Economics 562

future forecsast.pdf

Forecasting the present.docx

Forecasting the present

Taking the economic pulse

How to gauge the current state of the economy

Jul 5th 2014 | From the print edition

IT IS hard to predict the future: witness forecasters’ failure to foresee the financial crisis. Indeed, even ascertaining the current state of the economy is tricky. The first official estimates of quarterly GDP are generally published between four and six weeks after each quarter has finished. Interpreting them can be fraught since they are frequently revised. Such delays and uncertainties have led economy-watchers to search for other gauges.

Simply asking business-folk what they think is a venerable tradition—Britain’s Industrial Trends for example dates back to 1958—but such surveys are flourishing as never before. Among the most influential are purchasing-manager indices (PMIs). Every month managers in both manufacturing and private services are asked whether their firms’ output, employment, orders and the like have expanded or contracted (compared with the previous month). An index based on the net balance of their answers shows expansion above the level of 50 and contraction below it.

These findings can in turn be used to estimate the current rate of growth, given the previous relationship between the indices and GDP. For example, Markit, a research group, reported this week that their composite index for manufacturing and services in the euro zone stood at 52.8 in June. The survey suggests the euro area should grow by around 0.4% in the second quarter, twice as fast as in the first, says Chris Williamson, an economist at Markit.

Markit’s estimate of second quarter euro-zone GDP growth appeared six weeks before the first official estimate. Such surveys have other benefits: the method is transparent and easy to grasp. And the findings are not revised once the final reports emerge a week after the “flash” estimates.

Some data providers go further, seeking to exploit all relevant statistics, such as official figures for new passenger-car registrations. This requires a sophisticated model to extract a common signal for GDP from the welter of data that become available. This is the approach adopted by Now-Casting Economics, a firm whose founders include two economists, Lucrezia Reichlin and Domenico Giannone. In the case of the euro zone, their model gobbles up 50 monthly variables and uses their past relationships with GDP to calculate an estimate for the current quarter. At present the firm, whose clients are hedge funds and other asset managers, is expecting growth of 0.26% in the second quarter—somewhat more sluggish than Markit’s estimate.

In principle, the model-based approach might appear superior because it exploits more information. On the other hand, it is more of a black box. Since surveys are themselves an important source of information for the nowcasts this suggests that the two methods will co-exist.

From the print edition: Finance and economics


Free exchange

Competition, hammered

The risks that cartels and collusion pose to auctions

Jul 12th 2014 | From the print edition

PICKING the price at which to sell a public asset is a daunting task. The political stakes are high: this week Britain launched a review of such sales after claims that Royal Mail, the postal service, had been sold too cheaply. But the right price is hard to find, because privatisations are often one-offs. How much should, say, Portugal ask for TAP, the state-owned airline it has been urged to sell? Auctions are increasingly used to tease out the best price. Yet new research shows how collusion can corrupt auctions of public assets, so that the state is still short-changed.

Auctions have a simple aim: to reveal the bidders’ true valuation of the item being sold. Sellers then get the best possible price. By successfully revealing the maximum bidders are prepared to pay, auctions also allocate resources to those that value them the most. Auctions come in a wide variety. In a “Dutch auction”, often used to sell flowers and fruit, prices start high and gradually drop until a bidder is willing to pay up. A “Japanese auction” is a bit like poker: bids rise with each round and anyone who wants to win must bid every time. Vendors using auctions rid themselves of the headache of choosing prices and instead just pick the rules bidders must follow.

The choice matters, as a paper published last year, by Hongbin Cai and Qinghua Zhang of Peking University and Vernon Henderson of the London School of Economics, shows. The authors examine sales of public land in China. In the 1990s dissatisfaction with the private negotiations that allotted land to developers grew. The processes were murky and the prices paid were often suspected of being too low as local officials siphoned off bribes. So in 2004 the government announced both a crackdown on corruption and a new policy of selling land by public auction.

Local officials choose the auction rules. In Beijing and Shanghai they plumped for a zhaobiao or “sealed bid” sale. Across the rest of the country, two other types prevailed. One was a paimai, a familiar “English” ascending-bid auction: rival developers try to outdo each another, pushing up the price until only one bidder is left. The other was a guapai or “two-stage” auction. In the first stage, which lasts ten days, bidders can post bids anonymously on the internet. Rival developers see the current bid and the reserve price and decide whether to meet it, raise it or drop out. If after ten days more than one bidder is willing to pay more than the reserve, there is a second stage, in which an English auction is run between those who remain.

English and two-stage auctions produced strikingly different results. Collecting data for over 2,300 auctions covering 15 large cities between 2003 and 2007, the authors immediately spotted a suspicious pattern. In English auctions, bids were well spread, with some beating the government’s reserve by a big margin. But the first part of the two-stage auction clearly gave the bidders time to collude: in many there was little competition, with winning bids pitched at exactly the reserve price. If all the sales had been under English auction rules, government revenues would have been 30% higher.

Similar problems can arise when contracts are put out to tender. A paper by Kei Kawai of New York University’s Stern School of Business and Jun Nakabayashi of Tohoku University examines Japanese public building projects. They collected data on over 40,000 tenders from 2003-06 worth $42 billion (around 3% of national tax revenue). The Japanese government uses a first-price sealed-bid auction: builders write down their best price, and the lowest bid wins the work. If none beats a reserve price that is known only to the auctioneer, the procedure is repeated until a bid beats the reserve.

To track competition, the authors honed in on auctions where the two best bids were very close but failed to beat the reserve price. These auctions were run again. Such close bids in the first round—suggesting firms had similar costs or appetite for the job—should mean both bidders had a good chance of winning at the second attempt. Instead, in the second and third rounds of auctions, the order of bids was exactly the same. This suggested a “bidding ring”, a type of cartel in which builders had predetermined who should win. Messrs Kawai and Nakabayashi identify 1,000 firms whose bids were suggestive of collusion. Those firms won 7,600 projects worth almost $8.6 billion.

Slicker sell-offs

Tweaking the rules can make collusion harder, as a study in 2008 by Patrick Bajari and Jungwon Yeo of the University of Minnesota shows. Since 1994 America’s Federal Communications Commission (FCC) has run auctions to sell the spectrum used to transmit television, telephone and radio waves. To foster competition, it banned firms from discussing tactics. In response firms adopted a strategy called “code bidding”, using bids to signal their intentions. A bid of “$1,000,451” could mean, “I intend to go for licence 451. Don’t compete with me.” Other tactics used to deter competitors include “jump” bidding (raising prices by a big step rather than a small one) and “self bumping” (beating your own winning bid with a higher bid, as a display of strength).

Over time tinkering by the FCC has helped. The general rule is to restrict the information bidders have about their rivals. Restricting bidders to a small set of options (allowing bids to be raised by 1%, 5% or 10% per round, for example) prevents code bidding. Anonymous bidding creates a vacuum, breeding suspicion among cartel members. With these changes in place, pricing at FCC auctions has improved. In the 1995 auction of broadband spectrum over 6% of bids were suspicious; by 2008 less than 1% of bids were fishy. Auctions will never be perfect, but with the right rules they may be the best way for governments that are privatising assets to get closest to the best price.

From the print edition: Finance and economics

The future of universities.docx

The future of universities

The digital degree

The staid higher-education business is about to experience a welcome earthquake

Jun 28th 2014 | From the print edition

FROM Oxford’s quads to Harvard Yard and many a steel and glass palace of higher education in between, exams are giving way to holidays. As students consider life after graduation, universities are facing questions about their own future. The higher-education model of lecturing, cramming and examination has barely changed for centuries. Now, three disruptive waves are threatening to upend established ways of teaching and learning.

On one front, a funding crisis has created a shortfall that the universities’ brightest brains are struggling to solve. Institutions’ costs are rising, owing to pricey investments in technology, teachers’ salaries and galloping administrative costs. That comes as governments conclude that they can no longer afford to subsidise universities as generously as they used to. American colleges, in particular, are under pressure: some analysts predict mass bankruptcies within two decades.

At the same time, a technological revolution is challenging higher education’s business model. An explosion in online learning, much of it free, means that the knowledge once imparted to a lucky few has been released to anyone with a smartphone or laptop. These financial and technological disruptions coincide with a third great change: whereas universities used to educate only a tiny elite, they are now responsible for training and retraining workers throughout their careers. How will they survive this storm—and what will emerge in their place if they don’t?

Finance 101

Universities have passed most of their rising costs on to students. Fees in private non-profit universities in America rose by 28% in real terms in the decade to 2012, and have continued to edge up. Public universities increased their fees by 27% in the five years to 2012. Their average fees are now almost $8,400 for students studying in-state, and more than $19,000 for the rest. At private colleges average tuition is more than $30,000 (two-thirds of students benefit from bursaries of one sort or another). American student debt adds up to $1.2 trillion, with more than 7m people in default.

For a long time the debt seemed worth it. For most students the “graduate premium” of better-paid jobs still repays the cost of getting a degree (see article). But not all courses pay for themselves, and flatter graduate salaries mean it takes students longer to start earning good money. Student enrolments in America, which rose from 15.2m in 1999 to 20.4m in 2011, have slowed, falling by 2% in 2012.

Small private colleges are now struggling to balance their books. Susan Fitzgerald of Moody’s, a credit-rating agency, foresees a “death spiral” of closures. William Bowen, a former president of Princeton University, talks of a “cost disease”, in which universities are investing extravagantly in shiny graduate centres, libraries and accommodation to attract students.

Politically, the mood has shifted too. Both Bill Clinton and Barack Obama have said that universities face a poor outlook if they cannot lower their costs, marking a shift from the tendency of centre-left politicians to favour more public spending on academia. Cuts made by state governments have been partly offset by an increase in federal “Pell Grants” to poor students. But American universities will soon receive more money from tuition fees than from public funding (see chart 1).

In Asia tuition-fee inflation, running at around 5% for the past five years among leading universities, has stoked middle-class anxieties about the cost of college. Latin American countries fret about keeping fees low enough to expand the pool of graduates. In Europe high levels of subsidy, coupled with lower rates of college attendance, have insulated universities. But fees are going up: in 1998 Britain introduced annual tuition fees of just £1,000 (then $1,650), which by 2012 had increased to a maximum of £9,000 ($13,900).

Rising costs could scarcely strike at a worse time. Around the world demand for retraining and continuing education is soaring among workers of all ages. Globalisation and automation have shrunk the number of jobs requiring a middling level of education. Those workers with the means to do so have sought more education, in an attempt to stay ahead of the labour-demand curve. In America, higher-education enrolment by students aged 35 or older rose by 314,000 in the 1990s, but by 899,000 in the 2000s.

Improvements in machine intelligence are enabling automation to creep into new sectors of the economy, from book-keeping to retail. New online business models threaten sectors that had, until recently, weathered the internet storm. Carl Benedikt Frey and Michael Osborne, of Oxford University, reckon that perhaps 47% of occupations could be automated in the next few decades. They find that the odds of displacement drop sharply as educational attainment rises.

iPad illuminatio mea

So demand for education will grow. Who will meet it? Universities face a new competitor in the form of massive open online courses, or MOOCs. These digitally-delivered courses, which teach students via the web or tablet apps, have big advantages over their established rivals. With low startup costs and powerful economies of scale, online courses dramatically lower the price of learning and widen access to it, by removing the need for students to be taught at set times or places. The low cost of providing courses—creating a new one costs about $70,000—means they can be sold cheaply, or even given away. Clayton Christensen of Harvard Business School considers MOOCs a potent “disruptive technology” that will kill off many inefficient universities. “Fifteen years from now more than half of the universities [in America] will be in bankruptcy,” he predicted last year.

The first MOOC began life in Canada in 2008 as an online computing course. It was 2012, dubbed the “year of the MOOC”, that generated vatic excitement about the idea. Three big MOOC-sters were launched: edX, a non-profit provider run by Harvard and the Massachusetts Institute of Technology (MIT); Coursera, partnered with Stanford University; and Udacity, a for-profit co-founded by Sebastian Thrun, who taught an online computing course at Stanford. The big three have so far provided courses to over 12m students. Just under one-third are Americans, but edX says nearly half its students come from developing countries (see chart 2). Coursera’s new chief executive, Richard Levin, a former president of Yale University, plans an expansion focusing on Asia.

For all their potential, MOOCs have yet to unleash a Schumpetarian gale of disruption. Most universities and employers still see online education as an addition to traditional degree courses, rather than a replacement. Many prestigious institutions, including Oxford and Cambridge, have declined to use the new platforms.

