Experience curve development

I wrote about experience curve pricing and how China executed it as their industrial policy and successfully developed dominance in several sectors. It is hard work, and it takes a lot out of the economy, but it pays off subsequently.

The problem with Singapore is that we keep hitting up our scale limits. When we successfully bet on the right industries that have incredible growing demand, we end up expanding to our space and resource limits that we have to cede our dominance to others.

One good example was the manufacturing of actuators for hard disks. Singapore once had almost 70% market share for the production of that. Imagine that the majority of hard disks used in the world’s PCs had actuators that were manufactured in Singapore. But as the demand expanded significantly, companies like Toshiba, Seagate-Maxtor which had plants in Singapore faced a problem – they didn’t have enough space to add additional lines in their manufacturing facilities in Singapore. Of course, cost of manpower was also rising – and so they started to set their sights on other ASEAN markets for these manufacturing activities.

Singapore just had to keep going up the value chain; and it gets harder and harder to be able to bet on the right products that had good growth or stable demand externally. Most of the time, these demand were captured by the international companies first, and then when they set up their supply base in Singapore, they are effectively bringing that demand to Singapore. That was how we expanded our economy and ‘created’ markets for our economy.

There were still Singapore businesses which were successful in finding opportunities overseas and managed to capture demand externally. But how many of them were actually creating manufacturing in Singapore? How many of them actually brought most of their supply chain through our economy? It was probably quite limited because Singapore was either too expensive or simply not efficient to run them through Singapore. Besides, Singapore doesn’t even have much integrated full-scale supply chains within the country – we are merely one of the stops or churning out one particular part, or assembling some of the components for something much bigger eventually.

So, the experience curve strategy may not work well in Singapore. Yet what then could have that same sort of sticky effect that Singapore’s development can run on? What can generate persistent advantages that are self-reinforcing, without relying on a massive scale, and that do not hit up against our scale limits? We used to sell our ability to integrate and coordinate, but in my opinion, we will run up against it due to increasing size and increasingly siloed areas of specialisation. Besides, that advantage is limited to the government departments.

I think we are lacking focus when it comes to finding a particular niche that we can get into, which initially does not have sufficient scale but could be stewarded into success. It could be focusing on being excellent in a small area which has some natural scale limits in the global markets yet able to fit under the natural limits in Singapore. It could be in making something technically sophisticated that forms a small component of something that many other parts of the world will use for producing everything else. And then organising ourselves to make sure we truly dominate in that space – through strong lobbying and advocacy efforts in other countries and marketing ourselves strongly towards whoever is the end or intermediate users who have the ability to influence and bring that end-demand to Singapore.

We only need a basket of those areas of excellence and strong value proposition to fill our economy and survive. But I may be wrong about it.

Blunting policies II

I wrote about the government blunting their policies previously when it comes to SME grants, particularly in Singapore. The same applies to many countries where policy directions are not just unclear but constantly changing. In the energy transition world, so many projects and companies in the US were taking investment decisions on the basis of tax credits for production of renewable energy.

So when the fate of the tax credits was suddenly called into question, it massively derailed the plans of these companies and projects, resulting in a whole sector or industrial sub-segment seizing up. I have always thought it’s incredible that in Europe and US, you could build an entire business or project based on revenues that are only possible because of subsidies or government tax credits. That’s amazing to me because in Asia, companies do not rely on government subsidies to build their business cases. At least not the private companies who have no political influence.

The reason for that is that the private sector is unwilling to take a lot of the regulatory risks from the Asian government, and they are not sure about the longevity of those policies and incentives. They recognise that when leadership changes, these incentives could disappear (as it happened in the US most recently). In other words, those policy measures in Asia are actually pretty blunt because the private sector is not going to respond to it much. US government risk that happening and losing such a precious lever to influence the economy and coordinate the change that is required.

Likewise, in Singapore, one of the biggest advantage that the government have is the ability to coordinate change properly. Technically, they don’t need to use market-based mechanisms to do that, but decades of indoctrination about the need to use free-market capitalism to ensure efficiency have brought us to the approach taken these days. The topic of subsidies is tricky and often at the top level, the thinking is ‘who would not want subsidies and freebies for their business?’ Yet in practice, it is not so easy. But it is not the bureaucracy that companies are unwilling to engage with – it is the uncertainty around the discretion of agencies’ decisions on whether some company or activity merits the funding.

