Would a businessman run your country better? (2/2)

Note: this piece was embargoed and meant to be released on the 11th of March 2016.

Last week, we saw a few positive and negative examples of businessmen running countries. Donald Trump is still leading the Republican race. This week we will see a few examples of successful countries without businessmen as leaders. We will find out what skillsets are actually needed and we will thereafter check whether the US presidential hopefuls and the current world leaders share these competencies.

Looking East
When I was a pupil at school, the geography syllabus made references to the 4 tigers or dragons in Asia: Hong Kong, Singapore, Taiwan and South Korea. At that time, there was some French arrogance in covering these 4 smaller countries with good growth rates and large manufacturing base. Let’s cover a couple of successful leaders in these countries.

We start with Singapore, which recently mourned its former Prime Minister Lee Kuan Yew. Lee graduated from Cambridge with the highest honours in Law. During WWII, he learnt Japanese to be able to deal with the occupying nation. He started his career as a lawyer before being seduced by public office. In 1965, as Singapore was ejected from the Malaysian federation, Lee led the country into a major transformation, pushing the income per capita from $500 to nearly $60,000 today. There were several phases of the success story. First develop tourism and beg the British to not destroy the local harbour. Then set up a cheap manufacturing industry, using this harbour in a central location. Third, attract multinational corporations to set up a base in Singapore thanks to world-class infrastructure and the rule of law. In the early 70’s, the likes of Texas Instrument, HP or Hewlett Packard establish Asian bases on the island. Finally, in the late 70’s, develop a financial centre to attract and recycle capital inflows. During these decades, Lee surrounded himself with economists, senior bankers and law professionals, locals or foreigners, in order to keep economic development, fight against corruption and rule of law at the centre of the agenda.

Lee yuan kew young

How a Singapore leader looked like young

In South Korea, Syngman Rhee and then Park Chung-Hee propelled the country from a level of wealth equivalent to Ghana to Spain in 50 years. Both “presidents” shared a teacher background, an early experience of exile (in the USA for Syngman, after evading jail for political activities and Japan for Park, who was enrolled in the Imperial army) where they learnt foreign languages (English and Japanese). Syngman years in the US helped him build the right high-level connections which decided the US to defend the South against the North in the Korean War while Park used his Japanese links to negotiate that Japan paid some War Reparations and made the soft loans that gave the initial capital to create a manufacturing base in Korea.

What about Europe?
One major success to me of the continent over the past decades has been the creation of the EU. The main proponents of the project, the so-called “fathers of Europe” were Konrad Adenauer (Germany), Jean Monnet and Robert Schuman (France), Paul-Henri Spaak (Belgium), Johan Beyen (Netherlands), Joseph Bech (Luxembourg) and Alcide de Gasperi (Italy).

Mr Bech was a lawyer who studied in France and Germany.

Mr Beyen read law, worked in Switzerland in finance at the Bank of International Settlements and fled to the UK during WWII.

Mr Spaak learnt German as a war prisoner and then studied law, becoming a lawyer.

Mr Monnet left home to live in London and then the US – he was perfectly bilingual, a rare thing before WWI! He was a cognac merchant before becoming a politician. During WWII, in 1940, he was sent to the US to negotiate arm deliveries. This is where he met F.D.Roosevelt and convinced him to start re-arming, leading the whole project. He is credited by John Maynard Keynes to have cut short the war by one year thanks to his skillful planning.

Mr Schuman was born in Luxembourg, lived in Germany when France lost territories in 1870 and then became a lawyer.

Mr De Gasperi was born in what was Austria-Hungary (but now Italy) so had command of German from his youth. He read philosophy and became a politician quite quickly.

Finally, Mr Adenauer studied law and politics and also showed entrepreneurial skills by creating the CDU, the party of Mrs Merkel.

Have you noticed a pattern?
Many successful or visionary politicians share a legal education, significant time spent abroad (voluntarily or forced), mastering foreign languages and making connections at the highest level while abroad with businessmen, economists and politicians.

Why are lawyers so prevalent? Governments are here to write and execute laws, not to run a factory. Having a legal background is therefore a necessary condition.

Why is time spent abroad so important? These leaders have been exposed to new ideas and they have built connections at high levels that they have used with great success thereafter.

Foreign languages? All these leaders are multi-lingual. Look at your company or own life – will languages reduce your prospects or improve them?

Final word
Below I summarise the US presidential race as well as some current world leaders. I let you conclude yourselves about the prospects for the US and for the major countries.

US Presidential Race

The current world leaders

Will businessmen run your country better? (1/2)


First, apologies for the hiatus last week. I am now back on track.
As most people, you must have been following the US elections primaries, especially the Republicans’ race, with Donald Trump defying all the earlier forecasts. Mr Trump mentioned repeatedly that he will bring his business acumen to run better the country. Four years ago, Republican candidate Mitt Romney (a founder of private-equity group Bain Capital) also promoted the same idea. It therefore interested me to check whether businessmen ran countries better.


'I don't want to be president when I grow up, I want to be Donald Trump.'

