Questions on the Future of Work

Mckinsey has released a long awaited (by me anyway) report on the future of work entitled A Future that Works: Automation, Employment, and Productivity. It is a very interesting look at the technologies which are affecting the future of human work. Every business and organisation should read it in full.

Mckinsey takes a distinctly different approach than the much discussed Frey and Osbourne Oxford report on the susceptibility of jobs to computerisation.

This difference can be best seen in the following graphic from the report:

mckinsey-work-report-2017-exhibit-e1-18-separate-activities-mapped

Instead of looking at what jobs might be replaced the team at Mckinsey have examined all the activities that each job in the USA job market entails and then looked at the various capabilities for each of those activities. They have then mapped those activities against the possible timelines of those activities being able to be performed by technology.

This is important because except for very limited cases technology replaces activities rather than whole jobs.

From this approach Mckinsey have created various forecasts for both the types of activities and the sectors of the economy as shown in the next graphic which shows their view about the ability to automate those activities.

mckinsey-work-report-2017-exhibit-e4-different-sectors-mapped

Taken in aggregate their predictions are shown in the next graphic which I have annotated

mckinsey-work-report-2017-exhibit-e6-adoption-scenarios-annotated

RED: Their median forecast that 50% of all current activities will be replaced by 2055

BLACK: The rapid adoption forecast that 50% of all activities will be replaced by 2035 (only 18 years away)

GREEN – The extrapolation of the rapid adoption forecast from 2035 that shows that over 90% of current activities will be replaced by 2055.

Mckinsey also states that:

 “According to our analysis, fewer than 5 percent of occupations can be entirely automated using current technology. However, about 60 percent of occupations could have 30 percent or more of their constituent activities automated”

Apart from praising Mckinsey (which I do not normally do) for creating such detailed and interesting work, and also in highlighting the inherent uncertainty in any forecast, this raises several interesting questions in terms of impacts and change.

 

From an organisational perspective those questions include::

  1. Setting aside the changes the technology makes to our business models and speed of doing business if 20-50% of activities are going to be replaced over the next 18 years how are we going to lead our people through the continual change that is going to be required? If the average is 50% then many people will have far more of their activities replaced.
  2. If technology takes over more and more of non-routine activities in our organisation what are the skills we are going to need?
  3. If technology pushes people out of the lower skilled activities in the whole economy how many people in the whole community are capable of carrying out the higher skilled activities we will need our people to concentrate on? Will we be in an even fiercer fight to recruit the people we need?

An article in the New York Times on January 30th 2017 describes When the German engineering company Siemens Energy opened a gas turbine production plant in Charlotte, North Carolina:

some 10,000 people showed up at a job fair for 800 positions. But fewer than 15 percent of the applicants were able to pass a reading, writing and math screening test geared toward a ninth-grade education

Eric Spiegel, who recently retired as president and chief executive of Siemens U.S.A. said “People on the plant floor need to be much more skilled than they were in the past. There are no jobs for high school graduates at Siemens today.”

From a societal point of view this raises questions of:

  1. Are we heading into a period of increasing structural unemployment?
  2. How will we design an education/learning system which gives your young people the skills they need to work in the changed economy and our post school/university people the capacity to re-skill?
  3. If education is changing to be more focused on re-skilling people for jobs how do we still supply the wider general benefits of education?

Part of the answer to the second question is contained in the New York Times article where it describes the companies getting heavily involved in educating and training people with guaranteed jobs at the end of the cycle, and just as importantly no student loan debt. This was mirrored in my conversation in a trip to Austin Texas last year. Austin is growing at an enormous rate and part of the reason is that some of the major tech companies have realised that if they do not get involved with students before they graduate they may never get to hire them. So they are moving major parts of their operations closer to the Universities with strong reputations in the skills they need. University of Texas Austin happens to be one of those. Students are becoming heavily involved and supported by the companies.

When I work with clients on these issues they should be focused on the effects on their business or their organisation but the conversation always turns to the wider implications for society.

The techno-optimist argument is that technology has been destroying human jobs for hundreds of years and we have always created new ones. That is partly because we have created new capabilities that need people, but also because we have reduced the costs of inputs to make otherwise uneconomic business models viable. Mckinsey argues in their report that their median forecast results in job losses that have already been experienced in society as we reduced the human employment levels in agriculture, and then again in manufacturing. This is true if the pace remains the same.

