INTRODUCTION
I’ll admit that I have a love-hate relationship with flying. But throughout my professional life, and certainly in my current job as the Executive Director of Carnegie-Mellon’s Asia-Pacific campus here in Adelaide, it kind of goes with the territory. Last year I went from getting my Qantas frequent flier card to achieving, I think, something like plutonium level status, which allows me to fly the plane if I want.
It’s not that I don’t love visiting far-flung places. I do. But, after all of these years, I still can’t get comfortable with the idea of climbing into an enormously heavy metal tube that depends only on the laws of physics and lots of variables—pilot skill, weather, mechanicals—to stay aloft. Sure, I say to myself, the chances of a crash are pretty remote. But so is surviving one.
What really bothers me are those times when it’s a perfect day to fly, blue sky as far as the eye can see, and the plane unexpectedly starts to pitch and wobble and jump—what aeronautical engineers would call “clear-air turbulence”. Clear-air turbulence is caused when bodies of air moving at widely different speeds meet, and it’s impossible to detect either with the naked eye or conventional radar, meaning that it’s difficult to avoid.
As is turns out, if we hadn’t figured out at least some of the properties of clear-air turbulence modern air travel, as we know it today, probably wouldn’t exist.
As test pilot Chuck Yeager got closer and closer to flying at Mach 1, the sound barrier, the aerodynamic drag of his plane, coupled with the uncertainty of clear-air turbulence, became so extreme that engineers thought that there might be some sort of physical barrier to travel at or beyond the speed of sound. Through new innovations, experimentation, and the sheer courage and will of Yeager the sound barrier was broken in October 1947, the effects of clear-air turbulence at Mach 1 were conquered and the world has never been the same.
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Much of what we’ve heard at this conference has reinforced what’s been portrayed by industry, government, and the media about South Australia’s future—sure, there are some challenges to overcome but it looks like there is a lot of clear blue sky out there. More money, more people, certainly more influence in the Australian, if not the global, economy.
Now, I think it’s dangerous to make predictions, especially about the future. But I think that there are at least three big shifts happening in the world, perhaps the clear-air turbulence in an otherwise blue sky, that will require businesses, governments, and nonprofits like philanthropies, social service agencies, and universities like mine to have the courage and will to innovate and experiment if they hope to be around to see the last shovel of rock get mined from Olympic Dam. I’d like to spend the rest of my time with you today briefly describing these three shifts and some thoughts about the promise and peril that South Australia could face if the dream of an “economic powerhouse” comes true.
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Shift #1: The best customers in the world will have no money.
O.K., I exaggerated a little bit. Some of the best customers in the world or the customers of your best customers will have almost no money.
Many of us probably have a sense for how wide the difference in income levels are around the world. In fact, 80% of the world’s wealth is controlled by 15% of the world’s population, and the poorest 50% have only 1% of the world’s wealth. An estimated four billion people around the world live on less than $5 a day.
But, of the next 2 billion people to inhabit the planet, only 50 million of them will live in the developed world. With a global economy growing at more than 5% and a world population growing at a little over 1%, the average world per capita income is growing at a rate such that poverty could be cut by more than half by 2015.
This means that almost a billion new consumers will enter the global marketplace in the next decade, getting beyond the level of annual household income, about $5,000, when people generally begin to spend on discretionary goods. When you put all these numbers together, it results in consumer spending power in emerging economies increasing from $4 trillion to more than $9 trillion—nearly the current spending power of Western Europe.
Of course, these consumers will be harder to reach through traditional means, even with mass migrations around the world from rural to urban areas. Tapping into this big emerging market, even for companies that don’t provide goods directly to consumers, will require very, very new ways of thinking.
For example, this is Muhammad Yunus, the winner of the 2006 Nobel Peace Prize and the founder of the Grameen Bank of Bangladesh. You may already know the story of this social entrepreneur who, over 30 years ago, gave loans totaling $42 to 24 Bangladeshi women to launch micro-businesses and ultimately legitimized microfinance as not only a poverty alleviation strategy but a viable business model. As of January 2008, Grameen had nearly 7.5 million borrowers, 97 percent women, with branches covering more than 96 percent of all villages in the country. With over $7 billion in loans distributed since its inception in 1976, Grameen Bank, 90% of which is owned by its customers with the remaining 10% owned by the government, has had only three unprofitable years and a less than 3% default rate.
Not surprisingly, perhaps, established companies have started to get in the game. Late last year, JPMorgan launched its new Social Sector Finance unit intended to “achieve a double bottom line of social benefit and financial returns.” You might think that JPMorgan was particularly forward thinking here but they were merely responding to similar initiatives by other financial services companies including Morgan Stanley, HSBC, and Deutsche Bank.
