Wednesday, 3 March 2010

PESTEL Trends – The Western Economic Model – Regenerating Tangible Added Value...Part 2

To follow-on from the Societal perspective described in the previous post, the following 2 commentaries take a closer look at the Commercial.

As previously stated, business commentators and politicians alike highlight that the economic downturn has bottomed-out and slow recovery has begun. It seems that such leaders have had enough of the 'talking down' of the economy, even if a weighty proportion of metric indicators, along with general sentiment, don't necessarily reflect that optimism.

[NB. Of just as great concern is John Auther's recent Short View note that risk-averse global capital is reverting back into a still stagnant US so supporting a fundamentally weak Dollar and still fragile domestic economy].

Since the start of the Q209 equities rally, the constituent characters that make-up the capital markets view a parallax-biased world. One driven by the extremes of 'on-off' speculation and risk-aversion, much depending on event-driven sentiment. And it seems that such volatility will continue as the global economy lurches from one systemic pillar - and associated problem - to the next. Having been through the Credit Crisis, Banking Crisis, Sovereign Debt Crisis, all look-on with concerns of an Sterling and Euro FX Crisis emerging.

Even so, with many of these crises that form the systemic whole behind us, it is now time to review the very foundations of society and commerce - foundations that must support the future.

As investment-auto-motives has stated in the past, the evolution of the West's credit and asset bubbles demonstrated how the notion of true value and productivity had been surpassed by financial engineering at all levels - corporate, consumer and government, promoted by over-zealous financial innovators.

Although the process will be painful, it is surely time now for the West (UK and US in particular) to grasp the nettle regards the dismal public finances which if unattended will continue to strangle what should be a mixed, yet still pro-capitalist, economy. For it is that ambitious verve, that entrepreneurial drive, which will in large part regenerate desperately needed wealth creation.

In truth today the UK and US appear to sit in an idealistic bubble, many politicos' beliefs fed by their own rhetoric and perpetuated by miles upon miles of journalists' PR-driven column inches.

This eco-era is supposed to be the savior of the West, yet whilst progress is being made it is undeniably slow. The inability to consensually ratify Copenhagen given the costs to the present perilous economy, means that any government/regulatory push to 'greenify' industry and consumers has been largely halted by the headwinds of economic reality. Disheveled national budgets prohibit nationally sourced incentives, add to which the impact of 'liquidity cautious' companies and risk-averse investors. The latter demonstrated by the virtual collapse of Venture Capital funding, which has of course historically provided the seed money for sector transformative products and services.

Hence the green era set in motion still looks decidedly light in colour - more opaque verdigris than deep olive. Accordingly commercial expectations of a massive consumer-led green revolution have faded fast, from their initial unrealistic expectations.

[NB auto industry studies in the mid-1990's and over the following decade regards the importance of eco-friendly cars to consumers demonstrated the issue to be low on their agenda, only brought to bare with oil/petrol price spikes and the opportunity to buy new (eco-cars) at discount via scrappage schemes. That general past reluctance may well have been more entrenched behind the lip-service given the relative high cost-slow breakeven associated with eco-tech].

Even so, with realistic reduced or flat demand-pull some companies are under-taking supply-push.

Major commercial players such as Marks & Spencer here in the UK are indeed playing a role, with beyond its in-house 'No Plan B' initiatives, an externally directed effort to energy-lag its workforces' home attics. However, such cases look very much like an alternative (probably tax-efficient) form of PPI, used as a lever where the state itself has been unable to effect change upon its citizens. The M&S 'directive' stands in contrast to a similar attic-lagging project rolled out by the London Mayor's office, but this grande initiative hence stumbled over the bureaucratic reality that the Mayoral Office cannot enforce the roll-out via autonomous local borough councils.

[NB This initiative of overlapping the notions of 'work' and 'home' could well be M&S's attempt to expand its consumer finance ambitions, probably initially into employee mortgages, then hence moving on to customer mortgages possibly via a banking licence or in league with a major bank ; since M&S and its backers (large equity & FI) undoubtedly recognise the deflated price of the UK housing stock and the eventual need to extend its personal finance activities beyond store cards, insurance and personal loans].

So certain major corporations are, small step by small step both in-house and customer-facing, appear to be contributing; having set out feasible targets. However, others seem to have over-played the eco-promise.

GM's recent announcement that it will discontinue its (Chevy Volt-based) Cadillac Converj concept, highlights how the eco-bar has been dramatically lowered; thereby infact reducing its commitment to what was lauded as large, step-change, enabler.