Nick Gidwani, the founder of SkilledUp, an online-course directory, compares the process to the disruption of publishing and journalism. Large publishers used to enjoy a monopoly on printing presses, subscriber bases and deals with advertisers. A proliferation of low-cost blogs, websites and apps means they no longer do. Even successful print products have had to take on aspects of their digital rivals’ model. Mr Gidwani sees “scant hope for 200 professors, all delivering the same lecture”.

Traditional universities have a few trump cards. As well as teaching, examining and certification, college education creates social capital. Students learn how to debate, present themselves, make contacts and roll joints. How can a digital college experience deliver all of that?

The answer may be to combine the two. Anant Agarwal, who runs edX, proposes an alternative to the standard American four-year degree course. Students could spend an introductory year learning via a MOOC, followed by two years attending university and a final year starting part-time work while finishing their studies online. This sort of blended learning might prove more attractive than a four-year online degree. It could also draw in those who want to combine learning with work or child-rearing, freeing them from timetables assembled to suit academics. Niche subjects can benefit, too: a course on French existentialism could be accompanied by another university’s MOOC on the Portuguese variety.

Some universities are already adding digital classes to their syllabuses. In Brazil, Unopar University offers low-cost degree courses using online materials and weekly seminars, transmitted via satellite. In America, Minerva University has entry criteria to rival the best Ivy League colleges, but far lower fees (around $10,000 a year, instead of up to $60,000). The first batch of 20 students has just been accepted for Minerva’s foundation year in San Francisco, and will spend the rest of their course doing online tutorials while living outside America, with an emphasis on spending time in emerging economies as a selling-point to future employers.

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Online learning has its pitfalls. A pilot scheme at San Jose State University in California, offering a maths and statistics course run by Udacity, was suspended last year. Whereas 30% of campus students passed an entry-level algebra course, 18% of those studying online did—and the gap widened as material became more complex. “MOOCs’ pedagogy needs to improve very quickly,” admits Udacity’s Mr Thrun. He thinks the San Jose experiment showed that students needed more personalised support to use a university-level online course. A survey of MOOC students in America found that 70% already had a degree. If they are to compete with ordinary universities, MOOC providers must get better at teaching newcomers to academia. EdX’s Mr Agarwal wants to offer more courses during vacation-time, when students could use them to earn extra credit or to catch up on missed topics.

Detractors point to high dropout rates: only about 10% of first-time MOOC subscribers finish their course. That may not reflect badly on what is offered: the negligible cost of enrolment means that many people sign up without the firm intention to finish the course. But since the providers make most of their money from the certificates they grant to completers, maintaining a reasonable completion rate is important. Some are refining their courses to make the early stages easier to follow. EdX discovered that most dropouts happen quite quickly, in the same way that first-year university students sample courses before deciding which to pursue for their degree credits.

Another worry is that students can cheat by getting someone else to sit online tests in their place. The iversity, a German online college founded last year, is trying to get around this by holding in-person exams with an invigilator present. Coursera offers paid-for identity-verification services, which involve recording students’ unique typing patterns.

Online courses have provoked opposition from academics, who fear that they will accelerate cuts to university staffing. When Michael Sandel, a Harvard politics tutor, agreed to deliver some of his popular undergraduate lectures for edX, he was criticised by a group of Californian academics for supporting a model which poses “great peril to our university”. Online courses, they argued, risked “replacing faculty with cheap online education”. Others fret that the main beneficiaries will be stars like Professor Sandel, widening the pay and prestige gap between them and their colleagues. They may be right: lively teachers have always attracted more interest than dull ones (Socrates delivered lectures at raucous Athenian drinks parties). The difference now is that more students can share access to them.

Credit where it’s due

So far, MOOC providers have wooed new students by using graduates’ testimonials, vouching for the fact that completing a course has helped them get a job. Many potential students are put off by the fact that there is no guarantee that their online labours will be accepted as credit towards a degree. This is starting to change, as digital courses become more intertwined with existing curriculums. Over half the 4,500 students at MIT take a MOOC as part of their course. The John F. Kennedy University in California, which educates mainly mature students, has started to accept edX MOOC credits towards its degrees.

But most universities still do not. An answer to this stand-off may lie in Europe. Under rules designed to promote student mobility between EU member-states, students can transfer course credits, at the discretion of universities, in any of the 53 countries that have signed the Lisbon Recognition Convention, “regardless of whether the knowledge, skills and competences were acquired through formal, non-formal or informal learning paths”. The catch is getting European universities to accept MOOC credits, in order to trade them. “Europe will not quickly take to new forms of degree delivery,” predicts Santiago Iñiguez, the president of Spain’s IE university. Others are more optimistic. Hans Klöpper, the managing director of iversity, points out that it is easy for students to assess MOOCs’ quality, since they are open for all to see. Once students start to complete them in large numbers and clamour for recognition, it will be hard for Europe’s universities to resist accrediting the best of them, he believes.

In the meantime, a second generation of MOOC is trying to mirror courses offered at traditional universities. Georgia Institute of Technology and Udacity have joined forces with AT&T, a telecoms firm, to create an online master’s degree in computing for $7,000, to run in parallel with a similar campus-based qualification that costs around $25,000. Mona Mourshead, who runs McKinsey’s education consultancy, sees a turning point. “If employers accept this on equal terms, the MOOC master’s degree will have taken off. Others will surely follow,” she says.

Although some companies have authored online courses (Google, for instance, has made a MOOC on how to interpret data), established universities still create most of them. To encourage them to spare their best academics’ time to put the courses together, online-learning companies must give them a financial incentive. EdX says it is “self-sustaining” but provides no details of its revenues. The Chronicle of Higher Education reported last year that edX lets universities use its platform in return for the first $50,000 generated by the course, plus a cut of future revenues. An alternative model that it reportedly offers is to charge $250,000 for “production assistance” in creating a course, plus further fees every term that the course is offered. Coursera reveals only its revenue from certification—around $4m since its launch in 2012—for which it charges students between $30 and $100.

Some have struggled to make a business out of this. Last year Udacity underwent an abrupt “pivot”, declaring that the free model was not working and that from then on it would sell professional online training. Although web-based courses are much cheaper than on-campus ones, they will not retain ambitious students unless they replicate the interaction available in good universities. Making teachers available for digital seminars and increasing the level of interactivity could help. So would more detailed online feedback. Improvements like these raise costs. So a more varied MOOC-ecology might end up with varying price-tiers, ranging from a basic free model to more expensive bespoke ones.

You can’t do this online

The universities least likely to lose out to online competitors are elite institutions with established reputations and low student-to-tutor ratios. That is good news for the Ivy League, Oxbridge and co, which offer networking opportunities to students alongside a degree. Students at universities just below Ivy League level are more sensitive to the rising cost of degrees, because the return on investment is smaller. Those colleges might profit from expanding the ratio of online learning to classroom teaching, lowering their costs while still offering the prize of a college education conducted partly on campus.

The most vulnerable, according to Jim Lerman of Kean University in New Jersey, are the “middle-tier institutions, which produce America’s teachers, middle managers and administrators”. They could be replaced in greater part by online courses, he suggests. So might weaker community colleges, although those which cultivate connections to local employers might yet prove resilient.

Since the first wave of massive online courses launched in 2012, a backlash has focused on their failures and commercial uncertainties. Yet if critics think they are immune to the march of the MOOC, they are almost certainly wrong. Whereas online courses can quickly adjust their content and delivery mechanisms, universities are up against serious cost and efficiency problems, with little chance of taking more from the public purse.

In “The Idea of a University”, published in 1858, John Henry Newman, an English Catholic cardinal, summarised the post-Enlightenment university as “a place for the communication and circulation of thought, by means of personal intercourse, through a wide extent of country”. This ideal still inspires in the era when the options for personal intercourse via the internet are virtually limitless. But the Cardinal had a warning: without the personal touch, higher education could become “an icebound, petrified, cast-iron university”. That is what the new wave of high-tech online courses should not become. But as an alternative to an overstretched, expensive model of higher education, they are more likely to prosper than fade.

Correction: In an earlier version of this story, we incorrectly said that edX was a for-profit provider of MOOCs. It is a non-profit provider. Sorry. This was corrected on June 30th 2014.

From the print edition: Briefing



German lessons

Many countries want a Mittelstand like Germany’s. It is not so easy to copy

Jul 12th 2014 | From the print edition

GERMANY’S midsized manufacturers, collectively known as the Mittelstand, are often praised as a group for providing the backbone of the world’s fourth-largest economy. Individually, they are world leaders in hiding their light under a bushel. They tend to be family-owned, tucked away in small towns and familiar only to the businesses that buy their specialised machinery and components. “We are not digging for gold,” says Joachim Kreuzburg, the boss of Sartorius, a maker of laboratory equipment. “We are selling shovels to the gold-diggers.”

Increasingly, though, Germany’s hidden champions are enjoying a measure of international celebrity. Officials and businesspeople from the world over are making pilgrimages to Germany to learn from the Mittelständler, much as they flocked to Japan in the 1970s to study Toyota. Mario Ohoven, president of the BVMW, a trade body for the Mittelstand, says that wherever he goes these days, he is pressed to explain the secrets of his members’ success. Recent suitors include Iran and Egypt.

Germany’s economic strength in recent years is the most obvious reason why other countries want to emulate it. But the Mittelstand also appears to offer a solution to some of the biggest worries haunting the capitalist system. One is about inclusiveness: some countries worry that too much economic activity is becoming concentrated in a small number of giant companies and in a few megacities. Another is youth unemployment: millions of young people remain idle while bosses complain of skill shortages. Winfried Weber, a professor of management at the University of Mannheim, explains that the combination of medium-sized companies with deep local roots and a strong apprenticeship system means that in Germany only 7.8% of those aged 25 or under are unemployed, compared with 22.1% in Sweden and 54% in Spain. Mittelstand firms inspire extraordinary loyalty in their workers: on average only 2.7% of them leave each year, compared with the 30% turnover at some big American companies.

Of the stream of pilgrims who come to study Germany’s midsized marvels, the most devoted are from South Korea. Moon Kook-hyun, a former boss of Yuhan-Kimberley, a maker of disposable nappies, has argued for years that his country is too dependent on a handful of giant conglomerates, the chaebol, and must focus on improving its small and medium-sized family firms. He is so passionate about his cause that he set aside his business career to serve in parliament and, in 2007, to run for president. He got only 5.7% of the vote. But his message that companies do not have to be big to be world-class is resonating. South Korea’s current president, Park Geun-hye, recently took a group of would-be Mittelständler to visit their role models in Germany. South Korea has also set up German-style Meister schools, to teach bright youngsters to become masters of a technical trade.

Mr Moon is now taking his crusade to China. Every year he lectures to thousands of heads of Chinese family firms that Germany has more than 1,000 companies that have been in the same family for generations but can compete with the world’s best. Again, his message is hitting home, and China is also now sending delegations to Germany. However, some of its canny capitalists have concluded that the best way to understand the Mittelstand firms is to own one. Among those recently bought by the Chinese are Putzmeister, a maker of concrete pumps, and Preh, which makes various electronic innards for cars.

Before announcing the triumph of the Mittelstand, it is worth bearing two things in mind. The first is that business models can never be transported lock, stock and barrel. The German system depends on delicate relationships between schools and companies, and capital and labour. It is hard to see this being reconstituted in South Korea, with its adversarial industrial relations, or the United States, with its enthusiasm for labour mobility. The British have been trying to learn from the German apprenticeship model since the late 19th century, with limited success.

The second is that the Mittelstand is changing rapidly: just as the world is trying to learn from its companies, they are busy learning from the world. The Freudenberg Group, a maker of filters, seals and lubricants, has been owned by the Freudenberg family for eight generations. But its chief executive, Mohsen Sohi, is an American who spent his first 20 years in Iran. Mittelstand firms are realising that they can no longer just stay in small-town Germany. To stay competitive they need to produce their goods globally and service them wherever their customers are—and to help them with this, they are hiring growing numbers of foreigners. Sennheiser, which makes headphones and microphones, recently passed to a new generation of Sennheisers, Andreas and Daniel, who stress the importance of “being global in everything we do”. They want to learn from “innovative customers” around the world: the Japanese are particularly demanding when it comes to sound, and Americans when it comes to fashion.