And it’s a trend not just limited to the banking sector. Groupe Danone of France launched in 2006 with the Grameen Bank Grameen Danone Foods to manufacture nutrient-rich, fortified yogurt in small local plants. That approach minimizes the need for expensive refrigeration and reduces the price so that more rural children in Bangladesh can improve their diets. But Danone isn’t just launching this venture to eradicate malnutrition. Both partners expect to make money on the deal and establish a new business model that can be profitably scaled to other parts of the developing world.
Shift #2: Competitors will come from places that make almost no sense at all.
I don’t need to tell many of you in the room that competition seems to get fiercer every year. And, if South Australia becomes even more of a global player in the world economy expect that trend to continue, and then some.
The average life expectancy of a multinational corporation is between 40 and 50 years and rapidly decreasing. For example, more than 1 in 3 Fortune 500 companies in the U.S. from 1995-2004 experienced bankruptcy or takeover and a similar effect is taking place in most developed economies across Europe and Asia.
In addition, the average holding period for a share of common stock is about ten times shorter than it used to be—from 8 years to 8 months—and product life cycles have reduced by a factor of 3.
One reason for these, perhaps frightening conditions is that new products and business models are emerging from some pretty unlikely places.
For example…
- The PC industry has been rocked by an initiative called One Laptop Per Child, a nonprofit launched by the founder of MIT’s Media Lab, Nicholas Negroponte. The so-called “$100 laptop” [hold it up] is using open source software, an innovative design, and direct sales to governments around the world to disrupt the status quo. Not surprisingly, both Microsoft and Intel recently announced new initiatives in direct response to a nonprofit that didn’t even exist a few years ago.
- The Tata Nano is being called the “People’s Car”, proposed as a $2,500 replacement for the normal mode of transportation for families across India and around the world [upper left picture]. It has been hailed as the “next Model T Ford or Volkswagen Beetle”, claiming to meet European emissions standards with a fuel economy matching the best hybrids and unique financing arrangements to put it within reach of millions of new consumers. Oh, and Tata is rumored to be in the market to buy Jaguar from Ford.
- And these competitors aren’t just limited to product companies. The Aravind Eye Hospital was founded over 25 years ago and runs the biggest community eye program in the world, treating over a million patients each year. It profitably does cataract operations, provides glasses, and any other treatment free of charge to the poor by using a tiered pricing system for those who can pay. Aravind also continues to fuel its innovation engine by utilizing the latest advances in telemedicine to watch eye operations in Boston or London. And Aurolab, Aravind’s manufacturing division, has developed sophisticated designs and production processes to keep the cost of ophthalmic consumables down. Comparable spectacle lenses costing $150 in the West goes for $4, hearing aids costing $1500 cost $60. It’s not likely that anyone 25 years ago would have thought that Aravind could potentially redefine how eye care is provided around the world but then the Internet was around for 30 years before it became an “overnight sensation”.
Shift #3: The definition of “success” will change.
I tend to agree with the famed economist Milton Friedman that the sole purpose of a business is to make money. But there are forces at work that are beginning to change what “business success” means.
Governments, which should do at least two things well—#1: establish rules and #2: create incentives—are increasingly introducing double or even triple bottom line rules and incentives to drive industrial and economic policies. Do well financially, do well by the community, and do well by the environment—an infinitely more complicated operating environment with different governments around the world reacting differently to the emerging needs of society in the 21st century.
In addition, investors are devising more sophisticated ways to assess a company’s “intrinsic value”. When Al Gore left the White House in 2000, he listed his net worth at around $2 million. Eight years later, he’s worth between $50-$100 million. Can you get that much cash that fast through speaking engagements? Not likely. Winning the Nobel Prize. Hardly. Getting options on Google and Apple stock by sitting on their boards? Perhaps.
No, it seems likely that Gore’s newfound wealth could largely be attributed to the founding of his investment company, Generation Investment Management, founded with a former Goldman Sachs partner, David Blood (fortunately, they resisted the urge to call the new firm Blood and Gore). Generation has developed new, highly sophisticated modeling and analytical techniques, taking into account environmental and community impact indicators as well as prospects for future profitability, to estimate future stock prices and make investment decisions. Returns of the firm’s investment portfolio haven’t been made public but Gore is reportedly “very pleased” with the results.
It’s likely that Generation Management is using methodologies similar to those used in Fortune Magazine’s annual Accountability Rating of the world’s 100 largest companies. Last year’s evaluation reflected a further evolution of the approach used when it was first calculated in 2005, becoming increasingly more invasive.
How much longer will it be until it gets applied to even more companies, and media competitors apply their own scrutiny to the financial, social, and environmental practices of global corporations?
