Will Sustainability become the Feared Equalizer?

Why is the price of oil still hovering around $100 per barrel, if global demand has fallen and the supply of alternative energy sources, including shale and renewables, are increasing? Could it be that commodity traders are reacting to a new series of less visible market forces? 

We know that whenever Iran talks up their nuclear energy aspirations or Israel fires missiles into Syria, oil prices tend to rise or as of late, not drop by much. There is also US Congress’ lack of a comprehensive long term energy policy that has kept a tight rein on infrastructure investments such as charging stations for electric vehicles. However, as I discovered recently, there is yet another force at play, one that is far more complex than society is prepared to confront today and which will surely cause the price of oil and similar fossil fuels to double, if not triple in price, in the coming decades. This invisible force is referred to as sustainability.

What exactly is sustainability? In simple terms, sustainability is about replacing a resource so it can be used again and again. Terms like ‘recycling’ trash or producing ‘renewable energy’ are commonly associated with the practice of sustainability or the act of sustaining an activity in perpetuity with minimal environmental damage. Perhaps the best example of sustainability are e-books because they never wear out from one user to another and can be reproduced millions of times from one stored copy. Nevertheless, sustainability is more than just a repeatable process. It is also a culture, an attitude, a way of thinking that inspires inherent behavioral changes on socially-acceptable consumption practices.

MIT’s Sustainability Summit
At MIT’s Sustainability Summit last month, I came away with a deeper appreciation for what sustainability can mean to different people, especially how it can motivate them to change their habits and the habits of others, and yet, I could not help feel discouraged by the global indifference and the immense size of the problem. What set me over the edge was a powerful video called, ‘The Art & Science of Chasing Ice’ produced by James Balog on how our north and south polar ice caps are melting away from the amount of black soot dispersed into the atmosphere from our factories and automobiles. If this visual does not do if for you then perhaps a TED video by Charles Moore on the Great Pacific Garbage Patch may bring it home. The visuals are truly stunning, rude awakenings of what a planet with 7 billion individuals are capable of doing wrong.

With the UN’s projected 9.1 billion people by 2050, one can be absolutely certain that issues of sustainability will be front and center in the daily livelihood of every individual and entity. Why? …for the simple reason that our planet resources are limited and our current lifestyles and diverse cultures have yet to align and adapt to a sustainably-friendly behavior.

After attending the MIT Summit, I concluded that the efforts to align sustainable priorities are not only a discombobulated entanglement of disparate, self-appointed initiatives but also an odd assortment of potentially conflicting outcomes. To get an idea,  take a look at two opposing car ownership attitudes by city dwellers.  While the new normal has shifted favorably to shared auto usage among urbanites in developed countries (i.e. US – zipcar.com), in emerging countries (i.e. Brazil, China), new consumers expect to own their own car as soon as they move into a city!

Walmart vs WholeFoods
Another similar example of conflicting outcomes was visible at The Atlantic Magazine press conference in Washington DC on December 4, 2012. A forum of experts showcased the sustainability policies of two retail food companies, Walmart and WholeFoods.  While both companies work closely with their suppliers to recycle waste and introduce biodegradable packaging, Walmart’s Beth Keck, Senior Director of Sustainability, explained that Walmart provides their tight-fisted consumers with environmentally friendly products and chooses not to educate them on how they should change their consumption attitudes toward a more wholesome sustainable lifestyle.

In curious contrast, WholeFoods’ counterpart, Kathy Loftus, Global Leader, Sustainable Engineering & Energy Management, stated that with one-tenth the number of retail outlets as Walmart, WholeFoods is deeply committed to educating its employees and the communities they serve. The company teaches sustainability as a shared problem that begins with each and every consumer. WholeFoods believes that the improved knowledge on how one’s food is handled and prepared can help consumers make better choices and therefore lead healthier lives that will result in fewer medical issues. The money saved from fewer doctor’s visits and drugs, for instance, could justify WholeFood’s higher prices, …which explains in part why Walmart with its cadre of low-priced, branded, processed food suppliers has avoided engaging directly with their consumers.

Will the term ‘sustainability’ just become another commonly used marketing term such as ‘green’, ‘organic’, and ‘hormone-free’ that companies can push at will to meet their own corporate business agendas?  …maybe not this time.

A Key Driver – Shareholders
Fortunately the investment community is making meaningful strides with shareholders and CEOs. According to Sustainalytics, a Boston-based firm, companies are eager to disclose their annual ESG scores (Environmental Social and Governance), a metric used to measure best practices.  A total of 3,600 corporations globally have signed on since 1992, but as Annie White, their Research Products Manager noted, they have only scratched the surface with over 40,000 public companies still remaining.

Driving the increasing interest for ESG scores are concerned shareholders who fear that unmanaged risks or ‘blind spots’ could unexpectedly pull a global company down to its knees as has happened with BP’s Gulf oil spill of 2006, Foxconn’s child labor practice that affected Apple earlier this year and the five garment factories for European and American branded clothing that collapsed in Bangladesh this month. With good reason, shareholders are concerned that similar disasters will become more commonplace and that reactionary foreign government retaliation could put them out of business.

According to Katie Grace, a Program Manager involved with the ‘Initiative for Responsible Investing’ at the Harvard Kennedy School, local governments do not have to wait for a catastrophe to legislate changes but rather can take a proactive role by setting project specific policies. Regionally, for example, they can rezone areas to attract private sector investments. They can also set standards such as LEED, which is used for certifying eco-buildings. For social projects, governments can issue ‘green bonds’ or payment guarantees for investment funds (i.e. Social Impact Bonds).  Some mayors like Philadelphia’s Michael Nutter have adopted these proactive recommendations with their sustainability efforts and are starting to see positive results.

The City of Philadelphia
Katherine Gajewski, Philadelphia’s Sustainability Director, a new position also held at over 115 municipalities across the US, spoke of her challenges working within an entrenched bureaucracy of over 22,000 public employees, most of whom are reluctant to change. Her reprieve has been her frequent conference calls with her 115 peers who openly share their best and worst practices. Their collective list of ideas has grown as the group continues to innovate together, while making most of their ideas up as they go along.

Some interesting cases that have already crossed Gajewski’s desk might surprise you. For example, an Enterprise Car Rental operation in an industrial section of Philadelphia was paying $400 per month for their water bill but was costing the City millions of dollars to purify their share of dirty runoff from their car lots. Eventually, the situation was rectified but not until Gajewski ran the numbers to show the disproportionality between what Enterprise was paying for their office water usage and the cost to clean up its runoff.

Just how many other industrial installations are out there in a typical city like Philadelphia where a company unwittingly gets away with paying a small fee to use a common service but whose operations account for a substantial cost of clean up? …probably a lot!

Gajewski’s job as a Sustainability Director requires more people skills than know-how. She must craft alignments of interest among internal groups to achieve meaningful consensus. Perhaps most important, her role as director and facilitator is to refrain from becoming too preachy and be willing to dole out credit to each participant. Easier said than done, Gajewksi knows that sustainability is a shared task that succeeds when everyone is on board.

As more Sustainability Directors like Gajewski identify similar imbalances in their respective cities, the idea of charging the same consumer for both usage and their share of the cost of cleanup will become more widely accepted. …and herein lies the reason why fossil fuel prices will continue to rise for years to come.

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Below is a summary of Best Practices that were shared during MIT’s Sustainability Summit.

Best Practices

  1. At a university-run, trash audit, MIT students sieved through a months worth of the university’s garbage to discover that of the 2.5 tons of trash collected, 500 pounds was food waste while the remaining 90% could be recycled! The visual impact of over $11.4 billion of trash that could be recycled in the US alone inspired one student to launch a 30-day waste challenge on https://www.facebook.com/30DayWasteChallenge where Facebook friends could commit to ‘be inconvenienced by their trash’ by carrying the trash they personally generate throughout their day for a 30-day period.
  2. Offering consumers a list of prices for the same product but packaged with different levels of biodegradable materials would help bring to light the importance of recycling.
  3. Wirelessly integrating a soda vending machine with a recycle bin located nearby could encourage consumers to recycle their containers.  Consumers would pay, say two dollars and fifty cents, for a soda and receive a one-dollar refund on their university credit card once the soda can was disposed of in the appropriate recycle bin within the allotted time.
  4. ‘Rewire’ individuals at opportune times so their behavioral changes continue well after a recycling program or contest. For example, students can be impacted for behavioral change during a time of transition such as the beginning of a semester.  Recycling contest rules would be established at the start of the semester and monitored throughout the year.
  5. The crop of graduating students who enter the workforce concerned about sustainability issues will inspire a new set of hiring qualifications. Already companies like WholeFoods have changed their hiring criteria to reflect their corporate goals for sustainability.
  6. Teaching children in lower school to become advocates for a sustainable future is the most effective use of funds for behavioral change. Not only will these youngsters represent the future of our planet but their unbound audacity to correct adults who forget to recycle would deliver a priceless message with an impactful and lasting effect.
  7. A practical solution launched this year in California involves a utility tax on a consumer’s bill that is merely collected by the utility company and paid directly into a Global Educational Fund for educational initiatives. The tax removes the utility’s burden of financing similar programs for its sector and uses the utilities billing capacity as a pass-through.
  8. WholeFoods spends time in Washington DC convincing lawmakers that refrigeration codes need upgrading.  Currently stores are allowed to have open refrigeration, which according to a WholeFoods spokesperson, Kathy Loftus, spends considerably more energy than if the same refrigerator had a door.  Another sustainable tip from WholeFoods is the wider use of ships to transport goods rather than trucks. According to Loftus, ships have a lesser impact on the environment than trucks.