Mix and match

However, this does not mean that the pilgrims are visiting Germany in vain. It is a vivid example of the fact that manufacturers in rich, high-wage countries can prosper from globalisation if they invest in human capital and focus on sophisticated products. The West’s industrial companies learned from lean manufacturing without importing Japan’s system of managed capitalism. German companies such as Freudenberg are embracing globalisation without losing their roots: Mr Sohi has learned German and praises his company’s “Mittelstand spirit”. Management science has always progressed by picking up ideas from all over the world and remixing them into more productive combinations. Germany is assuming its rightful role as one of the world’s leading laboratories for this mixing.

From the print edition: Business


The Economist Magazine


In praise of laziness

Businesspeople would be better off if they did less and thought more

Aug 17th 2013 |From the print edition

THERE is a never-ending supply of business gurus telling us how we can, and must, do more. Sheryl Sandberg urges women to “Lean In” if they want to get ahead. John Bernard offers breathless advice on conducting “Business at the Speed of Now”. Michael Port tells salesmen how to “Book Yourself Solid”. And in case you thought you might be able to grab a few moments to yourself, Keith Ferrazzi warns that you must “Never Eat Alone”.

Yet the biggest problem in the business world is not too little but too much—too many distractions and interruptions, too many things done for the sake of form, and altogether too much busy-ness. The Dutch seem to believe that an excess of meetings is the biggest devourer of time: they talk of vergaderziekte, “meeting sickness”. However, a study last year by the McKinsey Global Institute suggests that it is e-mails: it found that highly skilled office workers spend more than a quarter of each working day writing and responding to them.

Which of these banes of modern business life is worse remains open to debate. But what is clear is that office workers are on a treadmill of pointless activity. Managers allow meetings to drag on for hours. Workers generate e-mails because it requires little effort and no thought. An entire management industry exists to spin the treadmill ever faster.

All this “leaning in” is producing an epidemic of overwork, particularly in the United States. Americans now toil for eight-and-a-half hours a week more than they did in 1979. A survey last year by the Centres for Disease Control and Prevention estimated that almost a third of working adults get six hours or less of sleep a night. Another survey last year by Good Technology, a provider of secure mobile systems for businesses, found that more than 80% of respondents continue to work after leaving the office, 69% cannot go to bed without checking their inbox and 38% routinely check their work e-mails at the dinner table.

This activity is making it harder to focus on real work as opposed to make-work. Teresa Amabile of Harvard Business School, who has been conducting a huge study of work and creativity, reports that workers are generally more creative on low-pressure days than on high-pressure days when they are confronted with a flurry of unpredictable demands. In 2012 Gloria Mark of the University of California, Irvine, and two colleagues deprived 13 people in the IT business of e-mail for five days and studied them intensively. They found that people without it concentrated on tasks for longer and experienced less stress.

It is high time that we tried a different strategy—not “leaning in” but “leaning back”. There is a distinguished history of leadership thinking in the lean-back tradition. Lord Melbourne, Queen Victoria’s favourite prime minister, extolled the virtues of “masterful inactivity”. Herbert Asquith embraced a policy of “wait and see” when he had the job. Ronald Reagan also believed in not overdoing things: “It’s true hard work never killed anybody,” he said, “but I figure, why take the chance?”. This tradition has been buried in a morass of meetings and messages. We need to revive it before we schedule ourselves to death.

The most obvious beneficiaries of leaning back would be creative workers—the very people who are supposed to be at the heart of the modern economy. In the early 1990s Mihaly Csikszentmihalyi, a psychologist, asked 275 creative types if he could interview them for a book he was writing. A third did not bother to reply at all and another third refused to take part. Peter Drucker, a management guru, summed up the mood of the refuseniks: “One of the secrets of productivity is to have a very big waste-paper basket to take care of all invitations such as yours.” Creative people’s most important resource is their time—particularly big chunks of uninterrupted time—and their biggest enemies are those who try to nibble away at it with e-mails or meetings. Indeed, creative people may be at their most productive when, to the manager’s untutored eye, they appear to be doing nothing.

Managers themselves could benefit. Those at the top are best employed thinking about strategy rather than operations—about whether the company is doing the right thing rather than whether it is sticking to its plans. When he was boss of General Electric, Jack Welch used to spend an hour a day in what he called “looking out of the window time”. When he was in charge of Microsoft Bill Gates used to take two “think weeks” a year when he would lock himself in an isolated cottage. Jim Collins, of “Good to Great” fame, advises all bosses to keep a “stop doing list”. Is there a meeting you can cancel? Or a dinner you can avoid?

Less is more—more or less

Junior managers would do well to follow the same advice. In “Do Nothing”, one of the few business books to grapple with the problem of over-management, Keith Murnighan of the Kellogg School of Management argues that the best managers focus their attention on establishing the right rules—recruiting the right people and establishing the right incentives—and then get out of the way. He quotes a story about Eastman Kodak in its glory days. A corporate reorganisation left a small division out in the cold—without a leader or a reporting line to headquarters. The head office only rediscovered the division when it received a note from a customer congratulating the unit on its work.

Doing nothing may be going too far. Managers play an important role in co-ordinating complicated activities and disciplining slackers. And some creative people would never finish anything if they were left to their own devices. But there is certainly a case for doing a lot less—for rationing e-mail, cutting back on meetings and getting rid of a few overzealous bosses. Leaning in has been producing negative returns for some time now. It is time to try the far more radical strategy of leaning back.

From the print edition: Business


Special report: The Nordic countries

In this special report

· Northern lights

· More for less

· The ins and the outs

· Global niche players

· If in doubt, innovate

· Cultural revolution

· The rich cousin

· The secret of their success

Sources & acknowledgements Reprints

Northern lights

The Nordic countries are reinventing their model of capitalism, says Adrian Wooldridge

Feb 2nd 2013 |From the print edition The Economist

THIRTY YEARS AGO Margaret Thatcher turned Britain into the world’s leading centre of “thinking the unthinkable”. Today that distinction has passed to Sweden. The streets of Stockholm are awash with the blood of sacred cows. The think-tanks are brimful of new ideas. The erstwhile champion of the “third way” is now pursuing a far more interesting brand of politics.

Sweden has reduced public spending as a proportion of GDP from 67% in 1993 to 49% today. It could soon have a smaller state than Britain. It has also cut the top marginal tax rate by 27 percentage points since 1983, to 57%, and scrapped a mare’s nest of taxes on property, gifts, wealth and inheritance. This year it is cutting the corporate-tax rate from 26.3% to 22%.

Special report

· Northern lights

· More for less

· The ins and the outs

· Global niche players

· If in doubt, innovate

· Cultural revolution

· The rich cousin

· The secret of their success

Sources & acknowledgements Reprints

Related topics

· Private Education

· Education

· Think-tanks

· Political policy

· Government and politics

Sweden has also donned the golden straitjacket of fiscal orthodoxy with its pledge to produce a fiscal surplus over the economic cycle. Its public debt fell from 70% of GDP in 1993 to 37% in 2010, and its budget moved from an 11% deficit to a surplus of 0.3% over the same period. This allowed a country with a small, open economy to recover quickly from the financial storm of 2007-08. Sweden has also put its pension system on a sound foundation, replacing a defined-benefit system with a defined-contribution one and making automatic adjustments for longer life expectancy.

Most daringly, it has introduced a universal system of school vouchers and invited private schools to compete with public ones. Private companies also vie with each other to provide state-funded health services and care for the elderly. Anders Aslund, a Swedish economist who lives in America, hopes that Sweden is pioneering “a new conservative model”; Brian Palmer, an American anthropologist who lives in Sweden, worries that it is turning into “the United States of Swedeamerica”.

There can be no doubt that Sweden’s quiet revolution has brought about a dramatic change in its economic performance. The two decades from 1970 were a period of decline: the country was demoted from being the world’s fourth-richest in 1970 to 14th-richest in 1993, when the average Swede was poorer than the average Briton or Italian. The two decades from 1990 were a period of recovery: GDP growth between 1993 and 2010 averaged 2.7% a year and productivity 2.1% a year, compared with 1.9% and 1% respectively for the main 15 EU countries.

For most of the 20th century Sweden prided itself on offering what Marquis Childs called, in his 1936 book of that title, a “Middle Way” between capitalism and socialism. Global companies such as Volvo and Ericsson generated wealth while enlightened bureaucrats built the Folkhemmet or “People’s Home”. As the decades rolled by, the middle way veered left. The government kept growing: public spending as a share of GDP nearly doubled from 1960 to 1980 and peaked at 67% in 1993. Taxes kept rising. The Social Democrats (who ruled Sweden for 44 uninterrupted years from 1932 to 1976 and for 21 out of the 24 years from 1982 to 2006) kept squeezing business. “The era of neo-capitalism is drawing to an end,” said Olof Palme, the party’s leader, in 1974. “It is some kind of socialism that is the key to the future.”

The other Nordic countries have been moving in the same direction, if more slowly. Denmark has one of the most liberal labour markets in Europe. It also allows parents to send children to private schools at public expense and make up the difference in cost with their own money. Finland is harnessing the skills of venture capitalists and angel investors to promote innovation and entrepreneurship. Oil-rich Norway is a partial exception to this pattern, but even there the government is preparing for its post-oil future.

This is not to say that the Nordics are shredding their old model. They continue to pride themselves on the generosity of their welfare states. About 30% of their labour force works in the public sector, twice the average in the Organisation for Economic Development and Co-operation, a rich-country think-tank. They continue to believe in combining open economies with public investment in human capital. But the new Nordic model begins with the individual rather than the state. It begins with fiscal responsibility rather than pump-priming: all four Nordic countries have AAA ratings and debt loads significantly below the euro-zone average. It begins with choice and competition rather than paternalism and planning. The economic-freedom index of the Fraser Institute, a Canadian think-tank, shows Sweden and Finland catching up with the United States (see chart). The leftward lurch has been reversed: rather than extending the state into the market, the Nordics are extending the market into the state.

Why are the Nordic countries doing this? The obvious answer is that they have reached the limits of big government. “The welfare state we have is excellent in most ways,” says Gunnar Viby Mogensen, a Danish historian. “We only have this little problem. We can’t afford it.” The economic storms that shook all the Nordic countries in the early 1990s provided a foretaste of what would happen if they failed to get their affairs in order.

There are two less obvious reasons. The old Nordic model depended on the ability of a cadre of big companies to generate enough money to support the state, but these companies are being slimmed by global competition. The old model also depended on people’s willingness to accept direction from above, but Nordic populations are becoming more demanding.

Small is powerful

The Nordic countries have a collective population of only 26m. Finland is the only one of them that is a member of both the European Union and the euro area. Sweden is in the EU but outside the euro and has a freely floating currency. Denmark, too, is in the EU and outside the euro area but pegs its currency to the euro. Norway has remained outside the EU.

But there are compelling reasons for paying attention to these small countries on the edge of Europe. The first is that they have reached the future first. They are grappling with problems that other countries too will have to deal with in due course, such as what to do when you reach the limits of big government and how to organise society when almost all women work. And the Nordics are coming up with highly innovative solutions that reject the tired orthodoxies of left and right.

The second reason to pay attention is that the new Nordic model is proving strikingly successful. The Nordics dominate indices of competitiveness as well as of well-being. Their high scores in both types of league table mark a big change since the 1980s when welfare took precedence over competitiveness.

Explore our interactive guide to Europe’s troubled economies

The Nordics do particularly well in two areas where competitiveness and welfare can reinforce each other most powerfully: innovation and social inclusion. BCG, as the Boston Consulting Group calls itself, gives all of them high scores on its e-intensity index, which measures the internet’s impact on business and society. Booz & Company, another consultancy, points out that big companies often test-market new products on Nordic consumers because of their willingness to try new things. The Nordic countries led the world in introducing the mobile network in the 1980s and the GSM standard in the 1990s. Today they are ahead in the transition to both e-government and the cashless economy. Locals boast that they pay their taxes by SMS. This correspondent gave up changing sterling into local currencies because everything from taxi rides to cups of coffee can be paid for by card.

The Nordics also have a strong record of drawing on the talents of their entire populations, with the possible exception of their immigrants. They have the world’s highest rates of social mobility: in a comparison of social mobility in eight advanced countries by Jo Blanden, Paul Gregg and Stephen Machin, of the London School of Economics, they occupied the first four places. America and Britain came last. The Nordics also have exceptionally high rates of female labour-force participation: in Denmark not far off as many women go out to work (72%) as men (79%).