On top of that they argue that the productivity improvements are required because we are losing the huge contribution that population growth rates have contributed to economic growth over the last 100 years. That is a good argument.

It is a brave futurist who says this time is different and it is completely plausible that the combination of new jobs being created, and the demographic change we are experiencing, particularly in developed economies will mean that we will still have close to full employment. It is also plausible that:

  • The pace of change will be at the rate that fulfills the rapid adoption scenario that Mckinsey has envisaged, increasing the rate of job losses above previous experience.
  • That as technology pushes people out of a whole range of human capability jobs we will find that a significant minority of people do not have the ability to carry out the jobs that are created.
  • That a significant group of people that have the abilities will be left behind because they cannot gain the skills required to harness those abilities.
  • That the combination of the two groups will either have to work for very low wages in order to not be replaced by technology or be permanently unemployed.

That is a recipe for societal unrest way beyond what we have seen in the rise of Donald Trump and Marie Le Pen. If the political response to the issues of the people that have expressed their frustration at the current system is to promise a greater share of the benefits of the economy and a genuine attempt to do that is derailed because of technology changes we could be in for a very bumpy ride indeed.

 

 

 

 

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.

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

 

 

 

So Your Daughter Wants to be a Motor Mechanic

Myself and Christopher Rice (@ricetopher) have started writing a book on the life and work skills that a child entering their first year of high school right now will need in 15 or twenty years time. There is a lot of stuff around about the disruptive effects of technology (especially robotics and artificial intelligence) will have on work and the economy over the next twenty years but we wanted to focus on the conversations that parents are having with their teenage children about these things right now.

There are a large range of issues to consider and we will be posting examples of our thinking to this site over the next few months as we write.

As an example of this consider the situation where your sixteen year old daughter or granddaughter is considering becoming a motor mechanic. What advice would you give them.

queens auto mechanic female via nydaily news amd-audra-fordin-jpg

Picture:NYdailynews

In order to train as a motor mechanic the individual concerned must think there are reasonable chances of good employment as well as having a passion for mechanical things. Due to the length of training you would want those prospects to be long term. The prospects for a motor mechanic in 15 years time are highly dependent on a range of interacting factors:

First of all it is clear that robotics and computer technologies have had their greatest impact on routine manual and cognitive (sense making/ intelligence) jobs that can be easily automated. Think robots in car manufacturing plants, online accounting packages, or websites that now sell all sorts of travel products and services.

Secondly it is now obvious that technology is now pushing into areas that have much higher requirements for intelligence and creativity and are less routine and therefore less easily automated. Examples include driverless cars, journalism (An NPR Reporter Raced A Machine To Write A News Story. Who Won?), specialised manufacturing (Cheaper Robots, Fewer Workers), and even senior management (Here’s How Managers Can Be Replaced by Software). Recently there was even a story about machine systems rapping (Machine learning algorithms can ‘bust a rhyme’ better than humans by 21%).

Thirdly it is in the interests of business to make most work more routine because this affects the balance of power between employers and workers and therefore costs. Routine jobs require less skills and therefore on average wage levels will be lower. If wage levels are high in routine jobs they are under more risk of being replaced by technology because the economic case is better.

Fourthly there is a risk of overall disruptive change in the industry you choose to work in.

So let’s look at that from the point of view of a teenage girl thinking of becoming a motor mechanic.

Cars have clearly become more complex over the last decade and are becoming travelling computers and software platforms as much as they are a form of transport. To the extent that John Deere and GM have recently asserted that you don’t own your vehicle, you only purchased the right to use it in order to protect their software(GM says you don’t own your car, you just license it). Tesla updates its cars via software releases over the internet.

