Opine Online - The Rubicon Blog

Big 3 Ad Campaign

2008-12-16T15:07:00.001-05:00

Brilliant campaign.

Congress is Clueless

2008-12-12T16:35:00.002-05:00

I just got around to reading the actual bill that was presented in Congress on Wednesday. I'm embarrassed by how overly simplistic the 37 page document is. Read it here.

The document was basically a term sheet with standard legal gobbly-gook around the edges. All things considered, for 37 pages, it as a pretty weak term sheet. The document has little/no substance on restructuring or milestones and clearly demonstrates how incompetent our Congressional leadership is. Mainly because these guys are debating the nits & nats of something that has no teeth. I could have written this bill in one page (although I wouldn't have).

My favorite part was this ridiculous clause:

During the period in which any financial assistance provided under this Act to any eligible automobile manufacturer is outstanding, the eligible automobile manufacturer may not own or lease any private passenger aircraft, or have any interest in such aircraft, except that such eligible automobile manufacturer shall not be treated as being in violation of this provision with respect to any aircraft or interest in any aircraft that was owned or held by the manufacturer immediately before receiving such assistance, as long as the recipient demonstrates to the satisfaction of the President’s designee that all reasonable steps are being taken to sell or divest such aircraft or interest.

That took up half a page. I find it pathetic that through the entire document, which resembles an overly-wordy standard financial/equity/debt term sheet, they include this provision. There's very little mention of other operational targets, but, hey, let's make sure they fly commercial.

Auto Industry Bailout

2008-12-10T17:07:00.004-05:00

This is ridiculous. I see absolutely no reason for Congress to step in and bailout the domestic auto industry. Why didn't Congress bailout Webvan in the 90s? What about Yahoo? They could use some cash. Global Crossing? Enron/PG&E? What about the hundreds/thousands of other small businesses that are struggling because of the economy? Heck, what about the hundreds of businesses that are failing because they're poorly run. Where do we draw the line?

The Big 3 are failures and have been since the 70s. The domestic auto business is structurally flawed (dealers, unions, overcapacity, and over-extended) and has proven incapable of innovating (poor design, terrible quality, no fuel-efficiency improvements, and out of touch).

The United States purchases 12-16 million new vehicles per year. Market share of the Big 3 has declined precipitously since the 70s and that has nothing to do with the economy. The companies are failing because they have been mismanaged over decades. Period. Full stop.

Letter to Senator Obama

2008-11-05T16:12:00.001-05:00

Congratulations on your milestone victory yesterday. I can’t begin to express how proud I am of you and our country on a whole. You ran a flawless campaign and have inspired millions across the United States. Although your election was monumental, now comes the hard part.

You’ve certainly inherited a mess. Our nation is embroiled in two wars: one in Afghanistan and one in Iraq. Our financial system is in shambles, ranging from continuous Wall Street meltdowns to the Political entangled Fannie/Freddie to soaring American household debt. There is a lot to fix, and it’s not going to be easy.

So, if I might impart a few ideas for you to chew on as you plan your move to Washington DC:

Build a Bi-partisan Administration. Take time to select the right cabinet members to help you forge a better future, not just focusing on tomorrow, but also on the ten years to come. Look to bring on opposing views to your administration – balance is key.

Simplify our Tax System. Reagan started this in the 1980’s, but there is still a ways to go. There are clear needs for immediate tax hikes (within reason), but another source of capital can come from simplicity. Sit down with Steve Forbes and hear him out; maybe even appoint him to your Cabinet. Be careful with your treatment of capital gains taxes. We must encourage investment and entrepreneurial spirit. Small businesses run our economy and many start small businesses with the hope for eventual payouts.

Be Careful with Regulation. Poor financial regulation is, in large part, what got us in this financial mess. Government oversight and regulation is a two edged sword. As you look at fixing the chaos we’re in, remember that our system of beliefs is rooted in small government and freedom of business.

Approach Healthcare Reform Cautiously. It’s clear that our system is broken, but there are many lessons to be learned from the drawbacks of nationalized healthcare in other countries. Countries with health systems based on greater government control tend to have more obstacles to care, such as long wait times, rationing and restrictions on the choice of doctors. Be wary of rampant administrative costs. Regardless of the outcome, at a minimum, we need to focus more on preventive care rather than reactionary medicine.

Support the Freedom of Choice. Our nation was built on the premise of the separation of church & state. Uphold this. Americans should have the right to choose. Abortion is not a religious discussion. Gay marriage is not a government’s decision. We are a nation of immigrants with different beliefs, backgrounds, languages, and should all have the right to not see our government impose on those individual rights.

