Tech Toys When Simple Will Do – $100,000 V $500

Give me $500 and I will fix the problem

 

On Monday there was a story here in Australia about traffic lights being installed in the pavement to reduce the risk of pedestrians crossing the road against the lights because they were looking down at their mobile phone screens: (Lights installed in Melbourne footpath to help distracted pedestrians cross safely)

pedstrians on phones abc traffic lights

source: ABC

Apart from the chorus of responses that people who were hit by cars when crossing against the light while looking at their phones is Darwinian evolution in action what struck me was the insane cost at $100,000 for one intersection. Now some of that cost is for the trial process but it would be enormously expensive to role out across the city. I am always reminded of the lyrics of 21st Century Digital Boy when I see this sort of stuff happening:

‘Cause I’m a twenty-first century digital boy
I don’t know how to live but I got a lot of toys

Not because of the phones but that we look at technology solutions when simple ones will do. Now some will argue that we should not be arguing about costs when lives are at risk but the hard truth is that if we spend money on this sort of thing then money is not available to spend on other things which may more effectively save lives.

Surely the simple solution here is to paint the approaches to the intersection a bright neon yellow so people who are looking down at know they are approaching an intersection and look up at the traffic lights, which are already there! This works for bikes on bike paths approaching risk areas. I have just come back from the World Science Fair in Brisbane where we walked in to South Bank from Milton each day and the bike paths/walking areas are great:

Bikeway_&_footpath_along_Brisbane_River_in_Milton,_Qld_07

Source: Wikimedia Commons

This issue is symptomatic of a wider problem across the community. As a futurist I talk to lots of people about technology, its impacts, and its capacity to change the way we live and work. However my constant refrain is if you lead a strategy with “shiny new toy syndrome” you will almost certainly fail.

Give me $100,000 and I will fix every intersection in the CBD with a paintbrush and a can of paint

Are we entering a world of the new portals?

tim_tams

Yes we are, and it has serious possible consequences for a whole range of businesses.

Gather around children for a story when grandpa was young (in internet years anyway). Once in the deep dark history of the internet portals were all the rage. They were the place that companies hoped you would use as your stepping off point into the internet. If you were part of their portal and had it set up as your home page then they could offer you services, and make money from you being there rather than you wandering around on your own. Truly capable search killed off a lot of these efforts by allowing people to more easily find what they were looking for although portals still make sense in a number of areas. For example here in Australia the Our Community organisation which supports about 80,000 community organisations has a grants portal (Our Community) which aggregates all of the grant information across the country. Essentially it provides a specialised aggregation and search service. The government also offers a portal called myGov which aggregates a range of government services, offering both specialised search services but also common identification and log in systems.

Besides these sorts of services we seem to be moving into a new era of portals based primarily on mobile systems. On March 3rd TechCrunch stated that “Uber plans to turn its app into a ‘content marketplace’ during rides“. I have long believed that Uber is a data and services company with the transport model being an interim stage, and this fits perfectly with that theory (confirmation bias anyone). As a transport company they are in a brutally competitive world. They have already signaled their intention to be in the autonomous car business, but I think that business is going to be an even more brutal fight that will require huge reserves of cash. That fight will include the existing car companies and a host of new competitors and some will inevitably lose, and have their whole business model destroyed. In those sorts of fights technology plays a role but quite often it is a last player(s) standing sort of a fight where people bleed cash until they can no longer operate. In that sort of fight it makes sense to have multiple possible strategies rather than a single win or lose one. If, in the interim period before autonomous cars are widespread Uber can build a huge trove of data and insight for autonomous cars, but more importantly insight into the movement of people, and what they do during and after their trip then they have a separate strategy. If they are not able to slug it out in the transport space then they can supply data and services across the whole sector instead.

A content market place for Uber makes sense. According to the TechCrunch article they now are providing 10 million rides a day and to a large extent those riders are a captured audience for them. They also know in advance where you or I are going and when we will arrive which is enormously useful information. If they know you are going to a shopping centre then businesses at that shopping centre would really like to know that so they can send you offers in advance. If you are going to restaurant area at lunchtime, or an airport the same applies. If they can tie your trip data to what you do after the trip by tracking you through their application and partner applications then the value of the data increases astronomically.