Generally one would think that increasing complexity would mean that the skills of the mechanics would have to rise and therefore it would be a good job to have. However there are several factors pushing this in the opposite direction:

  • The software systems are so complex that the job of monitoring and managing them is being increasing taken over by automated machinery that is moving towards a plug and play model that both diagnoses and fixes the car without human involvement.
  • Being a motor mechanic for specific brand of cars is essentially working in a closed system. The cars are all manufactured to a specification that is well known and understood. This means that the system you are working in is much more open to standardisation.
  • Companies such as BMW are introducing augmented reality systems that are able to recognise the car they are looking at and supply instructions and videos and augmented overlays that assist mechanics in doing their work. With massive investment and development of augmented systems around the world for a multitude of uses it is likely that these systems will rapidly improve. These sorts of technologies are very useful but they tend to lend themselves to de-skilling the workforce. If a mechanic is able to follow detailed and useful instructions overlaid on to their field of vision then there is less need for training. Less training means lower skills and easier replacement by others. Both indicators of lower wages

In the longer term the advent of driverless cars will greatly affect the job of the mechanic. There are various views on the timelines for the full scale implementation of driverless car but we view it is inevitable and likely within 15-20 years.

Currently our cars are idle about 94% of their life. The full implementation of driverless cars will mean that a large percentage of cars will be used far more as they move from transport job to transport job as de facto public transport system. Therefore the standard car is likely to do 60-100,000 km a year instead of the current 15,000 km. It also makes sense as a business model for driverless cars to be less personalised than in the past as we move from ownership to rentership[1].. Therefore very large scale model runs of cars that have greater durability and can be easily and systematically maintained make more economic sense. We will probably design cars that have lifetimes of 500,000 km but will still only last 6-8 years.

That means that the processes of fast food franchises/manufacturing plants will be applied to car servicing. This will include modularised systems that can be robotically swapped in and out of cars on a production line, with other servicing carried out on the same line Therefore skilled mechanics will be less in demand and will be replaced by a sort of basic manufacturing job.

Therefore our view is that the future job of motor mechanic for your daughter or granddaughter is much less promising than it seems currently. We would recommend that you steer that mechanically minded teenager more towards the field of robotics and drones which show much more promise and likely demand, but more on that later.

We would welcome your comments and debate

Paul Higgins and Christopher Rice

[1] A term used for moving from a system where we own most things to a greater percentage of the physical products we access being rented rather than owned.

Is Bitcoin Technology Accelerating Faster than Anticipated

The NASDAQ has announced that they are testing use of the Blockchain technology that underpins the programmable currency Bitcoin.

On Reddit 3 days ago:

“If the effort is deemed successful, Nasdaq wants to use so-called blockchain technology in its stock market, one of the world’s largest, and potentially shake up systems that have facilitated the trading of financial assets for decades.

“Utilizing the blockchain is a natural digital evolution for managing physical securities,” said Nasdaq Chief Executive Robert Greifeld. He said the technology holds the potential to “benefit not only our clients, but the broader global capital markets.”

Nasdaq will start its pilot project in Nasdaq Private Market, a fledgling marketplace launched in January 2014 to handle pre-IPO trading among private companies. The platform has more than 75 private companies signed up, according to the company.

Private companies typically handle sales and transfers of shares with largely informal systems, including spreadsheets maintained by lawyers who verify transactions by hand. Nasdaq wants to replace that process with a system based on bitcoin’s blockchain technology.”

The Blockchain technology allows transactions to occur between two parties who do not know each other without a trusted intermediary between them.

As an example in presentations and workshops I use betting on a football game with someone you do not know. That really doesn’t happen now because how do you know they will pay up. So if you want to bet on a football game you either bet with friends or use a commercial betting agency. Those relationships provide the required trust.

However you could use the Blockchain technology to program your bet into the system and the programming includes scanning the internet for the game result and paying out on the result. The money to do this would have already been locked in the Bitcoin (or other system) currency that you own. So you can make the bet without a trusted intermediary.

Immediately this disrupts existing betting agencies but this also applies to a whole range of business models including as we can see from the NASDAQ announcement the stock market.

The initial experiment by NASDAQ makes sense because it is dealing with a sub- market that is currently clunky.

There are lots of issues still to be sorted out. In the betting example above one of the problems is the consumer standardisation of the process. The wild fluctuations in the price of Bitcoin and other currencies also means a lack of confidence in the bet amount. However we are already seeing hedging services filling this vacuum.

The NASDAQ announcement as surprised me a little. The Blockchain technology has been on my radar for a while but it is accelerating faster than I expected. Get ready for a wild ride.