Donald Trump – the youth idol

At first glance, a successful entrepreneur or CEO of a multinational seems equipped for running a country. They understand economics – they know the impact of labour laws, trade deals, infrastructure, regulations on business. They master managing teams of people – if they are great managers, they will surround themselves from smart people. They also are used to make tough decision – closing a plant, shedding jobs, buying a rival, risking money on a new venture.

trump grate

They need to oil their message

Donald’s nephews
The US have actually had several examples of entrepreneurs/businessmen running the country. One is not too old: Jimmy Carter (1977-1981). Mr Carter was raised in a poor family in Georgia, spent his childhood in social housing (the only US president ever in this case). His education was completed at the Naval Academy in nuclear submarines after which he took over his father’s derelict farm. He had become a peanuts farmer. He actually did very well, multiplying production and profits. He then entered politics and was an efficient governor, merging agencies, saving costs (good farmer thinking) by being the first person to trust zero-based budgeting (a budgetary process in which every year, each line of spending has to be approved from scratch and justified, often accompanied by a reduction of that spending). A few years later, Anheuser-Bush Inbev used ZBB as an edge to become the biggest beer company in the world.

Jimmy Carter was unlucky that his terms coincided with a deep economic crisis. A lot of his deregulation policies have benefited the man on the street in the US, unbeknownst to them: in 1978, the US deregulated the airline industry, creating the leisure airline market while in 1979, the US authorised craft breweries, that some of you must enjoy today!

Democratic Presidential Candidate Jimmy Carter Leaving California Aboard the

As it was called before Air Force One

Run the country like your business? 
There have been a few other examples in the US of successful businessmen leading the country: Abraham Lincoln had a general store and ran a law practice (he even patented a product!). Warren Harding (1921-1923) was a successful newspaper magnate and ran the country during the boom years of the early 1920’s. George HW Bush (the dad) was a relatively successful oilman (although quite “helped” by local connections). These examples cannot hide some terrible failures. George W Bush (2001-2009) presided over the Great Recession. He previously made 15x his money buying and selling the Texas Rangers sport franchise.

The worst example is Herbert Hoover (1929-1933). A successful mining entrepreneur (among the pioneers mining for ore in Russia – he was not the inventor of the vacuum cleaner), he famously said: “If a man has not made a million dollars by the time he is forty, he is not worth much”. His ascent in politics was through being the Commerce secretary where his work centered on eliminating waste and increasing efficiency in business and industry. He promoted international trade by opening overseas offices to advise businessmen. As the Great Depression struck, he struggled to combat the slump and ended up raising trade barriers and taxes – what a change of heart!

herbert hoover

Famous last word

What about foreigners?
Current examples are rare. Finland is run by a tech entrepreneur – Juha Sipila. Finland is struggling to escape recessionary times and Mr Sipila has had to enter a coalition with nationalists True Finns to continue as Prime Minister. Not as exciting as his corporate career.
In Chile, Sebastián Piñera, president between 2010-2014, built a fortune in TV, credit cards, an airline and the ColoColo football club. During his presidency, a Richter 9 earthquake struck, fires destroyed the wild forest and a volcano erupted. Mr Piñera is now associated with bad luck in Chile.
Finally, there is one entrepreneur in an European country, who started in the construction industry before branching to advertising and then media, who was seen as the saviour of domestic politics given the low level existing at the time. He failed to make as much an impact on the country as he did in his businesses or in the tabloid press.


The saviour

To conclude this week, business acumen is not enough and sometimes may not even be useful. We will see next week that a lot of successful leaders in thriving countries have common skillsets, life experiences, education backgrounds and the composition of their staff is not a random affair. Also, by next week, we should have more indication whether Mr Trump will still benefit from enough momentum to become the Republican nominee.


Watch out for the new Dutch disease epidemic (2/2)


Last week, we touched upon the new case of Dutch diseases around the world. While these countries are very dependent on oil and lack diversification, some tried to put some money aside for rainy days and built up financial reserves, constituted in a mixture of cash, debt instruments, stocks and other asset classes such as property.

Severe weather alert
The unexpected fact of the oil price fall has been that rainy day funds are now facing hurricanes: Saudi Arabia already spent 15% of its financial reserves in 2015 and is set to lose at least another 15% this year. Algeria, with an oil output of 1.7m bl a day will have swung from its usual $10bn trade surplus to a deficit of $20bn in 2016. The Kazakh sovereign wealth fund lost 16% over the past 18 months.

cartoon oil brains

One of the symptoms

How did we get there?
At this point we can introduce another economics concept called the Permanent Income Hypothesis. What the concept says is that one adapts its consumption not to one’s current level of income but rather to the expected future levels. So a lower income in one year will not change the spending pattern as long as the future level of income is still expected at the same level. Only a permanent large change in your income level would warrant a change of spending. Our oil producing countries are now only waking up to the fact that the expected future levels were too high.

At the country level, Brazil is finding that 90% of its spending cannot be curtailed given the guarantees it gave to pensioners and civil servants. The following chart shows that many oil producing countries are highly dependent on oil revenues, showing both symptoms of being a carrier of the Dutch disease and affected by the Permanent Income Hypothesis bias. The fact that many countries need an oil price around $100bl to balance their budget shows how fast their spending has tracked the higher oil prices. Oil started trading above $100 only in October 2007 against less than $10bbl in 1999, 8 years before.


Watch Country Extreme Weight Loss on your TV in 2016.