© 2013 Tom Kadala

A Modern Day Gold Rush for a US Utility Company

On the Saturday after Hurricane Sandy had ravaged the New Jersey coast line, David Crane, the CEO of NRG, Inc. a New Jersey based Fortune 300 utility company, sat in his candle lit office waiting for a group of Japanese businessmen to arrive. On the agenda was the proposed construction of a replacement nuclear plant in Fukushima. As they entered his office, Crane noted their expression of disbelief and expected to hear more stories about the storm’s extensive damage. Instead his Japanese guests expressed how stunned they were to see transmission lines elevated on wooden poles throughout the State of New Jersey. What had caught their attention was the startling reality that the electrical infrastructure in America was truly obsolete.

Crane avoided expanding on the root causes of America’s infrastructure malaise for fear of losing their business. He chose not to tell them how complacent the US utility industry had become over the years nor how US consumers often take their reliable electricity service for granted. However, after Sandy, nothing would be the same. The status quo for both CEO and consumer would change forever creating an unprecedented opportunity for disruptive innovation.

MIT Energy Conference
At a recent two-day energy conference held at MIT, Crane in his unabashed, straight forward style, bluntly declared in front of a packed auditorium that America’s command and control utility business model was at the end of its useful life. The centralized grids used to service cities and towns would one day be replaced by independent mini-grids fueled by an assortment of readily available renewable energy sources such as wind and solar. Some in the audience acknowledged that it would only be a matter of time before technological breakthroughs would enable neighborhoods to produce their own power.

One such example of a potentially disruptive technology was presented at the conference by Abengoa Solar USA, a Spanish-based manufacturer of Concentrated Solar Power (CSP) plants. Just like the name suggests, these plants use mirrors to concentrate multiple sunlight beams toward a tower filled with a special fluid that is capable of reaching temperatures near 500℃ or 5 times hotter than the energy needed to boil water. During the day, some of the fluid’s heat energy generates power from steam turbines, while the remainder is stored for later use, (i.e. night hours or cloudy days). Between its extended energy storage capabilities and its ongoing innovative design enhancements, the Spanish company’s CSP plants are expected to compete with natural gas and coal on a price basis by 2020. …not bad for an electrical power source that requires a modest upfront capital cost (that has already dropped by 60% so far) and a near-zero operating cost extended over a 30 to 40 year lifespan!

As CSP and other similar renewable technologies continue to evolve, behemoth utility companies like NRG are preparing for a different future, one with less coal and more natural gas. At first glance, the transition has improved their public image from the 30% reduction in CO2 emissions. However, a closer look tells a different story. Utility companies converted to natural gas because they are betting that the soon-to-be, wide use of electric vehicles or EVs will breathe new life into the utility industry’s otherwise dying existence.

Just as air conditioners accounted for nearly 25% of power consumption decades ago, EVs are expected to have an even greater effect. First, large utilities like NRG will service fuel stations the same way oil companies have tended to their branded gas stations. However, unlike gasoline that can be stored for later use, electricity must be consumed at the same time it is produced. This difference will pose various peak demand challenges such as managing unpredictable recharging schedules from a disparate consumer base who at any given moment could plug-in for a boost.

Charging stations will offer a far different experience than what consumers are used to. For example, a trip to a Walmart might include self-operated charging stations located in a parking area where drivers can plug-in their vehicles before shopping. For customers in a hurry, charging stations may resemble a large dealership where leased EVs would be swapped or batteries exchanged for a freshly charged set. Perhaps a Zipcar-like self-serve business model with fully-charged EVs parked throughout a city could integrate an online reservation process with a smart phone App to offer a keyless activation experience.

Pricing models will probably resemble that of cell phones where a flat rate monthly subscription for say $89 would allow unlimited charges or exchanges at member stations. However, the success of these subscription models will depend on the size of the subscriber base. In California, for example, where local government support is strong, the number of EV owners participating in a fixed monthly rate pilot has only attracted 400 EV owners, well below the break even levels of 5,000 EVs needed to support a meaningful network of charging stations.

As the economy picks up, Crane and others believe that an increase in charging options along with green energy tax breaks will give consumers more reasons to tryout an EV. For NRG and other utility companies who are also EV advocates, the race to supply charging stations has only just begun. To get a jump on their competition, NRG’s board recently approved a $100 million investment to build out recharging stations in California where the adoption of EVs currently shows the greatest promise.

How significant is the size of NRG’s investment?  A glance at their income statement shows that a $100 million investment represents about three times what the company allocated for traditional R&D expenses in 2012. In fact, since 2010, NRG’s R&D budget has declined by nearly 20% annually (from $55m in 2010 to $36m in 2012). Was it the unsettling experience with hurricane Sandy or the lack of government energy policies that pushed Crane to the brink of innovation and reinvention? Either way, Crane has done what so many American pioneers did during the historic mid-1800‘s Gold Rush. Like them, he set his sights westward to California’s EV ‘gold’ in search of a better life for NRG.

© 2013 Tom Kadala

Advanced Manufacturing – GE’s Response to Full Employment

When Tom Donilon, the National Security Advisor for President Obama was asked what the two most pressing issues that kept him up at night, he replied, terrorist attacks and the US declining national competitiveness. The backdrop of 600,000 unfilled manufacturing jobs at a time when unemployment is near 8% has most certainly been his nightmare in the making. He must be asking himself, how could our educational system fall so out of line with industry demands, especially when student debts have exceeded $1 trillion? With such a large investment made to prepare our youth, what kind of a workforce do we have as a Nation? If vacant manufacturing  jobs were filled today with US workers, experts tell us that the contribution of our manufacturing economy would jump from its current level of $1.8billion to $2.2trillion! What has gone terribly wrong?

Political leaders supporting manufacturing initiatives in Washington are calling for another ‘Sputnik moment’ to inspire American students to pursue manufacturing careers. Without a ready inventory of workers to support a competitive manufacturing base, America’s future will always be vulnerable to outside economic threats. History reminds us of our true potential, when in 1945, 50% of the products produced in the world were ‘Made in USA’. Today that number has trended down to 22%.

At a recent press gathering in Washington DC’s Newseum sponsored by GE (General Electric Company) and The Atlantic Magazine, GE’s CEO, Jeff Immelt, along with an impressive slate of industry experts and thought leaders addressed the next chapter in US manufacturing and its expected role in creating jobs. David Arkless, Manpower Group’s President of Global Corporate and Government Affairs, led the discussion with a non-sugar coated account of how the Chinese have managed to grow their manufacturing base, while the White House has been floundering along forming more committees than solutions. Arkless explained how the Mayor of Tianjin, Huang Xingguo, (the 4th largest urban population in China) learned from speaking with over 2,000 foreign firms in his district that their number one concern was a ready supply of skilled workers at the right cost. Working with his local universities, the mayor and his team of advisors forecast the skill sets companies in Tianjin would need in the future and created specific course tracks that met these requirements. Local students who chose a STEM career were offered a tuition-free package and employment after graduation. Tianjin’s efforts appear to be paying off well, since this year the city is expected to grow at 17.5%, well above China’s average of 6.5%. Arkless asked out loud why the US Government could not do the same as the Mayor of Tianjin.

Could/should the US follow a similar manufacturing strategy as the Chinese? 

The other panel members argued strongly against Arkless’ recommendations, citing that the US has a different political system and could never ‘get away’ with what is socially acceptable in China. What the US Government could do, instead, is establish a set of certification guidelines that colleges can follow and employers can use to hire with confidence. Colleges that produce well-trained employees using these standardized tests could expect their employers to reciprocate with needed financial support, which in turn would alleviate the need for future government subsidies. Based on each college’s performance, free markets would determine the academic institutions that can deliver and those that should be dissolved or merged.

Despite the many efforts to entice students to follow a manufacturing career track today; however, the US strategy is clearly not working. For starters, most students are not aware that goods are produced on factory floors in the US. For years they have heard negative news coverage about the loss of US factory jobs to other countries with lower wages, so much so, that college to them is their ticket to avoid a dead-end job on an assembly line. Like a page taken from a Charles Dickens novel, they perceive factory jobs as requiring long tedious hours in a dark and dingy work space spewed with numerous health hazards.

At the event, GE’s CEO, Jeff Immelt, exclaimed the pressing need to change this archaic perception of factory work among young students. Parents, teachers, and guidance counselors alike had to be on-board too. Results from a recent survey showed that only 3 out of 10 parents supported a manufacturing career for their children. Without greater parental support, the hurdle to attract students to a STEM career path (Science, Technology, Engineering, Mathematics) would become insurmountable, especially among the emerging, young Latino population who tend to be family centric. Alcoa’s VP of Human Resources, Natalie Shilling, noted that children’s long-term interests in STEM subjects tend to drop off significantly during the 6th grade level. In response Alcoa has partnered with local schools to sponsor science fairs and family factory visits but expressed concern that their ‘grassroots’ efforts may be insufficient.  Like GE, they also see the urgent need for a formalized regulatory framework backed by sound government policies.