Addendum: 

The again maybe I should not be that surprised. It is a general rough rule of thumb in technology adoption that a technology has to be around for twenty years before it becomes mainstream. As the history of cryptocurrency page on Wikipedia notes:

“In 1998, Wei Dai published a description of “b-money”, an anonymous, distributed electronic cash system.[17] Shortly thereafter, Nick Szabo created “Bit Gold”.[18] Like bitcoin and other cryptocurrencies that would follow it, Bit Gold was an electronic currency system which required users to complete a proof of work function with solutions being cryptographically put together and published”

Welcome to the future.

Paul Higgins

For other interesting pieces on Bitcoin and the Blockchain see

Why Bitcoin Could Be Much More Than a Currency – Technology Review

After The Social Web, Here Comes The Trust Web – TechCrunch

The Age of Cryptocurrency: How Bitcoin and Digital Money Are Challenging the Global Economic Order – Book on Amazon

The Smart Business Model Play in Solar Energy Solutions

In conjunction with the announcement by Tesla on April 30th that they are supplying home battery storage systems (Tesla launches a stationary battery aimed at companies with variable electricity rates and homes with solar panels.) Solar City in the USA has announced that

Using Tesla’s suite of batteries for homes and businesses, SolarCity’s fully-installed battery and solar system costs are one-third of what they were a year ago

Just think about that for a moment. A model which has dropped in price by 67% in 12 months. That is disruption on a major scale.

The solar panel business and the battery storage business is likely to be a continually brutal Darwinian space and require huge capital to supply the necessary scale because of the structure of the technology and the cost reductions that are occurring.

This raises the question of what is the smart play in this space and I think it is in staying away from the panel and battery technology space and playing in business model innovation at the layer above that.

There has been considerable comment on what is happening in the cost curve reductions in solar panels and battery storage including:

Why Moore’s Law Doesn’t Apply to Clean Technologies

and a counterpoint from one of my favourite analysts/writers Ramez Naam:

Is Moore’s Law Really a Fair Comparison for Solar?

who embedded the following graphic from Nature Climate Change

Nature-Climate-Change-Batteries-Cheaper-than-2020-Projections-800x488

looking at the falling prices in battery storage.

I think both articles make excellent points but the main issue is the cause of price change over time which has been 60% annually for transistors and 14% annually for solar (over 37 years) according to Naam. Analysis of the two articles indicates that the change in transistors has been far more driven by technological innovation while the pace in solar has been more by the classic cost learning curve and move to scale.

Which brings us to the smart play. My view on the key drivers when thinking about business strategy:

  1. Just as many solar manufacturers have bitten the dust over the last decade the same will apply to battery manufacturers and start up battery companies in the next decade, as well as being a continuing issue in the panel industry.
  2. One of the main problems with Lithium Ion batteries is the charge and discharge cycle lifetime. From a cost per kWh storage point of view the shorter the life cycle then the higher the cost as the initial capital costs have to be depreciated over less energy usage. Therefore alternative battery storage options have to be a key competitor in the space. There is lots of investment going on in technology development. So to win you either have to have the capital backing that companies like Tesla boast or pick the right technology and take the development risk.
  3. Particularly at a household level the costs are related as much to installation and deployment model as to cost of the technology (just as transistors are only a fraction of smartphone or tablet costs).
  4. At the household level adoption issues beyond costs will also be critical.

So while there will be clearly winners in the panel and battery space the risks and capital required are enormous. There are better opportunities in deploying innovative business models in the space including:

  • Models for landlords that get around the issues of the landlords bearing the capital costs and tenants gaining the cost reduction on their power bills. This includes leasing and income sharing models driven by algorithms.
  • Efficient and low cost installation models that drive down the costs of installation and maintenance.
  • Financing models that allow installation for people that otherwise could not afford installation.
  • Community models that integrate use of the grid into distributed generation, storage and consumption models that reduce costs to consumers while improving the income for local generators and renewable energy systems

There are parallels for this in other sectors. The sports clothing company Under Armour is pursuing a strategy for fitness apps to complement its sports clothing sales. That strategy is hardware technology agnostic in that it integrates with a range of technologies that users are adopting. This means they do not tie themselves to any particular hardware solution and avoid riding on top of a technology that fails.

That is the smart play here

Paul Higgins

 Full disclosure: I have recently worked for the sugar milling industry here in Australia on energy transition scenarios. I may in the future have a financial interest in community models.