Flies in the ointment

This special report will examine the way the Nordic governments are updating their version of capitalism to deal with a more difficult world. It will note that in doing so they have unleashed a huge amount of creativity and become world leaders in reform. Nordic entrepreneurs are feeling their oats in a way not seen since the early 20th century. Nordic writers and artists—and indeed Nordic chefs and game designers—are enjoying a creative renaissance.

The report will also add caveats. The growing diversity of Nordic societies is generating social tensions, most horrifically in Norway, where Anders Breivik killed 77 people in a racially motivated attack in 2011, but also on a more mundane level every day. Sweden is finding it particularly hard to integrate its large population of refugees.

The Nordic model is still a work in progress. The three forces that have obliged the Nordic countries to revamp it—limited resources, rampant globalisation and growing diversity—are gathering momentum. The Nordics will have to continue to upgrade their model, but they will also have to fight to retain what makes it distinctive. Lant Pritchett and Michael Woolcock, of the World Bank, have coined the term “getting to Denmark” to describe successful modernisation. This report will suggest that the trick is not just to get to Denmark; it is to stay there.

The final caveat is about learning from the Nordic example, which other countries are rightly trying to do. Britain, for example, is introducing Swedish-style “free schools”. But transferring such lessons is fraught with problems. The Nordics’ success depends on their long tradition of good government, which emphasises not only honesty and transparency but also consensus and compromise. Learning from Denmark may be as difficult as staying there.


Schumpeter The silence of Mammon

Dec 17th 2009 From The Economist print edition

Business people should stand up for themselves

Illustration by Brett Ryder

HENRY HAZLITT, one of the great popularisers of free-market thinking, once said that good ideas have to be relearned in every generation. This is certainly true of good ideas about business. A generation ago Margaret Thatcher and Ronald Reagan did an excellent job of making the case in favour of business. Today it looks as though the case needs to be made all over again.

It is hardly surprising that business has fallen from grace in recent years. The credit crunch almost plunged the world into depression. The new century began with the implosion of Enron and other prominent firms. Some bosses pay themselves like princes while preaching austerity to their workers. Business titans who once graced the covers of magazines have been hauled before congressional committees or carted off to prison.

Business people have been at pains to point out that it is unfair to judge all of their kind by the misdeeds of a few. The credit crunch was the handiwork of bankers (who lent too much money) and policymakers (who fooled themselves into thinking that they had abolished boom and bust). Corporate criminals like WorldCom’s Bernie Ebbers and Tyco’s Denis Kozlowski were imprisoned for their crimes. Avaricious bosses like Angelo Mozilo, who pocketed more than $550m during his inglorious reign at Countrywide, are exceptions. The average American boss is actually paid less today than he was in 2000.

This is all true enough but hardly sets the blood racing. More ambitious defenders of business have advanced two arguments. The first is that many firms are devoted to good works. They routinely trumpet their passionate commitment not just to their various stakeholders (such as workers and suppliers) but to the planet at large. Timberland puts “green index” labels on all its shoes. GlaxoSmithKline makes HIV drugs available at cost to millions of Africans. Starbucks buys lots of Fairtrade coffee.

The second argument is more hard-headed: that businesses have done more than any other institutions to advance prosperity, turning the luxuries of the rich, such as cars a century ago and computers today, into goods for the masses. General Electric’s aircraft engines transport 660m people a year and its imaging machines scan 230m patients. Wal-Mart’s “everyday low prices” save Americans at least $50 billion a year.

The problem with the first argument is that it smacks of appeasement. Advocates of corporate social responsibility suggest that business has something to apologise for, and thus encourage its critics to find ever more to complain about. Crocodiles never go away if you feed them. The problem with the second argument is that it does not go far enough. It focuses exclusively on material well-being, and so fails to engage with people’s moral qualms about business.

This is doubly regrettable. It is regrettable because it has allowed critics of business to dominate the discussion of corporate morality. For all too many people it is now taken as a given that companies promote greed, crush creativity and monopolise power. And it is regrettable because it has deprived the business world of three rather better arguments in its defence.

The first is that business is a remarkable exercise in co-operation. For all the talk of competition “red in tooth and claw”, companies in fact depend on persuading large numbers of people—workers and bosses, shareholders and suppliers—to work together to a common end. This involves getting lots of strangers to trust each other. It also increasingly involves stretching that trust across borders and cultures. Apple’s iPod is not just a miracle of design. It is also a miracle of co-operation, teaming Californian designers with Chinese manufacturers and salespeople in all corners of the earth. It is worth remembering that the word “company” is derived from the Latin words “cum” and “pane”—meaning “breaking bread together”.

Another rejoinder is that business is an exercise in creativity. Business people do not just invent clever products that solve nagging problems, from phones that can link fishermen in India with nearby markets to devices that can provide insulin to diabetics without painful injections. They also create organisations that manufacture these products and then distribute them about the world. Nandan Nilekani, one of the founders of Infosys, put the case for business as well as anyone when he said that the computer-services giant’s greatest achievement was not its $2 billion in annual revenue but the fact that it had taught his fellow Indians to “redefine the possible”.

Enfranchising, not enslaving

A third defence is that business helps maintain political pluralism. Anti-capitalists are fond of arguing that companies account for half of the world’s 100 biggest economies. But this argument not only depends on the abuse of statistics—comparing corporate turnover with GDP (which measures value added, not sales). It also rests on ignorance of the pressures of business life.

Companies have a difficult enough job staying alive, let alone engaging in a “silent takeover” of the state. Only 202 of the 500 biggest companies in America in 1980 were still in existence 20 years later. Anti-capitalists actually have it upside down. Companies actually prevent each other from gaining too much power, and also act as a check on the power of governments that would otherwise be running the economy. The proportion of the world’s governments that can reasonably be called democratic has increased from 40% in 1980, when the pro-business revolution began, to more than 60% today.

Most hard-headed business people are no doubt reluctant to make these arguments. They are more concerned with balancing their books than with engaging in worthy debates about freedom and democracy. But they would do well to become a bit less reticent: the price of silence will be an ever more hostile public and ever more overbearing government.

Copyright © 2010 The Economist Newspaper and The Economist Group. All rights reserved.

Ways Developing Market Firms are Changing the Rules of the Management Game.docx

Ways Developing Market Firms are Changing the Rules of the Management Game:

1. Contract out ever more work up to the point of all but core business.

2. Use existing technology in imaginative news ways to cut costs.

3. Apply mass production techniques in new and unexpected ways and areas.

All of this is driven by gaining access and making money from customers in the bottom of the income pyramid.



· OCTOBER 27, 2008

The Age of Prosperity Is Over

This administration and Congress will be remembered like Herbert Hoover.


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About a year ago Stephen Moore, Peter Tanous and I set about writing a book about our vision for the future entitled “The End of Prosperity.” Little did we know then how appropriate its release would be earlier this month.

Financial panics, if left alone, rarely cause much damage to the real economy, output, employment or production. Asset values fall sharply and wipe out those who borrowed and lent too much, thereby redistributing wealth from the foolish to the prudent. This process is the topic of Nassim Nicholas Taleb’s book “Fooled by Randomness.”

image9.jpgDavid Gothard

When markets are free, asset values are supposed to go up and down, and competition opens up opportunities for profits and losses. Profits and stock appreciation are not rights, but rewards for insight mixed with a willingness to take risk. People who buy homes and the banks who give them mortgages are no different, in principle, than investors in the stock market, commodity speculators or shop owners. Good decisions should be rewarded and bad decisions should be punished. The market does just that with its profits and losses.

No one likes to see people lose their homes when housing prices fall and they can’t afford to pay their mortgages; nor does any one of us enjoy watching banks go belly-up for making subprime loans without enough equity. But the taxpayers had nothing to do with either side of the mortgage transaction. If the house’s value had appreciated, believe you me the overleveraged homeowner and the overly aggressive bank would never have shared their gain with taxpayers. Housing price declines and their consequences are signals to the market to stop building so many houses, pure and simple.

But here’s the rub. Now enter the government and the prospects of a kinder and gentler economy. To alleviate the obvious hardships to both homeowners and banks, the government commits to buy mortgages and inject capital into banks, which on the face of it seems like a very nice thing to do. But unfortunately in this world there is no tooth fairy. And the government doesn’t create anything; it just redistributes. Whenever the government bails someone out of trouble, they always put someone into trouble, plus of course a toll for the troll. Every $100 billion in bailout requires at least $130 billion in taxes, where the $30 billion extra is the cost of getting government involved.

If you don’t believe me, just watch how Congress and Barney Frank run the banks. If you thought they did a bad job running the post office, Amtrak, Fannie Mae, Freddie Mac and the military, just wait till you see what they’ll do with Wall Street.

Some 14 months ago, the projected deficit for the 2008 fiscal year was about 0.6% of GDP. With the $170 billion stimulus package last March, the add-ons to housing and agriculture bills, and the slowdown in tax receipts, the deficit for 2008 actually came in at 3.2% of GDP, with the 2009 deficit projected at 3.8% of GDP. And this is just the beginning.

The net national debt in 2001 was at a 20-year low of about 35% of GDP, and today it stands at 50% of GDP. But this 50% number makes no allowance for anything resulting from the over $5.2 trillion guarantee of Fannie Mae and Freddie Mac assets, or the $700 billion Troubled Assets Relief Program (TARP). Nor does the 50% number include any of the asset swaps done by the Federal Reserve when they bailed out Bear Stearns, AIG and others.

But the government isn’t finished. House Speaker Nancy Pelosi and Senate Majority Leader Harry Reid — and yes, even Fed Chairman Ben Bernanke — are preparing for a new $300 billion stimulus package in the next Congress. Each of these actions separately increases the tax burden on the economy and does nothing to encourage economic growth. Giving more money to people when they fail and taking more money away from people when they work doesn’t increase work. And the stock market knows it.

The stock market is forward looking, reflecting the current value of future expected after-tax profits. An improving economy carries with it the prospects of enhanced profitability as well as higher employment, higher wages, more productivity and more output. Just look at the era beginning with President Reagan’s tax cuts, Paul Volcker’s sound money, and all the other pro-growth, supply-side policies.

Bill Clinton and Alan Greenspan added their efforts to strengthen what had begun under President Reagan. President Clinton signed into law welfare reform, so people actually have to look for a job before being eligible for welfare. He ended the “retirement test” for Social Security benefits (a huge tax cut for elderly workers), pushed the North American Free Trade Agreement through Congress against his union supporters and many of his own party members, signed the largest capital gains tax cut ever (which exempted owner-occupied homes from capital gains taxes), and finally reduced government spending as a share of GDP by an amazing three percentage points (more than the next four best presidents combined). The stock market loved Mr. Clinton as it had loved Reagan, and for good reasons.

The stock market is obviously no fan of second-term George W. Bush, Nancy Pelosi, Harry Reid, Ben Bernanke, Barack Obama or John McCain, and again for good reasons.

These issues aren’t Republican or Democrat, left or right, liberal or conservative. They are simply economics, and wish as you might, bad economics will sink any economy no matter how much they believe this time things are different. They aren’t.

I was on the White House staff as George Shultz’s economist in the Office of Management and Budget when Richard Nixon imposed wage and price controls, the dollar was taken off gold, import surcharges were implemented, and other similar measures were enacted from a panicked decision made in August of 1971 at Camp David.

I witnessed, like everyone else, the consequences of another panicked decision to cover up the Watergate break-in. I saw up close and personal Presidents Gerald Ford and George H.W. Bush succumb to panicked decisions to raise taxes, as well as Jimmy Carter’s emergency energy plan, which included wellhead price controls, excess profits taxes on oil companies, and gasoline price controls at the pump.

The consequences of these actions were disastrous. Just look at the stock market from the post-Kennedy high in early 1966 to the pre-Reagan low in August of 1982. The average annual real return for U.S. assets compounded annually was -6% per year for 16 years. That, ladies and gentlemen, is a bear market. And it is something that you may well experience again. Yikes!

Then we have this administration’s panicked Sarbanes-Oxley legislation, and of course the deer-in-the-headlights Mr. Bernanke in his bungling of monetary policy.

There are many more examples, but none hold a candle to what’s happening right now. Twenty-five years down the line, what this administration and Congress have done will be viewed in much the same light as what Herbert Hoover did in the years 1929 through 1932. Whenever people make decisions when they are panicked, the consequences are rarely pretty. We are now witnessing the end of prosperity.