In this new portal era they are the aggregators of customers for other businesses but they are also aggregators of data that increases in value as time goes on. In some ways it is the perfect business – profitable while it is building a new capital asset that is much more valuable.

There are lots of other companies that are pursuing this strategy. WeChat in China now has enormous capacity inside its app that is intended to keep you inside their ecosystem so they can aggregate demand and sell it to other companies ( WeChat is morphing so Chinese smartphone owners will never have to download an app again). Facebook is attempting to copy them while also trying to copy Snapchat and is a huge percentage of people’s mobile we traffic (Benedict Evans).

All of this raises a very serious question. Where will the profit accrue to in this new world? Here in Australia we have had retail dominated by two major supermarkets although this is slowly changing. As a result they  have had the highest retail supermarket margins in the world, which have now crashed back to earth due to competition (see my post: Are The Two Major Supermarkets in Australia Doomed?). Through that time the suppliers of food into the Australian markets have been mostly constrained by having to supply to those two companies in large volumes. If you are Coca Cola or Mars this has not mattered too much but it has mattered to most suppliers (hence the high margins).

The advent of the internet and the capacity to connect to anyone around the world even if you are a one person business was supposed to break some of this  down, to usher in a new age of commerce. To an extent that has been true. However I have been working with a couple of businesses that want to use some of the new technologies to connect directly to the customer rather than going through the major supermarkets as “the agent of the consumer”. One of the key concerns is whether they are swapping one master for another. If they end up with channels going through systems and applications like WeChat or Facebook does the profit accrue to them or the platform, and how much can they rely on the platform continuing to deal with them in a fair and consistent manner. In part that question is answered by platform economics – if the deal does not work for the customers on both sides of the platform then the platform disintegrates. On the other hand if you are not key to the relationship between the consumer and the platform itself it leaves you in a very weak position.

If we use that thinking and go back to Uber then I do not believe that a coffee shop at my local shopping centre is going to have the clout or expertise to efficiently partner with Uber to market specials through their App. It seems far more likely to me that another aggregation platform for coffee shops (and others) will partner with Uber and connect up the systems required to send me a notification of a special as I am on my way, or take my order via the Uber app as I travel . That means if there are three coffee shops at my local shopping centre, and Uber has a significant transport footprint, as soon as one of them has joined up the others are forced to do so or lose customer traffic. In that case none of the coffee shops actually wins because the actual customer levels between all of them are likely to be the same (ignoring any marginal traffic that may come from signalling). However the two aggregators (coffee shops and Uber) are going to want a cut of the action so it is likely that the profit margins of the coffee shops will fall.

So in a world that promised better contact and relationships with customers for small businesses the result may actually be less contact, more distant relationships, and less profits as a result. The advantages go back to the portal holders.

Of course in a modern world there is always the opportunity for the coffee shop to make a direct contact with me when I come to their shop. If they can establish a contact with me via my messaging App of choice (WhatsApp in my case) then they can form a direct relationship. However that relationship lacks a geo-location and proximity/arrival time context so unless my messaging App can supply that then the direct relationship is at a significant disadvantage. It also lacks the sophistication to be able to take my order, so unless another aggregator can link to my messaging app and provide those services the friction of the relationship will be too high. And so the dance continues.

The whole process is complicated by the fact that people actually use very few apps. In theory the coffee shop could have an App that does all these things and connects with me but given the limited real estate on my device and the fact that most people only really regularly use 5 apps that is not going to happen.

It is going to be very interesting to see where all this goes in the not too distant future.

p.s. – for those of you not from Australia the picture is one of Arnotts Tim Tams which one of the major supermarkets tried to force a price reduction on but was unable to do so because of their popularity. Therein lies a lesson. You should try them, they are awesome.

Addendum

An additional point is that this means that the brand reputation issues that are afflicting Uber today are far more important than might be thought. If one of your key strategy pillars is that people need to trust you to share their data with you then your culture, behaviour and leadership become critically important. Because of the network effects of the data collection and utilisation if volume falls in broad terms but data sharing falls more then capital value of the company falls far more rapidly. I am sure that the board is having that discussion with the CEO right now

 

 

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.

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.

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

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”.

 

 

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

I have had a bit of a holiday from blogging over the last couple of months due to a variety of reasons but now I am back.