Major Disruptors of the Next Decade Section 3 – The Uber Pivot

This is part of a larger series on major disruptors. You can see the previous post in the series at:

Major Disruptors Section 2

The posts so far have focused on both the gains to be made from driverless car technology and the disruptive effects of that technology on various industries and landscapes. The next post was supposed to be on opportunities from driverless cars rather that disruptions. That post will be along soon but meanwhile lots of people have been asking me about the Uber business model in relation to driverless cars.

Uber has worked by displacing the taxi industry to a certain extent by harnessing unused capacity in vehicles in our communities but also by bypassing regulation and maximising the use of application and location technology. Given that the company has been valued at US$18 billion according to its latest funding round, (Taxi app Uber valued at $18 billion in new funding round) and my view that driverless car technology might be fully implementable in 10 years the question has been how does the company valuation make sense when the model is likely to be completely wiped out?

Firstly I think that the business model does have some short to medium structural problems. It is highly possible that the taxi/driver based car system is the one that will be initially replaced in the implementation of driverless cars. If this becomes clear then I think that Uber will have trouble retaining drivers and gaining new drivers in the transition period before the implementation period becomes practical. Who is going to invest in a vehicle or throw in their job, or turn down a job if they are likely to be replaced in one or two years. This is is similar to the problem that the car manufacturing industry will have close to a full scale implementation that I mentioned in my initial post.

The second issue is one that a lot of companies are facing right now and more will in the future. In a world that is changing more rapidly and where disruptive business models or technologies can turn up from anywhere how do you maintain a strategy and a profitable business model that has longevity? Market valuations are supposedly based on the forward view of cash flows (market irrationality aside). In a world where you business model only lasts for 10 years or less how do you maintain a valuation, especially if those cash flows are negative while you rapidly expand? The only way that Uber can do this is a long term vision of pivoting their business model significantly and that model has to be one of being a significant player in driverless car models. In the meantime they have to maintain a profitable or funded model that makes sense to people. In the longer term the game has to be one of using that platform to accrue a huge amount of data and expertise around customers and their travel requirements. It may seem crazy to have a 10 year plan to expand to hundreds of cities just to create a new business in the future but that is what is necessary in these times for lots of businesses. To me it is the only way that the current valuation makes sense.

 

What is your business model/strategy to deal with these sorts of issues given that as Gary Hamel has said “somewhere someone is making a bullet with your business’ name on it”.

 

 

The iQ Zeitgeist: Futurists Forecast the World of Tomorrow

As part of the 2nd birthday celebrations of Intel’s IQ platform they have published a 2 part article interviewing 7 international futurists. I am one of them and I feel in pretty good company  as you can see by the list below. Due to space considerations my answers were edited down so I am putting up links to the articles here but also publishing my answers in their entirety:

Brian David Johnson is a futurist at Intel Corporation. His charter is to develop an actionable vision for computing in 2020.

Dan Abelow is an American inventor, author, speaker, and technology consultant. His latest patent-pending invention, the Expandiverse, is new technology to build an advanced Digital Earth today.

Daniel Burrus is a technology forecaster, the founder and CEO of Burrus Research, and the author of six books, including The New York Times bestseller ”Flash Foresight.”

Paul Higgins is an Australian futurist and keynote speaker with a Masters degree in Strategic Foresight; a guest lecturer at Victoria University (Melbourne Australia); a tech editor on Tumblr; a partner at Social Venture Partners International (Melbourne); and a very slow triathlete.

Whitney Johnson is a Managing Director at Springboard Fund, and co-founder of Clay Christensen’s investment firm.

Frank Rose is the author of “The Art of Immersion: How the Digital Generation Is Remaking Hollywood, Madison Avenue, and the Way We Tell Stories” and a correspondent for Wired.

Vivek Wadhwa is a Fellow at Stanford University; Director of Research at Duke University’s Center for Entrepreneurship and Research Commercialization at the Pratt School of Engineering; and Distinguished Fellow at Singularity University; and was listed as one of 2013′s 40 Most Influential Minds in Tech by TIME Magazine.