Mr. Laffer is chairman of Laffer Associates and co-author of “The End of Prosperity: How Higher Taxes Will Doom the Economy — If We Let it Happen,” just out by Threshold.

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Here are two questions to think about and discuss on Weds.docx

Here are two questions to think about and discuss on Weds. 1.  We have often heard that if it is worth doing at all it is worth doing well.  What would economics say? 2.  Is is wrong the profit from the “pain” of others?  What would economics say? Have fun and let’s talk about these Weds. Dr. Shwiff

Global Developing Markets Issue.docx

Global Developing Markets Issue


Much of how you have been trained in you management and economic education has centered around the American market place. That means one is selling products to a market that has relatively high income by world standards. Another way of saying this is that the majority of Americans simply are not poor.

However, assume your firm has decided to concentrate on the markets in say India, China, Brazil etc in which something along the lines of 80% of the population have very low incomes.

So here is your question:

Given the tools we have learned this semester, how would you have to modify them (or not) to be successful in these low income high volume markets. Think about issues of market structure, pricing, costs etc. If we mean low cost, then the issue of min average costs and scale are key issues. Yet in most the developing world respect for patents and copyrights are questionable. Thus you may indeed produce at low cost product, but what must you do to keep your share and margins.

Further, it seems to me you would like to grow your market and go upmarket, you would want to see higher incomes from you strategies also.

What are your thoughts? No more than two pages.

I suggest you pick one concept and concentrate on it alone.

Freelance Workforce.pdf

Drake Bennett: A freelance work force 04:24 PM CST on Friday, February 5, 2010

As of last week, a company called Txteagle became the largest employer in Kenya. The firm,  started in its original form in 2008 by a young computer engineer named Nathan Eagle and  soon to be based in Boston, has 10,000 people working for it in Kenya. Txteagle does not  rent office space for these workers, nor do the company’s officers interview them, or ever  talk to most of them.

Also Online  What’s The Big Story? Find out  Blog: Opinion

And, in a sense, the labor that the Kenyan workforce does hardly seems like work. The jobs  –  short  stretches  of  speech  to  be  transcribed  or  translated  into  a  local  dialect,  search  engine  results  to be  checked,  images  to be  labeled,  short market  research  surveys  to be  completed – come  in over a worker’s own cellphone, and the worker responds either by  speaking  into  the phone or  texting back  the  answer. The workers  can be  anyone with  a  cellphone  –  a  secretary  waiting  for  a  bus,  a  Masai  tribesman  herding  cattle,  a  student  between  classes,  a  security  guard  on  a  slow  day  or  one  of  Kenya’s  tens  of  millions  of  unemployed. The  jobs  take at most a  few minutes and pay a  few cents each (payment  is  sent by cellphone as well), but a dedicated worker can earn a few dollars a day in a part of  the world where that is a significant sum.

The  Txteagle  story  is  a  variety  of  things:  a  tale  of  savvy  social  entrepreneurs  taking  advantage of the proliferation of cellphones in much of the developing world, an example  of the ability of clever programming to chop big jobs up into tiny, discrete chunks and to  assess  reliability  by  checking  the  answers  of  different  workers  against  each  other.  But  Txteagle is also, at the most basic level, a story of how people are rethinking what work can  be.

The  United  States  Government  Accountability  Office  has  estimated  that  so‐called  contingent  workers  –  everything  from  temps  to  day  laborers  to  the  self‐employed  to  independent  contractors  –  make  up  nearly  a  third  of  the  workforce.  And  forecasters  believe  that proportion will  rise. The growth  is being driven partly by economic  factors,  with the uncertain economic climate making short‐term contract workers more attractive  to firms than full‐time employees, but of course broader technological changes are at work  as well;  cellphones,  PDAs  and broadband make  it  easy  to  farm out work,  even  complex,  interactive tasks that previously only made sense to do in‐house.

This shift has begun to trigger a more fundamental examination of what a job is and what  we expect to get from it. Despite the vast diversity of the work people do, the traditional  notion of a job has tended to be a standard bundle of responsibilities, roles and benefits:  We do our work  for  an employer  to whom we owe our primary professional  allegiance,  and  that employer pays us and provides us health  insurance and  a sense of professional  identity. In the United States, many of the laws that shape health insurance, retirement and  tax policy are structured around this model.

But  in a  few realms, people have begun to unpack that bundle and reassemble  it  in new,  surprising and potentially important ways. As it becomes easier for companies to plug in  on  the  fly  to  the  constantly  shifting  network  of  freelance  labor,  freelance workers  have  begun to think not  in terms of having a  job, but of having a collection of different  jobs at  any one time. Some companies,  like Txteagle, are unbundling work in more radical ways,  using technology to “crowdsource” labor, to divvy it up into micro‐jobs that can be farmed  out to unaffiliated masses of remote workers.

At  the same  time, others have begun  to  think about  the broad social  implications of  this  reshuffling,  and  to  create  institutions  to  fill  the  gaps  that  it  is  opening  up.  These  new  institutions,  whether  clubs,  unions  or  something  more  like  a  medieval  guild,  seek  to  provide those benefits – everything from a dental plan to a place to socialize to a sense of  identity – that traditionally have simply come with the job.

“In the long term, what we’re doing is building the next safety net,” says Sara Horowitz, the  founder of Freelancers Union, a leading such organization with 130,000 members. “In the  short  term, we’re  picking  up  the  pieces  of what  people  need,  like  health  insurance,  and  helping members have the political clout to make the new New Deal happen.”

The middle of the 20th century was the age of the great employer: Mainstream success was  a  stable  job  at  a  single  company,  steadily  ascending  from middle  to upper management.  That  began  to  change  in  the  1970s  and  1980s,  for  reasons  that  were  social  as  well  as  economic: American conglomerates began to face stiff foreign competition, and the country  accustomed itself to – and even began to celebrate – a more mercurial, less cosseted brand  of  capitalism. The Organization Man was  replaced by  the worker  as  free agent,  one who  might with little regret leave a job when a competitor gave a better offer, or who might be  left  jobless  when  his  company  merged  with  another.  The  arc  of  the  average  career  trajectory grew more fractured.

What  we’re  seeing  today,  says  Thomas  Malone,  a  professor  at  the  MIT  Sloan  School  of  Management  and  author  of  the  2004  book The  Future  of Work,  is  a  further  shift.  The  growing freelance workforce, he argues,  is made up of people who see themselves not as

having  a  single  job  so much  as  having  several  at  once.  To  describe  the  current  change,  Malone borrows an image that the sociologist Alvin Tofflerused to describe the earlier one.

“One of  the  things  [Toffler] said was  that we should move  from  the  idea of a career as a  linear progression up the ranks in a single organization to that of a career as a portfolio of  jobs that you hold over time in a series of different organizations,” says Malone. “What I’m  just  now  realizing  is  that  many  people  today  see  their  career  portfolio  including  a  combination of jobs at the same time.”

Malone believes that new forms of freelancing will help drive this change. Companies like  iStockphoto (a stock photograph and image site containing the work of more than 70,000  artists),  Threadless  (a  T‐shirt  design  company  where  anyone  can  submit  designs  and  evaluate  others)  and  Elance  (an  online  source  of  skilled  freelance  labor)  are models  of  companies  where  not  just  secondary  jobs  but  the  core  function  of  the  business  is  outsourced  to  a  diffuse  online  workforce.  All  are  helping  connect  client  companies  and  freelance laborers to each other easily, without a traditional intermediary and with stricter  standards than online marketplaces like Craigslist.

These  sites  allow  freelancers  to  field  and  respond  to  far  more  offers  than  they  would  previously have been able  to, and to create a  far  larger and more diverse slate of  jobs at  any one time. Successful Elance workers often have nine or 10 projects going at any one  time.

“You can aggregate all these different jobs and clients, and create a portfolio of employers  rather  than  one,”  says  Fabio  Rosati,  Elance’s  CEO.  “The  independent  professional  freelancer has access  to many, many more opportunities and can  evaluate  them without  getting in the car or picking up the phone.”

The smaller the job, of course, the more voluminous the portfolio of work has to be. In this  sense,  the most  radical  form of  freelancing  is  crowdsourcing, where  jobs  that previously  might have been done by one person are instead “chunked” into much smaller tasks that  can  be  taken  up,  one  by  one,  by  a  far‐flung  army  of  online  workers.  The  best‐known  crowdsourcing  application,’s  Mechanical  Turk,  pays  pennies  for  tasks  like  tagging photos or transcribing speech.

A few programmers have started to look at how to expand the possibilities of what sort of  work  can  be  chopped  up  and  farmed  out  in  a  crowdsourcable way.  A  team  led  by  Greg  Little  at  MIT  created  a  software  toolkit  called  TurKit  that  allows  the  Mechanical  Turk  crowd workforce to be enlisted to perform more complex tasks like composing text, copy  editing  or  deciphering  illegible  handwriting  by  using  crowd  members  in  an  iterative  manner to go over each other’s work, replicating real‐world collaboration.

In  computer  science  and  other  fields,  Little  believes  crowdsourcing  could  allow  the  creation of a whole new category of worker, one with far greater specialization than what  professionals have now but who could work on a much  larger number of projects, being  called in to contribute a much smaller part of the whole.

“Right now I can’t hire a bunch of programmer experts in lots of different domains because  I can’t afford to keep them on hand all the time,” he says. “But if I could hire them just for  the  five minutes  I need them,  individual people would have the power to create projects  that  require  lots of  expertise,  and  the potential  for people  to  innovate  and  create  things  would increase.”

How much a person can make as a member of the “crowd” remains to be seen, of course.  Txteagle – along with another company called Samasource that connects Kenyan refugees  to crowdsourcing work – has found a population for whom a couple dollars a day is truly  helpful. But it’s hard to imagine making a living off of that in, say, Boston.

Other  distributed  labor market  firms,  however,  follow  a  somewhat  different model,  and  one that’s far more lucrative for the individual freelancer. Elance offers professional work  for  professional  pay  in  fields  from  programming  to  design  to  finance  to  law.  Another  example  is  InnoCentive, which  allows  firms  in  fields  like  software,  pharmaceuticals  and  engineering  to  post  problems  they  want  solved  –  requests  for  everything  from  “Biodegradable, Bioderived Elastomers  for Medical Applications”  to “a novel design  for a  male showering accessory” – and how much they’ll pay for a solution – usually something  in the tens of thousands of dollars – and lets interested parties go at it. Successful solvers  can make real money.

Some of  iStockphoto’s  contributors,  too, are able  to make a good  living. One of  the more  successful  artists  on  the  site  is  Nicholas  Monu,  a  medical  school  student  at  Brown  University who, according  to  iStockphoto, earns a  low‐six‐figure  income  from his photos  and  illustrations  on  the  site.  “It  pays  for med  school;  it  pays  for my  car.  IStock paid  the  down payment on my condo, and it’s paying the mortgage,” he says.

To Malone this shift is, in and of itself, an overwhelming good.

“It’s now possible, for the first time in human history, to have the economic benefits of very  large  organizations  –  things  like  economies  of  scale  –  but  at  the  same  time  to  have  the  human benefit of very small organizations: creativity, motivation, flexibility and so forth,”  he says.

Jobs  provide  more  than  a  paycheck,  though.  For  most  workers,  their  employer  is  their  source of health and retirement benefits, and for many, the workplace gives a structure to  their social life and a shape to their sense of themselves.

A shift is already under way with health care: The legislation before Congress could make  it easier to get health insurance without relying on one’s employer. But the more workers  there  are  outside  traditional  workplaces,  the  more  people  will  have  to  figure  out  alternative sources for all of those things.

One of the most basic benefits of a steady job, of course, is a measure of job security. Full‐ time jobs can always be terminated, as millions of Americans have been recently reminded,  but  with  freelance  work,  potential  unemployment  lurks  at  the  end  of  every  short‐term  contract. A world in which people have more smaller jobs rather than one big one would  go some way toward addressing this, smoothing out the ups and downs that losing any one  of them would bring.

But  to  provide  a  greater  level  of  stability,  freelance workers may  require  a  new kind  of  institutional  ally.  Malone  predicts  that  the  growth  in  freelance  work  will  necessitate  a  different breed of  labor union  to provide  some of  the benefits  the  employer now offers.  Today’s unions are largely defined by their role in collective bargaining – negotiating with  employers for better benefits, conditions and pay. But many early unions actually arose in  industries like construction or the garment trade where workers didn’t work for the same  employer for very long, so the longstanding relationship wasn’t with the employer but the  union.