Invest in Alternative Energy Research. Release us from foreign energy dependence. This will take time, but we should start now. We don't even need to spend that much on research to make simple changes to our energy policies. In addition to alternative energy, we should work on solving on foreign dependence now by migrating to existing solutions, even if not perfect. Drill at home, nuclear energy, etc. The policy needs to be comprehensive and have a 20+ year outlook. Incentivize the auto industry to innovate.

Maintain Free Trade. We live in a global economy. Imperialistic barriers cannot make any sense moving forward, however beneficial to the American worker in the short term. Competition will only make us stronger and better in the long run. Since our early days, this has been one of the main tenets of our economy. The colonies which became the United States generally supported free trade; indeed British restrictions on trade were a major factor in the war for secession.

Reform Campaign Finance. There is no longer any reason to for our electoral college system to exist. But, understanding that changing our electoral process would be a challenging undertaking given the embedded political interests, I encourage you to do what’s right and support substantial campaign finance reform. We, as Americans, do want change. And, we also want choice. Having to choose from two parties not only minimizes the potential change we see, but also narrows the field of possibilities.

Focus on Education. This is our future, our children’s’ future, and our nation’s future. Do not spare a dime on this matter. Come up with a plan to improve the quality of our teachers and our school systems. Sit down with Mark Warner (VA) and hear him out. Not only would investing in better public education would prove critical to helping the United States emerge from tough times stronger than ever, but it is the foundation for innovation that has driven us during the past century. Improved education would help us elect better officials, make smarter decisions, live healthier stronger lives, and cope with change as it’s needed.

Support our Immigrants. We have always considered ourselves the “melting pot,” driven by the rich tradition of immigrants coming to the United States looking for something better and having their cultures melded and incorporated into the fabric of the country. “Give me your tired, your poor, your huddled masses yearning to breathe free…” These are the people who are, have been, and will be the driving force of our country.

Listen to the People. During your acceptance speech you stated: “I will always be honest with you about the challenges we face. I will listen to you, especially when we disagree.” This was quite possibly the most critical statement you have made, in my opinion. If you can stick to this, I believe you will, I have no doubt that you will succeed.

I hope this letter gets to you and that you can, at least, acknowledge one more opinion out of the millions of opinions that you’re receiving every day.

It's Time

2008-11-05T11:56:00.002-05:00

The Economist published a fantastic commentary on the US Presidential Election last week that is a very worthy read. It's an extremely well articulated and thoughtful analysis on the election, the candidates, and their respective strengths & weaknesses, most of which is hard to dispute.

Memory is Fleeting

2008-09-30T11:35:00.002-05:00

Just yesterday, a friend of mine sent me this New York Times article dating back to September 1999. Yes, 1999. Interestingly, the article, Fannie Mae Eases Credit to Aid Mortgage Lending, discussed how Fannie Mae decided to ease the credit requirements on loans that it would purchase from lenders after coming under pressure from the Clinton Administration. Ahem.

Humorously enough (if we can even provide some levity to the terrible state we're in), the writer of the article can proudly say, I told you so.

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's. "From the perspective of many people, including me, this is another thrift industry growing up around us," said Peter Wallison a resident fellow at the American Enterprise Institute. "If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry."

How soon we forget.

A lot of people want to point fingers and place the blame, but I'd like to point out that "Wall Street" or "Investment Banks" are not singular entities who control policy or team under a joint modus operandi. The blame can be squarely placed on policy makers here. And, given the date of the aforementioned article, I'll let you choose which policy makers we're talking about. A lot of things have gone wrong over the past years but, generally speaking, poor execution comes from poor leadership & subpar planning.

One thing is for certain (in my humble opinion), bigger government and more policy will not help us get out of this mess in the long run. Frankly, it's what got us in this mess in the first place.

Mauldin on Energy

2008-08-05T17:41:00.002-05:00

John Mauldin comments on the US energy policy in a recent newsletter subsection called Some Thoughts on Energy. This is a great piece. He presents some great analysis and solid opinions. This passage sums it all up:

Either we are going to see the economic life sucked out of this country, or we can respond by doing everything that is in our power. There is not a shortage of energy. There is a shortage of leadership to produce the energy we need. A real energy policy would also have the benefit of boosting the beleaguered dollar.

Net. Net. We just need to start investing today, across the board, in all facets of cleaner energy, and in domestic natural resources. Period.

Alternative Energy Research

2008-06-23T11:36:00.004-05:00

Leo Tolstoy once said: "The struggle with evil by means of violence is the same as an attempt to stop a cloud, in order that there may be no rain."

The US Government spent nearly $440 billion on military expenditures for the Department of Defense during fiscal year 2007. In 2008, the proposed spending increased to over $480 billion for the same subject matter. Of that amount, from what I've read, the US spends roughly $67 billion annually on this war.