And if you can’t get investment capital from banks, private equity firms, or the growing sovereign accounts of countries, how about Google? Last year, the company’s philanthropic arm, Google.org, established investment initiatives in five major areas including Developing Renewable Energy Cheaper Than Coal called RE
Or how about the Gates Foundation which, given the recent commitment by Warren Buffet to contribute his vast wealth to the foundation, is redoubling its efforts to reshape health care and medical research around the world, often using unconventional methods and operating models borrowed from the private sector?
Or, if you’re a more competitive sort, how about vying for an X-Prize. Like the $25,000 that got Charles Lindberg to fly cross the Atlantic, a $10 million prize was enough to motivate some of the best engineers in the world to try to send a man into space, bring him home safely, and do it all over again in four days—a truly reusable space ship. It was pulled off by legendary airplane designer Burt Ruttan in 2004 and has ushered in the era of personal space travel, with entrepreneurs like Richard Branson rushing to enter the market. Now there are X-Prizes for things like the 100-mile per gallon (44km/liter) vehicle, greenhouse gas scrubbers, and wearable power.
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So let’s assume that South Australia’s companies, government, and nonprofit sector successfully navigates through this turbulence and emerges an “economic powerhouse”. What are the decisions and responsibilities that come with that kind of success?
That’s a pretty big question for the time that I have left so let me just leave you with some things to think about.
Last year, a university professor in the UK, Adrian White, completed an analysis called “A Global Projection of Subjective Well-Being”. The shorthand for his work, ranking every country in the world, has been called the “Happiness Index” because it attempted to apply a systematic approach to assessing relative contentment among global populations.
Now this may sound like a pretty difficult, perhaps even foolhardy task, but it’s an important one, especially for governments. In fact, the UK moral philosopher Jeremy Bentham in the late 1700’s argued that the purpose of politics should be to bring the greatest happiness to the greatest number of people. A 2006 survey in the UK found that 81% thought that the government should focus on happiness, not wealth creation.
Just for fun, I decided to see if there was any correlation between a country’s wealth, measured in per capita Gross National Product and its Happiness Index score.
It’s no surprise that people in high GNP per capita countries are generally pretty happy but what’s interesting is that there were lots of low GNP per capita countries where citizens were about as content.
So, I thought, maybe it’s because the cost of living is different in different countries. So I did the same analysis using data that equalizes GNP per capita based on a country’s relative cost of living.
You can see that the previous conclusion is even more obvious here—money alone doesn’t seem to guarantee happiness or, more importantly for governments, the contentment of its citizens.
Similarly, the United Nations publishes a “Human Development Index” that includes literacy rates, life expectancy, and other indicators of a “well developed” society.
Still, when compared to per capita GNP, even some of the world’s richest countries don’t stack up. Of course, it’s hard to draw firm conclusions but it would appear that the effective provision of important human needs such as healthcare, education, and housing—effectively and economically delivered increasingly with the cooperation of governments, industry, and the nonprofit sector—is an important determinant of societal development.
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I was in the United Arab Emirates a couple of weeks ago and places like Abu Dhabi and Dubai are interesting case studies of economic powerhouses on the move. It made me think about the choices and opportunities that South Australia might have in the future.
While I was there, a futuristic 100,000-resident city named Masdar meaning “the source” in Arabic, was announced, intending to rise up from land across from the royal family’s private terminal at the Abu Dhabi airport. The goal: to create the world's first metropolis that emits not a single extra molecule of carbon dioxide, the cause of global warming.
It's a delicious irony that Abu Dhabi, awash in oil and dollars with nearly 100 billion barrels in reserves may be the place that builds the first city for a post-oil world. No cars will be allowed within the walled city’s limits. Billions will be poured into renewable and sustainable energy technologies.
$250 million has already invested in clean-tech companies, including Segway, the maker of personal transporters, solar manufacturers, and wastewater-treatment companies. A new multi-billion dollar fund is working to allow Abu Dhabi's reach in renewables to extend all the way from research to large-scale manufacturing. By the time Masdar is complete in 2016, it will house 1,500 businesses, save the equivalent of $2 billion in oil over 25 years, create 70,000 jobs, and add more than 2 percent to Abu Dhabi’s GDP.
Of course, there are huge challenges ahead. The big question is whether enough talented scientists, engineers, and entrepreneurs can be persuaded to come to Abu Dhabi. The emirate's tiny population can’t furnish enough brains to develop an industry dependent on technological advances. Sound familiar, South Australia?
But the payoffs from success are almost immeasurable, especially when you consider the fact that China is building the equivalent of four new Manhattans every single year.
It’s obviously premature, but what would South Australia’s Masdar be if the promise of economic growth and prosperity became a reality? Like it or not, great opportunities and sometimes awesome responsibilities go along with being a “big dog” on the world’s economic stage.
Thank you.
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