Spend spend spend
The influx of dollars made these countries feel rich, enabling them to fund generous social programmes such as those in the Middle East, Eurasia or Latin America. Maybe one reason for spending can be found in the story of United Arab Emirates’ Sheikh Shakhbut ibn Sultan, 60 years ago.
Worried that oil revenues would turn the heads of his loyal subjects, he hid the cash received from oil sales under his bed.
Sadly, mice started to eat the dollars so he had to put the incoming notes into the bank. His comical penny-pinching (one had to obtain his royal permission to build a road or open a shop) led to his demise and in 1966, he was overthrown.
Understandably, no other ruler in the Middle-East or beyond were inspired by this experience.


Payments in cash, not Sheikhs

Let me now share the case of Venezuela. Under President Hugo Chavez, the country embarked on a massive spending through the Bolivarian missions. These missions built hospitals, houses, schools…

Very noble objectives which contributed to a fall in poverty rates from 49.4% in 1999 to 30.2% in 2006 according to the United Nations Economic Commission for Latin America and the Caribbean (ECLAC). However, the ECLAC showed a nearly 7% jump in poverty in 2013, from 25.4% in 2012 increasing to 32.1% in 2013. Local universities now put the poverty rate at 48.4% in 2015. it is now thought that only 10% of Venezuelans benefited from the missions’ money, out of which half were not poor in the first place. Some money could have been saved for rainy days.


Save save save
Today, there is no more money so profligacy is out of the question and local populations suffer. Algéria, a large oil and gas producer, already lost 25% of its reserves. The last period of low oil prices, between 1986 and 1995, led to a decade long recession and a civil war costing at least 60,000 lives. The country is only now reacting to the fall after thinking for one year that Saudi Arabia’s increased output was just bluff (!) Kazakhstan, best country in the world and third producer of potassium according to Borat, cut spending by 10% in 2015 by lowering the funding for winter sport events and delaying a subway in Almaty.

Some countries try to find original strategies to lessen the pain of austerity. Nigeria is banning imports of several categories of goods as to avoid stocking domestic inflation – inevitably, this creates shortages and substitution with lesser quality goods. Another tactic is more autoritarian: as shortages of many goods accelerated, Venezuela increasingly forced foreign companies to sell to the State their local subsidiaries. The total lack of management expertise led to the collapse of many consumer product supply chains. 80% of consumer products are now missing. You can hardly find toilet paper in shops in Caracas.


Buy one get one free – if you can.

Looking ahead, for the countries affected by the Dutch disease, two solutions are possible: further spending cuts and/or selling assets. Spending cuts will endanger many regimes, which rested on generous handouts to silence the crowds. Firesale of assets are currently depressing global markets.
However, they are a great opportunity for other investors to get involved at better prices. For instance Saudi Arabia is considering opening the capital of Saudi Aramco, its oil producing company, to the public. This move is done in a position of weakness and will imply a low price during depressed business conditions to tempt investors.

Saudi Arabia’s loss can be our gain.


Watch out for the new Dutch disease epidemic (1/2)

The falling oil price over the past 18 months has had the consequence to expose both the unpreparedness and the lack of diversification of many major oil producing countries. For those, oil represents the biggest economic sector and most of the foreign currency revenues. Some countries have tried to manage the oil dependency though. Dubai, for instance, discovered oil in 1966 but as soon as the 1970’s invested in new industries such as a financial hub or aviation infrastructure to create a tourism destination. The Emirate only derived 4% of its revenues in 2015 from oil exports. The then ruler, Sheikh Rashid, was surely wary of the Dutch disease.

diversification investment

Benefits of diversification

The pandemic’s roots
The term was coined in 1977 by The Economist to describe the decline of the manufacturing sector in the Netherlands after the discovery of the large Groningen natural gas field in 1959, the 10th largest in the world. In economics, it describes the apparent causal relationship between the rise of one sector (in our story oil production) and the relative or absolute fall of other sectors. The idea behind is that massive exports of oil create an influx of dollars in the economy, pushing up the value of the local currency, making other sectors uncompetitive globally. While for the Netherlands, the Groningen gas field was finally cleared of wrongdoing a few years later, for many oil producing countries, we can notice that the energy companies and affiliated (such as the petrochemical firms) dominate the economy.
Below I have assembled the data showing how important oil is to many leading oil producers.

Oil dependency

Nobody is working two jobs

As you can remark, these countries are very dependent on oil. They also have many companies linked to the oil complex. The biggest company listed on any Middle Eastern stock market is Saudi Arabia Basic Industries Corporation. SABIC is a world leading petrochemical company, dominating production of chemicals using crude oil as input – so much for diversification! In Russia, 40% of the stock market index is represented by oil companies. As a comparison, energy companies weight around 10% of US or European stock markets.


Diversification for dummies…

Become a Forex trader
Of course, as soon as crude prices fall, the inflow of US dollars slows. This has for consequence pressures on the domestic currency. If the country wants to keep a stable currency, it needs to use its reserves to prop it up. If it chooses to let it drop against the dollar, this increases domestic inflation considerably, slowing growth and making the population poorer. Russia spent $55bn in 2014 to keep the Ruble afloat – 10% of its reserves at the time. Despite this record amount of money put at use, the Ruble continued to fall and the Central Bank admitted defeat decided and let the Ruble drop. Nigeria, who had seen its budget revenues fall 35% in 2015 while GDP growth dropped from more than 6% in 2014 to 2.3% in 2015, also initially used a few billions to defend the local currency. However, the Naira fell 25% in 2015 and the currency can now be traded for ⅓ less on the black market.