Advanced Manufacturing
Factories today are referred to as operations of ‘advanced manufacturing’.  Unlike yesterday’s plants, they include robots, ‘lean’ manufacturing practices that improve overall process efficiencies, and local distribution channels. They are smaller, cleaner, and automated. For example, the labor required for the production of a GE refrigerator is only 1.8 hours, less time that it might take to install the unit at a customer’s home and read the manual. Breakthrough technologies such as 3-D printing are pushing the limits on smaller runs of customized products with near-zero waste. GE is investing heavily in 3-D printing technology citing its shorter design cycle benefits. Shaving one or two years off the traditional design-to-production process could translate into significant savings and competitive advantages.

Immelt’s predicament poses an interesting future for manufacturing. As wages have been squeezed out of the cost of production, the focus on future investments has shifted away from countries with cheap labor to regions that offer a steady flow of skilled workers, access to specialized materials, and a basic infrastructure to move goods to consumers. Where specific components are lacking, GE is prepared to make investments to ensure the integrity of their business model over an expected plant life-span of 40 to 50 years.  Immelt believes that this ‘in-country’ strategy will prepare GE to serve an expected one billion middle class entrants over the next five years.

What does Immelt consider to be a skilled workforce worthy of GE’s consideration? According to Immelt, future workforces must be capable of performing ‘additive manufacturing’, which means they will need the knowledge-base to combine some computer training with artisan skills. They must also work competitively in teams. How important are team skill sets to Immelt? Recently the shortage of skilled workers prompted GE to call back veteran GE employees, who according to Immelt, will need some technical training but will easily fit in, since they already have proven GE team work experience. 

…and yet, one key question remains. Can GE’s ‘advanced manufacturing’ strategy achieve full employment without an increase in US exports? Time will tell.

As currency wars mount, what will stop US trading partners from setting up their own ‘advanced manufacturing’ operations that service their own local markets? Factories will be cheaper to build and faster to set up locally, therefore, offering a distinctive advantage over imported finished goods. Furthermore, STEM online training courses such as edx.org and ocw.mit.edu will help prepare a viable pipeline of qualified local STEM students/workers virtually anywhere in the world.

Immelt’s predecessor, Jack Welch, once envisioned the future of manufacturing with factories mounted on moving barges that would dock at different ports-of-call depending upon the market demand for a manufactured good. In part his vision had some validity. The barges he referred to, are today, smaller and more agile high-tech factories that can be easily built adjacent to their intended buyers.

© 2013 Tom Kadala

A Folly in US Energy Financing

Ever wonder why gas prices at the pump have held steady around the $4 per gallon mark for the past two years, despite the global economic slowdown? The last time prices reached $4 was just after Katrina. Consumers then underwent sticker shock. Lately prices have pulled back a bit but come 2013, consumers may see $5 to $6 per gallon gas as the US economy rebounds. What is keeping fuel prices so high? Aside from the traditional market forces, there are many other factors that affect fuel prices too.

Certainly the conflicts in the Middle East (i.e. Syria, Egypt, Palestine) and the nuclear threats from Iran play a part. With the slightest inkling of a possible supply interruption, fuel buyers and speculators will jump into a buying or selling frenzy. Wars, threats of war, OPEC news or lack thereof are all likely triggers to set fuel buyers on edge creating havoc for companies and consumers alike. These erratic fuel price swings do more damage to an economy by spawning uncertainty and instability.

An important stabilizer for these lopsided market forces has been improved fuel efficient engine designs that presently deliver up to 40 miles per gallon (mpg). Already some designs are boasting 100mpg with their pilot models! – (ecomotors.com).  But, even if 100mpg cars were introduced to the US market today, fuel prices would most likely continue to rise because in addition to geo-political uncertainties, there are domestic ones as well.

MIT Energy Finance Forum
At a recent energy finance forum last month organized by MIT’s student run energy club (mitenergyclub.org), CEOs, thought-leaders, and entrepreneurs representing various facets of the energy industry discussed the many opportunities and challenges created by higher energy prices. Everyone agreed that moderate price increases backed by sound government policies could help boost a stagnant economy. They go hand in hand such that one could not exist without the other. Higher fuel prices stimulate new research for alternative fuel sources, encourage design engineers to do what they do best, and create public awareness on the importance of conserving energy. On the other hand, comprehensive government policies help companies and investors align their business strategies with US national interests as well as with each other. Having both in synch attracts new investors.

So when I heard panel members at the forum blame the high cost of energy on the Obama Administration’s lack of a national energy policy, I wondered if the Secretary of Energy, Dr. Steven Chu, had lost his way.  In 2012 Chu’s Department of Energy (DOE) invested in over 180 projects with ARPA-E, a new R&D agency for basic renewable energy projects. Chu’s ‘hit or miss’ approach to unveil the ultimate breakthrough without announcing a definitive national energy strategy has overshadowed the rest of the industry. Energy-sector CEOs have had to navigate rudderless relying on politically motivated investment tax credits and subsidy schemes (i.e. Renewable Energy Certificate or RECs) to make ends meet. The following are a few examples of how some have coped with the current situation.

PSEG
According to Ralph Izzo, the Chairman and CEO of PSEG, a New Jersey based utility company, DOE’s meddling with energy infrastructure projects  and the Obama administration’s lack of producing a national energy strategy have created such a high level of anxiety and uncertainty among investors, that no investor in their right mind would agree to finance the expansion or conversion of an energy plant today without insisting on a list of unfeasible assurances. In fact government subsidies and their tax credit schemes are never included in the financial proformas used to evaluate deals, since investors never know if the laws will survive the next political elections. Elections occur every four years and energy plant deals normally require a 20 year investment horizon. Izzo shared an insightful example of how the price of building a similar nuclear plant had jumped from $450m in 1989 to $10billion today. In his opinion the 20x price escalation was primarily due to the unwillingness of Congress to commit to a national energy strategy.

The uncertainties caused by the US Government’s indecisiveness is affecting not just fuel buyers but their capital investors too. Since renewable investments are so new and have yet to be securitized (packaged into tradable securities), cash-rich pension fund managers who invest for the long term have been barred from participating in non-traditional energy investments. Without more historic data from a broad range of similar investments and the availability of affordable financial tools to hedge against risks of loss, securitization of renewable energy projects has been challenging. Unfortunately, large cash reserves that would otherwise be used to finance infrastructure energy projects currently remain on the sidelines with dim chances of being deployed any time soon.

Siemens
Ironically, the more the DOE offers incentives to entice private investors to invest in large energy projects, the less likely private funds will participate in a deal. This very issue became part of a fascinating panel discussion with representatives from Siemens, Bechtel, CEIFA, Zanbato, and the DOE itself. The panel suggested the presence of a greater problem where investor expectations needed to be updated in favor of equity investments over debt. They highlighted that the risk profile of an energy-related project is significantly less from that of a bridge and hence should be structured differently. To them, bridges can ‘lead to no where’, while energy sources will always be in demand somewhere on the planet.

While it awaits for more favorable winds from Congress, the energy sector growth in the US has had to rely on internal financing along with many clever and unconventional energy financing partnerships.

Public-Private Partnerships in Energy
One way long term projects such as city metros and highways are financed is through the formation of a Public-Private Partnership or PPPs. How successful have PPP’s been with large energy projects? The truth is that not all PPPs are the same. In fact the lack of a reliable template that is easily transferable from one project to another was deemed ‘very difficult’.  Each deal had to be tailor-made from scratch to satisfy a long list of specific requirements. When compared to each other, PPP’s were no more than a name plate suggesting some form of a collaborative involvement among large players including the government.

A ‘public green bank’ operated in Connecticut under CEIFA (Clean Energy, Investment and Finance Authority) uses public funds to attract private investors into jump-starting small renewable energy projects. Directors of this new bank hope to show small success stories where their combined investments will eventually be pooled into a bond product and securitized for sale to larger players, possibly even to pension funds. Citing the Solyndra debacle, the CEIFA representative recommended that the US Government avoid large projects and instead focus on smaller ones that can be aggregated into securitized debt instruments.

A panel member from Siemens offered another PPP example involving three partners, an equipment manufacture, which in this case was Siemens, a methane gas buyer, which was Kimberly-Clark, and a client who produces methane gas (3-Rivers Solid Waste). To close the deal, Siemens had to front the equipment to the methane gas producer and agree to absorb 100% of the project risk. In turn Kimberly-Clark agreed to a floor price in the event the market of natural gas were to collapse. 3-Rivers Solid Waste leveraged tax exempt financing rates and loaded back end debt payments to Siemens during periods of maximum production. As you can see, each partner had to give up a little to make this deal work. (Additional details are listed at http://1.usa.gov/12FKdaS.)

Siemens impressed the audience further with another example of unconventional energy financing for a proposal to build 100 train coaches for Amtrak. In this deal Siemens agreed to underwrite the entire amount, if Amtrak, a US government owned entity, would agree to partially by-pass the open-bidding requirements and automatically award Siemens with one-quarter of the order. Government officials cited a possible violation to the fair bidding process, which according to the VP of Government Affairs, David McIntosh, has kept the deal tabled for now. Clearly Siemens is not happy with these and other similarly unconventional and risky arrangements, but noted that there are no better alternatives in the energy financing environment today. The Company hopes that its aggressive sales approach and patience will eventually pay off in the ‘very’ long run, while, it waits with the rest of the industry for the DOE to reassess its myopic R&D focus and introduce a comprehensive national energy strategy.

