my preparation for the summer triathlon season I have been mostly pursuing a slow carbohydrate nutrition plan which involves replacing carbohydrates in bread,pasta,rice,potatoes, etc with complex carbohydrates and proteins. It also means much more salads and vegetables. As a result I have been eating a lot more canned fish and canned beans. I am not that particular when it comes to the brands of those cans that I buy and generally do a weekly stock up and buy what is on special that week.

Now if one or more of those suppliers is able to communicate with me inside my messaging app and give me a quick option on a weekly delivery or a tap on quantity option then they have a relationship with me that bypasses the supermarket and may tie me to their brand

Having solved that problem and reduced the friction they then have  a delivery problem. I have long been a believer that Uber is a long term data play rather than an alternative people transport company and that they will use the data they are gathering for all sorts of uses including package delivery. In the long term that will be automated between driverless cars but in the shorter term they are still options. Once Uber has enough data they can offer package pick up and delivery options to drivers based on their known patterns of movements.

If a driver is heading home anyway and can pick up 5 packages and deliver them near their home for an extra income that will be an attractive proposition to them and a low cost delivery system. The reason I put the Post Office in the title of this post is that the Australian Post Office (along with others all around the world) is struggling with its business model and profitability in an era of reduced letter postage and increased parcel delivery competition. Its major strategic assets are its locations and its special place in the hearts of the community. A partnership with Uber using the post offices as a pick up and drop off location would provide an extra income stream and also drive foot traffic into their locations. Customers could pick up their packages or the messaging app could sense that they were home via GPS and ask if they want their package delivered now.

The key question in all of this is whether the logistics costs of a personalised pick and pack system and delivery system can reduce costs to the end consumer compared to a direct delivery service into distribution centres , taking into account the margins of the supermarkets and the other costs they impose on suppliers.

The secondary question is one of a cultural change. I know from personal experience in the food business that a big cultural change is required to move from a make it and ship it out culture to a customer focused culture.

The changes to our digital tools throughout the supply chain make these questions worth asking and exploring.

 

Tim Tams and the Social v Messaging Battle

A few weeks ago I did a presentation for the managers of a major global food manufacturing business on digital tools and what they might mean for their business. One of the major topics for discussion was using digital tools to connect to the consumer in order to try and level the playing field between food suppliers and the major supermarkets.

I was watching the ABC news here in Australia last night and there was a story about that iconic Australian biscuit the Tim Tam being pulled from the shelves at the major supermarket Coles because the supermarket was refusing to pay a higher price.

tim_tams

source: wikipedia

The story is a microcosm of the one that is being played out across the spectrum of products in Australian supermarkets and is now moving into new territory. You can see more detail on the story at:

Coles pulls Tim Tams from shelves as Arnotts price war goes public

In the end Coles relented because there is so much demand for Tim Tams. There are only a handful of products that can afford to go head to head with the major supermarkets in Australia because their hold in the mind of the consumer is so strong. Tim Tams is one, Coca Cola is another, Huggies nappies and Pal dog food are on the list. The rest are in a perpetual battle on price and shelf space where the supermarkets hold the whip hand because they control the gateway to the consumer.

The supermarkets hold that gateway and also now hold masses of data connected to loyalty cards and credit cards so they have a a continual view of what is working and what is not. The standard way of the suppliers to gain a greater foothold has been branding and marketing campaigns that try and catch the mind of the consumer.

Over the last few years social media has been the added tool that many have used to try and capture the hearts and minds of the consumer. That does not always work as evidenced by the disastrous taxi social media campaign (#YourTaxi campaign backfires as passengers share horror stories) here in Melbourne:

@yourtaxis Every single woman I know has, at some point, been sexually/verbally abused by a cabbie & now every single woman I know uses uber

.@yourtaxis Got kidnapped by a driver who wanted me to pay more than was on the meter. Had to call police to pull us over.

.@yourtaxis last time I caught a taxi he had no idea where he was going and stayed on his mobile the whole time. Uber from now on

Good and bad news is that messaging apps like Facebook Messenger and WeChat are moving heavily into this space as described in this great Wired article Facebook Messenger: inside Mark Zuckerberg’s app for everything .

Essentially Messenger seems to be trying to emulate the WeChat model of putting services inside the app like payment systems, airline bookings, etc in order to keep users inside the app and therefore in their ecosystem rather than elsewhere in the mobile or internet ecosystem. This is both good news and bad news for suppliers to supermarkets. The good news is that the way the apps are configured is creating a much closer one to one relationship with a wider range of customers rather than just communicating with “fans” on social media. The bad news is that if they go down this route then they will be swapping one gateway controller for a different one.

Now the supply of supermarket items is much different than the supply of airline booking services as described in the Wired article. Suppliers can think about product changes or they can reconfigure the delivery system.  In my next post I will put forward some ideas on how that might happen.

You can read that at:

Beans, Uber and the Post Office