In contrast, the US spends a mere $3 billion on energy research each year, according to the National Science Foundation. DARPA, the Defense Advanced Research Projects Agency and the creator/inventor of the Internet (computer networking and hypertext) amongst other things, manages a roughly $3 billion budget as well. This is the agency of the US Department of Defense that has been responsible for funding the development of many technologies which have had a major impact on the world, in past years...

President Bush currently says that he is seeking about $10 billion for alternative energy research over the next five years as part of his proposal to reduce U.S. gasoline usage by 20 percent by 2017. You have got to be kidding, right?

Albert Einstein once said: "The problems that exist in the world today cannot be solved by the level of thinking that created them."

It doesn't take a genius to realize that you're always better off solving the problem at the root cause (foreign energy dependence) rather than patching solutions (imperialism and aggressive foreign policy). This is such a exhaustive subject, but I'm hoping that the more we mention it, the more likely we spend our tax payer dollars on fixing the problem sooner rather than later.

We don't even need to spend that much on research to make simple changes to our energy policies. In the 70s, France migrated substantially away from oil and now generates about 75% of its power from nuclear power plants. That's worked successfully for them for nearly 30 years. In the US, in contrast, over 70% of our energy is derived from coal, petroleum, and natural gas. Although nuclear energy isn't ideal, it doesn't produce the air pollution that burning natural resources does and it unshackles us from a dependence on the Middle East. And, the technology is here now; including impressive solutions for nuclear waste remediation.

What do you think would happen if we tripled our annual energy research budget? Would we come up with a better solution than ethanol sooner? Would we have a better solution to our high consumer gas prices than the Prius? Possibly, probably... Considering the relative spend in the context of our war funding, it would seem like a smart diversion of funds if you ask me.

Demographics of Social Networks

2007-07-30T13:39:00.000-05:00

Forbes has an interesting article on the differences between users at Facebook and users at MySpace - arguing that the demographics differences are splitting among class lines.

Affluent kids from educated, well-to-do families have been fleeing MySpace for Facebook since it opened registration to the general public in September, while working-class kids still flock to MySpace.
This is an interesting notion, but I wonder if it hold up. Isn't the Internet the great equalizer?

I've touched on the subject of the natural evolution of multiple social networks when I referred to Danah Boyd's essay. To touch on the subject again, I'm sure there is a lot of room for continued evolution and I think it's still to early to determine what the real differences will be between Facebook and MySpace. I'm still curious as to the evolution of the likes of Friendster, ASmallWorld, LinkedIn, Hi5, Orkut, Bebo, Bolt, Tribe, Rapleaf, doostang, AsianAvenue, BlackPlanet, GLEE, MiGente, and others that have yet to come about.

Empowering the Enterprise End User

2007-07-19T21:00:00.000-05:00

This is probably not an entirely new topic, but I've been thinking about it for the past couple years. It's on the subject of choice in the enterprise IT department. I was tempted to call this post "The Rise of the Stupid Enterprise" but I figured that might be mis-construed. David Isen had it right as it related to the decentralization of communications networks. I believe that a version of this decentralization will happen to the CIO's office.

The software industry is emerging from a painful depression and entering an era where software as a service is without a doubt one of the most important innovations we've seen in a long time. That movement away from expensive client-server solutions & wide-scale enterprise site licenses to user-specific hosted solutions by third parties is rapidly changing the way enterprises buy software. It's enabling & empowering the end-users to identify, select, and adopt more quickly and, most importantly, act without having to rely on the IT or MIS department. What's this? Decentralization.

Wherever standards have been established, this trend is likely to take continue. We've seen it start with CRM, but I think that other enterprise apps are only inches behind. Tools such as VoIP and Mail/IM clients, ERP and SCM interfaces, and even business productivity suites, could become more influenced by end users, rather than mandated by IT / MIS. Movements such as SOA will only further distribute choice down from corporate to the business line to the end user. Bring it on! The enterprise software industry is entering the Age of Decentralization - let's keep empowering the end user.

Intellectual Happy Hour

2007-04-27T15:45:00.000-05:00

Jack Welch posted a column in the April 23, 2007 issue of BusinessWeek that's dear to my heart. He posits that the US faces a "brain drain" from the "best & the brightest" MBA's electing to work for private equity firms & hedge funds rather than taking management roles in operating companies. This is a real problem in my opinion, and I wrote a thesis on the subject nearly ten years ago. I suggested that the "best & the brightest" undergraduate engineers were electing to work for consulting or investment banking firms rather than taking product development roles in operating companies.