Lessons from the Other ‘Fiscal Cliff’

The infamous morning of Black Sunday, April 14, 1935 began as a bright sunny day filled with the hope that a three-year drought was finally coming to an end, but by evening, one of the most damaging dust storms in American history charged through the open landscape like a raging bull removing over 300 million tons of topsoil from the prairies, causing economic and agricultural devastation across the Midwest. It came at a low point during the Dust Bowl of the ‘30‘s when food and jobs were already scarce. By 1935 Congress initiated policies, incentives, and legislation that helped the economy to bounce back and its farmers to develop preventive measures that would save the Nation from what was then considered ‘the end of the world’. 

Nearly 77 years later, another bowl of devastation is heading our way loosely referred to as the ‘Fiscal Cliff of 2013’.  Its similarities to the Dust Bowl are truly striking, with one exception. the Dust Bowl of the 1930‘s was a natural phenomena caused by Mother Nature while the ‘Debt Bowl’ of today will have been self-inflicted by the US Congress.

During a recent PBS Documentary, the narrator quoted one of the families who had lived through the Dust Bowl era as saying that despite their efforts to plug every crack in their home, the dust still managed to get in. I could not help but think how, for the past decade, easy credit had similarly crept into every household in America the same way that dust had during the Dust Bowl. No matter how frugal one chooses to live today, Americans will be liable for not only their collective personal debt, but also their share of the rapidly growing National Debt. Like dust, our National Debt has infiltrated every American household for generations to come.

Washington Ideas Forum
Recently, The Atlantic Magazine, a political/business/entertainment publication, held their fourth annual Washington Ideas Forum at the Newseum in Washington DC where they conducted a series of live interviews with a Who’s Who list of Washington politicos including Senator Marco Rubio, Sheila Bair, Chris Matthews, Gene Sperling, and David Rubenstein. When asked to comment on the ‘Fiscal Cliff’, their combined assessments were bleak.  All of them agreed on the need to avoid the ‘Fiscal Cliff’, if at all possible, but like the example from the Dust Bowl era, they could not see any sure way to avoid the inevitable. The following is a recount of what they had to say.

Sheila Bair on the true Amount of Debt
Sheila Bair, the former head of the FDIC during the economic crisis of 2009, clocked the unsustainable size of US private debt at 160% of GDP, which she claimed was twice the size of the US public debt (80% of GDP). She noted that the size of the private debt had become a quiet secret that no one in Congress seemed eager to discuss. The private debt that goes unpaid, as we are seeing today with the recent unraveling of unpaid FHA loans, will eventually wind up on the US Government’s balance sheet and become every citizen’s concern. When added together, the aggregate public and private debt is truly astounding.  Bair has always preferred a ‘rip- off the band-aid quickly’ approach to the crisis and reminds her colleagues that banks should have taken a full hit early on to allow for a faster economic recovery. According to her intended strategy, banks that received government loans were expected to use the funds to realign their portfolio of home mortgages.  Instead they used the borrowed funds to increase their reserves and improve their capital ratios leaving home-owners with ‘underwater mortgages’ to their own devices.

Gene Sperling on Preserving a Tax Revenue Framework
Gene Sperling, one of Obama’s economic advisers, focused on the greater potential damage that could result from a surge in negative investor sentiment if Congress waits too long to act. Also present, David Rubenstein, a billionaire philanthropist, agreed.  Rubenstein felt that political uncertainty can create far more economic damage by holding businesses back from investing in their business and hiring new employees.

Sperling went on to defend the Democratic position of extending all tax cuts prior to the Holidays for those earning less than $250k/year, while hitting the remaining 2% of taxpayers with a hefty tax bill.  Republicans countered his proposal with a $50k tax deduction cap citing that the amount of tax revenues raised would match Obama’s plan ($750 billion/year).

Sperling’s response offered a glimpse at the intensity of the debate between both parties.  He felt that a tax deduction cap would discourage future donations to charities and non-profits, while encouraging the use of crafty lawyers to find tax loopholes for their rich clients.  Skeptical that the Republican plan would raise sufficient funds, Sperling noted that in principle the Republican plan would have ‘frozen the tax revenue framework’ by locking out the option of raising revenues at a time when voters today are willing to accept higher taxes.  If sufficient revenues were not raised using the Republican plan, Sperling points out, the onus of closing the revenue gap would fall on the middle class.

Senator Marco Rubio on Building a Middle Class
One could make a case that the Republicans may not have thought through their plan as thoroughly as the Democrats, but that is unlikely. Senator Marco Rubio, a young Republican hopeful for the 2016 Presidential elections, felt that Mitt Romney had failed to convince the American people how limited government and free markets can create a thriving middle class – a cornerstone in Republican ideology.

Rubio began his analysis by asking how the ‘fiscal cliff’ would reduce the national debt, if it also ‘wiped out’ small businesses through higher fees and taxes.  In his opinion any plan that does not include a comprehensive formula to stimulate growth is unsustainable and foolish.  The economy must produce something for it to service its debt, otherwise, its debt levels will continue to rise.  The products and services it produces will require jobs with new skills and those jobs can only be filled if the government invests in its workforce by, for example, making student financial aid accessible to anyone in need of proper training. Rubio notes from his Hispanic background that tomorrow’s workforce will depend upon a comprehensive immigration reform policy that balances the supply and demand for jobs as baby boomers continue to retire.

Rubio exemplifies a modernized version of a member of the Republican Party that our founding fathers probably had in mind, but he is only one person in a party severely split over a slew of self-serving cronies.  Many older Republicans have sided with arguing for the sake of argument rather than seeking ways to work together toward a common goal.

Chris Matthews on Restoring Respect in Politics
Chris Matthews, a news anchor and political commentator for the popular TV talk show Hardball, reminisced over the Reagan era when politicians respected each other’s office and compared the then-to-now changes with Senate Minority Leader Mitch McConnell’s comment that his number one priority going forward was to ensure that Obama would become a one-term President. McConnell’s comment coupled with Romney’s ‘47%’ blunder including his ‘self-deportation’ remedy for immigration during a debate have demonstrated how out-of-touch the older leadership have become, offering an unprecedented opportunity for young Republicans like Senator Rubio to regain control of the Republican Party and its true ideology.

Summary Remarks
Historically crises such as the ‘Fiscal Cliff’ have a silver lining.  They can whip a complacent and divided group of leaders into line and force them to work together despite their differences. During the famous Dust Bowl, President Roosevelt was heard saying to an affected group of farmers that the US Government did not know how to remedy their desperate situations but that if a solution existed, ‘they’ were sure to find it.  The ‘they’ President Roosevelt referred to included every living person who could lend a hand, which amounted to just about everyone. Today, 77 years later, President Obama already knows what needs to be done to tackle the ‘Debt Bowl’ of 2013 but lacks the political will and the genuine respect on Capitol Hill that President Roosevelt and his constituents had taken for granted.

So as we gather around our respective Thanksgiving dinner tables, think for a moment what our world would be like if we respected each other as individuals and not just as stepping-stones for personal gain. As the liberal Democrat, Tip O’Neill, a former Speaker of the House, once told the staunch conservative Republican President Ronald Reagan, “We may agree to disagree, but after 6pm, we are always friends.”

‘Systems Thinking’ – Your Next Competitive Edge!

Imagine for a moment that a friend followed you with a web cam and recorded every moment of your typical work day.  What could you learn from so much data?  Probably not much, unless you matched each video frame with a related task. Once you did, however, you could pinpoint areas for improvement by comparing your activities on video with the expected minimal requirements (time and money) to complete each task.

The clinical engineering term used to describe this comparative analysis is called ‘systems thinking’ where choices for a set of outcomes are optimized using benchmark data. For non-engineers, ‘systems thinking’ could be described as an exercise in time management or as an example of how a person should best maneuver while driving through rush hour traffic. Surprisingly, if you are not an engineer but know how to drive effectively in traffic, you may be more of an intuitive expert on ‘systems thinking’ than you realize.

So, what is ‘systems thinking’ and why should CEOs view it as their next competitive edge for years to come?  

At a recent conference on ‘Systems Thinking for Contemporary Challenges’ held at MIT, thought-leaders, CEOs, and entrepreneurs, (some representing various Fortune 100 companies), shared their thoughts and experiences. At first, I wondered why so much attention was being given to a decision-making process that appeared so intuitive. It was not until I realized that the clinical term, ‘systems thinking’ actually has two very different meanings.  One definition applies to how an individual must think to solve problems, while the other applies to how groups of individuals must think collectively to find solutions. Then it became obvious to me that the latter was the principal reason for the conference.

Another way to look at this important distinction is to split ‘systems thinking’ into two separate definitions, one for the individual within a company and the other for a group of integrated companies that work together on large projects.

Definition #1 – An Individual learns to think in terms of systems
The first definition focuses on an individual’s ability to use ‘systems thinking’ for self-improvement and measures the potential effects from a group of employees that improve at the same time.  For example, the web cam data exercise stated earlier would have given you a frame-by-frame glimpse of your daily routines and potentially exposed hidden areas for improvements. Now, imagine if everyone in your company analyzed their daily activities frame-by-frame too?  No doubt, the sum of their improvements would translate into a significant productivity boost for the entire company.

Definition #2 – A Group of Systems learn to think together
The second definition looks at how a group of companies can effectively work together as a ‘network of systems’ to complete huge complex projects such as the production of a fleet of fighter jets at Raytheon or the design of new wind turbines at GE.  As a fragmented bunch of contracted companies, these entities would find it impractical to use a web cam to video their collective daily activities the same way we proposed in Definition #1. Instead they would apply proven ‘systems thinking‘ tools and methodologies that are specifically designed to coordinate and optimize the collective efforts from multiple companies.