You can read the articles at:

The iQ Zeitgeist: Futurists Forecast the World of Tomorrow Part 1

The iQ Zeitgeist: Futurists Forecast the World of Tomorrow Part 2

 

My answers to the questions in full are below. For those of you who want to read more on some of these issues please refer to my ongoing series of major disruptors here on this blog :

1. Every piece of technology we own or online service we consume has Gordon Moore’s 1965 law as a common denominator (Moore’s Law = # of transistors doubling in microchips about every two years). Based on this, how do you think the tech landscape will change in 2 years, 4 years, and 8 years from now? Describe what a typical person’s day might be like at the office and at home.

[Paul Higgins]

Our view is that we have reached the point where with all this technology in the hands of hundreds of millions of people who are all capable of innovating both the hardware and the software platforms it is the height of arrogance to forecast what will happen. What I do know is that there will be enormous change and innovation based on the disruptive effect of these technologies.

2. Which technologies do you think will have the biggest impact on the humankind by 2025? 2050?

[Paul Higgins]

By 2025 I think that the most impactful technology beyond what we are seeing today likely to be driverless cars and while by 2050 artificial intelligence is likely to have the greatest impact. It is possible that large scale implementation of driverless cars can be done in many countries by that date although it is likely to be a little slower. Driverless cars have the capacity to create wholesale change across our communities with significant reductions in road trauma, requirements for hospital resources, and greatly reducing the capital investment needed in cars. The effects will go wider than this with significant impacts on the car manufacturing supply chain worldwide, elimination of the taxi industry, airport parking, and big changes in road and public transport infrastructure as well as urban planning.

The effects of significant levels  artificial intelligence are almost unimaginable. Combined with improvements in robotic technology they have the capacity to wipe out large swathes of current jobs and I am unsure whether the new jobs that are created will replace them. If this occurs we may see a fundamental restricting of the economy and a complete rethinking of people’s relationship to work. My fear is that this will be played out as a have and have not type of scenario and while here may be a strong chance of a rosy future that some science fiction paints the path to that future my be traumatic and tumultuous.

 

3. What technology / innovation that’s currently in development are you most excited about?

[Paul Higgins]

Rapid developments in artificial intelligence are the most exciting from my point of view, both in their capacity to enrich our lives but also from a risk point of view. The problems with artificial Intelligence capabilities have been a lot more stubborn than many people envisaged they would be and we commonly underestimate the capacity of our own brains which we should stand in constant awe of. However developments in both understanding of the brain, increases in computing power and the development of systems able to understand natural language and concepts are all driving us forward faster than in the past. Major projects such as The European and US Brain projects, and the development of technologies such as neuromorphic computer chips promise big leaps in our understanding and capacities over the next decade.

 

4. What will the role of tablets be in the future? How do you see personal computers evolving as they’ve gone from desktop, laptop, ultrabook, 2 in 1 and tablets?

 

[Paul Higgins] I think that we will naturally move towards wearable systems that will become more integrated into our lives. I cannot recall who said it but there is a line that I like that goes something like “it is when the technology disappears when it gets really interesting”. So in the not too distant future the use of smartphones and tablets will seem a little archaic. Wearable technology is at its early stages now and people are still fumbling around for a solution or combination of solutions that really work. However we tend to forget that tablets of different kinds were around for a long time before the iPad got such widespread adoption. Ongoing increases in computing power, changes in user interfaces, continuing miniaturisation and reduced energy requirements, plus rapid trialling of different systems and business models will move us a long way down this path in the next five years. The interfaces we deal with are likely to be even more intuitive than the ones that we have today and be a combination of wearable technology, cloud computing and projected interfaces that can be easily controlled through speech and motion.

 

5. Will humans ever decide to forgo real-life companions for virtual ones?

 

[Paul Higgins] Absolutely on several fronts. If we finally move to uploading our own consciousness (which I have significant doubts on) then virtual artificial companions are likely to be indistinguishable from “real” ones anyway. Before that in a world where we have had pet rocks, and people (including my 7 year old niece) have named their Roombas, and increasing people seem to be living alone I think that it is highly likely that semi-intelligent virtual companions are not far away.