Last week I did a presentation for the Cambooya Family Education Day on what the future looks like. This was both for them to look at how they should think about future investments but also to think about the future of their children and grandchildren.

We had an interesting discussion on a variety of issues and it prompted me to think a bit more deeply about the major disruptors in our global society. This was because part of my premise was that we are facing increased levels of change and disruption and therefore we need to rethink our views and measures on investments and their returns.

First of all this needs a definition. By disruption I mean a sudden change that alters a sector or industry rapidly and extensively. The definition of rapid here can be quite misleading. It took the iPhone years to really disrupt the sector and Airbnb took several years to ramp up to the size that it currently sits at but these are rapid changes when looked at form a historical perspective. Other changes such as turn by turn navigation being available on Google maps were a single individual change which revamped the GPS industry overnight.

By major I mean the capacity to completely transform large slabs of our entire society and economy.

So what do I believe are the major disruptors in the next decade.

The first of these is the driverless car. My last post:

Implementation of Driverless Cars – A case for public subsidy of private transport systems

was on how I believe there is a business case for government subsidies to implement a widespread adoption of driverless car technology given the savings that accrue to government in the process.

Given the promise that driverless cars could eliminate 90% of all accidents lets look at the industries and sectors that could be changed by such an implementation, some obvious, some not that obvious:

Car Insurance

The obvious one here is that car insurance as an industry would shrink enormously due to the reduction in accidents but there are a number of other interesting angles:

  • What happens to insurance of a vehicle where you are not driving – where do the risks lie and how do you insure those risks? If an accident is due to the failure of an algorithm then who is to blame if that algorithm has reduced the risk by 90% but still causes the accident? There is a case here for a comprehensive insurance of the system as a whole.
  • If there is wide scale implementation of driverless cars what does it cost to insure your car if you still want to drive? If you are 10 times more likely to have an accident or kill someone will anybody share those risks? If the government has implemented wide-scale adoption and is relying on the business case of reduced medical costs to fund that change are you liable for any costs incurred, including all medical costs? If so would only the super rich be allowed to drive and would we actually allow it?

Taxis

Taxis are an obvious one – put a fork in them they are done. There are some large legacy issues here. In Melbourne we are seeing protests from taxi licence holders because the government is going to issue extra annual licences which the current owners believe will devalue existing licences. Now I have little sympathy on anyone that builds a business and borrows money based on government policy on issued licences and then complains when government policy changes but there are political considerations here when taxis licences become worthless. I would not be buying one as a long term investment.

Road Building

The estimates are that we will need 30-40% of the vehicles on our roads if a complete system of driverless cars were implemented (Toward a Systematic Approach to the Design and Evaluation of Automated Mobility-on-Demand Systems: A Case Study in Singapore)

We have already started to talk to councils about what this might mean for road building and maintenance. It is clear that if we drastically reduce the amount of cars on our roads then we will need both less new roads built and less road maintenance. Of course there are all sorts of variables here about what might happen. It is likely that there would be a significant shift from public transport to private transport and that would be significantly different in different cities.

We also do not really know what happens to demand when we move from a cost that is largely embedded to one where costs are directly related to an individual decision. For instance I no longer have a car and use a car sharing service called Flexicar here in Melbourne. I estimate that it has reduced my car costs by about 60% but every time I use a car the cost is right in my face rather than being involved in my annual registration and insurance costs, or the costs of capital involved in owning a car, so I am much more likely to walk, cycle, or use public transport. The reactions of people around me are similarly different. People offer me a lift or ask me “will you have a car” or say “don’t go to that expense” when I talk about coming over when they would never do so if I owned a car. A full scale implementation of driverless cars will be an interesting experiment in people’s reaction to those costs.

What is clear is that road building companies and their supply chains will have far less demand in the long term future.

 

Please join me in the next installment where I will discuss some of the less obvious changes including effects on real estate prices.

 

Paul Higgins

 

Section 2 of this series can be found at

Major Disruptors Section 2

 

Implementation of Driverless Cars – A case for public subsidy of private transport systems

My family had a vigorous discussion over the Christmas break on driverless car technologies and the implementation timetable and pathway (yes we are like that, and if you don’t like it don’t turn up).

While we disagreed on the timelines there was general agreement that the technology is inevitable and desirable. My view was that there is a strong case for government subsidies to implement the technology which has some similar network effects as the fax machine: who buys the first fax machine?