A falling currency would be great for export-driven companies: they would be more competitive abroad. Unless your country does not have an export industry, that is…

USDRUB Curncy (Russian Ruble SPO 2016-02-11 12-50-31

Cheaper holidays anyone?

In white, the Russian Ruble, in yellow the Nigerian Naira, in Green the Kazakh Tenge, in pink the Mexican Peso and in red the Brazilian Real.

Arabian dreams
Of course, local governments are aware of their lack of diversification and are trying to remedy it, using successful countries such as Dubai as an example. Below is a picture of the Jeddah Tower, a one kilometer high (!) tower under construction (currently 140m high) part of a $20bn redevelopment of Jeddah, one of the major economic lung of the Saudi kingdom. The aim was to attract new industries to diversify the economy. The project started in 2012, when oil prices were above $110bl. Will the tower will ever reach the ambitioned height?

jeddah tower feb 2016

My tower will be bigger than yours

PS: two weeks ago I wrote about the jet engine’s reliability. I am happy to quote that the latest Rolls Royce engine, the Trent XWB, powering the new Airbus A350, reached a 99.84% dispatch reliability factor in its first year of operation, bettering the 99.65% of the CFM-56, powering the Beoing 737’s and Airbus A320’s families. Wow!

Will Chinese Astrology make you Rich?



Year of the monkey

There is no issue with your browser, this is hello and Happy New Year in Chinese.
The New Year kicks off officially on Monday the 8th but I wanted to be early.

This New Year will be that of the Monkey as you may have guessed. The Chinese follow a bizarrely-modified Lunar calendar by also adding one solar month in the equation (lunar months are only 28 days long). That explains why the New Year day changes every year. They have 12 animals symbolising the zodiacs: rat, cow, tiger, rabbit, dragon, snake, horse,goat, monkey, chicken, dog and pig.
People born in the years 1920, 1932, 1944, 1956, 1968, 1980, 1992, 2004, 2016 are monkeys.

If you do not know what sign you are, here it is*:

chinese sign

The animal in you

With a new year come predictions about everything and believe it or not, about the markets. A good macro-analysis should incorporate a few economic, political, sentiment drivers. The sentiment indicators do not include, in general, astrological signs.

But should we really care about the position of the moon or that of Uranus? What can we expect in the markets according to our Chinese friends?
Well, if you believe that astrology drives returns, then 2016 could be an average year, according to this chart by The Economist – note though that 2015 was the year of the goat and it turned out OK with the US markets roughly flat (S&P500 down -0.7%), Europe up mid single digit while the Chinese stock market itself was a roller-coaster but ended up 9% for the year.

stock market and Chinese sign

Monkey business

2008 was the year of the rat and equities plunged 40%. 2011 was the year of the rabbit and global stocks fell that year. 2013 was an excellent year, with the Dow up more than 20% and yet it was the year of the snake! Recent years hardly seem to validate the Chinese visions. Maybe we need to look into more details because there must be more subtleties to this?
Looking for experts, I found that Feng Shui experts could help us. What can they tell us then? I have selected the main inputs of Raymond Lo, Feng Shui expert, in his paper.

“The Year of the Monkey, 2016, in the Hsia calendar, is symbolized by two elements – with Yang fire sitting on top of metal. I can expect 2016 will be comparatively less violent than 2014 and 2015. It will be easier to reach agreements and treaties to resolve conflicts and struggles.

Regarding the economy, fire element is often the driving force behind the stock market. The industries that will perform well in the year of the Monkey will be industries related to Fire and Water elements. Fire industries are energy, stock market, finance, entertainment. Water element is referring to transport, shipping, communication. In general, the Yang Fire Monkey year is symbol of optimism and flexibility and progress.”

The portfolio created by Lo would be buying many of the industries that fell sharply over the past 2 years. Chinese Astrology in 2016 is contrarian.
Contrarian Investing is an investment strategy that is characterized by purchasing and selling in contrast to the prevailing sentiment of the time.

'When you said you're a contrarian, I just assumed you meant your investment style, Mr. Kobenz.'

Contrarian at work

Does it mean we should rely on astrology to manage our money?
While famously John Pierpoint Morgan (the man who built JP Morgan) had an astrologer on staff, apparently saying that “Millionaires don’t use astrologers, but billionaires do.”, several studies have failed to show that astrology-based returns were more than random events.
What it meant is that there is no proof that astrology adds value.

Furthermore, in 2007, the very aptly named Professor Wiseman and The British Association for the Advancement of Science asked a professional investor, a financial astrologer and a five-year old child to invest a fictional £5000 on the FTSE100. The investor chose shares on the basis of his experience, the astrologer based her decisions on the ‘birthdate’ of companies and the child chose her shares randomly. The child lost the least amount of money and the financial astrologer made the largest losses.

jp morgan

JP Morgan and the Wiseman study

新年快樂 again.
Astrology was not proven so far to be reliable in forecasting markets. However, it may have an impact on some market operators. This is because investors are emotional and do not always rely on facts.