These unions were more like guilds: organizations, united by a common set of specialized  work skills,  that combined elements of a social club and a mutual aid society. And rather  than pressuring employers to provide benefits, they provided them directly. Malone argues  that this sort of guild would be well‐suited to a work landscape in which more workers are  freelance.  Such  organizations  might  even  see  fit  to  offer  income‐smoothing  insurance  policies where freelancers can in good times pay into a fund that then helps them through  leaner periods.

Freelancers Union,  founded  in  1995  in New York City, models  itself  along  these  lines.  It  provides medical and dental benefits, a retirement fund and life insurance. It lobbies state  governments for freelancer‐friendly policies – among its causes right now is a proposal for  a tax‐advantaged unemployment insurance plan for freelancers.

And  it also  tries  to address some of  the  less quantifiable difficulties of  freelancing. Many  freelancers  complain  that  one  of  the  great  difficulties  of  the  work  is  its  solitary  nature.  Some of the online freelance companies try to tackle this. Most have online forums through

which they try to recreate some of the dynamics of an actual workplace. IStockphoto goes  further,  organizing  “iStockalypses”  for  select  groups  of  its  photographers:  weeklong  gatherings  in  exotic  locales  worldwide  that  are  part  party  and  part  photo  shoot.  And  iStockphoto photographers have begun organizing regional “Minilypses” on their own as a  way to pool resources for photo shoots, to share information and simply to socialize.

Freelancers Union’s attempts to knit its members together socially are more conventional.  Last  month  the  organization  held  a  holiday  party  in  New  York,  and  150  or  so  people  showed up. It was, says Horowitz, an enthusiastic crowd.

“These people hadn’t been to a holiday party because they had been freelancing for years,”  says  Horowitz.  “They  want  to  feel  connected;  they  want  to  feel  that  they’re  part  of  something.”

Drake  Bennett  is  a  staff  writer  for  the  Boston  Globe,  where  a  version  of  this  essay  first  appeared. His e­mail address


Atoms Are the New Bits.pdf


In the Next Industrial Revolution, Atoms Are the New Bits

• By Chris Anderson January 25, 2010 | 12:00 pm | Wired Feb 2010

In an age of open source, custom-fabricated, DIY product design, all you need to

conquer the world is a brilliant idea.

Photo: Dan Winters

The door of a dry-cleaner-size storefront in an industrial park in Wareham,

Massachusetts, an hour south of Boston, might not look like a portal to the future of

American manufacturing, but it is. This is the headquarters of Local Motors, the first

open source car company to reach production. Step inside and the office reveals itself as

a mind-blowing example of the power of micro-factories.

In June, Local Motors will officially release the Rally Fighter, a $50,000 off-road (but

street-legal) racer. The design was crowdsourced, as was the selection of mostly off-the-

shelf components, and the final assembly will be done by the customers themselves in

local assembly centers as part of a “build experience.” Several more designs are in the

pipeline, and the company says it can take a new vehicle from sketch to market in 18

months, about the time it takes Detroit to change the specs on some door trim. Each

design is released under a share-friendly Creative Commons license, and customers are

encouraged to enhance the designs and produce their own components that they can sell

to their peers.

The Rally Fighter was prototyped in the workshop at the back of the Wareham office,

but manufacturing muscle also came from Factory Five Racing, a kit-car company and

Local Motors investor located just down the road. Of course, the kit-car business has

been around for decades, standing as a proof of concept for how small manufacturing

can work in the car industry. Kit cars combine hand-welded steel tube chassis and

fiberglass bodies with stock engines and accessories. Amateurs assemble the cars at

their homes, which exempts the vehicles from many regulatory restrictions (similar to

home-built experimental aircraft). Factory Five has sold about 8,000 kits to date.

One problem with the kit-car business, though, is that the vehicles are typically modeled

after famous racing and sports cars, making lawsuits and license fees a constant burden.

This makes it hard to profit and limits the industry’s growth, even in the face of the DIY


Jay Rogers, CEO of Local Motors, saw a way around this. His company opted for totally

original designs: They don’t evoke classic cars but rather reimagine what a car can be.

The Rally Fighter’s body was designed by Local Motors’ community of volunteers and

puts the lie to the notion that you can’t create anything good by committee (so long as

the community is well managed, well led, and well equipped with tools like 3-D design

software and photorealistic rendering technology). The result is a car that puts Detroit

to shame.

It is, first of all, incredibly cool-looking — a cross between a Baja racer and a P-51

Mustang fighter plane. Given its community provenance, one might have expected

something more like a platypus. But this process was no politburo. Instead, it was a

competition. The winner was Sangho Kim, a 30-year-old graphic artist and student at

the Art Center College of Design in Pasadena, California. When Local Motors asked its

community to submit ideas for next-gen vehicles, Kim’s sketches and renderings

captivated the crowd. There wasn’t supposed to be a prize, but the company gave Kim

$10,000 anyway. As the community coalesced around his Rally Fighter, members

competed to develop secondary parts, from the side vents to the light bar. Some were

designers, some engineers, and others just car hobbyists. But what they had in common

was a refusal to design just another car, compromised by mass-market needs and

convention. They wanted to make something original — a fantasy car come to life.

While the community crafted the exterior, Local Motors designed or selected the

chassis, engine, and transmission thanks to relationships with companies like Penske

Automotive Group, which helped the firm source everything from dashboard dials to the

new BMW clean diesel engine the Rally Fighter will use. This combination — have the

pros handle the elements that are critical to performance, safety, and manufacturability

while the community designs the parts that give the car its shape and style — allows

crowdsourcing to work even for a product whose use has life-and-death implications.

Local Motors plans to release between 500 and 2,000 units of each model. It’s a niche

vehicle; it won’t compete with the major automakers but rather fill in the gaps in the

marketplace for unique designs. Rogers uses the analogy of a jar of marbles, each of

which represents a vehicle from a major automaker. In between the marbles is empty

space, space that can be filled with grains of sand — and those grains are Local Motors


Local Motors has just 10 full-time employees (that number will grow to more than 50 as

it opens build centers, the first of which will be in Phoenix), holds almost no inventory,

and purchases components and prepares kits only after buyers have made a down

payment and reserved a build date.

Local Motors CEO Jay Rogers combined the power of crowd sourced design and

professional experience to develop the Rally Fighter.

Photo: Adrian Gaut

Rogers was practically destined for his job. His grandfather Ralph Rogers bought

the Indian Motorcycle Company in 1945. When the light Triumph motorcycles began

entering the US after World War II, the senior Rogers recognized that his market-

leading Chief, a big road workhorse, was uncompetitive. The solution was to make a new

light engine so Indian could produce its own cheap, nimble bikes. He went bust trying to

develop the motor. It was just too hard to change direction — and eventually he lost the


Today, Rogers’ grandson intends to do something even more radical — create a whole

new way of making cars — on a shoestring budget. His company has raised roughly $7

million, and he thinks that’s enough to take it to profitability. The difference between

now and then? “They didn’t have resources back then to enter the market, because the

manufacturing process was so tightly held,” he says. What’s changed is that the supply

chain is opening to the little guys.

The 36-year-old Rogers favors military-style flight suits, an echo of his time as a captain

in the Marines, including action in Iraq, and he boasts both a Harvard MBA and a stint

as an entrepreneur in China.

While at Harvard, Rogers saw a presentation on Threadless, the open-design T-shirt

company, which showed him the power of crowdsourcing. Cars are more complicated

than T-shirts, but in both cases there are far more people who can design them than are

currently paid to do so — Rogers estimates that less than 30 percent of car design

students get jobs at auto companies upon graduation. The rest become frustrated car

designers, exactly the pool of talent that might respond to a well-organized vehicle

design competition and community. Today, the Local Motors Web site has around

5,000 members. That’s a 500-to-1 ratio of volunteer contributors to employees. This is

how industries are reinvented.

Here’s the history of two decades in one sentence: If the past 10 years have been

about discovering post-institutional social models on the Web, then the next 10 years

will be about applying them to the real world.

This story is about the next 10 years.

Transformative change happens when industries democratize, when they’re ripped from

the sole domain of companies, governments, and other institutions and handed over to

regular folks. The Internet democratized publishing, broadcasting, and

communications, and the consequence was a massive increase in the range of both

participation and participants in everything digital — the long tail of bits.

Now the same is happening to manufacturing — the long tail of things.

The tools of factory production, from electronics assembly to 3-D printing, are now

available to individuals, in batches as small as a single unit. Anybody with an idea and a

little expertise can set assembly lines in China into motion with nothing more than some

keystrokes on their laptop. A few days later, a prototype will be at their door, and once it

all checks out, they can push a few more buttons and be in full production, making

hundreds, thousands, or more. They can become a virtual micro-factory, able to design

and sell goods without any infrastructure or even inventory; products can be assembled

and drop-shipped by contractors who serve hundreds of such customers simultaneously.

Today, micro-factories make everything from cars to bike components to bespoke

furniture in any design you can imagine. The collective potential of a million garage

tinkerers is about to be unleashed on the global markets, as ideas go straight into

production, no financing or tooling required. “Three guys with laptops” used to describe

a Web startup. Now it describes a hardware company, too.

“Hardware is becoming much more like software,” as MIT professor Eric von

Hippel puts it. That’s not just because there’s so much software in hardware these days,

with products becoming little more than intellectual property wrapped in commodity

materials, whether it’s the code that drives the off-the-shelf chips in gadgets or the 3-D

design files that drive manufacturing. It’s also because of the availability of common

platforms, easy-to-use tools, Web-based collaboration, and Internet distribution.

We’ve seen this picture before: It’s what happens just before monolithic industries

fragment in the face of countless small entrants, from the music industry to newspapers.

Lower the barriers to entry and the crowd pours in.

The academic way to put this is that global supply chains have become scale-free, able to

serve the small as well as the large, the garage inventor and Sony. This change is driven

by two forces. First, the explosion in cheap and powerful prototyping tools, which have

become easier to use by non-engineers. And second, the economic crisis has triggered an

extraordinary shift in the business practices of (mostly) Chinese factories, which have

become increasingly flexible, Web-centric, and open to custom work (where the volumes

are lower but the margins higher).

The result has allowed online innovation to extend to the real world. As Cory Doctorow

puts it in his new book, Makers, “The days of companies with names like ‘General

Electric’ and ‘General Mills’ and ‘General Motors’ are over. The money on the table is

like krill: a billion little entrepreneurial opportunities that can be discovered and

exploited by smart, creative people.”

A garage renaissance is spilling over into such phenomena as the booming Maker Faires

and local “hackerspaces.” Peer production, open source, crowdsourcing, user-generated

content — all these digital trends have begun to play out in the world of atoms, too. The

Web was just the proof of concept. Now the revolution hits the real world.

In short, atoms are the new bits.

Mark Hatch (standing center) and Jim Newton (far left, glasses) of Tech Shop, where

members pay for access to sophisticated prototyping tools.

Photo: Leon Chew

It all starts with the tools. in a converted brewery in Brooklyn, Bre Pettis and his

team of hardware engineers are making the first sub-$1,000 3-D printer, the open

source MakerBot. Rather than squirting out ink, this printer builds up objects by

squeezing out a 0.33-mm-thick thread of molten ABS plastic. Five years ago, you

couldn’t get anything like this for less than $125,000.

During a visit in late November, 100 boxes containing the ninth batch of MakerBots are

lined up and ready to go out the door (as a customer, I’m thrilled to know that one of

them is coming to me). Nearly 500 of these 3-D printers have been sold, and with every

one, the community comes up with new uses and new tools to make them even better.

For example, a prototype head delivers a resolution of 0.2 mm. Another head can hold a

rotating cutter, turning the printer into a CNC router. (CNC is short for computer

numerical control, which simply means that the machines are driven by software.) And

yet another can print with icing, for desserts.

Out of the box, the MakerBot produces plastic parts from digital files. Want a certain

gear right now? Download a design and print it out yourself. Want to modify an object

you already have? Scan it (a researcher at the University of Cambridge has developed a

technology that will allow you to create a 3-D file by rotating the object in front of your

webcam), tweak the bits you want to change with the freeSketchUp software from

Google, and load it into the ReplicatorG app. Within minutes, you have a whole new

physical object: a rip, mix, and burn of atoms.