How ‘Systems Thinking’ Works…
‘Systems thinking’ begins by breaking down processes into their minimal components, even down to a molecular level, if need be. The data representing the flow of information from people, machines and business objectives are thrown into the same soup and mapped onto a Design Structure Matrix (DSM) that visually connects the dots among people, activities, priorities, and time tables. Even management is treated as just another series of systems and data points. Industry tools such as TRIZ and ANYLOGIC are commonly used to identify patterns and determine optimal interactions from one group or system with another. They also highlight critical path areas caused by any number of factors such as supply chain bottlenecks, limited use of shared resources, or a realignment of priorities.

When seen from close range, flaws and inefficiencies that were once hidden are suddenly exposed like a knitted fabric with a faulty stitch. When changes are implemented, the same ‘systems thinking’ methodology used to unearth the problem in the first place is ‘recycled’ and reassessed using more current data.

Looking Ahead…
If ‘systems thinking’ is something you feel that you have been doing all along but never knew that it had a name, you are not alone. Many professionals unwittingly apply the basic principles of ‘systems thinking’ to improve their time management at work or at home.  However, the ‘systems thinking’ discussed in Definition #2 goes much deeper. It evaluates companies as though they are systems operating within other systems and applies innovative methodologies that can spot hard-to-find problems or solutions.

Companies that already subscribe to ‘systems thinking’ ideas designate one person or team to offer company-wide recommendations, but past experiences have shown that a greater emphasis on a participatory effort from a wider range of individual inputs can be more effective, especially when it comes time to implement any changes. As the workplace becomes increasingly automated, an employee’s role will also change and require a better understanding of ‘systems thinking’. Companies would do well to invest in various levels of ‘systems thinking’ training for their entire workforce or hire employees who already have a degree or experience in ‘systems thinking’.

Not everyone needs to receive a graduate degree to get hired, of course, since as shown earlier, the majority of staff can be trained in ‘systems thinking’ at the individual level (see Definition #1). Management or specialize staff members, on the other hand, can opt for degree-level programs that use sophisticated tools to evaluate groups of systems (see Definition #2). Currently the number of institutions offering degrees in ‘systems thinking’ is limited, but as the demand for training is expected to increase in the coming years, many more options will become available.

MIT’s Masters Program
For those of you who are anxious to get started or are looking to realign their MBA degree should consider MIT’s System Design and Management Program (SDM), which offers a Master’s Degree in Engineering and Management.  This degree program is flexible with 13 to 24-month career-compatible options comprised of on-campus and live, synchronous, at-a distance classes.  Students work with their peers on problem sets that in many cases can be immediately applied to their existing companies. Many students who attend the program are sponsored by their company. Of course, you do not need to wait for your employer to sponsor you.  If the timing is right to advance your education, you might do better by taking your own initiative.   Aside from getting a leg up on this new and exciting trend,  you will also have much to gain personally, collectively, and professionally.

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– Appendix –

Client Case Studies using Systems Thinking to Improve Customer Satisfaction
As stated by one speaker, ‘systems thinking’ is a balance between science and art. To that description, I have arranged the following ‘systems thinking’ case-studies presented at the conference accordingly.

Science – using Machine Data
General Electric
At the event GE’s VP and GM for Technology and Sciences, Gary Mercer, spoke on behalf of GE’s Aviation Division.  Mercer explained how GE views its aircraft as magnets for collecting reams of machine data, to the tune of 18 million date points per month.  This data is used in various capacities to improve on aircraft design, manufacturing processes, and ultimately the passenger’s experience (in that order). Their software and analytics platforms also referred to as SAGE, allows GE’s 3,000 technologists to share the aircraft machine data and publish their ideas on a common platform.

John Deere
Another example came from a member of John Deere’s power systems team, Genevieve Flanagan.  Based on Flanagan’s ‘systems thinking’ analysis, John Deere inserted more probes in their tractors that would collect additional ‘machine data’ on a per customer basis. The ‘machine data’ is transmitted back to a central data bank for analysis and like GE is used to improve the product and customer experience.  Based on a set of algorithms, the data bank also alerts the user when maintenance such as an oil change is needed.  In this manner, the decision to change the oil or any other component is based on a client’s specific usage patterns rather than solely off a generic instrument reading such as the mileage from an odometer.

Art – understanding Client Needs
TIBCO Software
At the event TIBCO Software’s Executive VP of Global Field Operations, Murat Sönmez, cited two examples of how his company’s platform software allowed his clients to analyze their data to identify, design, and deploy ‘system thinking’, solutions dynamically.  His first example involved capturing profile data from Las Vegas gamblers for a client hotel. As soon as a guest would arrive at his client’s hotel, the hotel’s IT system would apply an algorithm that reviewed the guest’s past gambling experiences and established their most likely tolerance level for losing money.  Prior to reaching their threshold of ‘unhappiness’, the guest would receive a text with a special offer, such as a pair of show tickets. Appropriate staff members would be alerted instantly to ensure prompt delivery of the tickets and any other necessary amenities.

His other example involved preemptive measures taken for two major airline clients to minimize a passenger’s negative experiences during a luggage loss claim. Prior to landing, the airline’s systems would apply an algorithm that automatically communicated with a passenger via text and offered them instant remedies such as an approved check-in number at a hotel, a link to enter a delivery address once the luggage arrived, or a credit for purchases at a popular clothing store. In both examples large amounts of data had to be captured, analyzed, and acted upon involving numerous internal departments and partners, so that a one-remedy experience could be delivered to each guest/passenger in a timely manner.

To truly appreciate the value of ‘systems thinking’ from these two examples, imagine each client incident as a series of baton passes in an Olympic track relay.  Then, multiply this one event by thousands of different relays and baton passes where each relay represents one customer who must be treated according to their specific profile that is based upon the results generated from a dynamically, self-adjusting and self-correcting set of algorithms. Having all of these benefits perfectly determined, coordinated and delivered using the same staff as before and with minimal training requirements, if any, is an excellent testimony of the extraordinary capabilities from applying ‘systems thinking’.

CISCO Systems
Another example came from CISCO’s VP of Enterprise Smart Solution Engineering, Phil Sherburne.  Similar to the last example, CISCO learned that their customers had a 6 month threshold/tolerance for adopting new technologies and as a result adjusted both their R&D and engineering implementation processes to follow in tandem .

To continually fill the R&D pipeline with relevant projects, Sherburne used ‘system thinking’ analysis to discover missing links between his sales force and client’s needs.  The results favored a new type of sales force, one that he referred to as ‘honest brokers’ who would focus less on selling products by product line and more on solving client problems that included CISCO products.  Also in the works is a new video conferencing service that Sherburne hopes will further engage their clients into an ongoing solutions oriented conversation.

‘Big Data’ – Indigestion or Innovation?

With Facebook having recently logged in its billionth user, social networking has undoubtedly become the ultimate source for ‘Big Data’. Does the possession of gargantuan amounts of data provide a guarantee for success or failure? …success from getting the right information to the right person at the right time or failure from not knowing how to manage so much data?  

To get an idea what ‘Big Data’ means to Facebook, visualize a system that handles 6 million photo uploads, 160 million newsfeed stories, 5 billion realtime message exchanges, 10 billion profile photos shown, and 108 billion queries — every 30 minutes! Impressive by today’s standards, but not for long, for what is coming next, better known as the ‘Industrial Internet’ as opposed to the ‘Social Internet’, will very likely generate orders of magnitude more data than the social-driven ‘Big Data’ we have today.

Facebook vs ‘Panelbook’
For the sake of argument, let us consider a machine-version of Facebook, one that we will call ‘Panelbook’, where ‘Panel’ refers to the ‘face’ or screen used to operate a machine. At ‘Panelbook’, machines rather than people would ‘socialize’ with their fellow machines by exchanging lots of data,  24/7. For example, a smart meter in your home would collect data from your appliances and relay messages back to the manufacturing plant (i.e. GE) where more machines using algorithms to assess its condition might issue alerts to yet more machines including, perhaps, the homeowner’s smartphone. Don’t expect uploads of photos of machine-tikes in diapers any time soon on ‘Panelbook’, but you can get the point.  ‘Big Data’ in the ‘Industrial Internet’ will undoubtedly dominate ‘Big Data’ from the ‘Social Internet, a trend that CEOs and industry leaders should take close heed when allocating corporate resources.

At a recent annual technology conference called EmTech 2012, CEO’s, innovators, investors, academics, entrepreneurs, and major industry players gathered at MIT’s Media Lab to hear the industry’s thought-leaders share their best practices, comment on trends, and recommend new ideas. I felt that their various presentations on ‘Big Data’ barely scratched the surface of what potentially lies ahead. ‘Big Data’ is more than just an onslaught of information to be managed and disseminated but is also the fluid mosaic of the constantly changing faces of the Internet, its increasing number of users, and its collective implications on our growing societies.

To make some sense of  ‘Big Data’ today (indigestion or innovation), I organized four presentations from the event in a specific order to emphasize their complementary roles in the ongoing transition of ‘Big Data from ‘social’ to ‘industrial’ data. They are mission critical data, faster access to data, and organically generated data to trigger innovation.  Notice in each description how each role has influenced areas of society that have had to react to an ever growing number of new capabilities. As one might expect, these roles will continue to evolve, causing even more changes, as nothing on the Internet remains in its current state for long.

