Emerson's global growth

Chuck Knight believed that revenue growth and market share followed profit growth and everything flowed from that mantra. But, with revenue decline in the recessionary years after the turn of the century, the Knight formula faltered. Emerson's sales and earnings peaked in 2000 at $15.3 billion and $1.4 billion. FY 2003 revenue was about $14 billion, and market-cap is now about $25 billion. Pretty good for a down-economy.

Chuck Knight is now 67, and he passed the CEO baton to David Farr in late 2000, on the cusp of the recession. A Knight disciple, David Farr continued the tradition of profit management; but is also doing the things that are needed to restore growth. He closed 50 Emerson plants, mostly in N. America and Europe, to eliminate excess capacity. And he started to focus on growth in global markets.

David Farr, then just 37, became the Asia-Pacific president of Emerson Electric in 1992, and gained first-hand experience of international growth possibilities. Twelve years later, he is pushing Emerson increasingly into emerging markets, especially China. Emerson will sell $900 million in China in 2004, up from $750 million in 2003.

Initially, Emerson generated new Chinese manufacturing jobs. But now jobs for engineers and product designers are also moving to China. There is good management logic here: a/ manufacturing in the US is growing at just 3%, compared to 8% in emerging global markets; and b/ foreign availability, not only of lower-cost labor, but also brainpower.

China turns out 220,000 engineering degrees a year, compared to only 60,000 in the US. And almost half of US graduates are foreign. The US simply doesn't have a comparable engineering talent-pool. And, with a plethora of Chinese and Indian engineering talent, why hire in the US or Europe at significantly higher pay? A lot of Emerson Process DCS projects are already being designed and managed by Chinese systems engineers.

Today about 2,000 of Emerson's 7,000 engineers work outside the US and Western Europe; within four years, the split is expected to be 50/50 between the West (US & Europe) and emerging markets (China, Russia). Farr's formula: "If 50% of sales go outside the US, then 50% of engineering will be outside the US."

It makes good sense: Go global, stay local.

Solar Power advances

More than 3,000 megawatts of solar-powered electricity is generated in the world today. World production of photo-voltaic cells grew 32% from 2002 to 2003, with more growth expected this year. It took 30 years (1969-99) to produce the first gigawatt (billion watts) of solar-power. Total production has tripled since then.

In 2003, the solar power industry generated $5.2 billion in revenue. With scientific breakthroughs coming and production costs dropping fast, solar energy is expected to surge significantly in the next decade.

Till now, Japan, Germany and California have been the three largest solar markets because of subsidies that rebate about half of the cost of a solar installation. The annual growth rate of solar power is highest in Japan (45%) and Europe (43%), where government programs help residents buy rooftop units. In Japan, the cost of solar-power has dropped to a level that nearly matches traditional sources. Even individual households that use solar technology can sell excess electricity back to their utilities for higher-than-market prices.

Solar-power is clean. It eliminates air pollution, greenhouse gas emissions, coal or radioactive wastes. It is silent, and mostly unseen - solar-power systems can be installed in densely populated areas. There are no fuel costs, little or no maintenance.

Unfortunately, without subsidies, solar-generated electricity is still about 10 times more expensive than equivalent power from old coal-fired plants; 4 times more than natural gas; twice as much as nuclear; and 3 or 4 times as much as wind energy. But, technology is bringing prices down very quickly.

The photo-voltaic cells used for generating solar energy in the past were expensive, rigid silicon chips. Only techno-snobs were willing to show off the ugly roof-racks. Today's thin-film solar-cells can be sprayed by ink-jet nozzles in precise patterns onto sheets of plastic or roof tiles. Not only does this cut costs, but the obtrusive arrays are gone.

There is no real infrastructure to encourage the use of solar power, which inhibits its wider use. And many people would rather flip a switch, than buy their own equipment to generate their own power and learn the confusing technicalities. But solar power will become much more user-friendly, practical and economical in the decade ahead.

Of course, the future of conventional fuel and power is being increasingly questioned because of high oil prices, conflicts in the Middle East, the threat of terrorism at domestic facilities and the kind of Enron-related "rolling blackouts" that California recently experienced. Generating your own, independent power suddenly becomes interesting. And as technology and increased production brings down prices, and as the cost of traditional electricity rises, solar power is becoming increasingly attractive.