That same BusinessWeek issue had a wonderful article on the race to build an affordable car. That sounds like a losing proposition to any one of the major OEMs today if you ask me. Given the corporate overhead, expertise, & current troubles at the likes of GM, Ford, Daimler, Renault-Nissan, Chrysler, etc, a $2,500 car initiative couldn't be any less appealing to me as a shareholder. Why would you ever move downstream? Again, these sorts of decisions just highlight the incompetent managment of these organizations... it's not about volume folks, the game is profits!!

And, Metcalfe has a fun read in Forbes on network effects and the evolution of computing & the human mind.

And so it goes...

2007-04-12T17:34:00.000-05:00

Unfortunately, this is a very sad day, Kurt Vonnegut, a classic writer & creative who was dear to me passed away today. I hope that he finds creative peace and company, Kilgore Trout will not be forgotten here....

The Myth of Market Share

2007-02-12T17:13:00.001-05:00

A Wharton marketing professor, J Scott Armstrong, recently published an article in Knowledge@Wharton on a subject matter that I've agreed with for as long as I can tell --- focusing on market share is not necessarily a good business strategy. Heck, I've posted here about how that strategy is clearly a false one in the auto industry. I'm sick to my stomach when I hear Ford or GM talk about market share. I really wish they spoke more about profits and profit margin (a concept that's clearly foreign amongst the Big 3).

A Life of Living Dangerously

2007-02-12T09:51:00.000-05:00

Maxim has an essay in its January issue titled "A Life of Living Dangerously" by Vanity Fair columnist Christopher Hitchens, that is a must read. As usual, Hitchens is well spoken and opinionated in a subtle in-your-face way.

Most disturbing about his subject matter is the fact that this no-smoking revolution is even taking over France where all public places are already smoke-free and by January 2008 bars & cafes will be as well. I just can't imagine a Parisian cafe without the opulent stench of fresh Gauloises cigarettes. I obvsiously like it for my own health, but not for what it means to the culture - the image of France is defined in part by its smoky cafes and cigarette-puffing intellectuals.

As it relates to the US governing principles, Hitchens' conclusion is classic:

This is the only country in the history of the world that stipulates "the pursuit of happiness" as an inalienable human right. I once produced a book about Thomas Jefferson, who wrote those words, and I can tell you that nobody knows whether he meant pursuing happiness, or happiness itself as a pursuit. Whichever meaning he intended, it would clearly include the right to go to hell in your own way, and also the right to tell other people to go do the same.

A must read.

Energy Reform Ideas

2007-01-23T13:38:00.000-05:00

It's pretty obvious that we need to reduce our dependency on imported fossil fuels and figure out a way to have a supply of safe, clean, and affordable energy. Not only would it be a good environmental idea to switch away from oil dependency, but also a pretty good economic decision. And, probably a decent defensive foreign policy move.

So, I would suggest that the United States Government allocate some funds to this effort. The Pentagon's Defense Advanced Research Projects Agency (DARPA) is apparently using its growing budget to shift its focus back to long-term, high-risk projects. DARPA was established in 1958 after the Soviet Union launched the Sputnik spacecraft and now has an annual R&D budget of nearly $3 billion.

Why not allocate some (or a large part) of that to energy independence? Funds could:

Build a hydrogen eco-system: Support the development of affordable fuel cells and finance the build-out of infrastructure for production, delivery, & storage. Incentivise the auto industry and support our largest industry.
Adopt safe nuclear power: License a nuclear power plant and continue to develop safe & effective ways to store spent fuel. This has been used elsewhere successfully and it's only gotten safer.
Develop cleaner coal infrastructure: Clean up our most common fossil fuel and figure out how to reduce emissions & waste.
Invest in ethanol: Certain emerging markets have leaped ahead of us in this category and funds could accelerate our investment in research, infrastructure, production, delivery, & storage of this very viable alternative-energy option.
Educate: Create campaigns and tax incentives to get consumers & the private sector to adopt more energy conservant policies such as green architecture, transportation alternatives, recycling, etc, etc.

I, personally, think that these efforts could yield far better results over the long term for our economy, growth, defense, safety, & health than other "Star Wars" like projects that might be in the making.

Tired of Government Regulations

2007-01-22T18:36:00.000-05:00

I know that the whole discussion of net neutrality is a tired conversation, but my good friend Bret Swanson recently published a commentary in the Wall Street Journal that is worth reading.

I suggest you read the article here. He states:

Today's networks are not remotely prepared to handle this exaflood. Wall Street will finance new telco and cable fiber optic projects, but only with some reasonable hope of a profit. And that is what net neutrality could squelch.