Forget computing, this is the real technology industry


I wanted today to describe my amazement for an industry which is coming up this year with a major innovation that will propel it further forward. You most certainly have been the beneficiary of the products of this industry at least once in your life and for a few of you on a regular basis. Let me describe it to you in a few sentences.

This industry is an oligopoly – it is dominated by four firms exclusively and there are no signs of any potential entrant. Each product cycle lasts around 20 years and each new product requires billions of dollars of investment in research and development. Having a fortress balance sheet is therefore an imperative.
One of the 4 players is introducing this year a brand new technology, which it had initially wanted to launch at the beginning of the 1990’s! This is a 25 years delay due to the complications the new technology generated. The total research and development expense was a massive $10bn, to be compared with profits around the $1.3bn mark, around 8 years of those. This will represent probably a good third of total sales going forward so quite a commitment.

high riser budget

Who delivers on time and budget nowadays?

The Nines
The technological content of the product beggars belief. Parts are manufactured with atomic precision and must resist massive variation of temperature (from minus 70 to 1,400 degrees Celsius, pressure and operating speeds. Reliability is to the highest standards, one of the leading range of products from a French-American competitor having achieved a 99.65% dispatch reliability factor over the past 20 years.
The dispatch reliability factor computes how on time the product is delivering on its specifications. If the product was required to be used continuously, a 99.65% reliability factor means it will not be available on time for operations only 4 hours per year or 8 seconds per day. Imagine your local metro/train/bus with an average daily delay of 8 seconds.

"Sorry, I'm late. My train was delayed."

What low dispatch reliability means for you

Suspense over…
This product is the modern jet engine.
The 4 companies are Rolls-Royce of Britain, Snecma of France and the Americans General Electric and Pratt & Whitney. We have become accustomed without noticing to the extreme reliability and effectiveness of jet engines. The CFM56, powering all the Boeings 737 (the ones used by Ryanair or Southwest Airlines) and half the A320s, are capable of handling more than 50,000 cycles over a lifetime. That means they will allow 50,000 flights. Imagine you use your car everyday to commute to the office and also on week-ends. This is 14 trips per week or 728 per year. To use your car engine as much as a 737 jet engine, you would need to keep that driving for more than 68 years. The first large maintenance round for a CFM56 is usually after 12,000 cycles. There again, it means around 16 years of car driving before the first service.
Can you imagine not servicing your car for 16 years? How bad is an engine failure on your car? On your next flight?

Airliner passenger sees mechanic reading book on how to repair the engines.

Let’s hope he will remember how to do it again, like cycling

Pure Power
Pratt & Whitney is introducing this year its new type of civil jet engine range called Pure Power. It is based on a novel design called the Geared Turbofan (GTF) . If you want to know more about the new engine, you could try a few Internet links such as here or here. This engine was originally meant to power the then-brand new Airbus A340, which launched late in 1993 because it had to find an alternative (they used the CFM56 if you want to know but the plane still flopped as it was under-powered despite all the great attributes of the CFMs).  The GTF advertised goals are to reduce noise by 50% and fuel burn by 15%. The first noises I managed to hear about the second goal is that it will exceed this target by 2-3pp and even 4-5pp by 2020, when performance improvement packages are delivered.


Of course, this is not the way to get the most out of your engine

I hope, for your next journey by airplane, that you will be able to also marvel at the amount of human knowledge that has gone into producing the engine powering the aircraft taking you to the next destination. In its infancy, air travel was reserved to the favoured classes but thanks to these motorists, and soon the Pure Power, the world will continue to become smaller.

Solar Power: a New Hope


In this last part of our series, we will talk about why we should rejoice and pay attention. For this installment, I have interviewed my friend François Sonnet, a founding member of the Solar Change network, but first and foremost one of the pioneer of solar power in Europe.

The Swanson Law
The cost of solar panels has dropped considerably over the past 40 years. In 1977, the price of a solar panel was around $77 per watt. Francois tells me that in 2007, at the last peak of the solar industry, the price was still $3.5/w, still a 95% drop. However, a supply glut after the Great Recession has meant that panel prices dropped to $0.50/w in 2015, another 86% decline. In the past 38 years, prices have declined by a massive 99.4%! If you are familiar with the Moore Law for computers, the Swanson Law, from the name of the founder of SunPower Corporation, states that the price of solar panels tends to drop 20 percent for every doubling of cumulative shipped volume. Between 2015 and 2007, new capacity installed has grown by a factor of 25x!

francoit sonnet solar panel 2

What a solar pioneer look like today

Soft costs
However, panel costs are only part of the equation. François explains to me the concept of soft costs: they are things like the cost of obtaining permits, the installer fees, legal costs…He tells me the anecdote of a solar project in Romania, where he has to employ security guards to protect the grounds of the solar farm: “one soft cost I did not put in my initial spreadsheet”!