Often, if the government’s grants or subsidies are uncertain and criteria are flexibly applied to accept or reject applications, then companies would rather focus on dealing with the vicissitudes of the market than of the government. I’m writing these because I feel that our agencies could inadvertently undermine something precious that the government have built up in the past. The full implications can only be seen and experience when it’s probably too late.

Blunting policies I

I started my first serious job with the Singapore government over a decade ago. Before that, I worked variously in education (math and economics tutor, and teaching assistant for undergraduates), as a freelance writer for a local economics magazine, and water treatment systems (B2C and B2B sales of drinking water filters and treatment units).

But I’ve been thinking about government policies and the institutions required to build a strong economy for almost two decades. This is partly because I was influenced by Dr Goh Keng Swee’s achievements to study economics. In particular, I thought a lot about industrial policies and the approaches taken for that in Singapore.

I was subsequently part of IE Singapore, and then Enterprise Singapore. They were agencies that provided grants to local companies for various activities. To avoid ‘picking winners’ in terms of selecting particular sectors to support, most of these incentive policies are broad sweeping – they were targeted at investments that enhanced productivity such as supporting automation, digitisation, etc. Sustainability was recently a key theme for some of these incentive schemes.

As I’ve been out of the system for a long time, my views are not based on what I know from inside the system but observations made from conversations with businesses on the outside. In all of these incentive schemes, there’s a strong emphasis on governance so the process takes a bit of time. Companies are encouraged to go ahead with their plans while the grant application is in process. This plays the role of reducing risks of delays to the companies’ plans but it also mean that the companies faces uncertainty on the final outlay/expenses that the government would cover.

The government exercises a significant amount of discretion when approving grants. This is a conclusion arrived at by consulting and digital service solution providers to the Small-medium Enterprises (SMEs) with solutions or services that were supported by the grants.

What eventually happens as a result is that incentive schemes by the government becomes weaker and weaker as a tool to encourage companies to take up new solutions or move in the direction of the government. In the short run, when government pushes out incentives to help SMEs with payment systems, or improve their marketing, or even start R&D, the SMEs will definitely start looking into this areas thinking it’s their chance to defray some of their costs of making such improvements and getting more competitive advantage. Some may even realise they should go into it with or without grant support. But a majority of them would not look deep enough to make that decision – instead, they’ll make the decision contingent on the availability of support. When their applications are either denied or the amount granted falls short of their expectations, a certain trust in the government is broken.

The next time these grants or incentives are peddled around, they no longer respond to them. They are skeptical about the government’s sincerity. This is especially if they had experienced cases where the rejection comes through technical grounds or when they expected a particular expense to be eligible due to vague policy wording, but eventually the agency exercised discretion to deny it.

In the long run, these policies gets more and more blunt, and public servants will be spending so much effort thinking about the policies, setting up governance procedures, only to realise that uptake of these incentives are poor. I wonder how much governments realise this is actually a problem for longer term policy-making and economic levers. As much as they try to use market-oriented levers, some of these intangible factors make a huge difference.

Green jobs

While in the meeting rooms of policymakers, the discussion around green economy and creation of ‘green jobs’ is underway, there is a slightly different conversation about green jobs in the coffee shops and cafes.

“Good work-life balance. But limited impact.”

“We move two steps forward and three steps back sometimes when trying to drive corporate green transition.”

“We have no veto power on investment decisions, the company still needs to make money so the frontline business units have the final say even when the investment have adverse environmental impacts.”

“The corporate sustainability department primarily manages reputational risks, not environmental ones.”

The best way to create impactful green jobs is perhaps when the laws and regulations properly require compliance with stricter environmental standards. At the moment, a lot of compliance are around reporting requirements and yes you do get some kind of ‘green jobs’ but they are mainly the bean-counter sort. The solution-seeking sort will come when you begin to set up standards in environmental performance that companies have to meet.

There is no point propagating green jobs, trying to subsidise manpower for these jobs and using tax credits or other incentives to force companies to locate their sustainability or green functions in Singapore when there is no corresponding increase in environmental performance standards imposed on our corporates.

Better to spend the resources studying the suitable regulations to put in place. And then you can support the companies to meet them.

Experience curve pricing

So it started when I was reading Cedric Chin’s writing about Morris Chang, and then about Texas Instruments dominating semicon industry through the invention of the Learning Curve pricing. Here is a situation where a large company basically finances its product into dominance by sacrificing some early profits as they expect lower prices to generate sufficient demand to increase utilisation of their machine, improving product yield through improvements in the manufacturing process.