Siemens – Mission Critical Data
Leading the charge for ‘Big Data’ was none other than the CEO of Siemens Industry Sector, USA, Dr. Helmuth Ludwig who spoke of the crucial role ‘Big Data’, played with the Curiosity vessel that landed on Mars earlier this year. On the vessel are thousands of probes that monitor more probes that eventually release a signal back to NASA’s base station where receiving probes are monitored by more probes. Managing massive amounts of data from probe to probe is one challenge, but doing so flawlessly so tasks are performed perfectly each time, requires a well-trained and coordinated workforce of global experts who must use a common digital platform to share their data. For example, some of the parameters released by NASA to its contractor JPL and others for Curiosity’s landing on Mars included an entry speed of 13,000 miles per hour with an atmosphere one hundred times thinner than earth, a time frame of less than 7 minutes to touchdown and only a two-week window per year for launching from earth.

According to Ludwig, more and more projects will resemble the risk profile of Curiosity and the type of workforce needed to execute mission-critical projects. To that end Siemens currently spends over $500 million to train 1.2 million students per year. They also sponsor $100,000 rewards for innovation contests to encourage STEM (Science Technology Engineering Mathematics) career interest at both the high school and college levels.

Qualcom – Faster Access
Less on mission critical data and more on making room for more data through existing resources, Qualcom’s CTO, Matt Grob, focused on catapulting today’s 3G, 4G, and WiFi data capacities to 1,000 times faster access speeds by collating a clever topography of mini cell towers controlled by readily available  interference management technology. Overlapping signals from one tower to another would be automatically tweaked at just the right time to deliver an optimal throughput. The amounts of ‘Big Data’ to get the signals just right, are truly a task for machines. One can only imagine what new apps will emerge from an almost incomprehensibly faster mobile web connection, 1000x faster!

Iridium – Mission Critical Data and Faster Access
For ‘Big Data’ to be mission critical and responsive Matt Desch, CEO for Iridium, discussed his firm’s challenges with a global phone service that relies on an interconnected canopy of 66 orbiting satellites.  No matter where a call originates with an Iridium global phone, an Iridium satellite is no further than eight minutes away to pickup incoming signals and relay them to a central base station in Phoenix Arizona where calls are connected.

Iridium has reserved seven rocket launches from SpaceX to replace its aging fleet of satellites. The new fleet due by 2016 will unleash exciting apps including a top-down aircraft surveillance system that can save fuel by allowing planes to fly closer together and away from bad weather systems. At the end of his presentation, Desch held up a thumbnail-size ‘Iridium’ chip that enables any device to connect to its network including existing mobile phones. Perhaps, in the not too distant future, airline passengers will be able to make calls from their ‘Iridiumized’ mobile phones while in flight.

Xerox – Using ‘Big Data’ to Innovate
‘Big Data’ is not just about the collection of random data but also about the organic creation of more data.  The CTO at Xerox, Ms. Sophie Vandebroek, taps on ‘Big Data’ for innovation by treating its workforce as data points and deliberately mixing and matching unlikely pairs of experts to see what can happen. Xerox believes that innovation evolves when experts from different fields of study can look inward at a problem and lend a relevant suggestion. However, hitting a home run is analogous to winning a lottery ticket. For this reason, Xerox and other companies like Shell International with their “Game Changer” program encourage their participants to be critical from the out start and seek the fastest routes to failure before committing to a new idea.

In Summary
‘Big Data’ offers so many options for companies that without a clear set of objectives CEOs could run up huge losses from negative investment returns. Similar to chasing the end of a rainbow, ‘Big Data’ can become elusive, misleading, and overwhelming. One distinction that became clear from the EmTech 2012 conference was the growing importance of the Industrial Internet where machines communicate with other machines. Although the social data is useful for understanding markets and spotting new trends, industrial data is by far the platform-of-choice for what soon will become the ‘BIGGER DATA’.

Aviation Biofuels, Leading the Way to a New Global Economy

If you are wondering what our future holds with an economy subjected to political gridlock, an overview of an emerging industry called aviation biofuels could offer some interesting insights. 

Airlines today operate on razor thin profit margins with an industry average of less than one half of one percent, largely due to soaring fuel prices that gobble up about 30% of ticket revenues. Many factors are to blame and ultimately the traveling consumer is unwilling or unable to pay the higher ticket prices airlines need to offset their mounting losses. Merger mania among top airlines has played itself out leaving fewer options on the table.  Aside from shaving off more capacity than they have already, airlines are looking elsewhere to stay in business. One area that remains unexplored is the diversification from a one fuel source model to multiple fuel sources, which would include biofuels.

At a recent Aviation Biofuels Development Conference in Washington DC organized by FC Business Intelligence based out of London, thought-leaders, investors, government officials, and private sector industry leaders spent two days evaluating the growing prospects of aviation biofuels. So nascent is this industry that not even the US Government had a handle on its realistic potential and implications. However much they differed in their respective opinions, conference participants did agree on the pressing need to stabilized jet fuel prices through the production of alternative jet fuels. Their target production for 2015 was 600 million gallons per year, which amounts to a mere fraction of the 36 billion gallons per year mandated by Congress for ground transportation fuel blending. What impressed me most between the many animated discussions was the underlying dynamics among so many capable players that for whatever their reasons had been thrust together into the uncharted territory of aviation biofuels.

By the second day, the conference reminded me of the knocking sounds of an engine running with the wrong type of fuel. Was it the engine design or the fuel mismatch that was at fault? …and then it occurred to me. It was neither.  The aviation business model, which in my example would represent the engine, was being forced to change its fuel sourcing strategy from a single fuel pathway (from ground to gas pump) to multiple fuel pathways. Both the engine in my example and the fuel type were up for a complete redesign and eventual realignment, hence the ‘knocking’ sounds.

To appreciate the tectonic impact from a transition to multiple fuel pathways, imagine for a moment what life would be like if every home in the US had its own oil well and processing plant in its ‘backyard’ that could easily produce optimal grade fuel at a price well below today’s market price. “That scenario is absolutely ridiculous!”, you might say under your breath.  …and yet, the emerging aviation biofuels industry speaks directly to this end.

Instead of purchasing fuel from traditional fuel brokers, airports are planning to produce their own fuel at a lower and more stable price using feedstocks and a processing facility located adjacent to the airport’s existing storage tanks. Under this arrangement, airlines would no longer be subjected to volatile energy prices caused, for example, by a political event in the Middle East. Also, by positioning biofuels production facilities in their ‘backyard’, airports can eliminate shipping and port handling costs. Once more, if airports succeed in producing their own fuel source, what would prevent industrial parks around the world to do the same?

The resounding significance from producing fuel at the point of consumption will give both companies as well as groups of companies a far greater and sustainable edge over their competitors.  Just how an energy-decentralized economy will play out in the end will be anyone’s guess.  One thing is for sure. The base of wealth and power both politically and economically will shift significantly.

Considering this new perspective, one can better understand the industry’s current frustrations. On the one hand the US Government is hesitating with its renewable energy strategies not knowing if an untested policy might eliminate entire industries (i.e. fuel transportation), reduce existing business tax revenue streams, and increase unemployment. In the meantime, the DOE (Department of Energy) continues to invest in biofuels R&D and to develop incentives for private investors willing to scale biofuel productions.

The progress in the aviation biofuels industry can be measured by the rapidly growing number of fuel-production pathways.  In fact there may be too many pathways and efforts are underway to standardize a comprehensive evaluation process. Also in play are efforts to improve efficiencies within each pathway such as increasing the energy yield per acre of feedstock. But despite all of these efforts, the price of biofuels per gallon remains well above that of most conventional fuels.

With Republicans unwilling to pay more for energy than the lowest cost fuels available, the future of biofuels remains potentially entangled in a political gridlock. However, as the real threat to the airline industry continues to grow, aviation biofuels may force opposing members of Congress to reconsider their positions.  If and when they do, the production of aviation biofuels may unintentionally trigger the decoupling of crude oil prices globally. When that day arrives, businesses will learn to compete not only on price, but also on their respective ready access to ‘backyard’ biofuels energy.

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Appendix – Conference Overview
The conference organizers did an excellent job of presenting an interactive forum that offered new pathways from the traditional one-pathway strategy discussed in the article.  This section was written for readers with an advanced background in the industry.  New interconnected pathways discussed included:

Investment Strategies, presented by Baker & McKenzie (bakermckenzie.com), focused on parsing project risk into tradable financial instruments to attract diverse groups of investors. For example, project assets would be pledged to a lender using a Special Purpose Vehicle or SPV. The DOE (Department of Energy – energy.gov) spoke of Master Limited Partnerships (MLP’s) where project assets can be assigned to an LLC, tax free, and later IPO’ed to raise cash to finance newer projects.  They are also working on redefining the definition of REIT’s to include biofuels investments.  These changes will qualify more investment funds including foundations and make it easier for private sector participation.

Fuel Processing, presented by GEVO (gevo.com), compared the differences between processing techniques using biology (i.e. enzymes) or chemicals (i.e. catalyst). Their catalyst category included a clever building block platform of iso-butanol a C-4 carbon molecule that like lego pieces can combined to produce not only ethanol but also other lucrative chemicals (i.e. C-8 for gas and C-16 for diesel). As demand shifts for each chemical, the plants daily production can be calibrated to optimize profits. Another company, Byogy Renewables (byogy.com), also a chemical processing company has developed technology to extract 80% of oxygen content in biomass to produce a 100% replacement to jet fuel (no blending required). They are currently partnered with Qatar Airlines.