Other tools offer additional tricks. The $18,000 ShopBot PRSalpha can work door-sized

pieces of wood. Or buy a smaller kit for $1,500 at If metal is your

material, try a CNC mill for around $2,000. Or, if you’re more into electronics, use the

free CadSoft Eagle software to create your own circuit boards, then upload the file to

have it fabbed in a few days at places like Advanced Circuits.

So, too, for CNC laser cutters, plasma cutters, water-jet cutters, and lathes. You can

make anything from fine jewelry to car chassis this way, and tens of thousands of people

are doing just that. We’ve already seen this DIY creation movement boom around such

simple platforms as T-shirts and coffee mugs, then expand into handcrafting

at Etsy (which did about $200 million in sales last year). Now it’s moving to more

complex platforms — like 3-D models and plastic fabrication — and open source

electronics hardware like the pioneering Arduino project.

With the tools in place, the second part of this new industrial age is how manufacturing

has been opened up to individuals, letting them scale prototypes into full production

runs. Over the past few years, Chinese manufacturers have evolved to handle small

orders more efficiently. This means that one-person enterprises can get things made in a

factory the way only big companies could before.

Two trends are driving this. First, there’s the maturation and increasing Web-centrism

of business practices in China. Now that the Web generation is entering management,

Chinese factories increasingly take orders online, communicate with customers by

email, and accept payment by credit card or PayPal, a consumer-friendly alternative to

traditional bank transfers, letters of credit, and purchase orders. Plus, the current

economic crisis has driven companies to seek higher-margin custom orders to mitigate

the deflationary spiral of commodity goods.

For a lens into the new world of open-access factories in China, check out Alibaba .com,

the largest aggregator of the country’s manufacturers, products, and capabilities. Just

search on the site (in English), find some companies producing more or less what you’re

looking to make, and then use instant messaging to ask them if they can manufacture

what you want. Alibaba’s IM can translate between Chinese and English in real time, so

each person can communicate using their native language. Typically, responses come in

minutes: We can’t make that; we can make that and here’s how to order it; we already

make something quite like that and here’s what it costs.

Alibaba’s chair, Jack Ma, calls this “C to B” — consumer to business. It’s a new avenue of

trade and one ideally suited for the micro-entrepreneur of the DIY movement. “If we can

encourage companies to do more small, cross-border transactions, the profits can be

higher, because they are unique, non-commodity goods,” Ma says. Since its founding in

1999, Alibaba has become a $12 billion company with 45 million registered users

worldwide. Its $1.7 billion initial public offering on the Hong Kong Stock Exchange in

2007 was the biggest tech debut since Google. Over the past three years, Ma says, more

than 1.1 million jobs have been created in China by companies doing ecommerce across

Alibaba’s platforms.

This trend is playing out in many countries, but it’s happening fastest in China. One

reason is the same cultural dynamism that led to the rise of shanzhai industries. The

term shanzhai, which derives from the Chinese word for bandit, usually refers to the

thriving business of making knockoffs of electronic products, or as more

generously puts it, “a vendor, who operates a business without observing the traditional

rules or practices often resulting in innovative and unusual products or business

models.” But those same vendors are increasingly driving the manufacturing side of the

maker revolution by being fast and flexible enough to work with micro-entrepreneurs.

The rise of shanzhai business practices “suggests a new approach to economic recovery

as well, one based on small companies well networked with each other,” observes Tom

Igoe, a core developer of the open source Arduino computing platform. “What happens

when that approach hits the manufacturing world? We’re about to find out.”

Not long ago, all this was impossible. To see how it used to be back in the 20th

century, watch the movie Flash of Genius. The film, which is based on a true story, starts

in the mid-1960s and tells the sad tale of the invention of the intermittent windshield

wiper. A lone inventor — college professor Bob Kearns— tinkers in his basement until he

finally creates a working prototype. Rather than sell the technology to a big car

company, Kearns decides he wants to build his own company and make the wiper

himself. Ford signs on to install Kearns’ wipers in one of its new models. That means he

needs to build a factory. He leases a huge warehouse and starts outfitting it with

assembly lines, forklift loaders, and other heavy equipment — a classic industrial-age


How to Build Your Dream

In the age of democratized industry, every garage is a potential micro-factory, every

citizen a potential micro-entrepreneur. Here’s how to transform a great idea into a great


� 1) INVENT Stop whining about the dearth of cool products in the world — dream

up your own. Pro tip: Check the US Patent and Trademark Office Web site to ensure no

one else had the idea first.

� 2) DESIGN Use free tools like Blender or Google’s SketchUp to create a 3-D digital

model of your invention. Or download someone else’s design and incorporate your

groundbreaking tweaks.

� 3) PROTOTYPE You don’t need to be Geppetto to crank out a prototype; desktop

3-D printers like MakerBot are available for under $1,000. Just upload a file and watch

the machine render your vision in layered ABS plastic.

� 4) MANUFACTURE The garage is fine for limited production, but if you want to

go big, go global — outsource. Factories in China are standing by; sites can help you find the right partner.

� 5) SELL Market your product directly to customers via an online store like

SparkFun — or set up your own ecommerce outfit through a company like Yahoo or Web

Studio. Then haul your golden goose to Maker Faire and become the poster child for the

DIY industrial revolution.

As Kearns is getting close to firing up his facility, Ford abruptly backs out of the deal.

With no revenue in sight, the factory shuts down before producing a single wiper.

Eighteen months later, Kearns is walking home in the rain and sees a brand new Ford

Mustang turn the corner. The windshield wiper sweeps, then pauses, then sweeps again.

His brilliant idea has been stolen. Kearns is ruined and will soon go mad, thus the rest of

the movie. (The real-life Kearns eventually sued Ford and Chrysler for patent

infringement and, after years of litigation, won nearly $30 million.)

Today, Kearns would do it differently. As before, he would have made the first prototype

in his basement. But rather than building a factory, he would have had the electronics

fabbed by one company and the enclosure made by another. He then would have paid a

wiper manufacturer in China to create a custom assembly with these components. They

would have shipped straight to his customers, the car companies, and the whole process

would have happened in months, not years — too fast for big companies to beat him. No

factory, no lawsuits, no madness. He could have fulfilled his dream of turning his

invention into a company without tilting at windmills.

To see this model emerging in the real world, you need only visitTechShop, a chain of

DIY workspaces that offer access to state-of-the-art prototyping tools for around $100 a


On a recent afternoon at the facility in Menlo Park, California, Michael Pinneo, a

successful former executive in the synthetic-diamond business, is machining a vapor-

deposition chamber for his newest approach to creating colorless diamonds. Over in the

corner stands the base of a rocket lander being developed by a team that’s competing in

the Google Lunar X Prize. At another table, Stephan Weiss, vice president of Interoptix,

and one of his colleagues are assembling circuit boards used to manage electricity grids.

They’re doing 50-unit runs, which Weiss describes as “too small for a factory but too big

for your garage.” The devices carry the badge of ABB, a giant engineering firm; the

utility customers may never know that they were made by hand in a hackerspace.

This is an incubator for the atoms age. When TechShop founder Jim Newton went

looking for an executive to run it, he quickly decided on Mark Hatch, a former Kinko’s

executive. The analogy is apt: In the same way that Kinko’s democratized printing and,

in the process, created a national chain of service bureaus, TechShop wants to

democratize manufacturing. It now has two additional locations, in Durham, North

Carolina, and Beaverton, Oregon, and has plans for hundreds more. One of the spots

being considered is San Francisco, within the facilities of the much-shrunken San

Francisco Chronicle. The irony is delicious: the seeds of tomorrow’s industry growing in

the ashes of yesterday’s.

Over lunch, Hatch reflects on the arc of manufacturing history. With the rise of the

factory in the industrial age, Karl Marx fretted that a tradesman could no longer afford

the tools to ply his trade. The economies of scale of industrial production crowded out

the individual. Although the benefits of such industrialization were lower prices and

better products, the cost was homogeneity. Combined with big-box retailers, the

marketplace became increasingly dominated by the fruits of mass production: goods

designed for everyone, with the resulting limited diversity and choice that implies.

But today those tools of production are getting so cheap that they are once again within

the reach of many individuals. State-of-the-art milling machines that once cost

$150,000 are now close to $4,000, thanks to Chinese copies. Everybody’s garage is a

potential high tech factory. Marx would be pleased.

Blogger Jason Kottke wrestled with what to call this new class of entrepreneurship,

these cottage industries with global reach targeting niche markets of distributed

demand. “Boutique” is too pretentious, and “indie” not quite right. He observed that

others had suggested “craftsman, artisan, bespoke, cloudless, studio, atelier, long tail,

agile, bonsai company, mom and pop, small scale, specialty, anatomic, big heart, GTD

business, dojo, haus, temple, coterie, and disco business.” But none seemed to capture

the movement.

So he proposed “small batch,” a term most often applied to bourbon. In the spirits

world, this implies handcrafted care. But it can broadly refer to businesses focused more

on the quality of their products than the size of the market. They’d rather do something

they were passionate about than go mass. And these days, when anyone can get access

to manufacturing and distribution, that is actually a viable choice. Walmart, and all the

compromise that comes with it, is no longer the only path to success.

For a final example of that, swing to the Seattle suburbs to meet Will Chapman

of BrickArms. Out of a small industrial space, BrickArms fills gaps in the Lego product

line, going where the Danish toy giant fears to tread: hardcore weaponry, from Lego-

scale AK-47s to frag grenades that look like they came straight out of Halo 3. The parts

are more complex than the average Lego component, but they’re manufactured to an

equal quality and sold online to thousands of Lego fans, kids and adults, who want to

create cooler scenes than the standard kits allow.

Lego operates on an industrial scale, with a team of designers working in a highly secure

campus in Billund, Denmark. Engineers model prototypes and have them fabricated in

dedicated machine shops. Then, once they meet approval, they’re manufactured in large

injection molding plants. Parts are created for kits, and those kits have to be play-tested,

priced for mass retail, and shipped and inventoried months in advance of their sale at

Target or Walmart. The only parts that make it out of this process are those that will sell

in the millions.

Chapman works at a different scale. He designs parts using SolidWorks 3-D software,

which can create a reverse image that’s used to produce a mold. He sends the file to his

desktop CNC router, a Taig 2018 mill that costs less than $1,000, which grinds the mold

halves out of aircraft-grade aluminum blocks. Then he puts them in his hand-pressed

injection molding machine, melts some resin beads, and pumps them through. A few

minutes later, he’s got a prototype to show to fans. If they like it, he gets a local

toolmaker to reproduce the mold out of steel and a US-based injection molding

company to make batches of a few thousand.

Why not have the parts made in China? He could, he says, but the result would be

“molds that take much longer to produce, with slow communication times and plastic

that is subpar” (read: cheap). Furthermore, he says, “if your molds are in China, who

knows what happens to them when you’re not using them? They could be run in secret

to produce parts sold in secondary markets that you would not even know existed.”

Chapman’s three sons package the parts, which he sells direct. Today, BrickArms also

has resellers in the UK, Australia, Sweden, Canada, and Germany. The business grew so

big that in 2008 he left his 17-year career as a software engineer; he now comfortably

supports his family of five solely on Lego weapon sales. “I bring in more revenue on a

slow BrickArms day than I ever did working as a software engineer.” Life is good.

In the mid-1930s, Ronald Coase, then a recent London School of Economics

graduate, was musing over what to many people might have seemed a silly question:

Why do companies exist? Why do we pledge our allegiance to an institution and gather

in the same building to get things done? His answer: to minimize “transaction costs.”

When people share a purpose and have established roles, responsibilities, and modes of

communication, it’s easy to make things happen. You simply turn to the person in the

next cubicle and ask them to do their job.

But several years ago, Bill Joy, one of the cofounders of Sun Microsystems, revealed the

flaw in Coase’s model. “No matter who you are, most of the smartest people work for

someone else,” he rightly observed. Of course, that had always been true, but before, it

hardly mattered if you were in Detroit and someone better was in Dakar; you were here

and they were there, and that was the end of it. But Joy’s point was that this was

changing. With the Internet, you didn’t have to settle for the next cubicle. You could tap

the best person out there, even if they were in Dakar.

Joy’s law turned Coase’s law upside down. Now, working within a company often

imposes higher transaction costs than running a project online. Why turn to the person

who happens to be in the next cubicle when it’s just as easy to turn to an online

community member from a global marketplace of talent? Companies are full of

bureaucracy, procedures, and approval processes, a structure designed to defend the

integrity of the organization. Communities form around shared interests and needs and

have no more process than they require. The community exists for the project, not to

support the company in which the project resides.