In 2014, globally, an installed solar system cost $2.16/w. Progress is urgently needed on that front to help lower solar power costs. The bad news is that soft costs have generally held flat over the past decade, therefore growing in importance and now representing more than 2/3 of total installed costs!
The good news is that governments are working hard to lower soft costs. See for instance the US Department of Energy, creating a $10m prize for whoever comes up with a way to significantly quicken the installation of a solar power system.
The CEO of First Solar, a US solar system manufacturer, believes we will achieve a total installed cost of $1/w in 2017 for large solar farms, hereby implying that soft costs are being worked on. “We think 2017 could be conservative”, smiles François.

Of course cutting back on this level of bureaucracy will require a lot of work... We'll need LOTS more staff... And personnel will need extra support with recruitment.

Enlightened bureaucrats

It is all about money
Why does this matter? We need to look at the concept of levelized cost of electricity (LCOE). Think of it as the minimum price of electricity needed to break-even on your power generation system. The next set of data are the LCOE for major fuel types in 2014.

LCOE globally by fuels

LCOE in 2014

If First Solar CEO is right, then the LCOE of the best solar farms will drop below the level of natural gas power stations in the next two years. That implies that solar power will need no more tax credits or subsidies to be competitive. In the UK, the retail price of electricity is around USD200MWh. There again, you can see that it will soon be profitable for households to generate their own energy and remain autonomous.

I have some battery left
One aspect of solar panel which is exciting is the progress in battery technologies. The main drawback of solar power is that electricity production is variable and peaks around noon, when electricity demand (and therefore price) is not the highest of the day. Being able to generate power and store it until better prices can be achieved and/or storing it for personal use in outside of working hours make real sense. Fortunately, batteries are improving but along different directions. Tesla, in the US, is betting on economies of scale to lower battery costs fast, Bolloré in France is banking on a new lithium-polymer technology while China’s BYD is pushing its own technology of lithium-iron batteries which are better suited for power storage.

turtle solar

With new lighter batteries, anything is possible

Smarter grids
One of the main criticism of renewable energy on a power network is its variability. The system must absorb large amount of electricity production and be robust enough to fill the gap with power from other sources when the sunshine wears out. In summer, Germany can generate 90% of its electricity from solar sources at peak times. Widespread thinking about power networks is that such systems can cope easily with up to 20% of variable energy sources such as solar but faces Armageddon above that level.
However, new research shows that a level of 40% could be manageable and increase power prices by around 10% only. This is because of the integration of weather models and smarter grids. They allow power system operators to smooth energy demand at peak times and for instance reduce voltage or shut down remotely power hungry equipment and mills.


How smart grids work

Politicians finally useful
Last but not least, politicians are pushing in the green direction. In China, there are talks about raising the 2020 installed solar capacity of 100GW to 150GW, from the current ~50GW. 150 GW is the total power capacity of France. India has only 5GW of currently installed capacity but has set aside the Thar Desert for solar projects. At 320,000 square kilometers, it is the size of Norway. In the US, tax credits for solar energy, which were due to expire in 2015 were renewed until 2019 at least.


Finding Wally in the Thar Desert

Within a couple of years, solar power costs will have halved to the level of fossil fuel rivals and batteries will be cheaper and better. It opens a new era where clean power is becoming a reality.

The Dark Side of Solar Power


Welcome to the second part of our solar series. While the principle of solar power seems friendly to our environment, there are quite a few drawbacks which need to be taken into consideration. They include (but are not limited to) land, water and hazardous materials use, their improper location as well as the impact of solar power generation on the electricity networks. Adding the drawbacks together darkens the carbon-free picture of solar.

dilbert green tech dubious

How to make friends at a Greenpeace rally

It takes lots of space
Last week we saw that currently, humanity needed around 3,200GW of power and that the yield of solar panels was currently around 100W per square meters.It implie that using solar power only would require 3,200 billion square meters of solar panels. This is equivalent to the land area of India.
Solar panels cannot be installed anywhere and have an uncanny habit of being set up near population centres and on/near arable land. There is currently around 16 million square kilometers of cultivated land. If solar panels were to take some of this space, this would reduce arable land size by 20%. Unlike wind farms, solar and agriculture struggle to cohabit. With a global population still rising, the question of the priority of solar panels over food crops will be acute in the coming years.


Let’s hope they just eat the grass

Water and hazardous materials use
Manufacturing solar panels is very resource intensive as we saw quickly last week. The most demanding phase is the two phases of purification of silica into polysilicon, representing ⅔ of the energy needed to manufacture a solar panel system (even Greenpeace says it).
Purifying silicon produces many by-product chemicals including the highly explosive and irritant silicon tetrachloride. The level of contamination deemed dangerous is 2 parts per million (there are 400ppm of Co2 in the air your breath for instance) and you can smell silicon tetrachloride when its concentration in the air is 1 to 5 ppm. In sum, once you smell it, you are in serious danger. This is only one step of the manufacturing process and the other steps also bring their lot of energy use and recycling challenges. So if producing a solar panel is requiring a lot of resources, at least once it is operating, it is payback time, right?

dilbert methane

Recycling irritant gas is tricky

Location Location Location
Sadly, as with real estate, location matters, more precisely it is better to put panels where it is sunny. You will smile at this obvious statement but as solar and renewable energy in general have become political issues, they have benefited from profligate national energy policies. Germany, one of the least sunny country globally has the largest installed capacity of solar panels globally (before probably being overtaken this year by China). A solar panel in Berlin in January receives on average nearly 7x less solar energy than the same panel in Khartoum, Sudan, one of the sunniest place on Earth.

insolation 2

Global insolation map

It affects massively the structure of electricity markets
Another notable issue with renewable energy is its impact on power markets. Power markets do not operate in real-time since a disruption of power production could crash the power grid, the famous blackouts. Rather, power producers engage in auctions where they bid their capacity of production at a certain price. This price depends primarily on their marginal cost of producing electricity. For a coal-fired power station, the cost of producing electricity depends primarily on the cost of the fuel: coal. For a solar power producer, the cost of the fuel is free.