Bret comments that the amount of bandwidth that will be consumed on the Internet during the next several years will outstrip the availability of bandwidth (therefore the term exaflood). I couldn't agree more. Just think about how much more data you personally use on the Internet today than you did two years ago. Then, tack on more and more rich media content sharing & distribution (more MP3's, full movies, televsion shows) and then increase the quality (full screen resolution, high definition, etc) and then start to think about all the business applications for rich media (video conferencing, healthcare imaging, etc). That's a lot of bits & bytes.

But, that's not really Bret's point. He argues that government regulation can (and will) stifile investment on behalf of the physical network service providers. I couldn't agree more. As is, these guys are having a hard time making a go of it. Let them recoup some of their investment however they see fit. Two of the largest back-bone network providers in the US, Cogent and Level 3, aren't doing too well on the profit front - so why make it even more difficult. If it weren't for traditional voice services our old Ma Bell babies would be hurting too. These telecoms firms have spent billions of dollars in capital expenditures and their shareholders deserve the right to recoup this capital and (ideally) generate a return.

Unfortunately, the mere discussion of this topic has already caused pause in investors minds. Let our capital markets work freely -- that strategy seems to have worked well in the past.

Say It Ain't So...

2006-09-28T08:50:00.000-05:00

I'm surprised it's taken this long to become realized. The New York Times published an article earlier this week indicating that several intelligence agencies have found that the American invasion and occupation of Iraq has helped spawn a new generation of Islamic radicalism and that the overall terrorist threat has grown since the Sept. 11 attacks.

Surprise. Surprise. A five-year old could have guessed that this was going to happen.

The article went on to say that the radical Islamic movement has expanded from a core of Qaeda operatives and affiliated groups to include a new class of “self-generating” cells inspired by Al Qaeda’s leadership but without any direct connection to Osama bin Laden or his top lieutenants.

What amazes me here is not only that this wasn't (and still isn't, by most) considered to be a risk when considering our foreign policy, but rather that our friends in the White House haven't used their impeccable media skills to sway the Islamic community as they do their own American constituents.

Come-on folks. This new form of war isn't going to be won by guns and brute force, but rather by media and education.

More on Globalization

2006-09-21T12:49:00.000-05:00

Today, Ed Sim refers to a recent article in the Wall Street Journal and another article in The Economist that both discuss the impact of globalisation and emerging economies on our lives.

The Economist begins by stating:

Last year the combined output of emerging economies reached an important milestone: it accounted for more than half of total world GDP (measured at purchasing-power parity). This means that the rich countries no longer dominate the global economy. The developing countries also have a far greater influence on the performance of the rich economies than is generally realised. Emerging economies are driving global growth and having a big impact on developed countries' inflation, interest rates, wages and profits. As these newcomers become more integrated into the global economy and their incomes catch up with the rich countries, they will provide the biggest boost to the world economy since the industrial revolution.
I couldn't agree with this more. But, on the same token, emerging markets can also now bring down the world economy just as quickly. So, this boost is not coming without strings attached. These are countries that lack infrastructure, have been historically fraught with corruption, and are controlled by small groups of self-interested individuals & families. The Economist does point this out later in the article, but doesn't stress this risk enough in my opinion.

Financial wobbles this summer acted as a reminder that emerging economies are more volatile than rich-country ones; yet their long-run prospects look excellent, so long as they continue to move towards free and open markets, sound fiscal and monetary policies and better education. Because they start with much less capital per worker than developed economies, they have huge scope for boosting productivity by importing Western machinery and know-how. Catching up is easier than being a leader. When America and Britain were industrialising in the 19th century, they took 50 years to double their real incomes per head; today China is achieving the same feat in nine years.

Again, what China has gained in the past nine years could be lost within two if the capital markets lose faith in the economy & management over there. People, like the author of this essay, are quick to forget what happened in Argentina in 2002 or Russia in 1999, and countless other emerging economies in years past.

Michael Milken in the Wall Street Journal takes a different approach to the effects of globalisation:

As we start moving into our seventh decade, it's logical to ask what effect baby-boomer retirements will have on real estate and financial markets. The question is logical, but it puts the emphasis on the wrong side of the equation. The real future value of U.S. assets won't be determined by retirements, but by policy decisions on education, taxation, regulation, immigration, international investment and the environment. Baby boomer asset liquidation isn't really a financial market issue because (1) there's plenty of liquidity in the global economy; (2) as the rest of the world becomes wealthier, people outside the U.S. will own a greater percentage of global assets and they'll want to keep a share of their net worth in America; (3) liquidity will grow in both developed and developing nations as they adopt recent American financial innovations and market structures; (4) as baby boomers live longer and healthier, their new mantra will become "Who wants to retire?" and (5) most assets won't need to be sold.

It's always amazing to me just how much influence both the rest of the world & our governments' foreign policies have on our future. In this flattened global economic realm, the mass movements of dollars and information across borders has more of an impact than we really realize. As I mentioned in a past post, Bret Swanson has pointed out that the price of oil has more to do with our weak dollar than it does with our trade relations or oil producers.