The fast growing solar power markets are attracting venture capitalists to fund startups. A lot of VC funding is moving into solar energy products. Worldwide, 6 companies raised $64 million of VC money in 1999; 22 companies received $114 million in 2001, and 26 companies got $277 million in 2003. The VC bets are expected to top $0.5 billion this year.

Nanotech is coming on the scene, with Nanosys of Palo Alto working on sprayable solar coatings for roofs, and Nanostellar looking to produce cleaner, cheaper catalytic converters.

Stuck in the old industrial mindset

The term "output gap" is the difference between actual output and an economy running at "full" capacity. Since the onset of the 2001 recession, the US economy has theoretically fallen behind its full capacity by $4.4 trillion.

In the old "factory production" days, "full capacity" was when 3 shifts were running, and new labor was expensive (too much training was needed). It caused the familiar wage-price spiral which no one wants to repeat. But the problem is that "capacity" and "production" are outdated, industrial-age terms.

In the new techno-driven age, it cost's almost nothing to make another copy of software. A high percentage of TV advertising is for pills, pills and still more pills - which cost almost nothing to make. The high costs of pharmaceuticals are in research and FDA trials, not factory production.

The incremental cost of another music download is zilch - the work went into negotiating the royalties and setting up the system. Sending another email costs me nothing but my own time. My computer sends 8,000 eNews copies in less than an hour, and it costs me nothing.

It costs the telephone companies almost nothing for you to make another phone call - once the equipment is in place. So, the land-line companies are starting to offer unlimited nationwide calling, as a way to raise their average billing. And the cell phone must look for new ways to get people to spend more money - with video downloads, on-line chat, news services.

Even the service businesses have plenty of capacity. FedEx and UPS handle the Christmas rush, with excess "capacity" the rest of the year. Wal-Mart and COSTCO can easily multiply their shopping aisles with new buildings. Harry Potter and Bill Clinton books can sell a million a week, without depleting stock. Stock exchanges can handle hundred billion share trading days without straining "capacity". Bankers have very little to do to process another loan. Most movie theaters are multiplexed - there is a 24-theater AMC near my home, staffed by a handful of people.

In the knowledge age, there can never be an "output gap". And when knowledge sources (research, design, engineering) is available somewhere else in the world, at cheaper prices, the center-of-gravity of the old industrial world is shifting.

The technology of big transistors - an inflection point

Since the internal combustion engine was first developed almost a century and a half ago, the mechanical power was used to turn wheels and pump fluids. With a hybrid, all the power from the engine (about 100 HP in a small car) is used to generate electricity (about 70 kilowatts) to drive electric motors distributed throughout the vehicle. Technology converts the power from mechanical to electric, and electric provides the drive.

Everything is super-efficient, and power is never wasted.The battery is automatically re-charged every time the car brakes, or goes downhill. And the braking is electrical, brake pads and transmissions don't really wear out.

Hybrid automobiles will sweep across the auto market in the next decade or so, not only because they're cleaner and more fuel efficient but also because they can radically improve almost every aspect of performance over conventional cars.

The key enabling technology for the hybrid revolution is digital power control, made possible by the power transistor, invented only about 25 years ago. Integrated circuits have millions of gates per chip. By contrast, power transistors are single chips which handle kilowatts of power. These transistors are big enough to control the propulsion of trucks, automobiles and industrial machines. Sales of these big power switches are already more than $1 billion annually, and will double every few years for decades as more and more applications (like the hybrid car) come on line.

Building a transistor switch that handles kilowatts generates an inflection point which sets the stage for truly fundamental changes in the infrastructure of the new industrial economy.

We will soon start to see the escalation of this revolution in the auto industry. It's very likely that you and I will be driving a hybrid electric car within the next decade, simply because it'll be cheaper and better. And the old gas guzzler will be out of date.

Editorial - Fahrenheit 9/11

Moore's movie Fahrenheit 9/11 won the Cannes Film festival award - though, of course, conservatives are complaining that there was political motivation behind the award. In any case, it is grossing more money at the box office than any documentary ever.

The movie is disturbing because of what it reveals about the characters and motivations of the current US administration, the war in Iraq, the deceit used to start the war, the media's naive endorsement of that deception, the physical-emotional-mental horrors of the war in Iraq, the corruption that comes with power.

The sight of flag-covered coffins returning from Iraq is disturbing, especially considering that these coffins are strictly not allowed to be photographed. It is sad to see the stumps of American amputees coming home from the war, soldiers who gave their lives and limbs for reasons that turned out to be "intelligence errors". The evidently authentic footage of Bush is so candid and revealing that it's hard to imagine how Moore got access to it.