Once the power market system operator receives all the bids from producers and the demands of energy from consumers, it will create a market price for the upcoming period. Any power producers having offered their capacity at a too high price will have its capacity idled for the next phase. Since renewable energy producers have a zero marginal cost of production, they are preventing these fossil fuels producers from offering large stable outputs of power as their bids are lower.

The consequence is that these fossil fuel power plants, designed to run continuously, are now operating as low as 20% of the time. Coal power plants are  slow to start – to compensate, power system operators will rely on very polluting oil-fired power station.

Paradoxically, more solar power has kept the very dirty power plants alive. Moreover, solar power output is sun-dependent. This variability of production is a new challenge for power system operators: on very sunny day around lunchtime, solar power can supply 80% of the German electricity demand. However, one big cloud and this power production can quickly drop, requiring the immediate start of dirty power plants.


The “Merit Order”

Solar power have been costly to pioneer countries like German. One last negative has been the huge subsidies absorbed for their deployment (retail power prices in Germany have quadrupled since solar subsidies were introduced). These drawbacks are being worked on and we will see next week how solar can now be an effective proposition.

“Let the Sunshine in…”


2016 has arrived and on the excellent lyrics of Hair, I wanted to wish you a Happy New Year. Have you taken some good resolutions? I have certainly noticed more people in my gym this week. One of my goals for 2016 is to continue this column and manage to get an ever bigger readership. I am happy to dedicate some of my personal time for a few reasons:

  1. It is a great way to reconnect with you
  2. I love writing, especially about financial, economic and innovation topics
  3. I would like to have a column in a newspaper in the future.

To start this year, I am trying to skip the usual lists – I have no idea now in January what will be the most important events of the year. Rather, I am going to write a bit more about previously out-of-fashion countries / industries / ideas where I believe we are reaching an inflexion point. I am going to concentrate first over the next 3 stories on solar power. Billions were spent in recent years in many countries subsidizing solar power and colossal amount of capital wasted by investors on corporations building panels or operating solar farms. However, there could be good reasons that this industry is now more mature and ready to contribute to our lives in a bigger way.

'Following your 'barbecue summer' forecast, I'm revising predictions of your contract being reviewed.'

Why forecasting can be a waste of time

First, how do you generate electricity from the Sun?
Solar cells are not new – actually we can trace back the first solar electricity production to 1839, when Mr Becquerel casually exposed a chemical battery to the sun to see if it produced a voltage. It did and the current generated represented only 1% of the solar power received on the battery. In the 1880’s, Charles Fritts used gold-plated selenium to produce current, at a 1% efficiency rate again. He concluded that solar cells could replace traditional power plants with individually powered residences. Thomas Edison had just invented the light bulb in 1878. Quite a prescient man!

Today, the manufacturing process requires many intensive steps:

  1. Take some pure silica or quartz gravel, treat them with phosphorous or boron to create silicon. While silica/quartz is cheap and widespread, Boron is a “rare earth” and costs $5 per gram (10 times costlier than silver)
  2. This silicon is not pure so you have to purify it in 2 steps. The first step transforms it into a metallurgical silicon that can be used in metal alloys. For solar panel and semiconductors (the chips in your laptop and mobile phone), we need a second purification. This is mightily energy intensive and multiply the price of this purer silicon by a factor of 10!
  3. Once the pure silicon is produced, it goes through yet another converting process enabling the silicon atoms to be positioned in a more robust crystal shape.  The large blocks produced are then sliced into thin “wafers”. These wafers are cut by black diamonds and up to half the material is lost in the process.
  4. Assemble wafers together to form a panel, place electric contacts that will gather the electric current
  5. Add an anti-reflective coating: indeed, silicon reflects ⅓ of the light it receives so we need to reduce that loss.
  6. Seal the panel to protect it and you can mount it wherever you need
  7. Add electric cables, transformers, etc to complete the installation.  

Through these several steps, there is much waste – I detailed these steps more on the blog itself. However, while there is wastage, the sun is still sending us lots of energy.