 

6. What can we do today to prepare for technological advances of the future?

[Paul Higgins]

I always think of this in terms of a dog getting in a car and being driven along with the window open. They just accept the technology and embrace it and do not care about the technology as such, more about the experience. They just hang out the window with their tongue out and exude pure enjoyment. I think that the best thing that we can do is to embrace new technology and experiment with it continually. I do despair at times though that we are using these great technologies for trivial purposes and that some of the brightest brains in the world are focused on trivial applications because that is where the money is. We need to think a lot more deeply about the human and social applications of existing and new technologies because in the end that is all that really counts. I get depressed about technology when I read stuff like Michael Lewis’ latest book Flash Boys which describes about the use of technology to get a few milliseconds ahead of the market and cream off huge amounts of money without adding any value. At the same time I am enormously buoyed by the large numbers of people who I meet and work with who are totally engaged in making the world a better place. Last year I spoke at the Nexus Youth Philanthropy Summit in Australia and was blown away by the people in the room , mostly in their twenties, who were all doing fantastic things with technology and in particular social applications. It made me tired just to read their biographies but gave me enormous hope for the future.

 

7. Which prediction of yours didn’t come true (if any) that you were most disappointed about?

[Paul Higgins] In our work we actually eschew predictions as we believe that prediction does not work at any meaningful level of detail. Instead we work with people to envisage multiple futures and then to work with the uncertainty that is inherent in that approach and the real world. That has changed over time and we work a lot closer to the present than we used to. Having said that one of my big misses in picking up how things might we be used was the use of cameras on phones. I certainly did not consider how much they would be used and how important they would become in a personal and a political sense.

 

8. What films or books do you think best represent the future of technology? Will the world become The Jetsons soon?

[Paul Higgins] I am an avid reader of science fiction, both for enjoyment and for thinking about my own work. In that area I tend to read further in the future than our work is based. My favourite authors/books are:

 

Iain Banks and the Culture series. Sadly he passed away last year way before his time. The depiction of a society where work is no longer required and where idiosyncratic AIs run much of the systems, and structures is both highly entertaining and stimulating to think about.

 

Ramez Naam who wrote Nexus and Crux and who is on the short list for the Arthur C Clark award this year writes about nanotechnology and the possibilities of inserting it into our brains in order to both have more capacity, but also to commune with others. Couched in a political battle between idealists and governments seeking to control the technology it provides an interesting social perspective. I am also proud to have him as a Twitter follower.

 

Hannu Rajaniemi who wrote Quantum Thief and Fractal Prince and the upcoming Causal Angel writes really interesting fiction on the far future and harnessing of quantum physics. So dense that I have to go back and re-read the previous one to fully understand the next one.

 

Paolo Bacigalupi’s The Windup Girl is a favourite. It depicts a future world where there is conflict between the haves and the have nots where there has been environmental and technological disasters including climate change that are hinted at rather than described.

 

David Brin writes superbly on all sorts of areas of future technology and the dangers of ecological collapse, and is another Twitter follower I am proud to have,

 

And of course William Gibson, whose seminal book Neuromancer contributed significantly to my interest in science fiction and the field in general.

 

I would recommend that people read widely of these authors and others to think of all sorts of possible futures rather than nominating a particular book or film that best represents a future which is inherently unknowable

 

 

 

Major Disruptors Section 2

On Tuesday I started a blog post series on the major disruptors of the next decade. You can see the first post at:

A Series on the Major Future Disruptors of the next decade – Section 1

The first post centred on introducing the subject and looking first of all at driverless cars and the effects it may have on the insurance industry, taxis, and the road building supply chain. Today we continue to look at other sectors that may be affected in a major way:

Public Transport

A system of government subsidised and supported driverless cars would essentially be a hybrid public/private system. It is a complex issue to compare the utility of public and private transport in those circumstances but the most likely scenario is that more people will transfer to cars and away from trains, buses ad trams. The advantages of a personalised transport offering with increased comfort, door to door delivery, and specialised and personalised  services will be pretty compelling.

As always this will be a dynamic situation as less congestion on public transport may make that more appealing for some people. Overall though it is likely that there will be less demand for public transport, less demand for new public transport investment and a problem for all the shops and systems that have built up around the train and tram stops.

Hospitals and the medical supply chain

A 90% reduction in road trauma would have a significant effect on the hospital system and its supply chain. Road trauma supplies a large part of the business of major hospitals. Having suffered such trauma myself there is also a large component of ancillary services such as rehabilitation services, physiotherapy, insurance systems etc that flow on from the original trauma.