I definitely agree that as these emerging markets accumulate wealth, and we manage to continue to innovate & live ahead of the curve, America stands to benefit greatly from the investment of those countries in to our economy. However, therein is the crux of the challenge we face in this newly globalised society; that financial inflow can come and go just as freely. Open capital markets are a great thing, and so is the open dissemination of information, but being ahead of the curve in a constantly-equalizing market is the only way to sustain value.

And, the only way we can do this well over the long-term is by leading the pack in education. Something which we are clearly not doing right now. In his blog post, Ed Sim uploaded this graph along with others and commented:

We have always thought of India and China as places to offshore low-level development work. Yes, alot of that has already been done but what is alarming is what may happen in the future as the comparative advantage that India and China have over us in terms of college graduates in science and math is overwhelming.
Not every one of those graduates according to the McKinsey Global Institute is up to par with the standards that we have in the U.S. (10% in China and 25% in India) but that is clearly changing.

In a world of pervasive communications, widespread information sharing, remote learning, and cheap transportation, it's becoming more and more clear (to me at least) that our only competitive advantages are our smarts & our creativity. Let's make sure we invest in these attributes so that we don't fall behind. Please.

The Effects of Globalization

2006-09-14T16:01:00.000-05:00

Bruce Sterling brings up a subject that's dear to me, the effects of globalization, in last month's Wired Magazine. He starts by saying:

Cheap flights and ubiquitous worldwide communications are the stuff of globalization. Ready travel lets people oppressed at home taste the joys of free society, while the Net exposes them to the ideas and customs underpinning that social order. The effect is viral, spreading liberal values and economic growth to benighted dictatorships and hopeless pits of poverty.

But, then goes on to bring up some thoughts by Chris Parry, a Falklands vet, the former commander of HMS Fearless, and a current British intelligence officer.

During a recent briefing at the time-honored Royal United Service Institute – the oldest military think tank in the world, founded in 1831 by the Duke of Wellington – Parry imagined a future, circa 2030, in which the war on terror is still rolling along and the terrorists are winning. He describes a world so ripped up by nets and jets that sovereign nation-states like the UK are collapsing economically, politically, even physically. Then there are the people of that future, who hop from country to country and bear allegiance to none. “Globalization makes assimilation seem redundant and old-fashioned,” he noted, pointing out that, rather than dissolving into the melting pot of their host nations, immigrants are increasingly maintaining their own cultural identity. Jets and nets make this possible. “Groups of people are self-contained, going back and forth between their countries, exploiting sophisticated networks and using instant communication on phones and the Internet.” The result, Parry says, is “reverse colonization,” in which the developing world’s teeming masses conquer Western nations, as surely as the Goths sacked Rome.

With this thesis, these two innovations [nets and jets] might also be an imminent menace to Western civilization. I couldn't agree with Parry more. He may be a little dracronian, but his views, I believe, are directionally very relevant. Traditional states & international policies have to evolve to accomodate these changing times...

The Ford Memo

2006-09-05T09:43:00.001-05:00

I was there in 1998, 1999, and part of 2000. And, I believe that Jac Nasser utterred a strategy & vision for Ford Motor Company that wasn't too far off from this (taken from Bill Ford's recent memo to shareholders):

"The business model that sustained us for decades is no longer sufficient to sustain profitability," the memo said. "We must change to a new business model that requires greater bottom-line contributions from cars and crossovers, continued leadership in pickups in North America, healthier profits from all other business units, growth in Asia, greater integration of our global operations and an evaluation of strategic alliances."

As I've posited in the past, the auto industry is fundamentally sound. There are a few aspects of the industry, here in the United States, that need addressing, but it's certainly very possible to make money in the business. Bill and his leadership team (as most of Detroit) are just mired in the past, and afraid of change.

I would love to see a private equity consortium buy Aston-Martin or Jaguar or Volvo. That would cause such an influx of capital & interest in the sector that it would likely see some quick changes (= results). A series of private equity firms would defintely address the following:

Regarding leadership, he [Bill Ford] wrote that he was now "even more determined to continue to develop leaders inside the company and to attract leaders from outside when we need additional skills to turnaround our business."

Notes on Being a Board Member

2006-08-31T07:57:00.000-05:00

Fred Wilson posts about the importance of knowing the difference between being a good advisor to a CEO and being in the CEO's way. These are truly words of wisdom.

It's a lot about how you say things, not what you say. The most important thing is to advise not direct. Ordering entrepreneurs around won't work. If they wanted to take orders, they'd be working at some big company taking orders from someone else. It's also critical to soft pedal the advice. Coming from an investor, it's going to have an impact anyway, so I find it best to say something like, "have you thought about", as opposed to "that's not the way to do it".