Feedstock, presented by Paradigm Energies (paradigmbioaviation.com), reminded us that feedstocks or the raw materials used to process biofuels represents 80% of the cost of the biofuel produced. However, in the case of corn ethanol, for example, one of its byproducts can be sold for animal feed at a price close to the corn itself, hence, creating an offset revenue.

Paradigm Energies is in the waste-to-energy business. They source municipal landfills, ‘garbage’, for feedstock and supply a clean jet fuel called syngas that can be liquefied for blending or used to produce electricity. Cities are willingly pay a ‘tipping fee’ to have their waste removed, since landfills are unsightly and expensive to manage. The overall benefits to a city from a social and economic point of view are noteworthy, while the ‘tipping fees’ offer an offset revenue similar to corn. Potentially perceived as a ‘dirty business’, operators of similar waste-to-fuel schemes are mindful of potential negative public opinion for eliminating trash removal jobs, rezoning landfill areas, and other eventualities such as a plane accident that involves the use of a blended biofuel produced from ‘garbage’.

Another company, Solena Fuels (solenafuels.com) is building waste-to-garbage plants adjacent to city refineries in the UK. Cities with a population greater than 1.5 and 2 million can produce the 700,000 tons of garbage needed to operate one of their processing plants. One of its partners, British Airways, has recently placed an order for 5 plants to meet 2% of its annual fuel consumption.

Patents presented by Boeing (boeing.com) has become big business for this conglomerate. In the interest of helping its customers buy more airplanes, Boeing is actively redesigning its engines in an effort to move away from a one fuel model. They see their role as a catalyst to accelerate commercialization of biofuels and are aggressively taking a stake in new IP’s produced. The company uses its brand and influence to advocate policies and other related matters.

Guayaquil, Latin America’s New Hidden City!

Known mainly for its prehistoric inhabitants, the Galapagos Islands located off the coast of Ecuador has always overshadowed its bustling port-of-call, the City of Guayaquil.  To attract some of the 450,000 annual tourist that bypass the city on their way to the Galapagos Islands, Guayaquil’s long term Mayor, Jaime Nebot, has been busy rebuilding his city hoping to convince some of these visitors to stay a night or two longer.  New roads, malls, conference facilities, and two ambitious proposals to modernize their port facilities to world class standards has started to turn heads.  For investors who dig deep into the numbers, they may be pleasantly surprised to find a growing middle class grounded on socialist beliefs but ready and able to respond to international business demands.  

In mid-September of 2012, Guayaquil’s mayor and his entourage presented their case to investor groups in New York City.  Mayor Nebot openly solicited multi-nationals to consider a manufacturing presence at their new proposed 670 acre port facility located in Posorja, about 100km south of Guayaquil.  According to Nebot, early tenants could expect a generous dosage of municipal cooperation and a 10-year tax exemption that would begin on the first day of full operations.

Nebot’s primary goal is to create good-paying jobs for his newly indebted growing middle class who during the commodity-price bonanza era were lavished with both housing and consumer credit.  Nebot would prefer companies offering sustainable manufacturing jobs that participate in the value chain of products that move through his ports. Instead of just exporting raw materials to the rest of the world, Nebot wants some of his export products to be partially assembled in Guayaquil first.

Guayaquil’s population of 3 million inhabitants generate 20% of Ecuador’s GDP, and yet, its port facilities handle 70% of the country’s trade activities.  The disparity in these percentages suggests that the city has also been a long-time, pass-through port for the country’s rich oil industry with a daily production of  300,000 barrels. With good reason Nebot is focused on capturing a portion of the potential economic activities related to both oil and tourism that have been bypassing his city for years without leaving meaningful contributions.  If Nebot has his way, Guayaquil will one day represent a greater slice of the country’s GDP by becoming a preferred destination center for business tourism and a major logistics operation for companies servicing the many Latin American regions.  His proposed state-of-the-art port facilities, access to cheap energy sources, and future plans for a second airport with multiple runways located about 10 miles from the city in Dualar, will undoubtedly meet the needs of global companies.

Nebot has enjoyed unprecedented political stability, having been one of two mayors for the past twenty years. His likable demeanor and sincere passion to make Guayaquil the ‘Big Apple of the south’ has won him the trust and respect from his constituents. His long-term working relationships with managers of a prominent development bank in Latin America (CAF) has also proven useful.  By depositing the city’s tax revenues in CAF’s vaults, Nebot has gained access to low interest loans for up to 5 times the amount of the original deposits.  He has further leveraged CAF loans into public-private-partnerships and cooperative bonds to fund numerous infrastructure-related projects and public works in preparation for what he hopes will soon become a bustling center for business tourism.  At the event CAF’s President and CEO, Enrique Garcia, praised Mayor Nebot’s achievements naming Guayaquil as one of CAF’s most successful development investments.

Nebot is known to run a tight ship. He employs fewer public employees than 12 years ago and invests 85% of his tax revenues into infrastructure and other public works. The replacement of open flea market areas with modern malls, improved roadways and bridges, a new fleet of hybrid public buses, enhanced water systems, and diverse cultural centers are only some of the projects completed in recent years to attract a wider variety of tourist to the city.

Despite its new shine as a potential global center, Guayaquil offers yet another set of attractive benefits to foreign investors. First, the city is on the same time zone as New York City with the exception of one hour during daylight savings time and  second, the seasons are inverted, hence New York’s winter months occur during summertime in Guayaquil.

A recent merger between two prominent airlines called LanTam Group currently offers daily non-stop service from New York City to Guayaquil and in the not too distant future will offer four more flights so business travelers can arrive early and leave late from either destination. Best of all, travelers can leave without having to exchange currency, since Ecuador uses the same dollar that circulates in the United States.

After careful planning and meticulous strategizing, Guayaquil’s ambitious mayor and his capable team have truly prepared their city to become an extension of New York City.  Company CEO’s who answer his call early can probably expect  to negotiate more favorable terms.  As for investors seeking higher returns from lucrative Latin American markets, perhaps, this new passage between New York City and Guayaquil is the perfect starting point for the adventurous capitalist.

Winning by Failing, the new Entrepreneurial Paradigm Shift

Why is it that startup companies that fail never make headline news? A likely reason is that few readers are interested, and yet, over one-half of new startups fail during their first year of operations. To make matters worse, their unfortunate founders are often subjected to heavy losses, fines, foreclosures, and humiliation, just for trying to fulfill their dreams. Why then, do societies worldwide come down so hard on these well-intended individuals, especially when they represent a potential source for job creation? Are entrepreneurs who fail, outcasts or overlooked assets? 

Successful startups or inventions do not just surface out of thin air. Thomas Edison, one of the greatest inventors of modern times, once claimed that he never invented the light bulb but rather confirmed 2,000 ways of how not to make a light bulb. Edison knew that his inventions hinged on repeated experiments, the vast majority of which would fail. Why then did he consider his failed attempts more valuable than his inventions? Was it because he viewed his successes and breakthroughs as an afterthought? In a new world order where inventors have had to become entrepreneurs and entrepreneurs, inventors, could Edison’s approach to ‘inventing/winning by failing’ offer us some new insights?

Imagine if…
Imagine if, instead of shunning entrepreneurs who failed, societies embraced their expertise (such as the many ways not to make something work) by efficiently reintegrating their experiences/experiments into an ongoing process of discovery and invention? Take this idea one step further. Imagine if, these entrepreneurs were motivated to work together by co-owning shares of an organization that was partially funded by the profits of the companies whose ideas/inventions did succeed.

While most entrepreneurs would support this type of arrangement, the traditional establishment of venture capitalists, private equity investors, politicians, and large established companies may not. But, as technology advancements continue to enable entrepreneurs to accomplish more with lower funding requirements, investors and their cohorts may, at some point, be wise to reconsider their old business models.

Evidence of Edison: A Five Country Review
To see, if indeed, entrepreneurship is trending toward an inventor’s model, I met with key leaders from 5 different countries including an academic institution, (Ecuador, Chile, Kenya, Mexico, and MIT) and compared their respective entrepreneurial initiatives. My choice of countries coincided with a slew of conferences and meetings that I attended between the months of August and September of 2012.

With each person I met, I inquired what policies, if any, they or their respective governments/institutions were actively pursuing to promote local entrepreneurship. If they were entrepreneurs, I asked about their experiences and expectations. Over time their collective comments developed into an interesting mosaic, which reflected their wide range of experiences promoting entrepreneurship. Less experienced countries sought lofty goals and often highlighted successful models elsewhere. Assuming this trend, one might conclude that the country/institution with the most experience could thus be considered the industry trendsetter.

Least Experienced – Ecuador, Chile, Kenya
A countries with the least experience promoting entrepreneurship such as Ecuador are usually held back by their own overburdening bureaucracy and an economy largely operated by a handful of family-owned businesses. Chile partially addressed these issues by legislating laws that designated a protected area (legally and physically) for its new startups. Their plan also included shared support systems (i.e. office space, Internet connection, etc.), and funding for an aggressive international mentorship program. Kenya’s government built out an Internet infrastructure that today connects over 40 million Kenyan users. They also approved the use of a mobile phone digital currency called M-Pesa that together has mobilized local entrepreneurs and investors.