Thus the new industrial organizational model. It’s built around small pieces, loosely

joined. Companies are small, virtual, and informal. Most participants are not employees.

They form and re-form on the fly, driven by ability and need rather than affiliation and

obligation. It doesn’t matter who the best people work for; if the project is interesting

enough, the best people will find it.

Let me tell you my own story. Three years ago, out on a run, I started thinking about

how cheap gyroscope sensors were getting. What could you do with them? For starters, I

realized, you could turn a radio-controlled model airplane into an autonomous

unmanned aerial vehicle, or drone. It turned out that there were plenty of commercial

autopilot units you could buy, all based on this principle, but the more I looked into

them, the worse they appeared. They were expensive ($800 to $5,000), hard to use, and

proprietary. It was clear that this was a market desperate for competition and

democratization — Moore’s law was at work, making all the components dirt cheap. The

hardware for a good autopilot shouldn’t cost more than $300, even including a healthy

profit. Everything else was intellectual property, and it seemed the time had come to

open that up, trading high margins for open innovation.

To pursue this project, I started DIY Drones, a community site, and found and began

working with some kindred spirits, led by Jordi Muñoz, then a 21-year-old high school

graduate from Mexico living in Riverside, California. Muñoz was self-taught — with

world-class skills in embedded electronics and aeronautics. Jordi turned me on to

Arduino, and together we designed an autonomous blimp controller and then an aircraft

autopilot board.

We designed the boards the way all electronics tinkerers do, with parts bought from

online shops, wired together on prototyping breadboards. Once it worked on the

breadboard, we laid out the schematic diagrams with CadSoft Eagle and started

designing it as a custom printed circuit board (PCB). Each time we had a design that

looked good onscreen, we’d upload it to a commercial PCB fab, and a couple of weeks

later, samples would arrive at our door. We’d solder on the components, try them out,

and then fix our errors and otherwise make improvements for the next version.

Eventually, we had a design we were happy with. How to commercialize it? We could do

it ourselves, getting our PCB fab house to solder on the components, too, but we thought

it might be better to partner with a retailer. The one that seemed culturally matched

was SparkFun, which designs, makes, and sells electronics for the growing open source

hardware community.

The SparkFun operation is in a newish two-story building in an office park outside

Boulder, Colorado. The first floor is larger than three basketball courts, with racks of

circuit boards waiting to be sold, packed, and shipped on one side and some machines

attended by a few technicians on the other. The first two machines are pick-and-place

robots, which are available used for less than $5,000. They position tiny electronic

components in exactly the right spot on a PCB. Once each batch of boards is done,

technicians place them on a conveyor belt that goes into another machine, which is

basically just a heater. Called a reflow oven, it cements the parts into place, essentially

accomplishing what a worker could do with a soldering iron but with unmatched

precision and speed.

The PCBs arrive from SparkFun’s partner firm in China, which makes millions of them

using automated etching, drilling, and cutting machines. At volume, they cost a few

cents each.

That’s it. With these elements you can make the basics of everything from a cell phone to

a robot (structural elements, such as the case, can be made in low volume with a CNC

machine or injection-molded if you need to do it cheaper at higher volume). You can sell

these components as kits or find some college students on craigslist to spend a weekend

assembling them for you. (I conscript my kids to assemble our blimps. They rotate roles,

coveting the quality assurance task where they check the others’ work.)

SparkFun makes, stocks, and sells our autopilot and a few other products that we

designed; we get to spend our time working on R&D and bear no inventory risk. Some

products we wanted to make were too time-intensive for SparkFun, so we made them

ourselves. Now, in a rented Los Angeles garage, we have our own mini SparkFun. Rather

than a pick-and-place robot, we have a kid with sharp eyes and a steady hand, and for a

reflow oven we use what is basically a modified toaster oven. We can do scores of boards

per day this way; when demand outstrips production, we’ll upgrade to a small pick-and-

place robot.

Every day our Web site takes orders and prints out the shipping labels. Muñoz or one of

his workers heat-seals the products in protective electrostatic bags and puts them in

shipping envelopes. The retail day ends at 3:30 pm with a run to the post office and UPS

to send everything off. In our first year, we’ll do about $250,000 in revenue, with

demand rising fast and a lot of products in the pipeline. With luck, we’ll be a million-

dollar business by the third year, which would put us solidly in the ranks of millions of

similarly successful US companies. We are just a tiny gear in the economic engine

driving the US — on the face of it, this doesn’t seem like a world- changing economic


But the difference between this kind of small business and the dry cleaners and corner

shops that make up the majority of micro-enterprise in the country is that we’re global

and high tech. Two-thirds of our sales come from outside the US, and our products

compete at the low end with defense contractors like Lockheed Martin and Boeing.

Although we don’t employ many people or make much money, our basic model is to

lower the cost of technology by a factor of 10 (mostly by not charging for intellectual

property). The effect is felt primarily by consumers; when you take an order of

magnitude out of pricing in any market, you can radically reshape it, bringing in more

and different customers. Lowering costs is a way to democratize technology, too.

Although it’s shrinking, America’s manufacturing economy is still the world’s largest.

But China’s growing production sector is predicted to take the number one spot in 2015,

according to IHS Global Insight, an economic-forecasting firm. Not all US

manufacturing is shrinking, however — just the large part. A Pease Group survey of

small manufacturers (less than $25 million in annual sales) shows that most expect to

grow this year, many by double digits. Indeed, analysts expect almost all new

manufacturing jobs in the US will come from small companies. Ones just like ours.

How big can these small enterprises get? Most of the companies I’ve described sell

thousands of units — 10,000 is considered a breakout success. But one that has

graduated to the big leagues is Aliph, which makes the Jawbone noise-canceling wireless

headsets. Aliph was founded in 1999 by two Stanford graduates, Alex Asseily and Hosain

Rahman, and it now sells millions of headsets each year. But it has no factories. It

outsources all of its production. And though more than a thousand people help to create

Jawbone headsets, Aliph has just over 80 employees. Everyone else works for its

production partners. It’s the ultimate virtual manufacturing company: Aliph makes bits

and its partners make atoms, and together they can take on Sony.

Welcome to the next Industrial Revolution.

Chris Anderson ( is editor in chief of Wired.




TSOGT, Mongolia — Waves from the global economic downturn hit Sodnomdarjaa Khaltarkhuu when bank officials showed up at his tent on the edge of the Gobi desert and threatened to foreclose on his goats, sheep and camels.

Falling demand for cashmere among recession-hit shoppers in the West is cutting into earnings among nomadic herders in Mongolia, whose goats produce the soft fiber used in high-end sweaters, scarves and coats. The result: herder loan defaults.

Mongolian animal herders are being squeezed in this country’s version of a subprime lending crisis.

Mongolia Falls Deeper Into Poverty

View Slideshow

Josh Chin for The Wall Street Journal

Mongolians are calling the current situation a financial zud, invoking a local term for unusually harsh winters that devastate herds. After Mr. Sodnomdarjaa couldn’t pay back a $2,700 loan, he says bank officials pressed him to sell his livestock — which he used as collateral. The bank says he misrepresented the number of animals he owned, which he denies. Now a judge has ordered the seizure of Mr. Sodnomdarjaa’s family home — a tent — if he doesn’t come up with the rest of the money soon.

“We don’t have any animals,” says Mr. Sodnomdarjaa, sitting in his tent, heated by camel dung burned in a cast-iron stove. “How can we pay?”

Mongolian nomads’ troubles show that the ravages of the economic crisis have spread to even the most remote parts of the world. More than a quarter of the households in Mongolia — which has a population of about 2.6 million — earn a living raising animals.

The credit crisis on the steppe has root causes similar to those of the subprime mess in the U.S. Some herders, betting on continued strong cashmere prices, borrowed more than they should have, and spent the money on the Mongolian equivalent of conspicuous consumption: motorbikes and solar panels to provide electricity for their tents. Banks, looking to cash in on rural prosperity in the good years, didn’t pay enough attention to risk management and lent too freely, some bankers say.

Bankers say pressuring herders to sell animals and moving to foreclose on other collateral are last resorts. “We try our best to have flexible policies,” says Daimaa Batsaikhan, deputy chief executive of Khan Bank. He said the bank’s own forecasts for cashmere prices last year were “inaccurate” and that the bank has changed its risk-management practices.

He says his bank and other lenders have been working with herders. Khan Bank says it has restructured 7,000, or nearly 11%, of its outstanding herder loans, essentially extending the time borrowers have to repay. Ultimately, though, the money lent to herders is “money deposited by other Mongolians,” the banker says, and it is the bank’s responsibility to protect their interests.

Many banks have cut back on new lending. And a flood of forced sales has helped drive down prices for animals, skins and meat.

Munkhbat Tsedendorj, a 30-year-old animal dealer, based in Altai, the capital of the province where Mr. Sodnomdarjaa lives, says animals for sale in the city’s central market have been fetching about half of what they were before the downturn. “I’ve been in this business 10 years, and I’ve never seen anything like it,” he says, standing before a blue truck piled with skinned and frozen carcasses of sheep and goats. “They are bankrupting the herders.”

Debt is a main topic of conversation here in Tsogt, a settlement of tents, government buildings and a few shops. Sheriffs from the provincial capital delivered a new round of court orders in January, barring defaulters from disposing of their possessions until courts can rule on foreclosure proceedings.

Naranchimeg Sonom, 45, says she had to sell her herd of more than 300 animals to pay off her defaulted loan. Otherwise, she says, the bank would have foreclosed on her tent, known here as a ger, and on the decorative mirror that graces its back wall. She says bank collection officers said: “You are all beggars. Why did you take a loan if you can’t pay it back?”

In recent years, commercial banks started competing to extend credit to herders, who typically earn significant cash just twice a year — in the spring through cashmere and wool sales, and in the autumn through sales of animal skins and meat. The money helped families get through the times in between, usually at a cost of between 2% and 3% in interest per month.

Troubles began when demand for cashmere started falling after the U.S. slipped into recession in late 2007. By last June, the price for cashmere in Mongolia had fallen by more than 33% from a year earlier, hitting about 28,000 togrog, or $19, a kilogram. Prices have dropped further. “Everyone says now that we are just taking care of banks’ animals,” says Janchiv Nyambuv, a 65-year-old herder who borrowed 500,000 togrogs, or $350, that he must repay in May.

Herders who have sold their herds to repay loans have struggled to find other sources of income. Purevdelger Budkhuu, a 38-year-old widow, says she was forced to sell her family’s 128 goats and sheep after she couldn’t pay back a six-month loan of $1,270. Now, she and her two children live in a tent near Altai’s grimy central market. She says she has looked for work, to no avail, at shops, restaurants and hotels. “I don’t know what to do. I can’t go back to the countryside because I have no animals,” she says. “And I can’t stay here because I can’t find a job.”

Mr. Sodnomdarjaa says he went to a Khan Bank branch at the beginning of 2008 to get a loan to help repay those who had given him animals to start his herd and buy food and clothes for his wife and four children.

Mr. Sodnomdarjaa and his wife, Altantsetseg Tseyentsend, 38, say they intended to repay the loan by selling cashmere and other products from the 90 or so goats and sheep they owned, as well as from another more than 170 animals they were looking after for others. “We’d never taken a loan before” but, Mr. Sodnomdarjaa says, the bank officer he talked to seemed eager to give him money.

The bank says it checked government records of herders’ animals, which said Mr. Sodnomdarjaa owned 267 animals and had no reason to doubt their accuracy. The bank said that after Mr. Sodnomdarjaa defaulted, it discovered just 90 of the animals belonged to him. Bank officials said that if they had known that, he wouldn’t have qualified for such a large loan. Mr. Sodnomdarjaa denies any wrongdoing and says bank officials in Tsogt never asked him about the makeup of his herd.

When the loan was due, Mr. Sodnomdarjaa says he was unable to pay. He says the bank eventually pushed him to sell his animals. The bank says Mr. Sodnomdarjaa still owes more than 2.7 million togrogs, or about $1,900.

Mr. Sodnomdarjaa says he and his wife are determined to repay the loan and plan to look for construction or mining work. These days, the couple cares for other families’ camels. Their only regular compensation is the right to milk the herd. About half the milk, they drink. The other half they sell. Two months’ earnings are about enough to buy a sack of flour.

“The kids want to eat meat, but we have nothing to give them,” says Mr. Sodnomdarjaa.

Write to Gordon Fairclough at

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