[NB. investment-auto-motives has, as previously stated on many occasions, long been skeptical about the technical and commercial feasibility of the GM Volt, especially given its $40,000+ price vs $20,000 Honda Insight or $22,000 Toyota Prius. (Expect to see Prius match insight on pricing given the Toyota debacle). Hybrids are only now starting to prove commercially viable, largely on a consortium basis for most automakers, whilst electric vehicles will only be able to realistically exist within their own co-designed 'micro-environs' as we see with North American NEVs within essentially closed communities. Hence a truly bright future for e-vehicles depends upon a en mass changed social fabric].

So where does the ever extolled green revolution sit today?

We are in reality seeing the inching forward of practical solutions and drawing back of the impractical.

And that, quite rightly, will set a rational contextual background for the eco-investment mentality. In doing so it will set a conservative tone regards acceptance of proposals set out by companies and entrepreneurs seeking backing. The oft over-hyped 'change the world in one easy step' inventors with wild-card schemes - such as the global CO2 air filtration machine - will be replaced by far more realistic 'incremental opportunists'. Individuals and groups who work pragmatically in accord with real-world restrictions (micro & macro) and can ideally incorporate the tenants of low-risk, low-cost and scalability across multiple market segments an geographies.

Fundamentally, it means reviewing the broad spectrum of possibility across all human activity with a discerning commercial acumen. It may mean that instead of seeking the far-reach scientific panacea, it engenders a view across neighbouring and disperate sectors to identify complementary technical and service solutions. Of consequence is the fact that this process is not purely the domain of the West, since Eastern intellectual force has grown to become weighty and in the future prolific.

So the West, the UK perhaps in particular, must address its place in the world.

Politicos and the like hark the typical rhetoric... “the land of opportunities presented by 21st century high-tech, high-value industries”...typically identifying "the creative industries", Info-Tech, Bio-genetics, Pharmaceutical and of course (Advanced) Energy. Yet we must add to this the somewhat hidden but vitally important sector of Defence, militarily developed technologies often the spring-board for latter-day broader private commercialisation.

But in reality the power of the competitive advantage the UK (& US) seems to innately believe it holds may infact be far weaker than imagined. This is exemplified by the Anglo-Swedish firm AstraZeneca, with its restructuring announcement that sees a consolidation of its R&D activities, with aligned 'high-value' job losses. That act alone demonstrates the commercial pressures in a R&D led organisation, pressures which politicians and business commentators cannot disregard.

And whilst the R&D / IPR 'future-promise' is a central, meaningful mantra, recognition must also be given to the intrinsic complexities of managing an increasingly 'people-soft' based economic system. Complexities which exist from the ground-up of state education all the way through to the organisation of corporate cultural creativity (CCC). Hence it questions the very structural basis of a modern western society.

The issue in the short term has ramifications that stretch well beyond the hypothetical operational management of firms or schools, and drills right down into the heart of investor attitude.

IPR-based sectors whilst undeniably important are also harder to orchestrate to provide continued year on year success unless a firm is fortunate to create a 'wonder' product and associative new segment from which it thenceforth maintains its leadership, as we've seen with Microsoft, Apple, Google, Facebook, Linked-In etc. Thus using IT as the case-construct, early phase investors can do well if a new company gains true market traction and swells enormously in its formative years.

But much of the investor base (from institutionals to skeptical private individuals) – especially today - want a Buffett-eque style of constant returns with secured initial capital set against hard physical assets, as historically typified by manufacturing and other traditional sectors in which labour was a component (replaceable) part of the economic system (ie Smith's: land + capital + labour = rent/profit)....yet today and increasingly tomorrow, people/labour have become the primary element of the investment equation.

Of course the rise of the corporation through the 20th century ring-fenced overt dependence on 'people-soft', yet it is also recognised that the traditional corporation must change to survive...the question is how?

Ultimately the idea of 'high-value' spans a plethora of sectors, from certain media-space through to specialist aero components and systems through to scientific instruments. In essence it means a knowledge-economy created from a merging of discipline-based education/training allied with personal curiosity and experimentation.

'People-soft' centres like Silicon Valley, the Cambridge Triangle and the Pune Valley have helped to set the socio-industrial templates that endeavour to create the best conditions for success, but the need to essentially re-create that 'free' academic campus feeling also increases the peril of remoteness from commercial reality and investment return necessity, and has been a major focus of the investment community's vision for tomorrow.

So today we see the best practices of the academic laboratory and the commercial R&D centre being assessed so as to try and create a commercially controllable environment for innovation – the term 'innovation' in itself a very blunt descriptor for the full spectrum and levels of variant activity.

Thus for the UK and US the real challenge is to spark, encourage, grow and harness the innate ability of their respective and combined populations. But this nurturing ability will need to be directed toward a credible industrial/commercial template. Presently it is the construct of such a template-form which is the major issue for strategic governmental research, assessment, debate and policy-creation.

The UK Auto sector must demonstrate its role in driving the UK economy, identifying its role for value-creation within a regional and global contexts.