Here's David Letterman's
"Top Ten George W. Bush Complaints About Fahrenheit 9/11":

Disney (which owned the US distribution rights) tried to stop the movie (beyond innuendos, no one openly admits why). The right-wingers are now calling Moore a "domestic enemy". And as if on cue, the conservative intellectuals are writing critiques that suggest it is empty nonsense.

This is NOT "just another Moore movie" - if it was, it would be easier to ignore. No matter whether you're a Republican or a Democrat, if you haven't seen Fahrenheit 9/11, you've just got to see it.

AFTER you've seen it, I'd like very much to receive your feedback!

eFeedback

"In a democracy, majority rule doesn't always produce a fair and just outcome. The US Founders purposely made government cumbersome and limited because they didn't trust decisions made in the heat of the moment.

"The USA is based on a rule of law, although in recent years it is clear that many do not consider this to be an obstacle for implementing rule of man.

"Certainly Bush doesn't understand the bit about not being a democracy, but being governed by rule of law. Otherwise, he would have stated his objective in Iraq as, and planned for, a rule of law. But rule of law is, as the Founders intended, cumbersome and slow, so Bush has done what he can to implement a rule of Bush.

"As to the reason for many not voting, the answer is simple, as any game theorist or economist or engineer can tell you.

"If two competitors, say red and blue, are selling hot dogs on the beach with each betting the other he will sell more hot dogs, the position both will pick will divide the beach goers equally on either side. Each will limit their choice to hot dogs, even if some customers might rather have hamburgers, sausage, brats, fried pickles, because the bet is for the most hot dogs. The people at the ends of the beach who hate hot dogs can see no reason to bother to walk half way down the beach to buy a hot dog from either the red or the blue hot dog stand. Both are equally distasteful.

"Not willing to give up any possible hot dog sales, both red and blue do all they can to prevent green from setting up a stand anywhere on the beach selling brats, for example. Customers can never depend on finding the green stand open, so many never bother searching.

"If all parties were to cooperate, a much larger group of customers could be satisfied. For example, by locating red one quarter of the way down the beach, blue at three quarters, and green in the middle. But the tastes of the customers are fickle, and both red and blue might end up losers. So we have the current system, with many unhappy customers and the winner of the red-blue bet depending on the fickle choice of mustard or relish brand. Do you prefer Heinz?"

"We are faced with the same situation in western European countries. The reasonable wage which must be paid to stabilize our average living level boosts the labor costs. The point is that the competitive position of the most advanced western countries falls below the floor more and more.

"It is clear how the West can retain the ability to be competitive against hungry Asian workers: Slimming down the public sector would reduce its cost, reduce the labor costs, and would recover flexibility of people in general.

"This does not mean that we should forget the needy people. But social welfare requires constantly flowing money, which means taxes. Europe has to convert its society. The way will be long, and many sore spots will be touched. But we have no alternative.

"The ability of poor countries to raise their living standards brings the chance to make the world better. We will profit by it, somehow or other."

"The essential points are these:
1. "Hubbert's work is based on declared reserves and initial discoveries. There is substantial proof to show that most oilfields have many times more economically recoverable oil and gas than initial discoveries have found.
2. "The current turmoil (Shell is most prominent) deals with the 3 classifications of oil and gas "reserves". Oil companies are de-motivated to declare reserves that they will not convert into production in the short term.
3. "One important diagram shows the oil "bubble" - started in the mid-19th century, peaks in the 21st century, and ends in the 23rd century. In the big picture, this is serious because major changes produce all of the nastiness that humans bring - wealth and power are tied to control of use of the energy. The Bible talks consistently about end times with horses, and the fulfilled predictions have been true to the last detail.
4. "It is very true that in 30 years, oil companies have to "find" as much resources as the world is producing today. The key issue is economics - how do you get at it and get it out of the ground? Please note that much of the available resources are under fragile surface ecosystems and major urban areas.

"Oil isn't a serious problem yet, but it will be. There is a lot of posturing right now. Even the anti-oil people don't want the power shift and suffering that comes with moving off oil. Oil prices will cycle - the main driver of the cycle is the poor foresight for seasonal demand. Normally this means that oil prices are lowest in autumn and highest in spring. We will see."