This enabled Texas Instruments to dominate the industry as the anticipated increase in manufacturing yield (as a result of the ‘learning curve’), enabled more aggressive pricing, pushing out competitors, increasing market share for Texas Instruments, and thereby creating more scale advantages to drive more yield improvements. This is a remarkable use of financing to use scale economies to dominate the market. Essentially, most of the digital tech companies tries to use this as a means to eventually dominate a market of their niche.

The original idea of the learning curve of course came with manufacturing, and I believe this idea was applied at the scale of the entire industry in China when it comes to solar panels, Li-on battery architecture and now probably electric vehicles. By massively subsidising the products and creating demand not just domestically but also in foreign markets, China successfully increased utilisation of their capital equipment, improved their manufacturing capabilities and cement their advantage further.

While other markets are still focused on ‘costs’ of deploying solar, or using batteries, China took a different perspective, one that was driven by manufacturing capabilities and learning curve. I believe Japan had desired such an approach as well, having been subsidising certain markets and technologies, including development of hydrogen cars as well as residential hydrogen appliances (see ENE-FARM home use fuel cell system).

Sometimes when we wonder if we are too early into the market for something, when it comes to the government that is willing to orchestrate a strategy at that sort of industrial level, one can mobilise the resources to create the future rather than wait for the right time.

Learning from mistakes II

A few years back, I devoted a couple of blog posts to writing about ‘wicked learning environments’, a concept popularised by psychologist Robin Hogarth (see the posts here, here and here).

Some recent experiences working on various requests for proposals and tenders brought this concept back to mind. And I want us to think about it a bit more as we think about the culture that we are developing here in Singapore – in school, business and within organisations.

I ran into a situation where multiple organisations belonging to this larger mothership, who was originating various requests for proposals refused to entertain request for feedback on the proposals submitted. Basically joining the tender was a black box with rather binary outcomes; and when you fail, you couldn’t even take a lesson out of it. At times, non-constructive feedbacks were provided; such as ‘the competition was strong’, or that ‘we received many competitive proposals and decided not to go with yours’.

I was reminded of a story from a friend who had a really non-supportive reporting officer (RO). When she requested feedback on her performance, the RO said she was doing okay, but when the performance reviews came back, she was placed at either average or slightly below. The response she got from her RO about why she was placed in that performance grade was that her grade was ‘already not bad’.

Feedback is so important, but in Singapore, we are so conflict-avoidant that we refuse to think about it more thoroughly. We might even have experienced defensiveness during exit interviews when employees felt more free to voice out concerns or areas of improvement. The fear of mistakes borders on being completely irrational and the desire to run from the shame or perceived humiliation supersedes the willingness to learn from those mistakes.

This is a massive problem for our culture. And Singapore is worse for such behaviours – where juniors are expected to silent dissenting voices, sometimes to the extent of surrending their thinking ability in exchange for harmony and masquerading that as ‘respect for elders’.

How can we move faster and progress if we want to enable Singapore to make the leap towards a better future?

I wrote another post with the same topic but from a different angle 2 years back. You can find it here.

All about energy transition

I’ve been fighting against the prevailing culture for the past decade of my career. And for those who blame things on culture and act like it cannot be changed, they are being delusional. I have a few examples to show:

  • How did we get from flagging for a cab on the street to punching our mobile phone screens to hail a cab?
  • How did we get from ‘solar power’ is too inefficient and there is not enough space in Singapore to targeting a 2GWp solar by 2030?
  • How did we get from being in kampongs where we helped each other and lived for generations in a house to thinking that our financial lives depend on getting BTO, then selling it after MOP and then upgrading non-stop over our adulthood?

While it takes time, culture can be changed. It also takes identifying some loose bricks in the existing edifice to overhaul the structure of our prevailing culture. Energy transition is one tough one to crack, but that said, our region in Southeast Asia has already moved quite a bit from the days of coal-fired power generation. Yes there was a bit of attempts to catch on with the hype around hydrogen but the dollars and sense prevailed at least for now.

So I’ve been toying with the idea of doing a lot more content to teach all of us about energy transition and to be able to learn together. There is a whole lot of de-stigmatising, trying things out, and unlearning our previous biases to be able to move the culture a bit and accelerate the transition. There’s a question of format, level of engagement, how to manage and nurture a community and so on. I guess I’ll have to dive in head first.