Now, having a driverless car has some initial advantages, even if you are the only adopter. For instance if you can read/work/sleep instead of driving it is a great time saver while reducing your chances of having an accident. However the benefits of us all having driverless cars are far greater because network benefits accumulate exponentially as the number of vehicles with the technology grows.

This means that there is a significant case for a huge publicly funded effort for implementation to maximise early adoption rates. This was reinforced for me in the last week while reading several items:

The New Killer Apps: How Large Companies Can Out-Innovate Start-Ups

Audi’s traffic light assistance helps you hit every green light

The Men Who United the States: The Amazing Stories of the Explorers, Inventors and Mavericks Who Made America

In the New Killer Apps the authors describe some of the cost savings that implementation of driverless cars in the USA including:

“The American Automobile Association studied crash data in the ninety-nine largest urban areas in the United States and estimated the total accident-related costs— including medical costs, loss of productivity, legal costs, travel delays, pain, and lost quality of life— to be roughly $ 300 billion. Adjusting those numbers to cover the entire country suggests annual costs of about $ 450 billion. Now take 90 percent off these numbers. Google claims its car could save almost 30,000 lives each year on US highways, prevent nearly two million additional injuries, and reduce accident-related expenses by at least $ 400 billion a year”

Mui, Chunka; Carroll, Paul (2013-12-02). The New Killer Apps: How Large Companies Can Out-Innovate Start-Ups (pp. 19-20). Cornerloft Press. Kindle Edition.

They also go on to postulate that there would be other savings include fuel costs due to more efficient driving, and productivity improvements due to time saving. They also state that the demand for cars would be reduced by 90% due to improved utilisation of vehicles. While it is true there would be reduced demand for cars I highly doubt it would be at this level because the reduced demand theory is largely based on the fact that we only use use our cars a small percentage of the time. I no longer have a car for this reason and use Flexicar a local car sharing service. In Australia the data indicates we only use our cars on average 4% of the time and they lie idle the rest of the time. However the figure of 90% reduction in car demand is likely to be an exaggeration due to two factors:

  1. There will be a requirements for cars at peak times that will need to be filled, meaning that at other times there will still be a large capacity underutilisation.
  2. If we increase the overall capacity utilisation of our cars then they will not last as long. If we increase average car utilisation to say 20% then we will increase the mileage of our cars 5 times. In Australia that would mean moving average distance traveled to 70,000 km per year instead of the current 14,000 ( 9208.0 – Survey of Motor Vehicle Use, Australia, 12 months ended 30 June 2012 ). That means a 5 year old car would have traveled 350,000 km so changeover rates would be much higher. (there are some interesting design issues here – designing and building cars with greater durability while still allowing technology updates for instance)

There are clearly huge savings to be made in implementation of a true driverless car system if the Google assumptions are only partly correct.

In the Audi story the article states:

“Using both live and predictive data beamed into the vehicle’s navigation unit via onboard wifi, TLA doesn’t need a single camera to tell you when the light is going to change. Local data sources provide information about traffic light patterns, and the in car system uses that data and the motion of the car to predict exactly how long it’ll be until the green light goes red”

Clearly this does not work that well unless almost everyone is on the system. If drivers ahead of you are travelling too slowly for the system or brake suddenly then it would not be of much value. Also if you were travelling slowly to match your speed against when the next light would change and behind you was a trail of angry drivers trying to pass you then it could cause more problems than it solves. This magically disappears if all cars are on the system and fuel and time efficiency are gained as well as reduced accidents.

This is what I mean by network efficiencies. There must be a tipping point at which once there are enough driverless cars on the roads that benefits start to accrue more quickly and more adoption takes place. For instance if nearly all the cars on the road were driverless and communicating with each other then travel time information would be greatly improved. However the benefits accrue to different sections of the community rather than just accruing to the user, and accrue at different time frames, and there will be many self interested parties. The following are just a few examples:

  • Reduced accident rates mean a huge reduction in physical trauma and medical costs on top of the reduction in emotional trauma. This is largely saved in the government sector both in operating costs but also in continuing demand for new hospital facilities (this is also complicated by demographic changes, growth of cities, and urban intensification).
  • Individual car owners will save money in the longer term but will have the legacy costs of their current vehicles and their financing costs which may inhibit adoption and cause political backlashes. For instance if you new car is suddenly almost worthless and you have a car loan against the asset what do you do?
  • A number of sectors will miss out on income. The government will miss out on speeding fines and drink driving fines. Panel beaters, car insurers,and car manufacturers will all suffer significant revenue losses as will taxi operators and taxi licence holders.
  • If the general public came to the conclusion that large scale adoption of driverless cars was a good thing and about to happen in the next 3 years new car sales would plummet. Who would buy a new car today if it was virtually worthless in 3 years time?