I couldn't agree more that it's of critical importance that a Board Member know how to coach & guide while keeping a CEO upbeat about what he/she has already accomplished. Obviously, this is Management 101, but I've found several VC's and Board Members who tend to forget the basics of management & motivation. No matter how good the CEO, people are people and they need to be treated with respect & recognition. Just like anyone, CEO's appreciate words of motivation & validation.

If you have something to say, think carefully about how to phrase it...

Intellectual Happy Hour

2006-08-25T16:17:00.000-05:00

Dan Primack points me to an interesting article by James Surowiecki of The New Yorker discussing the inherent conflict of interest in buyouts of public firms. Surowiecki claims that LBOs present a conflict of interest between management and shareholders. The thought is that management is not incentivised to sell the company at a low price since they’re participating as shareholders in the new acquisition vehicle. This is a thought-provoking piece.

Rumour has it that Ford Motor Company may be taken private. With a market cap of about $15 billion, current long-term debt at $150 billion, and a credit rating in the dumps, it would be a really brilliant idea to take this company off the market and help it refocus it's business. The divestiture of several key assets could raise a substantial amount of cash to fund the company to viability. Let's see who steps up. Nasser, possibly?

Bret Swanson hits the Wall Street Journal with a testy commentary on the reasons behind the skyrocketing price of oil in the US. He states: "Today, commodity prices across the board, from coffee to carbon fiber, remain near 25-year highs. High oil prices are not a unique phenomenon, but just another commodity whose price is determined primarily by the value of the dollar. Expensive oil isn't exclusively a monetary event, of course: Risk and demand matter, too. But in comparing oil to other commodities, especially gold, we find that elevated risk and demand explains only $10-$15 of the higher oil price; $30 of the price is explained by a weak, inflationary dollar. The entity most responsible for expensive oil is thus the Fed." Read this article.

Pluto was demoted to dwarf status. That's just flat out sad.

Ford Sales Drop 34%

2006-08-07T17:06:00.000-05:00

...this is not a bad thing. As I've mentioned before, these car companies have focused way too much on being number one or number two and not focused enough on being solidly profitable. Toyota has become the number two automaker in the US.

This is the best news I've heard come from Ford management in quite some time:
Ford officials painted an optimistic picture of July's results, citing an improvement in sales excluding those to rental companies, government agencies and other mass purchasers. The auto maker said its July retail sales climbed 7% compared to June, representing the second best retail month for the auto maker this year. The auto maker is looking to lessen its reliance on unprofitable sales to so-called fleet customers.
Fleet sales are probably one of the worst kind of sales an automaker can get in to. Usually fleets simply diminish the residual value of vehicles tremendously; as they flood the market with an abundance of used vehicles 2-3 years after the purchase.

That basically means that the re-sale value of that Taurus you bought is crushed when you try to re-sell it because Hertz and Avis are dumping theirs as well. So, the supply of used Taurus' in the market is greater than the original supply of new Taurus' a few years earlier (because the vehicles sold to Hertz and Avis originally were never actually part of the open supply). But, generally, demand for those same vehicles (but used) hasn't drastically increased either.

Talking About MVNO's

2006-07-20T22:38:00.000-05:00

Mobile Virtual Network Operator's (MVNO's) are mobile operators that do not own any spectrum or any network infrastructure. Instead, MVNO's have business arrangements with traditional mobile operators to buy minutes of use (MOU) for sale to their own customers.

In general, MVNO's have full control over the SIM card, branding, marketing, billing, and customer care operations.

The market is seeing a number of these businesses cropping up since the huge success of Boost Mobile. I may be a little dense, but I don't really get the value proposition and sustainability of these businesses. Most of these new businesses cropping up seem to be purely lead generation businesses, with very little long-term value creation other than a brand (possibly). I feel like this rash of new companies is a little reminiscent of the days of CLECs. After all, wireless voice/data services are pretty much a commodity (today).

I would argue that for a new MVNO to be truly successful (over the long term), they need to find some meaningful differentiator other than some trendy urban or language brand push. But, I hope that someone out there can prove me wrong...

Fixing the Auto Business

2006-07-16T12:03:00.000-05:00

The auto industry is not dead. People still buy cars in this country. In the first half of this year, 8.3 million cars & light trucks were sold in the United States. Last year, people bought 17.0 million vehicles, up from 16.9 million in 2004. Since 2002, the market has grown steadily. So, if cars are still selling, what gives? Auto divisions in other parts of the world are extremely profitable (in the case of Ford, both Brasil and Asia are doing well).