Functional Atheism

Despite being a Christian, I’d probably confess to living most of my life like an atheist, and for most of us in the modern world, that is perhaps the case. As we send our reports and deliverables to clients, we don’t start praying to God for Him to grant favour in the eyes of our clients. At the same time, before we start our meetings to make crucial decisions, it’s not like we ask the Lord to grant us wisdom to decide the right course of action in a corporate prayer. Beyond prayer, more often than not, we are petty with the way we approach our suppliers, and potentially quite transactional on many interactions.

If we had been in a more agriculture setting, surely after tilling the land and sowing the seeds, we would have prayed for good weather and for patience to arrive upon harvest time. Each day as we work the fields we’d ask the Lord to bless the work of our hands. And when if we were to be waiting in the market for someone who needs our produce to pass, we might ask for customers, and we might deal with them with greater kindness than we would when chasing a customer for bill payment.

I don’t know if it’s the environment, the (false) sense of self-sufficiency and control that leads us to act this way. But we often enjoy acting like we are in control; and we are glad for the assurance from others’ false sense of control over circumstances and happenstance. We have lost the security and comfort that we can have in the embrace of God’s grace and His provision. And each time we practice that modern day ritual of self-reliance and independence from nature and from God, we weaken our faith so much.

Rethinking business moats

Popularised by Warren Buffett, the idea of business moats is simply some kind of persistence or stickiness in demand that businesses have, which can keep them going. Basically it is really anything that helps to reduce competition to a business. This is important in the real world though we tend to celebrate competition in economics. Business moats are actually necessary for innovation, and avoiding a race to the bottom.

Moats are largely about maintenance of a profit margin. The stronger the moat, the higher the margin would be but having a moat itself makes a lot of difference. In fact, we tend to worry in economics about moats because we think it creates high margins. That’s not always true. You could have low margins as a moat itself – because being able to keep your costs low would keep competitors at bay. The point of moats is more about the persistence of the margin.

The most significant problem with competition is that you are in a dynamic environment that keeps you on your toes. Now you may think that is a good thing. But if we keep having to compete with competitors who are just diverting your customers easily through one-off gimmicks and popping up in different places, dislodging your margins here and there, it is not going to make a significant dent in your profits, but it certainly takes up your attention and ability to consider longer-term growth and innovation.

It is such long-term thinking that a business moat creates, which can support the maturing of a system. Yes, other institutional factors contribute to the growth and development of markets. But pure ‘perfect competition’ in the manner it is traditionally thought isn’t one of them. Many developed countries and markets have that sort of dynamism and competition. Just go to a weekday market in a mid-sized town in Africa. But that in itself does not produce the sort of progress that capitalism is touted to produce.

What underlies the success of market capitalism is ultimately the ability not just to accumulate capital but to be freed of that savage competition to engage in more medium to long-term strategic competition. And that is enabled by business moats.

Artificial Intelligence

I realise I’ve never written on artificial intelligence. GenAI swept the world quite a bit over the past 2 years and of course, the consciousness of it in the market since ChatGPT was made available for public use had driven Nvidia’s stocks up insanely.

I had realised that since I’ve got a collection of writings in the public domain from since 2009, it would not be hard for me to train an LLM to be able to almost think and write like me at least to the extent of views, ideas and information I have expressed.

The truth is I’ve somehow avoided using AI to do my work; rather, I’ve been using it more to gather and synthesize information, help me identify blindspots and figure out perspectives I might have missed. I know that what we have observed in the publicly available tools is just displaying a fraction of their potential and capability but I feel that ultimately, we are still hitting back at the same constraints that holds us back as humans. Resource.

AI continues to suck up computing power, materials and energy in order to work. This is almost silly to the extent that we are feeding machines copious amount of energy in order to produce output that pale in comparison with a human being. ‘Biological energy’ so to speak, is far superior and we already have the human brain that allows all of us to perform at a far higher and more meaningful level. Of course there are lots of ethical and safety issues confronting us as we develop AI further, and I’m not decided whether we should necessarily stop the developments – all I can say is that we are getting distracted by AI.

We are embarking on an almost insane hype in the market for AI while ignoring the greater problem that confronts mankind today – climate change. And we ignore it at our peril. AI, like the many other engineered geopolitical crises, are chipping away at our attention, energies and resources to deal with the things that matters much more.

I really believe we can do so much better with the struggles and challenges in this world if we had not been distracted by these things. I have no doubt AI is going to be important and influential, but along with a lot of other innovations that have radically changed our lives, it may only serve to exacerbate problems that are still not well appreciated by us, while taking away resources to solve the problems that are apparent today.