Which brings me to Simon Winchester’s fine book,The Men Who United the States. In it he describes how a young Eisenhower was part of an army project to cross the USA by road in 1919 to test the capability the road system for military transport in case of war (Lt. Col. Dwight D. Eisenhower – Transcontinental Motor Convoy, 1919).Winchester claims that this experience led to Eisenhower’s long term commitment to the National road system which was later built at the cost of hundreds of billions of dollars and changed the nature of America.

There is a similar case for a large scale public investment in the adoption of driverless cars across the world. As many of the benefits accrue to government through lower costs in the health system then there is an overriding case for the government to get involved on several levels:

  • Implementation of the necessary technology systems outside of the cars themselves which link the cars to the rest of the transport system including traffic light systems.
  • A major effort to overcome any legislative barriers and risk issues, and coordinating national approaches to the problems. As an example the implementation of all this technology is likely to result in more accurate data on causes of accidents even if the overall numbers fall significantly. There will be cases where failures in the car technology causes an accident. In that case the manufacturers are likely to be held liable for the costs in that accident through the courts. At the same time the manufacturers would not accrue any of the benefits of the large reductions in accidents flowing from the technology adoption. There is a strong case for governments sharing those costs with the manufactures to reduce the costs of implementation ( I would be against indemnifying the manufacturers as they need some skin in the game).
  • Public subsidy of the system in a similar way that we subsidise private road use and public transport systems now but at least initially for a different reason. There is likely to be significant barriers to adoption of the technology which will be tied to initial costs and social attitudes. In a networked system such as large scale of adoption of driverless cars the advantages accrue much faster with higher rates of adoption. A pure business case can be made to government subsidising the system in the initial phase to significantly reduce costs and ramp up adoption rates with the payback being more rapid reduction in government costs.

Beyond all the economic arguments the human cost of road trauma is enormous and long lasting. As someone who was hit by a car 2 years ago and was lucky to escape with some serious injuries which I have mostly recovered from I have enormous sympathy for those who have not been so lucky. I was in hospital for 10 days and had 4 anesthetics and two lots of surgery but the day I left a patient in my ward was being moved to rehab after being in hospital for over 3 months, with the prospect of never walking normally again. I was able to compete in a triathlon again last Sunday in an embarrassingly slow time but at least I could finish. My thoughts go constantly to those who have not been so lucky.

My question is where are the visionary leaders of our time who will take on the huge challenge of implementing a system that can change the lives of thousands of people over the next 50 years? Who will hold the experience of meeting a severely injured car accident victim in their head in the same way Eisenhower held in his head the difficulties of crossing the USA in 1919 and set about changing the system?

Paul Higgins

Further Links:

Large-scale trial of driverless cars to begin on public roads

The world’s first large-scale test of driverless cars will involve 100 Volvos taking to the streets of Gothenburg in 2017

BMW FORECASTS CARS WILL BE HIGHLY AUTOMATED BY 2020, DRIVERLESS BY 2025.

U.K. town will build driverless podcar system

Milton Keynes, a town of more than 200,000 people, announced that it will begin a pilot program for a transit system that uses driverless, electric podcars starting in 2015.

The £65 million pilot project will use 100 podcars (that can hold two passenger each) which can be summoned by a smartphone. The initial test will have the podcars travel on a one mile route between the city’s train station and shopping centers and offices. Each ride will cost £2. The pilot will run for two years and continue if the test run is positive, possibly even spreading to other cities in the U.K.

Further links posted up by futurist P A Martin Börjesson:

New IHS Automotive study forecasts nearly 12 million yearly self-driving cars sales and almost 54 million in use on global highways by 2035

The Driverless City

 

Update:

Volvo’s first self-driving cars now being tested live on public roads in Swedish city