Mid-Way – Mexico
At mid-way, Mexican thought-leaders are grappling with more sophisticated issues such as integrating venture capital funding. Key to their strategy is a coordinated effort among Mexican government officials, local venture funds, and public universities (i.e. Tecnológico de Monterrey) to identify the next ‘Steve Jobs-like’ entrepreneurs (or, in their words, ‘super entrepreneurs’’) who are capable of building the next ‘Apple-like’ industry on Mexican soil. To attract greater investor interest, the Mexican government recently approved a USD$120 million ‘fund of funds’ to encourage more venture fund managers to work with their most promising startups.

Most Experienced – MIT Media Labs
The highest level of experience also tagged as the industry’s potential trendsetter in my sample was MIT’s Media Lab (Massachusetts Institute of Technology). Under the direction of Joicho Ito, an accomplished investor and colorful visionary, MIT’s Media Lab operates about 350 concurrent student-related startups.  Ito explains that his primary focus is to develop a team’s collective agility rather than the prowess of one exceptional individual. Startup founders find each other, are free to innovate together as they see fit, and, when ready, present their ideas for funding by conducting a proof-of-concept such as a small pilot or survey. Funding is limited to no more than $100,000 per team. Teams that succeed may pitch for more funding (with a formal business plan), while those that fail are encouraged to join another team.

Teams are expected to conduct many small pilots and leverage their data analytics to identify timely opportunities. Ito’s unwritten rule of denying a second round of financing has forced team members to become more agile with their decisions.  As expected, however, failures do happen and are not only common at the Media Lab, but most importantly, revered. According to Ito, students who learn to fail several times, actually win by learning the art of risk taking. Given several chances to take risks within a short period of time has proven to render more ‘breakthrough ideas’ as well as develop a more seasoned crop of team leaders/entrepreneurs.

Conclusion
This brief five country evaluation simplifies the entrepreneurial process into three distinct levels and suggests that sequential levels place the most experienced country/institution as the potential trendsetter, in this case MIT’s Media Labs.

Assuming my analysis is true and MIT’s Media Lab succeeds at creating companies responsible for new industries in the coming years, then one might guess what advice Thomas Edison would have given to governments and institutions if he were alive today.  According to Edison, future entrepreneurial programs would do better if they focused more on efficiently recycling lessons from failed attempts than on sifting through hay stacks of candidates in search of a few needles of success.

Hopefully Edison’s likely advice will turn on a few more light bulbs in the minds of our global leaders!

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Appendix

I have included an Appendix for those of you interested in more details and interesting tidbits from my interviews with each country/institution for this article.

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Ecuador, Chile, Kenya, Mexico, MIT
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Guayaquil, Ecuador
Considered a hidden city by investors in-the-know, Guayaquil recently conducted a national roadshow, http://www.nationroadshow.com/guayaquil/en, that began in New York City. In my brief interview with their mayor, Jaime Nebot, he expressed his views on entrepreneurship for his city in two words. ‘Not now!” Ecuador, like other Latin American countries are controlled by a handful of influential family groups who operate the country’s key businesses. For young Ecuadorian entrepreneurs, the chance of succeeding is both intimidating and inhibiting, not to mention, the 8 month lead time needed just to register a company and fulfill all of the public sector requirements. Venture funding exists primarily for launching new businesses within already established ones. Most new businesses are proven concepts transferred from other countries rather than breakthrough technologies that could offer spectacular returns. For now, Mayor Nebot is focused on attracting established international firms to Guayaquil that have the wherewithall to weather his country’s stifling bureaucracy.

Santiago, Chile
At a recent conference on M&A activities in Latin America held at the offices of Baker & McKenzie – (www.bakermckenzie.com) in New York, a cadre of legal experts described Chile’s financial economy as brisk. Unlike Ecuador with its family-owned monopolies, Chile’s formerly family-owned firms have been institutionalized and therefore easier to merge and acquire. Despite these advances, entrepreneurialism in Chile has had its challenges. Young Chilean students who might have taken to entrepreneurialism sooner prefer careers in finance, medicine, or law.

About two years ago, the government of Chile approved funds for a revolutionary program called Startup Chile (www.startupchile.org). Hoping to change the mindset of its youth, Chile’s government is offering entrepreneurs from around the world a USD$40,000 grant to spend 6 months launching their startups in one of two buildings located in downtown Santiago. The program attracted seasoned global entrepreneurs who served as mentors to Chile’s young hopefuls.  Chilean entrepreneurs today account for over half of the startups in the program. One of the participants I interviewed at a local meeting in New York, described the environment at the incubator in Santiago as serious-yet-fun, inspiring, rewarding, and very international. Founders often work with one partner on premise and form virtual teams-on-demand using shared referred resources sometimes located in other countries.

Nairobi, Kenya
A banking phenomena called the M-Pesa has emerged in the unlikely city of Nairobi, Kenya. M-Pesa is a cell phone currency operated by Safaricom (www.safaricom.co.ke) that has transformed local economies in a manner that few could have imagined possible and that other countries have had difficulty emulating. Similar to PayPal’s online capabilities (www.paypal.com), M-Pesa funds appear as a balance on a cell phone account that can be drawn and transferred at the time of purchase from one cell phone to another. Its resounding success has created fertile ground for Kenyan entrepreneurs and has attracted investor groups including a local bank. As expected, Kenyan entrepreneurs have formed their own version of an incubator/consulting operation called iHub, (www.ihub.co.ke) where local techies and investors can congregate. Despite having many fundamental issues to resolve, Kenya’s success in lubricating its economy with a digitized currency is truly noteworthy. Credit is largely due to the Kenyan government who played a crucial role in building out the infrastructure needed to connect over 40 million cell/Internet users.

Mexico City, Mexico
At a recent conference held in New York by the Mexican-American Chamber of Commerce – Northeast Chapter, (www.usmcocne.org) on Mexican innovation, entrepreneurship, and venture capital financing, two panels of key influencers shared their views.

There I learned that 99.8% of the firms in Mexico produce just over half of the country’s annual GDP (52%).  Most revealing was that the remaining 0.2% of Mexican firms are in the hands of the ‘super-rich’ who collectively account for the other half of the country’s annual GDP. With half of the country’s GDP in so few hands, venture capitalists and similar funding sources have seized the opportunity to disrupt the status quo with a new crop of technology-based firms that could deliver ‘Apple-like’ growth and a similar eco-system of supporting companies.  Their ‘plan of attack’ as expressed at the conference, was principally focused on identifying ‘Steve Job-like’ candidates who would agree to work tirelessly, communicate effectively, innovate constantly, and function amenably with their venture capital support teams. They referred to these individuals as ‘super entrepreneurs’.

To fill the pipeline with potential candidates, one of Mexico’s largest academic institutions, Tecnológico de Monterrey, operates a Technology Center for Entrepreneurs (www.itesm.mx). The center currently manages a total of 1,500 startups per year. Startups that show exceptional promise graduate to the university’s accelerator program and may eventually compete for venture capital funding. This step also includes assistance from internationally recognized non-profit organizations such as Endeavor Global (www.endeavor.org), also present at the conference. Graduates from the exclusive Endeavor Global program work with leader/mentors along with their peers to gain additional market access and intel.

Mexico’s Venture Capital (VC) industry is small in comparison to the US but is making meaningful strides.  They have approved legislation granting VC’s with limited access to its hefty pensions. In addition, the government has recently approved a $120 million fund called the Entrepreneur’s Fund or ‘fund of funds’ to encourage more local money managers to address the needs of their up and coming squadron of ‘super entrepreneurs’. The government’s support is crucial and timely for Mexico, since its crop of qualified candidates are more global in scope than their predecessors and  could easily decide to move their businesses to another country for support and funding.

Cambridge, MA (MIT)
At MIT’s student incubator known as the Media Lab in Cambridge, MA (www.media.mit.edu), Joicho Ito, an accomplished investor and colorful visionary, oversees over 350 concurrent student-related startups.  On the surface, the incubator program appeared similar to the incubator/accelerator initiative at the Tecnológico de Monterrey in Mexico. However, a closer inspection showed that  their similarities ended at the front door.  At the Tecnológico de Monterrey, startup instruction is centered around the rigors of writing and rewriting a comprehensive business plan that might, one day, be used for funding consideration at a venture capital firm. In contrast, MIT’s Media Lab postpones the business plan writing exercises until funding has been approved.  Heretical in his approach, Ito explains that his primary focus is a team’s collective agility rather than the prowess of one exceptional individual or a business plan subjected to the rigidity of an outline and presentation. Startup founders find each other, are free to innovate together as they see fit, and, when ready, present their ideas for funding by conducting some form of proof-of-concept such as a small pilot or survey. Funding is limited to no more than $100,000 per team. Teams that succeed may pitch for more funding (with a formal business plan), while those that fail are encouraged to join another team.

Teams are expected to conduct many small pilots and leverage their data analytics to identify timely opportunities. Ito’s unwritten rule of denying a second round of financing has forced team members to become more agile with their decisions.  As expected, however, failures do happen and are not only common at the Media Lab, but most importantly, revered. According to Ito, students who learn to fail several times, actually win by learning the art of risk taking. Given several chances to take risks within a short period of time has proven to render more ‘breakthrough ideas’ as well as develop a more seasoned crop of team leaders/entrepreneurs.