Having spent a number of years in operating roles in the auto business, I have absolutely no idea why anyone would think that a merger of GM and Nissan-Renault would be good for shareholders. The WSJ had a commentary today that a tie up between GM and Ford would be a good idea. That's a tough one to understand, but I guess everyone's allowed to an opinion.

The savings would be tremendous -- far larger than anything the Nissan Motor-Renault alliance presents. If a merged GM-Ford reduced costs equal to 2% of sales -- one common M&A benchmark -- the capitalized value of the savings could be some $40 billion -- well above their $30 billion of combined market cap today. [...] Because a merger would only make sense if it eliminated entire brands -- such as Buick, Pontiac and Mercury -- further market-share losses would also be anticipated.

This is a ludicrous concept. First of all, there are several key reasons why the automotive industry has not been faring well: (a) the union pensions, employee benefits, & legacy healthcare costs are crippling, (b) the management of these giants are bloated and laden with generational politics, (c) Ford and GM are partially vertically integrated and partially horizontally integrated, and (d) they synergies of multiple brands under one roof are extremely tough to capitalize on.

So, given that people still buy 17.0 million vehicles in this country alone, how could it be that eliminating consumer choice (by killing brands) be a good thing? And, since one of the reasons that the companies have struggled is bureaucracy, how could a merger of two giants be a good thing? It pains me that these are the ideas that are most prevalent in the wires.

Most the Detroit is plagued in the belief that market share is the most important goal to strive for. It doesn't help that journalists and analysts chime in about this all the time. Given the state of affairs today, I would argue that profitablity and sustainability are orders of magnitude more important than market share. I know, that's an unusual concept, but I'll step out on a limb. Come on Detroit, bigger does not mean better.

To believe in what I'm saying, there is one fundamental concept that needs to be grasped -- it is possible to make money on a low volume vehicle. Many on Wall Street think that high volume is the only way to make money, therefore giant companies make sense.

If I were running GM or Ford, I would spin off some assets to raise capital and re-focus the company's on their core competencies -- designing, assembling, branding, & selling products. Smaller, more nimble companies would be apt to succeed in this globalising market. If the companies were more focused, then employee satisfaction would be ten times greater and unions could be fended off simply treating people well. Didn't Toyota do that?

Fundamentally, I think that the auto business could learn a lot from the PC industry. Why do Ford and GM need to have full control of their powertrain divisions? In my experience, these divisions within these companies are complete disasters; always way over-budget and fraught with quality issues. Why? Because no one wants to work in those departments. Cars take a long time to develop, about 3-4 years. Powertrains are even longer than that. Is there not an opportunity to spin out these powertrain divisions and outsource that entire portion of the vehicle? Isn't that what Intel and AMD are for the PC business, or Qualcomm for the mobile phone business? This is a very very controversial idea, but I'm convinced that there are very few business synergies in keeping powertrain in house.

If these auto companies were more focused on only a handful of competencies, they would likely be more apt to succeed.

Dealership networks should be completely blown up. Why do these auto companies not have direct control of their customers? They're extremely dependent on dealers who they cannot control. What if pricing for vehicles were standardized at the OEM level and there was no haggling over price? Didn't Honda do that? Today, dealers for Ford and GM are not value added; they're a pain in the ass.

Lastly, on the concept of synergies: (a) they don't exist and (b) when they do, they destroy product value. The baby Jaguar shares common components with the Taurus. What a disaster! Who the hell wants to pay for a Jaguar and get a Taurus? The Mercury vehicle line is basically comprised of Ford's with a slight different fascia. What's the point!

There are only two synergies that can come from multiple brands under one roof: (a) purchasing / pricing and (b) assembly / manufacturing. I would argue that new forms of communication, the Internet, and globalisation have pretty much made purchasing / pricing transparent and extremely competitive. So, there's no need for a common purchasing department. And, as for assembly / manufacturing, these giant auto companies are incapable of even managing volume across multiple plants. Determing capacity needs is extremely challenging. Excess capacity and under capacity are the most crippling challenges to the business. Whereas some vehicles can't be assembled fast enough, other plants are sitting idle. It's this lack of capacity where vehicles are in demand and these empty sites that are a drag on a company's profits. This has nothing to do with platform synergies, but rather with extremely poor planning.

Smaller, stand-alone, focused, non-integrated vehicle lines are the way to go. I want to buy my next Jaguar with Bosch brakes, a Honda powertrain, Lear leather seating, and Motorola electronics. I'd like to be able to buy that car at the same price as my neighbor.

This industry needs some new blood and new ideas. How about KKR or TPG buy Volvo from Ford and put Michael Dell in as the CEO? How about Blackstone or Warburg buy GM's powertrain group and put Andy Grove in as the CEO?