Apart from the reduction in the emotional toll if we saved $30 billion a year in hospital costs (see the first post in this series) it will have significant flow on effects in terms of short terms need for new hospitals, long term care requirements for the seriously injured, and all the income flows that come with the whole system.

Car manufacturing

Global implementation of driverless cars will mean sweeping changes to the car manufacturing system due to a number of key factors:

  • If we do not own cars then we are likely to be less concerned about the models of cars that we use and we will have far less model ranges. The experience will be far more focused on what happens when we are in the car from the point of view of connectivity, entertainment, safety and our capacity to work while in motion than they will an emotional attachment to a car model.
  • Cars will be driven far more than they currently are. Cars are currently used on 4-6% of their daily life. If we reduce the number of cars on the road by 60-70% then the mileage done by most cars will be much higher than it previously was. In fact some uses may be five times as high if a model is adopted where a basic car model is the workhorse of the system and we use other cars less for specialty occasions such as moving stuff or a luxury dinner night.

This means that it is likely that the number of car models will reduce significantly and the focus will be on durability and reliability and a faster changeover of the life of cars measured in time while they last longer in terms of kilometres traveled. So while there may be a bloodbath in car manufacturing as these adjustments are made there is the capacity to have significant reductions in the costs of car manufacturing and running costs based on improved model volumes and increased durability from improved design, and more rapid innovation cycles.

Real Estate Markets

One of the key drivers (sic) for real estate prices in inner city areas is the price of the commute to work for a large number of people. That price is both on of an economic price of vehicles, fuel and parking but also one of a personal toll in terms of time spent travelling and lack of productivity. I live I Brunswick (6km from the Melbourne CBD) because it is 15-20 minutes into the city via tram or train, it is 15 minutes to the airport (and I travel a lot interstate and internationally), and it has a car sharing service which means I save money I would otherwise spend on owning a car. I am prepared to send more money on housing for those reasons.

If the time spent travelling can be reduced by the smart use of driverless cars creating less traffic on the road, and if costs can be reduced by sharing use of those cars and no parking, and you can get all the connected services you want inside those cars would you be prepared to travel further? If you could work in the car on the way back and forwards to an office with specialised cars that allow that in comfort plus use virtual reality technologies to have meetings while you travel would you travel further? If you could have a drink on the way home and watch your favourite comedy show in the car that no-one else in the family likes watching would you travel further? Personally I would like the capacity to have a 30 minute power nap.

If the answer to any of those questions is yes it is likely to cause a reduction in price pressures for inner city living and an increasing prices for real estate a little further out.

As an extra change all those inner city car parks will disappear, freeing up more space for accommodation and/or offices. I would be factoring that into my investment thinking right now.

Postal and Delivery Services

If we think through the issues of driverless cars and demand for their services if we implement a wholesale implementation of driverless cars then obviously there will be peak demand times around travel to work that will determine overall volumes. This means that there will be lots of times where there are large excesses of available vehicles. If we combine this with the opportunity for advances in robotics to create automated delivery systems it is easy to see a system that will replace all current postal and parcel delivery systems

A semi-autonomous system that would flex and change and link to when people are actually at home rather than based on logistics systems that seek to get us to provide a window of our time would be much more efficient. Imagine a system that senses when you arrive home and sends you a message asking if you are able to take delivery in the next 90 minutes. Parcels could be kept continually in motion and exchanged between vehicles in a way that keeps the parcel within deliverable distance of your home on a continual basis using smart logarithms. This would eliminate warehousing and provide a much more efficient system and provide a much reduced cost of delivery by utilising vehicles that are already in motion and being used rather than those dedicated to delivery.

 

Urban Planning

A significant change to road use, the number of vehicles on the road, changes in parking requirements, and the desirability of living areas has significant challenges for urban planning. If this change is likely in 10 years then the changes start to impact on the thinking for urban planning well before that point. At what stage should the approaches to urban planning change? This is a very tricky question. Even if we had an implementation date right now it would still be a difficult question to answer. We should all start thinking through these issues now

 

 

Most of the focus on these issues so far has been on the disruptions of existing infrastructure, industries and business models. In the next post I will look more at the possibilities for new jobs and services that might spring from the wide scale implementation of a driverless car society.

 

Paul Higgins