Assembling a solar panel

Second, how much energy can we garner from the sun?
Our sun is pouring a deluge of energy on Earth. We receive on the ground around 120PW – 120 petawatts (i.e. not reflected by the upper atmosphere) of energy from the sun. A petawatt is one million gigawatts (GW). One gigawatt is one billion watts (definition of a billion here).
In comparison, the new EPR nuclear reactors under construction in Finland and France have an electrical power of 1.6GW, which is therefore 75 million times lower. The Earth nuclear reactor fleet comprises currently 437 units with 66 under construction, with an installed capacity of 375GW, which is still 320,000 times lower than what we receive from the sun. Since nuclear is 12% of the electrical power output globally, we can calculate that the sun still delivers roughly 40,000 times more energy than what we humans produce! All that for free!

there must be a source of nrg

It is above your nose

Harnessing this deluge of energy makes therefore sense.
The average power delivered per square meter on earth is calculated at 1,366W per square meter. Currently, solar panel technologies generally capture 20% of this power (remember that Mr becquerel and Fritts only managed a 1% efficiency). But this is achieved in best-case conditions such as peak insolation time, no clouds and being close to the equator for the best sunlight angle. Therefore, average operating conditions yield a more paltry 100W/sqm with the current technologies.


1366 watts

The sun pours dozens of petawatts on our heads at any given time. So why are we not using more solar power? There are many impediments which we will cover next week.

By the way, I am in New York the whole of next week – if you happen to be there and are available for a coffee or a burger, let me know.

Weather NY

Low voltage in New York next week

Is this the worst industry in the world?


This week, I will not talk about the over-commented US raising interest rates. Rather, there have been quite a few mergers in an industry which is central to our economies. I will tell you a bit more about this sector and why it deserves this title.

Worst in the world?
Imagine an industry where investments in productive assets are very large, so large in fact that buying one extra unit of capacity can bankrupt you if you misjudged the market. Your fixed costs are massive: your asset need constant care and will lose value and operational efficiency if you do not tend to it for just a few weeks. Having your asset idle will cost you nearly as much money as having it in operation, therefore you need jobs constantly to cover the large expenses.
There is a lot of competition on the market: the service you offer is not differentiated – everybody offers the same thing. Your only lifeline is your price (lower than rivals if possible).
For all that, the margin you can generate is probably 10-15% in great years (Apple margins are above 40%) and -10% or even lower in recessions – actually, over the cycle, you will be around break-even.

cartoon shipping

Strategy of the industry 101

In the long run, one positive is that there is structural growth. However, your and your rivals’ capacity is often growing as fast if not faster than demand, preventing prices to rise durably. More recently, some larger players have been able to increase capacity quickly by adding larger assets with much lower costs of operations: basically, they can generate a 5pp better margin than you, meaning they can gain market share by cutting prices.
Sadly, you have no other choice than cutting your prices to keep some business. You too are looking at buying these similar large assets so you can compete on price with these larger rivals. However, your smaller size means that you are taking a much larger risk. For you it is quit or double.

Would you invest in this industry?
Yet, despite the adverse fundamentals, maritime shipping is still attracting a lot of investor and banks’ money. I think it is a worse industry than airlines, another industry you may have thought of by reading these lines. At least in airlines, there is some differentiation in service and routes offered.
A quick nomenclature of shipping is helpful at this point:


What you can ship

Shipping is so bad that it is nearly impossible for a stockmarket investor to make good money in these stocks in the long run, whatever category you are looking at. The largest container shipping company globally is Maersk Lines, from Denmark. Maersk are the true market leader, the only company profitable in downturns. Since 1990, world container trade has expanded by close to 10% annually. Maersk has risen from outside the top 10 shipping companies in 1990 to global leadership by 2000, a position it has strengthened since.
Yet, the share price of the parent company has been rising by 8.5% per annum during that period. The best company could not grow its worth as fast as the market where it is becoming dominant! Imagine how it looks down below!

'Could you bring in that list of risk factors you downloaded yesterday?'

An investor checklist

A new hope?
As I eluded earlier, this industry has been traditionally very fragmented. However, we have seen over the last few years many mergers and acquisitions which are progressively reshaping the industry. Take container shipping again. The table below shows the growing control of the top firms on this market.

shipping ranking

This has been possible because the leading players have been investing in much larger ships, which costs less per TEU to operate, creating efficiency enabling them to lower prices and gain market share, which was reinvested into bigger and bigger ships – pushing down shipping rates further and squeezing out weaker players out of the market.
Current ships are massive. The Triple E container ships can hold 18,000 containers, enough to carry 180m IPADs or 36,000 cars or 108m pairs of shoes in one go. The ULCC tanker ships can carry up to 2m barrels of oil (enough to fill one million bath tubs).
This scale is helpful because it helps lower the cost of maritime shipping. For instance, the chart below displays the Baltic Dry Index, reflecting the cost of shipping dry bulk. As you can see, over the last 30 years, while there have been fluctuations, the index is nearly twice below the inception price of 1000. This is not taking into account inflation, which was 2.6% annually over the period. This means shipping dry bulk has cost clients 4.7% less each year other the last 31 years!

bdiy LT

Back to normal service

Last but not least.
To me, an industry were your price falls by nearly 5% a year deserves the title of worst industry in the world. However, the suffering of the ship investors and bankers is our gain, since it allowed a rapid expansion of global trade which in turn helps us buy inexpensive Chinese gadgets for our Secret Santa at work. To finish, two surprising facts about global shipping. First 15% of the global fleet is owned by the Greeks. Second, the next biggest container shipping company globally is MSC of Switzerland, a country with no access to the sea!

ship in 2 bits

One solution for parking your big ship: fold it.

Best Wishes
Thank you very much for reading me all these weeks. The Little Friday Stories will take a break for the festive season and come back on the 8th of January 2016.